10-K

United States Washington, D.C. 20549

X	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: February 29, 2004 OR
	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from              to              Commission file number: 1-8803

(Exact name of registrant as specified in its charter)

Delaware	95-2673173
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2200 East Pratt Boulevard, Elk Grove Village, Illinois	60007
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 847-439-8270

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

Title of each class Common Stock, $.02 par value (including Preferred Stock Purchase Rights) Name of each exchange
on which registered
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes         X         No                 

The aggregate market value of the voting stock of the registrant held by shareowners of the registrant (not including any voting stock owned by directors or executive officers of the registrant (such exclusion shall not be deemed an admission that any such person is an affiliate of the registrant)) was approximately $119,858,528 as of August 29, 2003, the last business day of the registrant’s most recently completed second fiscal quarter (based on the closing sale price on the New York Stock Exchange on such date, as reported by The Wall Street Journal Midwest Edition).

As of April 28, 2004, the registrant had outstanding an aggregate of 14,263,092 of its Common Stock.

Document Incorporated by Reference

Portions of the following document are incorporated herein by reference into the indicated part of this Form 10-K:

Document Registrant’s Proxy Statement for the Annual Meeting of Shareowners to be held on June 24, 2004 Part of Form 10-K
into which incorporated
Part III

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PART I

Item 1. Business

Overview

Material Sciences Corporation (unless otherwise indicated by the context, including its subsidiaries, “MSC” or “Company”) designs, manufactures and markets material-based solutions. The Company is organized under two business segments – MSC Engineered Materials and Solutions Group (“EMS”) and MSC Electronic Materials and Devices Group (“EMD”). The Company continues to evaluate the strategic position, growth and economic value potential of portions of its business. Depending on available options, the Company may decide to invest or disinvest with the objective of creating additional value for shareowners. In fiscal 2001, MSC operated under four segments: Coated Products and Services; Engineered Materials; Specialty Films; and Pinole Point Steel. The Specialty Films segment was sold on June 29, 2001, and the Pinole Point Steel business was sold on May 31, 2002. Both of these segments have been reported as discontinued operations since August 31, 2001. In November 2001, the Company announced a reorganization and new operating structure whereby the previous business units and management structures were eliminated, resulting in one reportable segment, EMS. In fiscal 2003, the Company significantly increased its investment in field-effect technology for interface touch controls and sensor solutions in the consumer electronics and transportation markets. This business is now operating as a separate business segment, EMD. For more information concerning the Company’s operating results by segment, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 14–27, and Note 15 of the Notes to the Consolidated Financial Statements entitled “Business Segments,” on pages 53 and 54).

EMS, which represented 99.8% of the Company’s fiscal 2004 net sales, focuses on providing material-based solutions for electronic, acoustical/thermal and coated metal applications. The electronic material-based solutions include coated and laminated noise reducing materials used in electronic applications to solve customer specific problems and enhance performance. The acoustical/thermal material-based solutions include multilayer composites consisting of metals, polymeric coatings and other materials used to manage noise and thermal energy. The coated metal material-based solutions include coil coated and electrogalvanized (“EG”) protective and decorative coatings applied to coils of metal in a continuous, high-speed, roll-to-roll process. The Company’s material-based solutions are designed to meet specific customer requirements for the automotive, building and construction, electronics, lighting and appliance markets. The electronic and acoustical/thermal products are primarily manufactured and marketed as EMS’s own products. With coated metal applications, EMS generally acts as a “toll coater” by processing its customers’ metal for a fee, without taking ownership of the metal.

EMD’s primary focus to date is designing, developing and commercializing the technology licensed from TouchSensor Technologies, LLC (“TST”). On January 31, 2002, the Company expanded its electronic material-based solutions by entering into an exclusive license agreement with TST. This agreement provides EMD the right to manufacture, use, further develop and sell TST’s patented touch sensor technology for sensors, switches and interface solutions in the consumer electronics and transportation markets. Royalty payments to TST, per the license agreement, consist of a certain percentage of net sales of licensed products plus a certain percentage of sublicense profits subject to a minimum annual royalty amount (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 14–27, and Note 14 of the Notes to the Consolidated Financial Statements entitled “Contractual Commitment” on page 53). In general, the exclusive license period ends on February 28, 2006, subject to the Company’s right to extend the exclusive license period under certain conditions.

Headquartered near Chicago, the Company, through its subsidiaries Material Sciences Corporation, Engineered Materials and Solutions Group, Inc., MSC Walbridge Coatings Inc. (“MSCWC”), MSC Laminates and Composites Inc. (“MSCLC”) and Material Sciences Corporation, Electronic Materials and Devices Group, Inc. operates six manufacturing plants in the United States and Europe. EMS operates two facilities in Elk Grove Village, Illinois, one facility in Morrisville, Pennsylvania, one facility in Middletown, Ohio and one facility in Eisenach, Germany. MSCWC, a subsidiary of EMS, owns and operates a facility in Walbridge, Ohio, that, until May 7, 2003, was owned by a partnership (the “Partnership”) between MSCWC and a subsidiary of Bethlehem Steel Corporation (“BSC”). MSCLC has a 51% ownership interest in a joint-venture partnership in Brazil with Tekno S.A. (“Tekno”), formed in November 2000. EMD currently does not operate any manufacturing facilities, but instead obtains its products from a number of contract subassemblers. The Company announced the closing of the Middletown, Ohio facility in May 2004, effective July 2004.

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Additional information concerning certain transactions and events is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 below.

MSC, a Delaware corporation, was founded in 1971 and has been a publicly traded company since 1984. The principal executive offices of the Company are located at 2200 East Pratt Boulevard, Elk Grove Village, Illinois 60007, and its telephone number is (847) 439-8270.

Available Information

MSC’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on MSC’s website at www.matsci.com as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission.

MSC Engineered Materials and Solutions Group

EMS laminates, coats and electrogalvanizes various types of metal. EMS also manufactures composites typically consisting of steel or other metals in combination with polymers or other materials to achieve specific properties, such as noise and vibration reduction and thermal insulation, also known as electronic and acoustical/thermal materials. These products consist of functionally engineered materials that are designed to meet specific customer requirements. Products largely result from EMS’s research and development efforts and the proprietary equipment and processes designed and implemented by its engineering and manufacturing organizations. EMS supplies its electronic, acoustical/thermal and coated metal materials to a variety of markets both in the United States and internationally. The majority of these materials are used in the automotive, building and construction, electronics, lighting and appliance markets. The major products included in the electronic material-based solutions product group are computer hard disk drive covers, storage racks and electronic cabinets and boxes. The major products included in the acoustical/thermal material-based solutions product group are disc brake noise dampers and Quiet Steel^® for automotive body panels and engine parts. The major products included in the coated metal material-based solutions product group are coil coated and electrogalvanized protective and decorative coatings for use as automotive body skins, metal building skins, appliance cabinets (refrigerators, freezers and other appliances), heating and ventilation applications, lighting fixtures and metal furniture.

Electronic Material-Based Solutions

NRGDamp^TM is EMS’s proprietary laminated metal used to manufacture disk drive covers to reduce vibrational noise and improve performance. Although hard drives are best known for storing data in computers, they are quickly being adopted for a number of other products such as set-top boxes, home servers, television receivers, audio/video juke boxes and digital video recorders. The need for vibration damping in data-storage applications also extends to storage racks and brackets.

Acoustical/Thermal Material-Based Solutions

The disc brake noise damper market developed as manufacturers moved to asbestos-free brake linings. The increased brake noise these linings produce can be virtually eliminated by the composite materials pioneered by EMS. The Company believes that EMS’s material is used in over 50% of the domestic disc brake noise dampers manufactured for the original equipment market and the aftermarket.

Quiet Steel is a multilayer composite consisting of various metals, coatings and other materials, typically consisting of metal outer skins surrounding a thin viscoelastic core material. Quiet Steel is engineered to meet a variety of needs. The Company believes that EMS is a leader in developing and manufacturing continuously processed coated materials that reduce noise and vibration and create thermal barriers. The automotive industry is currently the largest market for metal composites, which are being used to replace solid sheet metal parts, including body panels, floor pans, wheel wells, oil pans, valve covers, front engine covers and heat shields. Quiet Steel is also found in a number of other products, including lawn mower engines, appliances and air conditioners. Quiet Steel is being evaluated for use in other internal components in the automotive market to help reduce road noise. EMS produces Quiet Steel at both its Elk Grove Village, Illinois location and at the Walbridge Coatings location in Ohio.

Coated Metal Material-Based Solutions

The Company believes that coil coating is the most environmentally safe and energy-efficient method available for applying paint and other coatings to metal. This continuous, roll-to-roll, highly automated, high-speed process applies coatings to coiled metal of varying widths and thicknesses. In the process,

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sheet metal is unwound from a coil, cleaned, chemically treated, coated, oven-cured and rewound into coils for shipment to manufacturers that fabricate the coated metal into finished products that are sold in a variety of industrial and commercial markets. The coatings are designed to produce both protective and decorative finishes. Through techniques such as printing, embossing and striping, special finishing effects can also be created. The finished product (i.e., pre-painted or coil coated metal) is a versatile material capable of being drawn, formed, bent, bolted, riveted, chemically bonded and welded. EMS generally acts as a “toll coater” by processing coils for steel mills or their customers, without taking ownership of the metal. EMS charges by weight or surface area processed.

EMS’s coil coated products are used by manufacturers in building products, appliances, heating and air conditioning, lighting, automotive and other products. EMS’s strategy in coil coating has been to produce high-volume, competitively coated products at low cost, as well as to identify, develop and produce specialty niche products meeting specific customer requirements.

Coil coating technology reduces the environmental impact of painting and reduces manufacturers’ energy needs. In coil coating processes, over 98% of the coating material is applied, in contrast with the significant waste from “overspray” typical in post-fabrication painting. The energy required to cure coil coated metal is substantially less than that required by other coating methods. These savings are achieved because of high-speed material processing and because 90% to 95% of the coatings’ volatile organic compounds are recycled back into the curing ovens and/or used as fuel.

Manufacturers that use pre-painted materials can eliminate or significantly reduce on-site post- fabrication paint lines and the associated costs of compliance with complex environmental and other regulations. Pre-painted materials facilitate the adoption of just-in-time and continuous process manufacturing techniques that can result in improvements to work-in-process inventory, plant utilization and productivity. Since pre-painted metal is cleaned, treated and painted while flat, the result is a more uniform and higher quality finished part than can be achieved by even the best post-fabrication painting operation. There are no hidden areas where paint is difficult to reach and where corrosion can begin after the product has been marketed. As a result, companies using pre-painted material generally benefit from lower manufacturing costs and improved product quality. Use of pre-painted metal may, however, require product design or fabrication changes and more stringent handling procedures during manufacturing.

The Company serves the automotive market by electrogalvanizing steel coils. EG is a corrosion-resistant steel product used to manufacture automobile and light-truck body skins. The Company serves the automotive market (including Quiet Steel) through its own marketing efforts and through an EG tolling agreement. However, the use of automotive quality hot-dip galvanized steel has been introduced by the steel industry and continues to make inroads into the EG market. The Company is unable to determine the effect, if any, on the market resulting from the existence of excess capacity, the entrance of additional capacity, changes in galvanizing technology or the substitution of other materials. MSCWC’s current and future production levels are also dependent upon economic conditions in the industries that use EG and other coated sheet steel products, including the automotive and appliance industries.

MSCWC electrogalvanizes zinc and zinc-alloy coatings and applies organic coatings onto sheet metal in coil form. MSCWC offers a full complement of pure zinc and zinc-nickel plated products with or without organic coatings or top coats that offer corrosion, forming or cosmetic advantages over competitive products, such as plastic and hot-dip galvanized steel, to the automotive as well as other markets. Demand for coatings over the electrogalvanized plating has increased historically due to greater corrosion expectations for steel products and enhanced cosmetic requirements. The MSCWC facility is the only facility in North America capable of meeting the wide width demand, in a single pass through its line, for this full complement of products. In addition, MSCWC has laminating capability to produce Quiet Steel for acoustical/thermal applications.

On May 7, 2003, International Steel Group Inc. (“ISG”) purchased substantially all of Bethlehem Steel Corporation’s (“BSC”) assets as part of BSC’s bankruptcy proceedings. On the same day, the Company purchased the remaining 33.5% ownership interest in the Partnership from ISG (the “ISG Transactions”). As a result of the ISG Transactions, the Company has a 100% controlling interest in the Partnership’s electrogalvanizing facility in Walbridge, Ohio and has consolidated the results of operations of the MSCWC facility from that date. In connection with the purchase, MSCWC entered into a tolling agreement with ISG to provide EG and other coating and ancillary services to ISG until December 31, 2004. Through the expiration of the tolling agreement, ISG has priority production rights for up to 25% of the available line time at the MSCWC facility (see Note 3 of the Notes to the Consolidated Financial Statements entitled, “Joint Venture and Partnership” on pages 40 and 41). The EG products processed by MSCWC for ISG are expected to be sold primarily to the automotive industry.

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ISG and the other mills utilizing the MSCWC facility are major suppliers of sheet steel to the United States automobile industry. The orders for MSCWC’s toll coating services are primarily and independently generated by ISG and MSC for their respective customers. For reporting periods ending on or before the date of the ISG Transactions, EMS’s net sales for electrogalvanizing primarily consisted of various fees charged to the Partnership for operating the facility. Net sales to the Partnership represented 2%, 20% and 21% of MSC’s net sales in fiscal 2004, 2003 and 2002, respectively. The fees consisted of a variable portion, based on the production volumes and product mix, and a fixed portion, including taxes, rent, insurance and the fixed portion of electricity. The overall profitability to EMS depended on MSCWC’s processing skill and efficiency. MSCWC’s pricing of services to ISG is contractually fixed, while pricing of services to other customers is market driven.

MSC Electronic Materials and Devices Group

EMD is now offering the transportation and consumer electronics markets the world’s only field-effect sensor that may be implemented as a 5-volt, digital, stand-alone, software-free switch, recognized by Underwriter Laboratories, Inc. Products using the switch/sensor include interface control panels for fluid-level sensing devices for recreational vehicles and marine markets. The switch/sensor operates by generating an electronic field above and below the substrate that covers it – typically a glass or plastic panel. When the field is disrupted, the switch/sensor is triggered. Since the switch/sensor has adjustable sensitivity levels, it can be fine-tuned to meet the requirements of each application. Because the switch/sensor is solid-state with no moving parts and the switch/sensor is mounted entirely behind the interface material (including glass or plastic), it is protected from environmental conditions and operating abuse that often damage ordinary mechanical or membrane switch/sensors. These switch/sensors can be integrated into new or current user interfaces, reducing time-to-market and developmental costs. Since this sensor technology also can be configured to detect non-human machine and material movements, EMD also is developing product solutions for position, as well as, fluid-level sensing applications.

Pinole Point Steel

On May 31, 2002, the Company completed the sale of substantially all of the assets of its Pinole Point Steel business. The Company is in the process of settling the net liabilities of the business. As of February 29, 2004, the Company has received $58.0 million related to the disposition and liquidation of the business, consisting of $31.2 million of sale proceeds from Grupo IMSA S.A. de C.V. and $26.8 million from liquidating the Pinole Point Steel operations. The proceeds from liquidating the Pinole Point Steel operations include an income tax refund of $10.6 million received during the second quarter of fiscal 2004 related to the sale of Pinole Point Steel. As of February 29, 2004, there are $0.4 million in net liabilities remaining. The remaining net liabilities include liabilities (primarily workers compensation exposure) not assumed by Grupo IMSA S.A. de C.V. Pinole Point Steel has been reported as a discontinued operation in the Consolidated Financial Statements.

Competition

The market for electronic (both EMS and EMD) and acoustical/thermal material-based solutions is competitive, both domestically and internationally. There are competitors in each product market served by the Company, some of which have greater resources than the Company. The Company believes, however, that its technology, product development capability, technical support and customer service place it in a strong competitive position in the electronic and acoustical/thermal markets.

The coated metal material-based solutions process competes with other methods of producing coated sheet metal, principally post-fabrication finishing methods such as spraying, dipping and brushing. Although there can be no assurance, the Company expects that the market penetration of coated metal (coil coating) will increase as a result of more stringent environmental regulation and the energy efficiency, quality and cost advantages provided by pre-painted metal as compared to post-fabrication painting, particularly in high-volume manufacturing operations. The Company believes it is one of the largest coil coaters, with approximately 12% of the total tons processed in the United States in calendar 2003 based on National Coil Coaters Association data. Competition in the coil coating industry is heavily influenced by geography, due to the high costs involved in transporting sheet metal coils. Within geographic areas, coil coaters compete on the basis of quality, price, customer service, technical support and product development capability. The Company believes the domestic coil coating market is approximately 27% over capacity.

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Competition in the production and sale of EG steel for the automotive industry comes from other steel companies that, either directly or through joint ventures, produce EG steel on seven manufacturing lines in the United States. Limited quantities of EG steel also are imported into the United States from foreign steel suppliers. The Company believes that the Walbridge facility operates at higher costs than the domestic mills and is having difficulty serving the expected end-users of EG steel. The Company is reviewing the profitability of the continued sale and production of EG. In addition, the use of automotive quality hot-dip galvanized steel continues to make inroads into the EG market. The Company is unable to determine the effect, if any, on the market resulting from the existence of excess capacity, the entrance of additional capacity, changes in galvanizing technology or the substitution of other materials.

International

The Company believes that significant opportunities exist internationally, particularly for the Company’s computer hard disk drive cover materials, disc brake noise dampers and Quiet Steel products. As a percentage of net sales, direct export sales represented 10%, 8%, and 15% in fiscal 2004, 2003 and 2002, respectively.

The Company has certain distribution agreements and licensing and royalty agreements with agents and companies in Europe, Latin America and the Far East that cover computer hard disk drive covers, disc brake noise dampers, Quiet Steel, lighting products and electronic materials. These agreements provide the Company with opportunities for market expansion in those geographic areas.

The Company is pursuing a variety of other business relationships, including direct sales, distribution agreements, licensing, acquisitions and other forms of partnering to increase its international sales and expand its international presence.

Marketing and Sales

The Company markets its electronic (both EMS and EMD), acoustical/thermal and coated metal products, services and technologies primarily through its in-house sales and marketing organization as well as through independent distributors, agents and licensees. The Company employs key individuals with noise, vibration and harshness (“NVH”) experience using a proven sales methodology for penetrating the automotive markets served by EMS. The retention of these individuals is important to the development of solutions supporting the growth in sales of the EMS laminate products. The Company focuses its sales efforts on manufacturers, but also sells to steel mills and their intermediaries, metal service centers and metal brokers. EMS markets EG and other products (including Quiet Steel) using the MSCWC production rights to 75% of the available line time at the MSCWC facility. EMS has the right to utilize available line time to the extent that ISG does not provide firm orders for EMS services. In fiscal 2004, EMS utilized approximately 30% of the total available line time, and ISG utilized approximately 30%.

All of the Company’s selling activities are supported by technical service departments that aid the customer in the choice of available materials and their use in the customer’s manufacturing process.

The Company estimates that customers in the building products market were the end-users for approximately 16%, 18%, and 22% of MSC’s net sales in fiscal 2004, 2003 and 2002, respectively. The Company also estimates that the original equipment and aftermarket segments of the transportation industry were the end-users for approximately 44%, 51%, and 48% of MSC’s net sales in fiscal 2004, 2003 and 2002, respectively. Due to concentration in the automotive industry, the Company believes that sales to individual automotive companies, including indirect sales, are significant. One end user of the Company’s disk drive materials (Western Digital) accounted for approximately 10%, 4% and 7% of the Company’s consolidated net sales in fiscal 2004, 2003 and 2002, respectively.

The Company’s backlog of orders as of February 29, 2004, was approximately $20.4 million, all of which is expected to be filled during the remainder of the current fiscal year. The Company’s backlog was approximately $23.0 million as of February 28, 2003.

MSC is generally not dependent on any one source for raw materials or purchased components essential to its business for which an alternative source is not readily available. During the fourth quarter of fiscal 2004, a shortage of available metal and higher pricing developed which impacted each of the markets served by the Company. The Company expects this industry-wide metal situation to continue for the first three quarters of fiscal 2005.

MSC believes that its business, in the aggregate, is not seasonal. Some of its products, such as materials used for building products and swimming pools, however, experience greater demand in some seasons.

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Environmental Matters

The Company believes it operates its facilities and conducts its business, in all material respects, in accordance with applicable environmental laws. The Company spent approximately $3.1 million in fiscal 2004, and has budgeted approximately $3.2 million for fiscal 2005, for maintenance or installation of environmental controls at its facilities. For additional information regarding the Company’s environmental matters, see “Legal Proceedings” on pages 10 and 11 and Note 4 of the Notes to the Consolidated Financial Statements entitled “Contingencies,” on pages 41 and 42.

Research and Development

Management estimates that it spent approximately $4.3 million in fiscal 2004, $3.9 million in fiscal 2003 and $6.1 million in fiscal 2002 for product and process development activities.

When possible, the Company seeks patent and trademark protection for its products. The Company owns and is licensed under a number of U.S. and foreign patents, patent applications, trademarks and trademark applications. Patents for individual products extend for varying periods according to the date of patent filing or grant and the legal terms of patents in the various countries where patent protection is obtained. While the Company considers its various patents, patent applications, trademarks and trademark applications to be important, it does not believe that the loss of any individual patent, patent application, trademark and trademark application would have a material adverse effect upon its business as a whole. However, the loss of EMD’s license with TST and any patents and patent applications related thereto could have a material adverse effect on EMD’s business and future growth. EMD represented less than 1% of the Company’s net sales in fiscal 2004.

Employees

As of February 29, 2004, the Company had 702 full-time employees. Of these, approximately 473 were engaged in manufacturing, 77 in marketing and sales, 137 in administrative and clerical positions and 15 in process and product development.

The employees at the Eisenach, Germany facility are not represented by a union. Hourly manufacturing employees at Elk Grove Village, Illinois; Morrisville, Pennsylvania; and Middletown, Ohio are covered by separate union contracts expiring in February 2007, November 2005 and May 2007, respectively. The Walbridge, Ohio hourly employees elected in October 2003 to be represented by a union. The Walbridge, Ohio contract is currently being negotiated.

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Executive Officers to the Registrant

The executive officers of the Company as of April 28, 2004, are as follows:

Name	Age	Position(s) Held
Ronald L. Stewart	61	President and Chief Executive Officer, MSC and a director of MSC since March 2004. Mr. Stewart is the acting President and CEO of Pangborn Corporation for a transition period ending on or before December 31, 2004 and was President and CEO of Pangborn Corporation from 1999 to 2004. Mr. Stewart was President and CEO of Colt Industries from 1996 to 1998.
James J. Waclawik, Sr.	45	Vice President, Chief Financial Officer and Secretary, MSC since October 1996.
Robert J. Mataya	61	Vice President, Business Planning and Development, MSC since July 1991.
Ronald L. Millar, Jr.	53	Vice President and General Manager of Pre Finish Metals since May 2004; Senior Vice President Operations of EMS since July 2003; President, EMS since November 2001; and Group Vice President and General Manager, MSCLC from November 1995 to November 2001.
John M. Klepper	57	Vice President, Human Resources, EMS since November 2001; and Director of Corporate Human Resources, MSC from March 2000 to November 2001. Prior to joining the Company, Mr. Klepper was Vice President, Human Resources for Fluid Management, Inc. since 1997.
Clifford D. Nastas	41	Vice President and General Manager of EMS since May 2004; Vice President, Sales and Marketing, EMS since July 2003; Vice President, Marketing, EMS from November 2001 to July 2003; and Vice President, Marketing, MSCLC from January 2001 to November 2001. Prior to joining the Company, Mr. Nastas was Global Automotive Business Director for Honeywell International Inc. since 1995.
Andrew G. Blake	46	President, EMD since July 2002. Prior to joining the Company, Mr. Blake was a management consultant for MSC since 1999; President for Innovative Manufacturing Solutions Corporation since 1998.
John J. Glazier, Jr.	42	Vice President Administration and Finance, EMD since July 2002; Director Corporate Procurement, from April 2000 to July 2002; and Plant Manager, Pre Finish Metals (EGV) Inc. from September 1996 to April 2000.

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Item 2. Properties

The Company owns or leases facilities with an aggregate of approximately 1,386,000 square feet of space. In addition to the principal physical properties used by the Company in its manufacturing operations as summarized in the table below, the Company leases insignificant sales and administrative offices pursuant to short-term leases. The Company considers all of its principal facilities to be in good operating condition and sufficient to meet the Company’s near-term operating requirements. In addition to the properties noted below, the Company also has products manufactured with a joint venture, Tekno S.A. (“Tekno”), and third parties in North America, South America and Southeast Asia, respectively.

Location	Approximate Area in Square Feet	Lease Expiration (or Ownership)		Primary Business Segment Served	Description
Elk Grove Village, Illinois Plant No. 1	58,000	Owner	(1)	EMS	Coil Coating Facility (Currently Idle)
Elk Grove Village, Illinois Plant No. 2	223,000	Owner		EMS	Laminating and Coil Coating Facility
Elk Grove Village, Illinois Plant No. 3	312,000	Owner		EMS	Coil Coating Facility
Morrisville, Pennsylvania	121,000	Owner		EMS	Coil Coating Facility
Middletown, Ohio	170,000	Owner		EMS	Coil Coating Facility (To be closed July 2004)
Walbridge, Ohio	465,000	June 2008	(2)	EMS	Electrogalvanizing, Laminating and Coil Coating Facility
Eisenach, Germany	11,000	Owner		EMS	Stamping and Testing Facility

(1) On December 15, 2003, the Company entered into a definitive agreement for the sale of the production line in Plant No. 1 in Elk Grove Village, IL. In addition, MSC entered into a letter of intent for the sale of Plant No. 1 contingent upon the removal of the production line by March 2005.

(2) This facility was held under a capital lease until June 30, 2003. The Company extended the lease for five years until June 30, 2008 and this extension period is being treated as an operating lease. The lease may be further extended in five year increments, at the option of the Company, through June 30, 2023. From April 1, 1986 to May 7, 2003, this facility was subleased to the Partnership (see Note 6 of the Notes to the Consolidated Financial Statements entitled “Leases,” on page 44).

Item 3. Legal Proceedings

Environmental Matters

MSC is a party to various legal proceedings in connection with the remediation of certain environmental matters. The most significant proceedings relate to the Company’s involvement in Superfund sites in Kingsbury and Gary, Indiana. MSC has been named as a potentially responsible party (“PRP”) for the surface, soil and ground water contamination at these sites.

The United States District Court for the Northern District of Indiana has entered a Consent Decree between the government and certain PRPs on the scope of its remediation work at the Kingsbury site. The participating PRPs account for approximately 75% of the waste volume sent to this site. In December 2001, the PRPs established and funded a trust that has contracted with a remediation contractor to undertake all foreseeable activities necessary to achieve cleanup of the site pursuant to the decree. The trust has purchased an annuity that will pay the remediation contractor the anticipated expenses and oversight costs, including the purchase of stop-loss insurance coverage to reimburse the trust in the event of unforeseen cleanup expenses. The Company contributed $2.0 million to the trust in December 2001, with no impact to income (loss) before income taxes, and expects that this payment will conclude its financial obligations with respect to the Kingsbury site. In addition, the trust is receiving periodic payments by a non-participating PRP equal to such PRP’s share of the trust’s ongoing remediation expenses, and the Company will receive credits (which may be distributed as cash at the discretion of the trustees) in the amount of its pro rata share of such periodic payments. Moreover, should site closure be achieved ahead of schedule, the Company will be entitled to receive its pro rata share of the computed value of the annuity less a 25% early closure incentive bonus payable to the remediation contractor. The Company has not recorded any amounts for such potential distributions.

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The United States District Court for the Northern District of Indiana also has entered a Consent Decree between the government and certain PRPs on the scope of the remediation work at the Gary site. The estimate of the Company’s liability for this site is $0.9 million to $1.1 million. This work has begun, and MSC has maintained a letter of credit for approximately $1.2 million to secure its obligation to pay its currently estimated share of the remediation expenses at this site.

In November 2003, the Company received notice of a potential liability from the United States EPA regarding a Lake Calumet Cluster Site in Chicago, Illinois. To date, the Company has been unable to estimate the potential liability for this site, if any, due to the limited information that has been provided.

On February 27, 2002, the Company received a notice of alleged violations of environmental laws, regulations or permits from the Illinois EPA related to volatile organic matter (“VOM”) air emissions and other permitting issues at its Elk Grove Village facility. The Company has filed a response and performed stack testing for one of its production lines (“Tested Line”) under the supervision of the Illinois EPA. Those recent stack test results, when considered with stack test results from the facility’s other production lines taken in the past, indicate the Company’s Elk Grove Village facility is in compliance with the overall VOM emission limitations in its Clean Air Act permit. However, the Company’s VOM coating application volume on its Tested Line is in excess of the permit limit. To address that issue, the Company has filed a permit modification request to reflect the current VOM application rates on the facility’s production lines, which the Illinois EPA granted. The Illinois EPA has indicated that resolution of the matters alleged in the February 27, 2002 Notice of Violation were referred to the office of the Illinois Attorney General for potential enforcement action, which could lead to the imposition of penalties on the Company. On December 22, 2003, the Company received a notice from the office of the Illinois Attorney General of their intent to file an enforcement action regarding the alleged violations. In the fourth quarter of fiscal 2004, the Company recorded a reserve of approximately $0.2 million for its potential costs related to this action. The Illinois Attorney General filed a complaint on April 8, 2004.

MSC believes its range of exposure for all known sites, based on allocations of liability among PRPs and the most recent estimate of remedial work, is $1.2 million to $1.9 million. The Company’s environmental reserves were approximately $1.2 million as of February 29, 2004.

The Company believes that the ultimate outcome of its environmental legal proceedings will not have a material adverse effect on the Company’s financial condition or results of operations, given the reserves recorded as of February 29, 2004 and, where applicable, taking into account contributions from other PRPs. However, there can be no assurance that the Company’s environmental legal proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s financial condition or results of operations due to a number of uncertainties, including without limitation, the costs of site cleanup, the discretionary authority of the Illinois Attorney General in bringing enforcement actions and other factors.

Other Matters

The Company is also party to various legal actions and customer disputes arising in the ordinary course of its business. These legal actions and customer disputes cover a broad variety of claims spanning the Company’s entire business. The Company believes that the resolution of these legal actions and customer disputes will not, individually or in the aggregate, have a material adverse effect on the Company’s financial condition or results of operations.

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

There were no matters submitted to the Company’s shareowners during the fourth quarter of fiscal 2004.

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PART II

Item 5. Market for the Registrant’s Common Equity and Related Shareowner Matters

The Company’s common stock, $.02 par value, is listed on the New York Stock Exchange under the symbol “MSC.” The table below sets forth, by fiscal quarter, the high and low sales prices of the Company’s common stock during its past two fiscal years.

Fiscal Year	Fiscal Quarter	High		Low
2004	1st 2nd 3rd 4th	$	10.5600 11.1400 10.4900 12.8700	$	8.0500 8.9500 9.2900 9.4100
Fiscal Year	Fiscal Quarter	High		Low
2003	1st 2nd 3rd 4th	$	12.3000 15.6500 14.1200 14.9400	$	9.9700 12.4000 9.6300 10.2600

There were 748 shareowners of record of the Company’s common stock at the close of business on April 28, 2004.

On April 16, 2003, the Company’s Board of Directors voted to terminate the Company’s shareholder rights agreement. The agreement was terminated by redeeming all of the outstanding rights at a price of $0.01 per right, payable in cash. There was one right attached to each outstanding share of common stock. The redemption payment was mailed on or about May 27, 2003 to shareowners of record on April 28, 2003. As a result of the redemption, the rights cannot become exercisable, and the shareholder rights agreement was terminated (see Note 11 of the Notes to the Consolidated Financial Statements entitled “Equity and Compensation Plans,” on pages 48–51).

MSC has not paid cash dividends, other than the redemption payments for the rights under MSC’s shareholder rights agreement discussed above and a nominal amount in lieu of fractional shares in connection with stock dividends. Management currently anticipates that all earnings will be retained for development of the Company’s business. If business circumstances should change, the Board of Directors may declare and instruct the Company to pay dividends. However, the Company’s ability to pay dividends on its common stock is limited by certain covenants contained in the Company’s credit and Senior Note agreements (see Note 5 of the Notes to the Consolidated Financial Statements entitled “Indebtedness” on pages 43 and 44).

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Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with the Company’s Consolidated Financial Statements. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K in order to fully understand factors that may affect the comparability of the financial data below.

(Dollars and number of shares in thousands, except per share data)	Fiscal Year
	2004			2003			2002			2001			2000
Income Statement Data
Net Sales	$	243,218		$	266,818		$	250,506		$	273,860		$	278,669
Income (Loss) from Continuing Operations Before Income Taxes		(17,689	)		(1,712	)		(7,621	)		10,415			21,380
Net Income (Loss)(1)		(14,537	)		1,494			(25,083	)		(684	)		16,715
Diluted Net Income (Loss) Per Share	$(1.04)			$0.11			$(1.79)			$(0.05)			$1.10
Balance Sheet Data
Working Capital	$	37,875		$	68,398		$	115,463		$	162,735		$	163,378
Net Property, Plant and Equipment		80,667			93,188			102,915			118,464			124,922
Total Assets		203,954			237,809			299,474			345,539			350,564
Total Debt		43,944			55,503			105,262			137,465			120,667
Shareowners' Equity		110,978			121,887			128,624			149,736			158,982
Average Capital Employed	166,156			205,638			260,544			283,425			283,552
Cash Flow Data
Depreciation and Amortization	$	14,929		$	16,397		$	17,826		$	17,064		$	16,803
Net Cash Provided by (Used in) Operating Activities		4,397			33,622			(25,510	)		12,450			47,730
Capital Expenditures	4,519			6,259			5,289			9,710			9,763
Financial Ratios
Gross Profit as a % of Net Sales		16.9%			17.8%			18.1%			19.7%			22.6%
SG&A Expenses as a % of Net Sales		15.8%			15.2%			16.9%			15.3%			14.0%
Income (Loss) from Continuing Operations Before Income Taxes as a % of Net Sales		(7.3%	)		(0.6%	)		(3.0%	)		3.8%			7.7%
Net Income (Loss) as a % of Net Sales		(6.0%	)		0.6%			(10.0%	)		(0.2%	)		6.0%
Research and Development as a % of Net Sales		1.8%			1.5%			2.4%			2.3%			1.9%
Effective Income Tax Rate		20.6%			80.2%			41.1%			37.4%			33.3%
Return on Average Shareowners' Equity		(12.5%	)		1.2%			(18.0%	)		(0.4%	)		10.8%
Return on Average Capital Employed		(8.7%	)		0.7%			(9.6%	)		(0.2%	)		5.9%
Total Debt to Total Capital Employed		28.4%			31.3%			45.0%			47.9%			43.1%
Other Data
Per Share Information:
Net Cash Provided by (Used in) Operating Activities	$	0.31		$	2.36		$	(1.82	)	$	0.88		$	3.14
Book Value	$	7.93		$	8.57		$	9.18		$	10.59		$	10.46
Market Price:
High	$	12.87		$	15.65		$	10.96		$	14.31		$	15.75
Low	$	8.05		$	9.63		$	6.70		$	7.50		$	6.38
Close	$	11.38		$	10.26		$	10.00		$	8.80		$	14.44
P/E (High)		NM			142.3	x		NM			NM			14.3	x
P/E (Low)		NM			87.5	x		NM			NM			5.8	x
Weighted Average Number of Common Shares Outstanding Plus Dilutive Shares		13,990			14,226			14,007			14,141			15,200
Shareowners of Record		741			826			893			929			950
Number of Employees(2)	702			740			745			815			808

(1) In 2004, the Company has recorded a loss, net of tax, on the sale of Pinole Point Steel of $489; a pretax gain on the curtailment of Retiree Healthcare of $1,951; a pretax loss from asset impairments of $15,810, a pretax restructuring charge of $1,964, a pretax charge of $917 related to SERP buyouts, and a pretax charge of $322 related to retention agreements.

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In 2003, the Company recorded a gain, net of tax, on the sale of Pinole Point Steel of $1,934; a loss, net of tax, on the sale of Specialty Films of $101; a pretax contractual debt prepayment penalty of $2,388; and a pretax restructuring charge of $855.

In 2002, the Company recorded a gain, net of tax, on the sale of Specialty Films of $38,787; a loss, net of tax, on the sale of Pinole Point Steel of $53,287 (including a provision of $12,278 for future operating losses); a pretax restructuring charge of $1,450; and a pretax impairment charge of $8,361.

(2) Represents employees from continuing operations.

NM: Not meaningful.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (In thousands)

The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this Form 10-K.

Material Sciences Corporation (“MSC” or “Company”) reports segment information based on how management disaggregates its businesses for evaluating performance and making operating decisions. MSC reports results on the basis of two business segments, MSC Engineered Materials and Solutions Group (“EMS”) and MSC Electronic Materials and Devices Group (“EMD”). EMS’s electronic material-based solutions consist primarily of coated metal and laminated noise reducing materials used in the electronics market. EMS’s acoustical/thermal material-based solutions consist of layers of metal and other materials used to manage noise and thermal energy for the automotive, lighting and appliance markets. EMS’s coated metal material-based solutions include coil coated and electrogalvanized (“EG”) products primarily used in the automotive, building and construction, appliance and lighting markets. EMD’s electronic material-based solutions include field-effect technology for sensors, switches and interface solutions in the consumer electronics and transportation markets.

As a result of the sale of substantially all of the assets of the Company’s Specialty Films segment, including MSC Specialty Films, Inc. (“MSC/SFI”), to Bekaert Corporation and its affiliates (“Bekaert”) in the second quarter of fiscal 2002, and the sale of substantially all of the assets of the Company’s Pinole Point Steel business, including MSC Pinole Point Steel Inc. and MSC Pre Finish Metals (PP) Inc., to Grupo IMSA S.A. de C.V. (“IMSA”) and other third parties in the first quarter of fiscal 2003, both Specialty Films and Pinole Point Steel are reported as discontinued operations for all periods presented.

Results of Operations – Fiscal 2004 Compared with Fiscal 2003

Executive Summary

Net sales decreased by 8.8% in fiscal 2004 to $243,218 from $266,818 in fiscal 2003. MSC’s gross profit margin was 16.9%, or $41,015, in fiscal 2004 as compared with 17.8%, or $47,575, in the prior year. Selling, general and administrative (“SG&A”) expenses of $38,445 were 15.8% of net sales in fiscal 2004 as compared with $40,476, or 15.2%, of net sales in fiscal 2003.

Results of Operations

	2004		2003		2002
Net Sales	100.0	%	100.0	%	100.0	%
Cost of Sales	83.1		82.2		81.9
Gross Profit	16.9	%	17.8	%	18.1	%
Selling, General and Administrative Expenses	15.8		15.2		16.9
Asset Impairments, Restructuring and Other	7.0		0.3		3.9
Income from Operations	(5.9)	%	2.3	%	(2.7)	%
Total Other (Income) and Expense, Net	1.4		2.9		0.3
Loss from Continuing Operations Before Income Taxes	(7.3)	%	(0.6)	%	(3.0)	%
Income Taxes	(1.5)		(0.5)		(1.2)
Gain (Loss) on Discontinued Operations, Net of Income Taxes	(0.2)		0.7		(8.2)
Net Income	(6.0)%		0.6 %		(10.0)%

The general state of the principal industries in which the Company operates includes the following risks and opportunities. Overcapacity in the coil coating industry is approximately 27% which has an impact on pricing, facility utilization and the need for competitive terms of sale. In addition, the domestic steel industry has suffered numerous bankruptcies and strong international competition

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which has impacted the Company’s EG business and the availability and cost of steel substrate. However, there are significant growth opportunities for the Company’s noise, vibration and harshness (“NVH”) solutions in the acoustical/thermal and electronic markets served. We also believe that the future opportunities for EMD’s field-effect technology are significant, as exhibited by the recent commercial successes with Lear Corporation (“Lear”) and in the recreational vehicle and marine markets.

During fiscal 2004, management executed an action plan to make systemic cost reductions; initiate organizational changes designed to provide focus on operations; evaluate the strategic direction of the Company and its portfolio of operations; and perform a review of underperforming assets with the intent of improving performance, selling or idling those underperforming assets.

During the fiscal year, the Company benefited from approximately $6,800 of cost savings (including both cost of sales and SG&A cost reductions). These cost savings were due to the Company’s production efficiencies ($899); workforce reductions and reductions in benefit costs ($5,083, including the reduction of $1,951 in retiree health care liability in the second fiscal quarter); and other reductions in discretionary spending ($791).

The Company made certain organizational changes in fiscal 2004, impacting the Company’s marketing and manufacturing operations. The last changes were made in May 2004. The primary emphasis of these actions was to focus appropriate resources on the coil coating markets to increase sales and reduce costs. In the growth area of the business, primarily Quiet Steel products, the Company continues to invest in marketing and manufacturing facilities to commercialize its laminate products. These efforts were rewarded with key product wins including the Ford F 150 dash panel and oil pan, and the recessed floor pans for the “Stow ‘n Go” seat in the new Chrysler Town & Country and Dodge Grand Caravan Minivans. In May 2004, the Company announced the addition of a center of excellence (“COE”) which will be utilized for the engineering, application and validation of its NVH material solutions.

In connection with its strategic review process, the Company announced the sale of its idled Elk Grove Village production line in January 2004, and entered into a letter of intent for the sale of the Elk Grove Village production facility housing the idled line. In addition, the Company entered into retention agreements with key employees to ensure continuity of business operations. A significant portion of the retention benefits vest on May 31, 2005. The Company also entered into agreements to buyout legacy costs related to certain supplemental pension benefits (“SERP”) with officers and key employees.

As a result of the strategic review and fourth quarter events (industry wide metal shortages, higher metal pricing and the loss of a significant customer serviced by the Middletown, Ohio facility), the Company announced the closing of the Middletown facility in May 2004. The Board concluded that operating the remaining coil coating facilities would provide the best opportunity for a greater return to shareowners. This resulted in a pretax impairment charge of $9,071 in the fourth quarter of fiscal 2004. The Company also evaluated the goodwill related to its fiscal 2002 acquisition of Goldbach Automobil Consulting (“GAC”) in the fourth quarter in accordance with its accounting policy to review goodwill for impairment on an annual basis. The penetration of the European brake market was slower than previously projected. In addition, the Company experienced delays in the negotiation of definitive agreements with a potential strategic partner related to the marketing and sales of Quiet Steel in Europe. Based on these factors, the Company recorded a pretax impairment charge of $6,739. The Company is reviewing various strategic alliances, including joint ventures, to commercialize these products in Europe. However, we cannot be certain of the success of these efforts.

The Company is also reviewing the continued investment in the EMD business segment. We believe that the field-effect technology has significant value indicated by the acceptance of the technology in several areas including the automotive market (execution of an exclusive supply agreement with Lear), the non-automotive transportation market (products in the recreational vehicle and marine) and the consumer electronics market. The Company is currently discussing a full range of strategic alternatives as it relates to the EMD business. The Company believes that this process will accelerate the market penetration of the technology.

As discussed below, Asset Impairments, Restructuring and Other in the Consolidated Statements of Income total $17,062 which includes asset impairments of $15,810, restructuring expenses of $1,964 and other net benefits of $712.

MSC Engineered Materials and Solutions Group

Net sales for EMS decreased 8.9% in fiscal 2004 to $242,748 from $266,546 in fiscal 2003. Sales of electronic-based materials grew 18.9% to $26,810 in fiscal 2004 from $22,540 in the prior year. The

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growth was due to increased sales of NRGDamp^TM for computer disk drive covers as well as cabinetry materials. In fiscal 2004, acoustical/thermal materials sales increased 23.0% to $76,183 from $61,938 in fiscal 2003 primarily due to continued acceptance of the Company’s NVH solutions in the areas of body panel laminate (Quiet Steel), engine and aftermarket brake markets, somewhat offset by lower shipments of Specular +. Coated metal materials sales decreased 23.2% in fiscal 2004 to $139,755 from $182,068 in the prior year primarily due to lower electrogalvanizing sales resulting from ISG beginning to exit the EG market. In addition, lower sales to the gas tank, lighting and clutch plate markets were somewhat offset by higher sales to the appliance and swimming pool markets.

EMS’s gross profit margin was 16.7%, or $40,612, in fiscal 2004 as compared with 17.8%, or $47,540, in the prior year. Gross profit was impacted by several factors including the reduced capacity utilization (61% in fiscal 2004 compared with 77% in fiscal 2003); the inclusion of depreciation of the Walbridge Coatings facility due to the May 2003 purchase of the remaining interest in the Partnership; offset, to some extent, by the Company’s cost reduction program. SG&A expenses were $26,374 in fiscal 2004, an 8.8% decrease from $28,919 in fiscal 2003. The decrease was due to lower administrative costs resulting from the Company’s implementation of its cost reduction program and lower variable compensation expenses, slightly offset by increased investment in marketing and research and development.

On May 7, 2003, ISG purchased substantially all of Bethlehem Steel Corporation’s (“BSC”) assets as part of BSC’s bankruptcy proceedings. On the same day, MSC purchased from ISG the remaining 33.5% ownership interest in the Partnership for $3,600. Accordingly, as of such date, the Company has a 100% controlling interest in the Walbridge, Ohio facility. Prior to May 7, 2003, the Company accounted for the Partnership under the equity method. Beginning May 7, 2003, the results of Walbridge Coatings have been consolidated with the results of MSC and are included in the Consolidated Financial Statements. In conjunction with the ISG Transactions, MSC entered into a tolling agreement with ISG to provide EG and other coating and ancillary services to ISG for a period ending on December 31, 2004. ISG also assumed amounts payable by BSC to the Partnership through the expiration date of the tolling agreements. ISG has priority production rights to 25% of the available line time at the Walbridge, Ohio facility, and MSC markets the remaining 75% of the line time.

On May 13, 2002, the Company completed the purchase of an ownership interest in the Partnership from a subsidiary of LTV Steel Company, Inc. (“LTV”) for $3,137. As a result of the purchase, MSC’s ownership interest in the Partnership increased to 66.5% and it gained access to an additional 33% of the facility’s line time for a total of 37%.

On December 15, 2001, a major fire significantly damaged an electrogalvanizing facility owned by the Double Eagle Steel Coating Company (“DESCO”), a joint venture between U.S. Steel Corporation and Rouge Steel Company. The Partnership serviced both U.S. Steel Corporation and Rouge Steel Company through September 2002, when the DESCO facility resumed production, in addition to BSC, ISPAT Inland Inc. and other customers with EG and other services in fiscal 2003.

The Company’s sales to ISG for fiscal 2004 were significantly less than the fiscal 2003 sales to BSC ($37,379). For fiscal 2004, ISG utilized 30% of available line time at the Walbridge facility compared with BSC’s utilization of 49% in fiscal 2003. Based upon the loss of DESCO’s business, the expected decline in ISG’s utilization of the facility, partially offset by increased production of Quiet Steel, the Company operated the Walbridge, Ohio facility at approximately 60% of capacity in fiscal 2004 versus 81% in fiscal 2003. The Walbridge, Ohio facility’s current and future production levels, however, are dependent, in large part, upon economic conditions in the industries that use EG and other coated sheet steel products, including the automotive and appliance industries, the consumption of laminated noise and vibration products and the potential shifting of EG business between electrogalvanizing facilities by major steel producers. The Company expects the facility to operate at approximately 45% to 50% in fiscal 2005.

MSC Electronic Materials and Devices Group

Sales related to the switch/sensor business increased 72.8% to $470 from $272 in the prior year. Sales were related to prototype and product development services, product commercialization in the non-automotive market segment and the revenue associated with an exclusive supply agreement with Lear.

EMD’s gross profit margin was 85.7%, or $403, in fiscal 2004. The margin reflects the revenue generated by EMD’s supply agreement, non-recurring engineering revenue, and product sales in the non-automotive and consumer electronics market segments.

SG&A expenses were $5,464 in fiscal 2004 as compared with $3,774 in fiscal 2003. The SG&A expenses relate to marketing, research and development, and application development efforts related to

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the switch/sensor business and the license fee payable to TouchSensor Technologies, LLC (“TST”). The Company anticipates marketing, research and development and application development spending and the license fee payable to TST related to the switch/sensor business to be approximately $6,200 for fiscal 2005 based on anticipated spending levels.

The TST agreement provides EMD the right to manufacture, use, sell and further develop TST’s patented touch sensor technology for sensors, switches and interface solutions in the consumer electronics and transportation markets. Royalty payments to TST, per the license agreement, consist of a certain percentage of net sales of licensed products plus a certain percentage of sublicense profits subject to a minimum annual royalty amount (see Note 14 of the Notes to the Consolidated Financial Statements entitled “Contractual Commitment,” on page 53). In general, the exclusive license period ends on February 28, 2006, subject to the Company’s right to extend the exclusive license period under certain conditions (see “Contractual Obligations” on page 22).

On August 1, 2003, EMD entered into a supply and joint development agreement with Lear . This agreement provides Lear the exclusive right to incorporate EMD’s field effect technology-based MIRUS^™ detector cells into specific interior applications on passenger cars and light trucks. In consideration of this exclusive supply relationship, Lear has agreed to pay EMD $1,500 over the initial two years of the agreement. Both parties retain specific rights of termination during the term of the agreement. The consideration of $1,500 will be amortized into income over a three year period which coincides with the initial period of exclusivity. Under the exclusive supply portion of the agreement, any sales of product would be in addition to the $1,500 of consideration.

Asset Impairments

As one of the results of the Company’s strategic review process, the Company announced in May 2004 the closing of the Middletown, Ohio facility. This action was taken due to the underutilization of the facility, recent industry wide metal availability and pricing issues and the loss of a significant customer which made the facility noncompetitive in the market place. The aforementioned factors resulted in a pretax asset impairment charge of $9,071 being recorded in the fourth quarter of fiscal 2004. In addition, the Company expects to incur approximately $1,600 in fiscal 2005 related to location closing costs including severance and other expenses. The facility is expected to be closed by July 2004.

In the fourth quarter of fiscal 2004, MSC completed its annual assessment of goodwill under SFAS No. 142, “Goodwill and Other Intangible Assets.” Based on the assessment of the goodwill associated with the acquisition of GAC, the Company recorded a pretax impairment charge of $6,739. The impairment resulted from slower growth in the penetration of the European brake market than previously projected. In addition, the Company experienced delays in the identification and negotiation of definitive agreements with potential strategic partners related to the marketing and sales of Quiet Steel in Europe. The Company is reviewing various strategic alternatives, including strategic alliances, to commercialize these products in Europe.

In fiscal 2002, the Company reviewed its investment in its powder coating assets. MSC reevaluated its efforts to commercialize its proprietary powder coating capabilities and, based on the projected cash flows from the powder coating assets, recorded a $5,929 charge to earnings in fiscal 2002.

In fiscal 2002, the Company also reviewed its investment in the capitalized intangible assets and equipment related to its license with Northwestern University to commercialize Solid State Shear Pulverization (“SSSP”) technology. The Company completed research studies with potential licensees of the SSSP technology. Based on the projected cash flows from the SSSP assets, MSC recorded a $2,001 charge to earnings in fiscal 2002. The total impairment charge recorded in fiscal 2002 was $8,361.

Restructuring Expenses

On April 17, 2003, the Chairman, President and Chief Executive Officer resigned and was replaced by a non-executive Chairman of the Board and a new President and Chief Executive Officer. A separation arrangement was entered into resulting in a pretax charge to earnings of $1,821 in the first quarter of fiscal 2004. Of this amount, $1,543 is scheduled to be paid over two years and the remainder relates to the executive’s non-contributory supplemental pension plan to be paid in accordance with the plan. The Company recorded additional restructuring expenses of $143 in the first quarter of fiscal 2004. Total restructuring expenses for fiscal 2004 were $1,964. Of this amount, net cash of $977 was paid during fiscal 2004. A total of $559 is recorded as Accrued Payroll Related Expenses and $122 is recorded as Other Long-Term Liabilities in the Consolidated Balance Sheet as of February 29, 2004. The Company expects to incur approximately $700 in severance expense (in addition to Middletown related severance and closing costs) related to further reductions in labor and overhead in fiscal 2005.

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On November 20, 2002, the Company announced it had implemented a program to reduce overhead and improve efficiencies. The program involved restructuring the Company’s manufacturing organization, including terminating 14 salaried employees in the third quarter of fiscal 2003. The Company recorded a restructuring charge of $855 for severance and other related costs in the third quarter of fiscal 2003, $677 of which pertained to severance expenses and $178 for other related costs. Total cash paid in fiscal 2003 related to this restructuring program was $383. Total net cash paid in fiscal 2004 related to this restructuring program was $440, and as of February 29, 2004, all such amounts under this program were paid.

On November 15, 2001, the Company announced it implemented a reorganization and cost reduction program. MSC terminated 41 employees primarily in its sales, general and administrative departments and recorded a restructuring charge of $1,450 in fiscal 2002. Of this amount, $1,110 pertained to severance expenses and $340 for other related costs. As of February 28, 2003, all amounts under this restructuring program were paid.

	Severance			Other			Total
Restructuring Reserve Recorded on November 15, 2001	$	1,110		$	340		$	1,450
Cash Payments, Net		(676	)		(236	)		(912	)
Restructuring Reserve as of February 28, 2002	$	434		$	104		$	538
Restructuring Reserve Recorded on November 20, 2002		677			178			855
Cash Payments, Net		(720	)		(201	)		(921	)
Restructuring Reserve as of February 28, 2003	$	391		$	81		$	472
Restructuring Reserve Recorded During Fiscal 2004		1,013			951			1,964
Reclassification of Supplemental Pension Reserve		—			(338	)		(338	)
Cash Payments, Net		(794	)		(623	)		(1,417	)
Restructuring Reserve as of February 29, 2004	$	610		$	71		$	681

Other

During the second quarter of fiscal 2004, as part of its implementation of systemic cost reductions, the Company curtailed the future retiree health care benefits for certain active employees. This resulted in a one-time reduction in operating expenses and improvement in income from continuing operations of $1,951. This amount is recorded in the Asset Impairments, Restructuring and Other line in the Consolidated Statements of Income (Loss).

As noted in the Executive Summary, the Company entered into retention agreements with certain officers and key employees and bought-out certain SERP benefits. Approximately $322 and $917 were expensed in the fourth quarter of fiscal 2004 for retention and the buyout of SERP, respectively. In addition, a contingent liability (based on employees remaining with the Company through various dates through May 31, 2005) of approximately $1,850 will be expensed in fiscal 2005 and approximately $550 will be expensed in fiscal 2006 related to these agreements.

Total Other Expense, Net and Income Taxes

Total other expense, net, was $3,197 in fiscal 2004, compared with $7,956 in fiscal 2003. The variance was primarily due to the charge related to the early extinguishment of debt of $3,934 in fiscal 2003. Fiscal 2003 also included an allocation of consolidated interest expense to Pinole Point Steel (see Note 8 of the Notes to the Consolidated Financial Statements entitled “Interest (Income) Expense, Net” on page 47). No interest costs were allocated in fiscal 2004. Equity in Results of Joint Ventures was a net loss of $211 in fiscal 2004 as compared with a net loss of $1,557 in fiscal 2003. The Partnership loss is no longer being incurred effective with the Company’s purchase of the remaining interest in the Partnership on May 7, 2003.

MSC’s effective income tax rate was 20.6% (benefit) in fiscal 2004 as compared with 80.2% (benefit) in fiscal 2003. During fiscal 2003, the Internal Revenue Service completed its review of fiscal years 1997, 1998 and 1999. The Company analyzed its income tax reserve position based on this event and reduced its previously provided income tax reserves by $673 in the fourth quarter of fiscal 2003. The variance in the effective tax rate compared to the statutory rate was due to the income tax reserve adjustment and tax credits, valuation allowances for net operating losses and other permanent items relative to income (loss) before income taxes.

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Results of Discontinued Operations – Fiscal 2004 Compared with Fiscal 2003

Pinole Point Steel

On May 31, 2002, the Company completed the sale of substantially all of the assets of its Pinole Point Steel business. The Company is in the process of settling the net liabilities of the business. As of February 29, 2004, the Company has received $58,016 related to the disposition and liquidation of the business, consisting of $31,174 of sale proceeds from Grupo IMSA S.A. de C.V. and $26,842 from liquidating the Pinole Point Steel operations. The proceeds from liquidating the Pinole Point Steel operations include an income tax refund of $10,589 received during the second quarter of fiscal 2004 related to the sale of Pinole Point Steel. As of February 29, 2004, there are $414 in net liabilities remaining. The remaining net liabilities include liabilities (primarily workers compensation exposure) not assumed by Grupo IMSA S.A. de C.V. Pinole Point Steel has been reported as a discontinued operation, and the Consolidated Financial Statements have been reclassified to segregate the net assets or liabilities and operating results of the business.

As of February 28, 2002, the Company recorded a provision for loss on discontinued operation, net of income taxes, of $53,287. The loss on discontinued operation, net of income taxes, included the allocation of consolidated interest expense of $5,391 incurred from September 1, 2001 through May 31, 2002. The allocations were based on the debt associated with the original purchase of Pinole Point Steel in December 1997 and Pinole Point Steel’s subsequent cash flow. During fiscal 2003, the Company recorded an adjustment on sale of discontinued operation, net of income taxes, of $1,934 to reduce the previously provided loss on discontinued operation. The adjustment consisted of a favorable change in the estimated proceeds of the sale of $2,436 and a reduction for estimated operating losses of $1,247 due to higher plant utilization and customers’ willingness to accelerate product deliveries prior to the closing of the transaction. The adjustment also included an additional loss of $949 related to bad debt, product claims, workers compensation and employee expenses as well as a reduction of $800 primarily due to a change in the estimated apportionment of state income taxes.

Net sales of Pinole Point Steel for the partial year of fiscal 2003 were $48,050 versus $128,397 for the entire year of fiscal 2002. Loss from discontinued operation, net of income taxes, was $2,136 for the partial year of fiscal 2003 as compared to $16,456 for the entire year of fiscal 2002. The loss from discontinued operation, net of income taxes, includes the allocation of consolidated interest expense of $1,797 in fiscal 2003 versus $8,100 in the prior year.

Results of Operations – Fiscal 2003 Compared with Fiscal 2002

Net sales in fiscal 2003 increased by 6.5% to $266,818 from $250,506 in fiscal 2002. MSC’s gross profit margin was 17.8%, or $47,575, in fiscal 2003 as compared with 18.1%, or $45,231, in the prior year. SG&A expenses of $40,476 were 15.2% of net sales in fiscal 2003 as compared with $42,333, or 16.9%, of net sales in fiscal 2002.

MSC Engineered Materials and Solutions Group

Net sales for EMS increased 6.4% in fiscal 2003 to $266,546 from $250,506 in fiscal 2002. Sales of electronic-based materials grew 13.5% to $22,540 in fiscal 2003 from $19,856 in the prior year. The growth was due to an increase in NRGDamp sales for computer disk drive covers as well as set-top box sales. Acoustical/thermal materials sales declined 2.2% in fiscal 2003 to $61,938 as compared with $63,306 in fiscal 2002 primarily due to lower sales to the aftermarket brake and lighting markets, offset in part by higher shipments to the body panel laminate and engine markets. In fiscal 2003, sales of coated metal materials increased 8.8% to $182,068 from $167,344 in fiscal 2002.

EMS’s gross profit margin was 17.8%, or $47,540, in fiscal 2003 as compared with 18.1%, or $45,231, in the prior year. The decrease in gross profit margin was primarily the result of an unfavorable product mix and lower capacity utilization due to sales shortfalls of coated metal products and higher operating costs.

SG&A expenses were $28,919, or 10.8%, of net sales in fiscal 2003 versus $32,764, or 13.1%, of net sales in fiscal 2002. The decrease in SG&A percentage was due to the increase in net sales offset by $1,270 of bad debt expense incurred due to several customers declaring bankruptcy.

MSC Electronic Materials and Devices Group

SG&A expenses were $3,774 in fiscal 2003 which related to marketing and research and development spending related to the switch/sensor business and the license fee payable to TST.

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Total Other Expense, Net and Income Taxes

Total other expense, net, was $7,956 in fiscal 2003 as compared to $708 in fiscal 2002. The variance was primarily due to the allocation of interest expense to the Pinole Point Steel business for all of fiscal 2002 versus only the first quarter of fiscal 2003. In addition, fiscal 2003 included a charge related to the early extinguishment of debt of $3,934. Equity in Results of Joint Ventures was a net loss of $1,557 in fiscal 2003 as compared with a net loss of $1,560 in fiscal 2002.

MSC’s effective income tax rate was 80.2% (benefit) in fiscal 2003 as compared with 41.1% (benefit) in fiscal 2002. During fiscal 2003, the Internal Revenue Service completed its review of fiscal years 1997, 1998 and 1999. The Company analyzed its income tax reserve position based on this event and reduced its previously provided income tax reserves by $673 in the fourth quarter of fiscal 2003. The variance in the effective tax rate compared to the statutory rate was due to the income tax reserve adjustment and tax credits and other permanent items relative to income (loss) before income taxes.

Results of Discontinued Operations – Fiscal 2003 Compared with Fiscal 2002

Specialty Films

On June 29, 2001, the Company completed the sale of substantially all of the assets of its Specialty Films segment, including its interest in Innovative Specialty Films, LLC, to Bekaert pursuant to the terms of the Purchase Agreement by and among MSC, MSC/SFI, Bekaert and N.V. Bekaert S.A., dated June 10, 2001. The Company received cash of $121,982 and recorded an after-tax gain of $38,787 in the second quarter of fiscal 2002. Net proceeds after taxes and transaction costs were $90,537.

Net sales of Specialty Films for the partial year of fiscal 2002 were $21,578. Income from discontinued operation, net of income taxes, was $1,469 for the partial year of fiscal 2002.

During the second quarter of fiscal 2003, the Company recorded an after-tax charge of $101 related to a decrease in the previously estimated insurance premium refund for the Specialty Films business.

Liquidity and Capital Resources

The Company has historically financed its operations with funds generated from operating activities, borrowings under credit facilities and long-term debt instruments and sales of various assets. The Company believes that its cash on hand and availability under its amended and restated credit facility will be sufficient to fund its operations, redeem its 1998 senior notes and pay a contractual debt prepayment penalty associated therewith, and working capital needs.

MSC generated $4,397 of cash from operating activities in fiscal 2004, as compared with $33,622 in the prior fiscal year. The decrease in cash generation was due mainly to the investment in working capital of $18,652 in fiscal 2004 as compared with an investment of $2,398 in fiscal 2003. The increase in working capital was due mainly to the purchase of the Partnership interest in fiscal 2004, a change in payment terms, and an increase in inventory due to the growth in the Quiet Steel business and other building products using an organic coating over an EG substrate in the second half of the fiscal year. The working capital is now consolidated on MSC’s balance sheet versus recorded in investment in joint ventures in the prior year. The liquidation of Pinole Point also generated less cash from operating activities in fiscal 2004 as compared with fiscal 2003.

In fiscal 2004, MSC invested $4,519 in capital improvement projects compared with $6,259 in fiscal 2003. Investments in joint ventures were $358 in fiscal 2004 compared with $3,405 in fiscal 2003. The change in investments in joint ventures related to the Company’s purchase of LTV’s ownership interest in the Partnership for $3,137 in fiscal 2003. There were no investments in joint ventures related to discontinued operations in fiscal 2003 compared with $5,114 in fiscal 2002 due to the investment in the joint venture with Bekaert Corporation prior to the disposition of the Company’s Specialty Films business. On May 7, 2003, the Company invested $3,600 to purchase the remaining ownership interest in the Partnership from ISG. Fiscal 2005 capital expenditures are projected to be approximately $9,500. The increase is primarily due to the investment in the COE announced in May 2004.

MSC’s total debt decreased to $43,944 in fiscal 2004 from $55,503 as of February 28, 2003. The Company made principal debt payments of $11,278 on June 2, 2003 related to the 1998 Senior Notes. Total interest paid on the Senior Notes was $3,364 in fiscal 2004. In the fourth quarter of fiscal 2004, the results of operations, including the asset impairment charge, caused the Company to be out of compliance with the minimum net worth covenant under the terms of the 1998 Senior Notes. Accordingly, the Company notified the holders of the 1998 Senior Notes that it intended to repay the principal, interest and contractual debt

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prepayment penalty on or before June 1, 2004. The Company paid principal of $36,167, interest of $1,086 and a contractual debt prepayment penalty of $3,318 to all but two noteholders on May 10, 2004. The remaining noteholders elected to receive payment on or before June 1, 2004. The Company expects to pay the remaining principal ($7,778), approximate interest ($264) and estimated contractual debt prepayment penalty ($713) on or before June 1, 2004. In addition, the remaining noteholders waived the noncompliance of the minimum net worth covenant until June 1, 2004 or earlier upon prepayment of the notes (see Note 5 of the Notes to the Consolidated Financial Statements entitled “Indebtedness,” on pages 43 and 44). On July 31, 2002, the Company made a debt payment of $39,432 to the holders of the 1997 Senior Notes. The debt payment consisted of principal of $35,714 and a contractual debt prepayment penalty of $3,934 (pretax basis). The contractual debt prepayment penalty included the prepayment penalty of $3,718 and a $216 write-off of debt issuance costs.

The Company entered into an amended and restated $30,000 committed line of credit (“New Line”) on April 30, 2004. The agreement expires on October 11, 2007. No borrowings were outstanding under the New Line or previous line as of February 29, 2004. There were $3,357 in outstanding letters of credit as of February 29, 2004. Under the New Line, fees are charged for the unused portion of the line. At the Company’s option, interest is at the bank’s prime rate (4.0% as of February 29, 2004) or at LIBOR plus a margin based on funded debt to EBITDA (as defined in the agreement). The financial covenants include a fixed charge coverage ratio of not less than 1.25 to 1.0 commencing May 31, 2004; a maximum leverage ratio (3.0 to 1.0); and minimum net worth of $80,000 plus 50% of positive consolidated net income ending on or after May 31, 2004. As of February 29, 2004, the outstanding letters of credit were cash collateralized. A total of $3,357 was classified as Restricted Cash in the Consolidated Balance Sheets. There are restrictions on the Company’s use of its cash and cash equivalents related to repurchase of stock, dividends and acquisitions. The New Line is secured by specific personal property (including receivables, inventory and property, plant and equipment) and intangible property of the Company.

On March 1, 2002, the Company purchased 13,593 of its shares from certain employees at $10.00 per share related to the vesting of the Company’s 1999 Long-Term Incentive/Leverage Stock Awards Program. The Compensation Committee of the Board of Directors approved the share repurchase under the provisions of the Material Sciences Corporation 1992 Omnibus Awards Plan for Key Employees to cover a portion of the participants’ tax withholding liability for the vesting of these shares under the 1999 Program. On June 20, 2002, the Company resumed the previously approved repurchase program (suspended in fiscal 2001) and purchased the remaining of the authorized shares for a total of 290,619 shares with an average purchase price of $14.89 per share by February 28, 2003. On June 20, 2002, MSC’s Board of Directors also authorized a new program to repurchase up to an additional 500,000 shares of the Company’s common stock. The repurchase of 500,000 shares was complete as of February 28, 2003 with an average purchase price of $14.50 per share. No further share repurchase programs have been approved by the Company’s Board of Directors.

MSC had a capital lease obligation of $281 as of February 28, 2003 and $905 as of February 28, 2002, relating to a facility that the Company subleased to the Partnership. The capital lease expired on June 30, 2003. In the fourth quarter of fiscal 2003, the Company renewed the term of the lease for five years ending June 30, 2008. The extension is being treated as an operating lease (see Note 6 of the Notes to the Consolidated Financial Statements entitled “Leases,” on page 44).

The Company paid minimum royalty fees of $1,500 in fiscal 2004 and $1,167 in fiscal 2003 related to the license agreement with TST. The Company has a contingent liability related to the license agreement with TST to pay minimum royalty fees of $2,750 in fiscal 2005 and $2,750 in fiscal 2006.

On April 16, 2003, the Company’s Board of Directors voted to terminate the Company’s shareholder rights agreement. The agreement was terminated by redeeming all of the outstanding rights at a price of $0.01 per right, or approximately $148 in the aggregate, payable in cash and recorded as a charge to Shareowners’ Equity in the Consolidated Balance Sheets. There was one right attached to each outstanding share of common stock. The redemption payment was mailed on or about May 27, 2003 to shareowners of record on April 28, 2003. As a result of the redemption, the rights cannot become exercisable, and the shareholder rights agreement was terminated.

The Company is continuously reviewing the potential for investments in its growth markets. In addition, the Company also reviews the potential value to shareowners of divesting facilities or other assets which are not performing to the Company’s expectations.

The Company is party to various legal actions arising in the ordinary course of its business. These legal actions cover a broad variety of claims spanning the Company’s entire business. The Company believes that the resolution of these legal actions will not, individually or in the aggregate, have a material

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adverse effect on the Company’s financial condition or results of operations. The Company is also a party to various legal proceedings in connection with the remediation of certain environmental matters. MSC believes its range of exposure for all known and quantifiable environmental exposures, based on allocations of liability among potentially responsible parties, the most recent estimate of remedial work, and other information available, is $1,200 to $1,900 as of February 29, 2004 (see “Legal Proceedings” on pages 10 and 11, and Note 4 of the Notes to the Consolidated Financial Statements entitled “Contingencies,” on pages 41 and 42).

Contractual Obligations

The following table summarizes the contractual obligations the Company has outstanding as of February 29, 2004.

Contractual Obligations	Obligations Due In
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Operating Leases	$	6,879	$	1,975	$	4,350	$	554	$	—
Minimum Royalties		5,500		2,750		2,750		—		—
SERP		917		917		—		—		—
Purchase Obligations		32,232		32,232		—		—		—
Long-Term Debt Principal		43,944		36,944		7,000		—		—
Total	$	89,472	$	74,818	$	14,100	$	554	$	—

Inflation

MSC believes that inflation has not had a significant impact on fiscal 2004, 2003 and 2002 results of operations.

Critical Accounting Policies

MSC’s significant accounting policies are presented within the Notes to the Consolidated Financial Statements (see Note 1 of the Notes to the Consolidated Financial Statements entitled “Summary of Significant Accounting Policies,” on pages 36-40) included elsewhere in this Form 10-K. While all of the significant accounting policies impact the Company’s Consolidated Financial Statements, some of the policies may be viewed to be critical. These policies are those that are both most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective or complex judgments and estimates. Management bases its judgments and estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. The results of judgments and estimates form the basis for making judgments about the Company’s value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.

Revenue Recognition. The Company recognizes revenue upon shipment of goods to customers, at which time title (MSC’s value added content in the case of toll processing) and risk of loss pass to the customer. The Company records shipping and handling billed to a customer in a sales transaction as revenue. Costs incurred for shipping and handling are recorded in cost of sales. Volume discounts due customers are recognized as earned and reported as reductions of revenue in the Consolidated Statements of Income (Loss). The Company’s revenue recognition policies comply with the criteria set forth in Staff Accounting Bulletin No. 104, “Revenue Recognition.” The Company also records expenses for manufacturing claims for product defects based upon historical experience and upon specific claims issues as they arise. Any material differences between these estimates and our actual costs are recorded on a monthly basis and are reflected in the historical experience prospectively.

Long-Lived Assets. Long-lived assets consist of property, plant and equipment and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based on projections of cash flows on a non-discounted basis. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. Fair value is determined based on market quotes, if available, or is based on valuation techniques, such as discounted cash flows. The valuation techniques utilize certain assumptions made by the Company including, but not limited to,

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estimated fair market value of assets, which are based on additional assumptions such as public market data, depreciation factors for orderly liquidation, including allowances such as dismantlement and removal, and the relationship between replacement cost new and market value based on the age of the assets.

Goodwill. In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” With the adoption of SFAS No. 142 on March 1, 2002, goodwill will no longer be subject to amortization over its estimated useful life. Goodwill will be subject to at least an annual assessment of impairment by applying a fair value based test. This test requires that the Company estimate the fair value of its goodwill and compare that estimate to the amount of goodwill recorded on the Consolidated Balance Sheet. The estimation of fair value requires that the Company make judgments concerning future cash flows and appropriate discount rates. The estimate of the fair-value of goodwill could change over time based on a variety of factors, including the actual operating performance of the relevant portion of the business (see Note 1, of the Notes to the Consolidated Financial Statements entitled, “Summary of Significant Accounting Policies – Goodwill” on pages 37 and 38).

Income Taxes. The provision for income taxes is determined under the liability method pursuant to SFAS No. 109. Under this method, deferred tax assets and liabilities are recognized based on differences between the financial statement and tax bases of assets and liabilities using presently enacted tax rates. The Company has net deferred tax assets of $7.3 million at February 29, 2004. In assessing the need for valuation allowances, the Company considers future forecasted taxable income and tax planning strategies. The Company has determined that it is unlikely that it will be able to realize certain deferred tax assets in the foreseeable future relating its GAC operation. A valuation allowance of $2.6 million was recorded during fiscal 2004 related to these deferred tax assets. Although the Company’s management believes its tax accruals are adequate, differences may occur in the future depending on the resolution of pending and new tax matters.

Defined Benefit Retirement Plans. The plan obligations and related assets of defined benefit retirement plans (including the non-contributory supplemental pension plans for some MSC officers) are presented in Note 7 of the Notes to Consolidated Financial Statements entitled “Retirement Plans.” Plan assets, which consist primarily of marketable equity and debt instruments, are valued using market quotations. Plan obligations and the annual pension expense are determined by consulting actuaries using a number of assumptions. Key assumptions in measuring the plan obligations include the discount rate at which the obligation could be effectively settled and the anticipated rate of future salary increases. Key assumptions in the determination of the annual pension expense include the discount rate, the rate of salary increases and the estimated future return on plan assets. To the extent actual amounts differ from these assumptions and estimated amounts, results could be adversely affected.

Accounting Pronouncements

In June 2001, FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting. With the adoption of SFAS No. 142 on March 1, 2002, goodwill will no longer be subject to amortization over its estimated useful life. Goodwill will be subject to at least an annual assessment of impairment by applying a fair-value based test, beginning on the date of adoption of the new accounting standard. The Company completed its initial assessment as of August 31, 2002 and its annual assessment as of February 28, 2003, as required under the impairment requirements of SFAS No. 142 and no impairment was deemed necessary. The Company also completed the required annual impairment assessment as of February 29, 2004 and recorded an impairment charge of $6,739 related to GAC (see Note 13 of the Notes to the Consolidated Financial Statements entitled, “Asset Impairments and Restructuring” on page 52 and 53).

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which is effective for financial statements issued for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The adoption of SFAS No. 143 did not have an impact on the financial position or results of operations of the Company.

The Company adopted SFAS No. 144, “Impairment or Disposal of Long-Lived Assets” on March 1, 2002. This statement addresses accounting and reporting for the impairment or disposal of long-lived assets, including discontinued operations, and establishes a single accounting model for long-lived assets to

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be disposed of by sale. MSC has assessed the impairment requirements of SFAS No. 144 and has reviewed all assets for potential impairment and determined that there are no other impairments other than the charge for the Middletown, Ohio facility as of February 29, 2004.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” SFAS No. 145 makes changes to several areas, including the classification of gains and losses from extinguishment of debt and accounting for certain lease modifications. The statement is effective for fiscal years beginning after May 15, 2002. With the adoption of SFAS No. 145 on March 1, 2003, the contractual debt prepayment penalty is no longer classified as an extraordinary item and is reflected as a component of income from continuing operations in the Consolidated Statements of Income (Loss).

In November 2002, the FASB issued Interpretation No. 45 “Guarantees, Including Indirect Guarantees of Indebtedness to Others,” which expands previously issued accounting guidance and disclosure requirements for certain guarantees. Interpretation No. 45 requires the Company to recognize an initial liability for fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has evaluated the provisions of Interpretation No. 45, and has determined that no guarantees or indemnifications currently exist that must be disclosed or accounted for according to the requirements of Interpretation No. 45.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FASB Statement No. 123.” This statement amends FASB No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and disclosure provisions of SFAS No. 148 are effective for the February 28, 2003 and February 29, 2004 financial statements.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106, and a revision of FASB Statement No. 132.” This standard revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, “Employers’ Accounting for Pensions,” No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The new rules require additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. The new disclosures are effective for the Company in fiscal year 2004. As a result, we have modified the related discussion in Note 7 entitled “Retirement Plans” to comply with this revised standard.

Effective March 1, 2003, the Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which rescinds Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by this statement include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. Adoption of this statement had no material impact on the company’s financial position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which requires certain financial instruments that were previously presented on the consolidated balance sheets as equity to be presented as liabilities. Such instruments include mandatorily redeemable financial instruments and certain options and warrants. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for the company as of July 1, 2003. Adoption of this standard had no impact on the Company’s financial position, results of operations or cash flows.

Effective July 1, 2003, the Company adopted EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” which establishes criteria for whether revenue on a deliverable

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can be recognized separately from other deliverables in a multiple deliverable arrangement. The criteria considers whether the delivered item has stand-alone value to the customer, whether the fair value of the delivered item can be reliably determined and the customer’s right of return for the delivered item. Adoption of this standard had no material impact on the Company’s financial position, results of operations or cash flows.

In January 2003 and December 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), and its revision, FIN 46-R, respectively. FIN 46 and FIN 46-R address the consolidation of entities whose equity holders have either not provided sufficient equity at risk to allow the entity to finance its own activities or do not possess certain characteristics of a controlling financial interest. FIN 46 and FIN 46-R require the consolidation of these entities, known as variable interest entities (“VIEs”), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that is subject to a majority of the risk of loss from the VIE’s activities, entitled to receive a majority of the VIE’s residual returns, or both. FIN 46 and FIN 46-R are applicable for financial statements of public entities that have interests in VIEs or potential VIEs referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. Adoption of both of these standards is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

On December 17, 2003, the Staff of the Securities and Exchange Commission (“SEC” or “the Staff”) issued Staff Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition,” which amends SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21. Additionally, SAB 104 rescinds the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” (“the FAQ”) issued with SAB 101 that had been codified in SEC Topic 13, “Revenue Recognition.” Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. Adoption of this standard had no material impact on the Company’s financial position, results of operations or cash flows.

Cautionary Statement Concerning Forward-Looking Statements

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Form 10-K contains forward-looking statements, which include, without limitation, those statements regarding our estimated loss and proceeds from the disposition of discontinued operations, that set out anticipated results based on management’s plans and assumptions. MSC has tried, wherever possible, to identify such statements by using words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with any discussion of future operating or financial performance.

Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Many factors could also cause actual results to be materially different from any future results that may be expressed or implied by the forward-looking statements contained in this Form 10-K, including, among others:

• The Company’s ability to successfully implement its restructuring and cost reduction plans and achieve the benefits it expects from these plans, net of estimated severance-related costs;

• Impact of changes in the overall economy;

• Changes in the business environment, including the transportation, building and construction, electronics and durable goods industries;

• Competitive factors (including changes in industry capacity);

• Changes in laws, regulations, policies or other activities of governments, agencies and similar organizations (including the ruling under Section 201 of the Trade Act of 1974);

• Continuation of the favorable environment to make acquisitions, including regulatory requirements and market values of candidates;

• The stability of governments and business conditions inside and outside the U.S., which may affect a successful penetration of the Company’s products;

• Acts of war or terrorism;

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• Acceptance of brake damping materials, engine components and body panel laminate parts by customers in North America and Europe;

• Proceeds and potential impact from the potential sale or closing of facilities or other assets;

• Increases in the prices of raw and other material inputs used by the Company, as well as availability;

• The loss, or changes in the operations, financial condition or results of operations, of one or more significant customers of the Company;

• The risk of the successful development, introduction and marketing of new products and technologies, including products based on the touch sensor technology the Company has licensed from TST;

• The anticipated marketing and research and development spending and the license fee payable to TST related to the switch/sensor business;

• The realization of the future value of the Lear Corporation agreement;

• Facility utilization and product mix at MSCWC’s facility, including the extent of ISG’s utilization;

• Realization of the tax credit carryforward generated from the sale of Pinole Point Steel and other net operating loss carryforwards;

• The impact of future warranty expenses;

• Environmental risks, costs, recoveries and penalties associated with the Company’s past and present manufacturing operations, including any risks, costs and penalties arising out of an enforcement action by the Illinois EPA and Illinois Attorney General related to the Company’s Elk Grove Village facility and the Lake Calumet site;

• Continuation of current interest rates and the potential impact on potential future contractual debt prepayment penalty;

• Assumptions used in the calculations for the Middletown asset impairment (including the discount rate, projected cash flows, and other assumptions used in the calculation of the valuation of long-lived assets);

• Assumptions used in the calculations for goodwill impairment (including terminal value, sales and income projections, discount rate, EBITDA multiple and cash flows);

• Expected severance and shutdown related costs related to the Middletown, Ohio facility;

• Expected results of operations from foreign operations, and;

• Other factors, risks and uncertainties described elsewhere in this Form 10-K and from time to time in the Company’s other filings with the Securities and Exchange Commission.

MSC undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. This discussion of potential risks and uncertainties is by no means complete but is designed to highlight important factors that may impact the Company’s business and financial condition. Other sections of this Form 10-K may include additional factors which could adversely effect the Company’s business and financial performance. Moreover, the Company operates in a competitive environment. New risks emerge from time to time and it is not always possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or to which any factor or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, shareowners should not place undue reliance on forward-looking statements as a prediction of actual results.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company operates internationally (Malaysia, Germany and Brazil), and thus is subject to potentially adverse movements in foreign currency rate changes. As of February 29, 2004, foreign sales were approximately 5.0% of consolidated net sales. Historically, the effect of movements in the exchange rates have not been material to the financial position or the results of operations of the Company. The Company believes that movement in foreign currency exchange rates will not have a material adverse affect on the financial position or results of operations of the Company.

26

The table below provides information about the Company’s debt that is sensitive to changes in interest rates.

	Expected Maturity Date (Fiscal Year)
(Dollars in Thousands)	2005			2006		2007			2008		2009		Thereafter		Total			Fair Value
Fixed Rate:
Principal Amount	$	36,944		$	—	$	7,000		$	—	$	—	$	—	$	43,944		$	38,451
Average Interest Rate		6.8	%		—		6.8	%		—		—		—		6.8	%
Variable Rate:
Principal Amount	$	—		$	—	$	—		$	—	$	—	$	—	$	—		$	—
Average Interest Rate		N/A			N/A		N/A			N/A		N/A		N/A		N/A

The Company notified the holders of the 1998 Senior Notes that it intended to repay the principal, interest and contractual debt prepayment penalty on or before June 1, 2004. The Company paid principal of $36,167, interest of $1,086 and a contractual debt prepayment penalty of $3,318 to all but two noteholders on May 10, 2004. The remaining noteholders elected to receive payment on or before June 1, 2004. The Company expects to pay the remaining principal ($7,778), approximate interest ($264) and estimated contractual debt prepayment penalty ($713) on or before June 1, 2004.

Item 8. Financial Statements and Supplementary Data

Material Sciences Corporation

Index to Consolidated Financial Statements and Financial Statement Schedule

Covered by Report of Independent Accountants

	Page No.
Independent Auditors’ Report	28
Report of Independent Public Accountants	30
Consolidated Statements of Income (Loss) for the years ended February 28 or 29, 2004, 2003 and 2002	31
Consolidated Balance Sheets as of February 29, 2004 and February 28, 2003	32
Consolidated Statements of Cash Flows for the years ended February 28 or 29, 2004, 2003 and 2002	33
Consolidated Statements of Changes in Shareowners’ Equity for the years ended February 28 or 29, 2004, 2003 and 2002	34
Consolidated Statements of Comprehensive Income (Loss) for the years ended February 28 or 29, 2004, 2003 and 2002	35
Notes to Consolidated Financial Statements	36
Schedule II, Reserve for Receivable Allowances	63

Note: All other financial statement schedules are omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or notes thereto.

27

Independent Auditors’ Report

To the Board of Directors of Material Sciences Corporation

Elk Grove Village, Illinois

We have audited the accompanying consolidated balance sheets of Material Sciences Corporation and Subsidiaries (“the Company”) as of February 29, 2004, and February 28, 2003, and the related statements of income, cash flows, shareowners’ equity and comprehensive income for each of the two years in the period ended February 29, 2004. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. The financial statements of the Company for the year ended February 28, 2002, prior to (i) the addition of the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), described in Note 1 to the financial statements and (ii) the adjustment necessary to conform the 2002 segment disclosures to the 2004 and 2003 composition of reportable segments, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated April 29, 2002.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of Material Sciences Corporation and Subsidiaries as of February 29, 2004, and February 28, 2003, and the results of their operations and their cash flows for each of the two years in the period ended February 29, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2003.

As discussed above, the financial statements of Material Sciences Corporation and Subsidiaries for the year ended February 28, 2002, were audited by other auditors who have ceased operations. As described in Note 1, these financial statements have been revised to include the transitional disclosures required by SFAS No. 142, which was adopted by the Company as of March 1, 2002. Our audit procedures with respect to the disclosures in Note 1 related to 2002 included (i) comparing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill, equity method goodwill, and intangible assets that are no longer being amortized, as a result of initially applying SFAS No. 142 (including any related tax effects) to the Company’s underlying records obtained from management, and (ii) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings per share amounts. In our opinion, the transitional disclosures for 2002 in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2002 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2002 financial statements taken as a whole.

As discussed above, the financial statements of Material Sciences Corporation for the year ended February 28, 2002, were audited by other auditors who have ceased operations. As described in Note 15, the company changed the composition of its reportable segments in 2003, and the amounts in the 2002 financial statements relating to reportable segments have been restated to conform to the 2004 and 2003 composition of reportable segments. We audited the adjustments that were applied to restate the disclosures for reportable segments reflected in the 2002 financial statements. Our procedures included (i) comparing the adjusted amounts of segment revenues, operating income and assets to the Company’s underlying records obtained from management, and (ii) testing the mathematical accuracy of the

28

reconciliations of segment amounts to the consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2002 financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2002 financial statements taken as a whole.

/s/    DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Chicago, Illinois

May 10, 2004

29

The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP.

To the Board of Directors of Material Sciences Corporation:

We have audited the accompanying consolidated balance sheets of Material Sciences Corporation (a Delaware corporation) and Subsidiaries as of February 28, 2002 and 2001, and the related statements of income (loss), cash flows, shareowners’ equity and comprehensive income (loss) for each of the three years in the period ended February 28, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Material Sciences Corporation and Subsidiaries as of February 28, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended February 28, 2002, in conformity with accounting principles generally accepted in the United States.

Arthur Andersen LLP

Chicago, Illinois

April 29, 2002

30

Consolidated Statements of Income (Loss)

Material Sciences Corporation and Subsidiaries

	For the years ended February 28 or 29,
(In thousands, except per share data)	2004			2003			2002
Net Sales	$	243,218		$	266,818		$	250,506
Cost of Sales		202,203			219,243			205,275
Gross Profit	$	41,015		$	47,575		$	45,231
Selling, General and Administrative Expenses		38,445			40,476			42,333
Asset Impairments, Restructuring and Other		17,062			855			9,811
Income (Loss) from Operations	$	(14,492	)	$	6,244		$	(6,913	)
Other (Income) and Expense:
Interest (Income) Expense, Net	$	2,896		$	2,440		$	(1,126	)
Equity in Results of Joint Ventures		211			1,557			1,560
Contractual Debt Prepayment Penalty		—			3,934			—
Other, Net		90			25			274
Total Other Expense, Net	$	3,197		$	7,956		$	708
Loss from Continuing Operations Before Benefit for Income Taxes	$	(17,689	)	$	(1,712	)	$	(7,621	)
Benefit for Income Taxes		(3,641	)		(1,373	)		(3,130	)
Loss from Continuing Operations	$	(14,048	)	$	(339	)	$	(4,491	)
Discontinued Operations:
Income from Discontinued Operation – Specialty Films (Net of Provision for Income Taxes of $0, $0, and $1,009, Respectively)		—			—			1,469
Loss from Discontinued Operation – Pinole Point Steel (Net of Benefit for Income Taxes of $0, $0 and $5,261, Respectively)		—			—			(7,561	)
Gain (Loss) on Sale of Discontinued Operation – Specialty Films (Net of Benefit for Income Taxes of $0 and $70 and Provision for Income Taxes of $31,445, Respectively)		—			(101	)		38,787
Gain (Loss) on Discontinued Operation – Pinole Point Steel (Net of Benefit for Income Taxes of $316, Provision for Income Taxes of $2,726, and Benefit for Incomes Taxes of $37,047, Respectively)		(489	)		1,934			(53,287	)
Net Income (Loss)	$	(14,537	)	$	1,494		$	(25,083	)
Basic Net Income (Loss) Per Share:
Loss from Continuing Operations	$	(1.00	)	$	(0.02	)	$	(0.32	)
Income from Discontinued Operation – Specialty Films		—			—			0.10
Loss from Discontinued Operation – Pinole Point Steel		—			—			(0.54	)
Gain (Loss) on Sale of Discontinued Operation – Specialty Films		—			(0.01	)		2.77
Gain (Loss) on Discontinued Operation – Pinole Point Steel		(0.04	)		0.14			(3.80	)
Basic Net Income (Loss) Per Share	$	(1.04	)	$	0.11		$	(1.79	)
Diluted Net Income (Loss) Per Share:
Loss from Continuing Operations	$	(1.00	)	$	(0.02	)	$	(0.32	)
Income from Discontinued Operation – Specialty Films		—			—			0.10
Loss from Discontinued Operation – Pinole Point Steel		—			—			(0.54	)
Gain (Loss) on Sale of Discontinued Operation – Specialty Films		—			(0.01	)		2.77
Gain (Loss) on Discontinued Operation – Pinole Point Steel		(0.04	)		0.14			(3.80	)
Diluted Net Income (Loss) Per Share	$	(1.04	)	$	0.11		$	(1.79	)
Weighted Average Number of Common Shares Outstanding Used for Basic Net Income (Loss) Per Share		13,990			13,941			14,007
Dilutive Shares		—			285			—
Weighted Average Number of Common Shares Outstanding Plus Dilutive Shares		13,990			14,226			14,007
Outstanding Common Stock Options Having No Dilutive Effect		427			633			912

The accompanying notes are an integral part of these statements.

31

Consolidated Balance Sheets

Material Sciences Corporation and Subsidiaries

	February 28 or 29,
(In thousands, except share data)	2004			2003
Assets
Current Assets:
Cash and Cash Equivalents	$	33,483		$	43,880
Restricted Cash		3,357			2,280
Total Cash, Cash Equivalents and Restricted Cash	$	36,840		$	46,160
Marketable Securities		—			1,002
Receivables, Less Reserves of $4,185 in 2004 and $4,874 in 2003		40,386			27,607
Income Taxes Receivable		51			2,339
Prepaid Expenses		1,290			1,792
Inventories:
Raw Materials		8,946			10,540
Finished Goods		22,271			15,832
Deferred Income Taxes		2,235			1,461
Assets Held for Sale		2,281			506
Current Assets of Discontinued Operation, Net – Pinole Point Steel		—			16,035
Total Current Assets	$	114,300		$	123,274
Property, Plant and Equipment:
Land and Building	$	54,506		$	59,975
Machinery and Equipment		162,178			171,576
Capital Leases		17,195			17,195
Construction in Progress		2,484			2,497
	$	236,363		$	251,243
Accumulated Depreciation and Amortization		(155,696	)		(158,055	)
Net Property, Plant and Equipment	$	80,667		$	93,188
Other Assets:
Investment in Joint Ventures	$	1,399		$	12,881
Goodwill		1,319			7,116
Deferred Income Taxes		5,080			—
Other		1,189			1,350
Total Other Assets	$	8,987		$	21,347
Total Assets	$	203,954		$	237,809
Liabilities
Current Liabilities:
Current Portion of Long-Term Debt	$	36,944		$	11,559
Accounts Payable		20,723			22,944
Accrued Payroll Related Expenses		12,154			13,705
Accrued Expenses		6,190			6,668
Current Liabilities of Discontinued Operation, Net – Pinole Point Steel		414			—
Total Current Liabilities	$	76,425		$	54,876
Long-Term Liabilities:
Deferred Income Taxes	$	—		$	5,699
Long-Term Debt, Less Current Portion		7,000			43,944
Other		9,551			11,403
Total Long-Term Liabilities	$	16,551		$	61,046
Shareowners’ Equity
Preferred Stock, $1.00 Par Value; 10,000,000 Shares Authorized; 1,000,000 Designated Series B Junior Participating Preferred; None Issued	$	—		$	—
Common Stock, $.02 Par Value; 40,000,000 Shares Authorized; 18,431,998 Shares Issued and 14,243,350 Shares Outstanding as of February 29, 2004 and 18,221,830 Shares Issued and 14,033,182 Shares Outstanding as of February 28, 2003		369			365
Additional Paid-In Capital		72,387			70,143
Treasury Stock at Cost, 4,188,648 Shares as of February 29, 2004 and February 28, 2003		(46,528	)		(46,528	)
Retained Earnings		82,759			97,296
Accumulated Other Comprehensive Income		1,991			611
Total Shareowners’ Equity	$	110,978		$	121,887
Total Liabilities and Shareowners’ Equity	$	203,954		$	237,809

The accompanying notes are an integral part of these statements.

32

Consolidated Statements of Cash Flows

Material Sciences Corporation and Subsidiaries

	For the years ended February 28 or 29,
(In thousands)	2004			2003			2002
Cash Flows From:
Operating Activities:
Net Income (Loss)	$	(14,537	)	$	1,494		$	(25,083	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities:
Discontinued Operation, Net – Specialty Films		—			—			(2,597	)
Discontinued Operation, Net – Pinole Point Steel		10,205			16,637			1,096
(Gain) Loss on Sale of Discontinued Operation – Specialty Films		—			101			(38,787	)
(Gain) Loss on Discontinued Operation – Pinole Point Steel		489			(1,934	)		53,287
Depreciation and Amortization		14,929			16,397			17,826
Asset Impairments		15,713			—			8,361
Provision (Benefit) for Deferred Income Taxes		(3,641	)		76			779
Compensatory Effect of Stock Plans		800			1,460			2,753
Gain on Sale of Asset		(92	)		—			—
Other, Net		(817	)		1,789			1,984
Changes in Assets and Liabilities:
Receivables		(10,619	)		(358	)		2,258
Income Taxes Receivable		1,183			1,986			(2,688	)
Prepaid Expenses		502			(462	)		810
Inventories		(4,845	)		(1,516	)		271
Accounts Payable		(1,460	)		(574	)		(4,369	)
Accrued Expenses		(2,179	)		(891	)		(9,366	)
Income Taxes Payable		—			—			(31,445	)
Other, Net		(1,234	)		(583	)		(600	)
Net Cash Provided by (Used in) Operating Activities	$	4,397		$	33,622		$	(25,510	)
Investing Activities:
Discontinued Operation, Net – Specialty Films	$	—		$	—		$	(6,508	)
Discontinued Operation, Net – Pinole Point Steel		—			(176	)		(1,583	)
Cash Received from Sale of Specialty Films, Net		—			—			121,982
Cash Received from Sale of Pinole Point Steel, Net		—			31,174			—
Capital Expenditures		(4,519	)		(6,259	)		(5,289	)
Acquisitions, Net of Cash Acquired		(568	)		—			(634	)
Proceeds from Sale of Asset		679			—			—
Investment in Joint Ventures		(358	)		(3,405	)		(893	)
Purchases of Marketable Securities		(83	)		(8,003	)		(30,701	)
Proceeds from Sale of Marketable Securities		1,167			20,199			17,423
Other		75			117			(451	)
Net Cash Provided by (Used in) Investing Activities	$	(3,607	)	$	33,647		$	93,346
Financing Activities:
Discontinued Operation, Net – Specialty Films	$	—		$	—		$	(294	)
Proceeds Under Lines of Credit		—			—			65,800
Payments Under Lines of Credit		—			—			(90,300	)
Payments of Debt		(11,558	)		(49,759	)		(7,703	)
Cash from Cancellation (Issuance) of Letters of Credit		(1,077	)		3,035			(5,315	)
Payments of Rights Redemption		(148	)		—			—
Purchase of Treasury Stock		—			(11,715	)		—
Issuance of Common Stock		1,596			1,244			1,363
Net Cash Used in Financing Activities	$	(11,187	)	$	(57,195	)	$	(36,449	)
Net Increase (Decrease) in Cash	$	(10,397	)	$	10,074		$	31,387
Cash and Cash Equivalents at Beginning of Year		43,880			33,806			2,419
Cash and Cash Equivalents at End of Year	$	33,483		$	43,880		$	33,806
Supplemental Cash Flow Disclosures:
Interest Paid	$	3,462		$	7,898		$	8,650
Income Taxes Paid		684			2,364			17,682
Non-Cash Investing and Financing Activities:
Accrued Future Operating Losses – Pinole Point Steel	$	—		$	—		$	3,383
Accrued Expenses Related to Pinole Point Steel Disposition		—			—			2,121

The Changes in Assets and Liabilities above for the year ended February 28, 2003 and February 28, 2002 are net of assets and liabilities acquired and sold.

The accompanying notes are an integral part of these statements.

33

Consolidated Statements of Changes in Shareowners’ Equity

Material Sciences Corporation and Subsidiaries

	Common Stock				Additional Paid-In Capital			Retained Earnings			Treasury Stock
(In thousands, except share data)	Shares		Amount								Shares		Amount
Balance as of February 28, 2001	17,676,984		$	354	$	63,334		$	120,861		(3,384,436	)	$	(34,813	)
Net Loss	—			—		—			(25,083	)	—			—
Issuance of Common Stock	166,198			3		1,293			—		—			—
Compensatory Effect of Stock Plans	272,442			6		2,741			—		—			—
Tax Benefit from Exercise of Stock Options	—			—		73			—		—			—
Conformity of Fiscal Years for Joint Venture	—			—		—			24		—			—
Balance as of February 28, 2002	18,115,624		$	363	$	67,441		$	95,802		(3,384,436	)	$	(34,813	)
Net Income	—			—		—			1,494		—			—
Issuance of Common Stock	126,238			2		1,113			—		—			—
Purchase of Treasury Stock	—			—		—			—		(804,212	)		(11,715	)
Compensatory Effect of Stock Plans	(20,032	)		—		1,442			—		—			—
Tax Benefit from Exercise of Stock Options	—			—		147			—		—			—
Balance as of February 28, 2003	18,221,830		$	365	$	70,143		$	97,296		(4,188,648	)	$	(46,528	)
Net Loss	—			—		—			(14,537	)	—			—
Issuance of Common Stock	165,284			4		1,572			—		—			—
Rights Redemption	—			—		(148	)		—		—			—
Compensatory Effect of Stock Plans	44,884			—		800			—		—			—
Tax Benefit from Exercise of Stock Options	—			—		20			—		—			—
Balance as of February 29, 2004	18,431,998		$	369	$	72,387		$	82,759		(4,188,648	)	$	(46,528	)

The accompanying notes are an integral part of these statements.

34

Consolidated Statements of Comprehensive Income (Loss)

Material Sciences Corporation and Subsidiaries

	For the years ended February 28 or 29,
(In thousands)	2004			2003			2002
Net Income (Loss)	$	(14,537	)	$	1,494		$	(25,083	)
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments		1,418			1,408			(85	)
Minimum Pension Liability, Net of Benefit for Income Taxes of $24 and $440, Respectively		(38	)		(712	)		—
Unrealized Gain (Loss) on Marketable Securities		—			84			(84	)
Comprehensive Income (Loss)	$	(13,157	)	$	2,274		$	(25,252	)

The accompanying notes are an integral part of these statements.

35

Notes to Consolidated Financial Statements

Material Sciences Corporation and Subsidiaries (In thousands, except share data)

For the three years ended February 29, 2004

Note 1: Summary of Significant Accounting Policies

Nature of Operations

The operations of Material Sciences Corporation and its wholly-owned subsidiaries (“MSC” or “Company”) consist of providing material-based solutions for electronic, acoustical/thermal and coated metal applications. Principal markets include the automotive, building and construction, electronics, lighting and appliance markets.

Summary of Significant Accounting Policies

The significant accounting policies of MSC, as summarized below, conform with generally accepted accounting principles. Certain prior-year amounts have been reclassified to conform to the fiscal 2004 presentation.

The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and the disclosures in the financial statements. Actual results could differ from those estimates. Significant estimates include cash flow projections related to the assessment of long-lived assets and goodwill impairments, deferred tax asset valuation allowances, reserves for inventory and receivable exposures, customer claims, income taxes, pension and postretirement benefits and contingencies.

Principles of Consolidation

The accompanying Consolidated Financial Statements include the accounts for MSC after all significant intercompany transactions have been eliminated. The Company maintained a voting interest no greater than 50% in Tekno S.A. (“Tekno”). Under the terms of the Tekno agreement, significant actions require unanimous consent of all parties and, as a result, MSC does not have a controlling interest in Tekno. Accordingly, the Company accounts for Tekno under the equity method.

Cash Equivalents

Cash equivalents consist of highly liquid investments with original maturities of three months or less.

Inventories

Inventories are stated at the lower of cost or market, using either the specific identification, average cost, or first-in, first-out method of cost valuation. Due to the continuous nature of the Company’s operations, work-in-process inventories are not material.

Long-Lived Assets

Property, Plant and Equipment are recorded at cost. Improvements and replacements are capitalized, while expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the assets’ estimated useful lives as follows: buildings and building improvements, 5 to 20 years; operating equipment, 5 to 20 years; furniture and fixtures, 5 to 10 years; software, 3 to 5 years. Facilities and equipment that were on capital leases were recorded in Property, Plant and Equipment, with their corresponding obligations recorded in Current and Long-Term Liabilities. The amount capitalized was the lower of the present value of minimum lease payments or the fair value of the leased property. Amortization of capital lease assets was recorded on a straight-line basis over the shorter of the lease term or the life of the related asset.

Intangible assets consist principally of the excess of cost over the fair market value of net assets acquired (“goodwill”) and non-compete agreements. As discussed below, goodwill is no longer subject to amortization and is subject to at least an annual assessment of impairment by applying a fair value based test.

36

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based on projections of cash flows on a non-discounted basis. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. Fair value is determined based on market quotes, if available, or is based on valuation techniques, such as discounted cash flows.

Revenue Recognition

The Company recognizes revenue upon shipment of goods to customers, at which time title (MSC’s value added content in the case of toll processing) and risk of loss pass to the customer. The Company records shipping and handling billed to a customer in a sales transaction as revenue. Costs incurred for shipping and handling are recorded in cost of sales. Volume discounts due customers are recognized as earned and reported as reductions of revenue in the Consolidated Statements of Income (Loss). The Company’s revenue recognition policies comply with the criteria set forth in Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”

Research and Development

The Company expenses all research and development costs in the period incurred. Research and development expenses of $4,347 in fiscal 2004, $3,919 in fiscal 2003 and $6,121 in fiscal 2002 are included in the Selling, General and Administrative Expenses on the Consolidated Statements of Income (Loss).

Concentrations of Credit Risks

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of trade receivables. The Company reviews the collectability of accounts receivable on a regular basis, taking into account customer liquidity, payment history and industry condition. Approximately 55% of the Company’s receivables as of February 29, 2004 were with customers in the automotive industry. Approximately 12% of the Company’s receivables as of February 29, 2004 were with U.S. steel mills, and approximately 12% were with one hard disk drive customer.

Foreign Currency

The Company’s international operations are translated into U.S. dollars using current exchange rates at the balance sheet date for assets and liabilities. A weighted average exchange rate is used to translate sales, expenses, gains and losses. The currency translation adjustments are reflected in Accumulated Other Comprehensive Income (Loss) in Shareowners’ Equity.

Goodwill

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting. With the adoption of SFAS No. 142 on March 1, 2002, goodwill will no longer be subject to amortization over its estimated useful life. Goodwill will be subject to at least an annual assessment of impairment by applying a fair value based test, beginning on the date of adoption of the new accounting standard. In the fourth quarter of fiscal 2004, the Company completed its annual assessment of goodwill. Based on the assessment of the goodwill associated with the acquisition of Goldbach Automobil Consulting (“GAC”), the Company recorded a pretax impairment charge of $6,739. The impairment resulted from slower growth in the penetration of the European brake market than previously projected. In addition, the Company experienced delays in the negotiation of definitive agreements with a potential strategic partner related to the marketing and sales of Quiet Steel in Europe. Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over a period of 20 years (see Note 13 of the Notes to the Consolidated Financial Statements entitled “Asset Impairments and Restructuring” on pages 52 and 53).

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All goodwill relates to the EMS segment. Apart from goodwill, the Company has no other material, identified intangible assets resulting from acquisitions recorded on the Consolidated Balance Sheets. Changes in the carrying amount of goodwill for the year ended February 29, 2004 are shown below.

Goodwill, Net as of February 28, 2002	$5,956
Foreign Exchange	1,160
Goodwill, Net as of February 28, 2003	7,116
Foreign Exchange	942
Goodwill Impairment	(6,739	)
Goodwill, Net as of February 29, 2004	$1,319

For comparison purposes, the following table presents net income adjusted to exclude the impairment of goodwill and the amortization expense related to goodwill that is no longer being amortized.

	2004			2003		2002
Net Income (Loss):
As Reported	$	(14,537	)	$	1,494	$	(25,083	)
Goodwill Amortization, Net of Tax		—			—		73
Adjusted Net Income (Loss)	$	(14,537	)	$	1,494	$	(25,010	)
Basic Net Income (Loss) Per Share:
As Reported	$	(1.04	)	$	0.11	$	(1.79	)
Goodwill Amortization, Net of Tax		—			—		0.01
Adjusted Net Income (Loss) Per Share	$	(1.04	)	$	0.11	$	(1.78	)
Diluted Net Income (Loss) Per Share:
As Reported	$	(1.04	)	$	0.11	$	(1.79	)
Goodwill Amortization, Net of Tax		—			—		0.01
Adjusted Net Income (Loss) Per Share	$	(1.04	)	$	0.11	$	(1.78	)

Equity Plans

The Company has four stock option plans: the Material Sciences Corporation 1985 Stock Option Plan for Key Employees (“1985 Plan”); the Material Sciences Corporation 1992 Omnibus Awards Plan for Key Employees (“1992 Plan”); the Material Sciences Corporation Stock Option Plan for Non-Employee Directors (“1996 Directors Plan”); and the Material Sciences Corporation 2001 Compensation Plan for Non-Employee Directors (“2001 Directors Plan”). MSC accounts for all plans in accordance with APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for employee stock purchases under the Employee Stock Purchase Plan and for stock options awarded under the stock option plans been determined using the fair market value-based accounting method, the Company’s net income (loss) and basic and diluted net income (loss) per share would have been as shown in the following pro forma amounts:

	2004			2003			2002
Net Income (Loss):
As Reported	$	(14,537	)	$	1,494		$	(25,083	)
Stock Based Employee Compensation Expense		(903	)		(861	)		(116	)
Pro Forma	$	(15,440	)	$	633		$	(25,199	)
Basic Net Income (Loss) Per Share:
As Reported	$	(1.04	)	$	0.11		$	(1.79	)
Pro Forma	$	(1.10	)	$	0.05		$	(1.80	)
Diluted Net Income (Loss) Per Share:
As Reported	$	(1.04	)	$	0.11		$	(1.79	)
Pro Forma	$	(1.10	)	$	0.04		$	(1.80	)

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Accumulated Other Comprehensive Income (Loss)

The components of Accumulated Other Comprehensive Income (Loss) at February 28 or 29 are as follows:

	2004			2003
Foreign Currency Translation	$	2,741		$	1,323
Minimum Pension Liability		(750	)		(712	)
Total	$	1,991		$	611

Recent Accounting Pronouncements

In December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106, and a revision of FASB Statement No. 132.” This standard revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, “Employers’ Accounting for Pensions,” No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The new rules require additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. The new disclosures are effective for the Company in fiscal year 2004. As a result, we have modified the related discussion in Note 7 entitled “Retirement Plans” to comply with this revised standard.

Effective March 1, 2003, the Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which rescinds Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by this statement include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. Adoption of this statement had no material impact on the Company’s financial position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which requires certain financial instruments that were previously presented on the consolidated balance sheets as equity to be presented as liabilities. Such instruments include mandatorily redeemable financial instruments and certain options and warrants. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for the Company as of July 1, 2003. Adoption of this standard had no impact on the Company’s financial position, results of operations or cash flows.

Effective July 1, 2003, the Company adopted EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” which establishes criteria for whether revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverable arrangement. The criteria considers whether the delivered item has stand-alone value to the customer, whether the fair value of the delivered item can be reliably determined and the customer’s right of return for the delivered item. Adoption of this standard had no material impact on the Company’s financial position, results of operations or cash flows.

In January 2003 and December 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), and its revision, FIN 46-R, respectively. FIN 46 and FIN 46-R address the consolidation of entities whose equity holders have either not provided sufficient equity at risk to allow the entity to finance its own activities or do not possess certain characteristics of a controlling financial interest. FIN 46 and FIN 46-R require the consolidation of these entities, known as variable interest entities (“VIEs”), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that is subject to a majority of the risk of loss from the VIE’s activities, entitled to receive a majority of the VIE’s residual returns, or both. FIN 46 and FIN 46-R are applicable for financial statements of public entities that have interests in VIEs or potential VIEs referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. Adoption of both of these standards is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

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On December 17, 2003, the Staff of the Securities and Exchange Commission (“SEC” or “the Staff”) issued SAB No. 104, “Revenue Recognition,” which amends SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21. Additionally, SAB 104 rescinds the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” (“the FAQ”) issued with SAB 101 that had been codified in SEC Topic 13, “Revenue Recognition.” Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. Adoption of this standard had no material impact on the Company’s financial position, results of operations or cash flows.

Note 2: Acquisitions

During August 2001, a subsidiary of the Company acquired the net assets of GAC, a European disc brake noise damper distributor and stamper. An initial payment of 1,525 Euros was made on September 26, 2001 and an additional payment of 4,490 Euros was made on October 5, 2001 (approximately $5,300 based on the foreign exchange rate as of August 31, 2001). Goodwill of $4,637 was recorded in connection with this acquisition.

Note 3: Joint Venture and Partnership

On May 7, 2003, International Steel Group, Inc. (“ISG”) purchased substantially all of Bethlehem Steel Corporation’s (“BSC”) assets, including BSC’s 33.5% interest in Walbridge Coatings (the “Partnership”), and MSC purchased this Partnership interest from ISG for $3,600. Accordingly, as of such date, the Company has a 100% ownership interest in the Walbridge, Ohio facility. Prior to May 7, 2003, the Company did not have voting control of the Partnership and accounted for the Partnership under the equity method. Beginning May 7, 2003, the results of Walbridge Coatings have been consolidated with the results of MSC and are included in the Consolidated Financial Statements. In conjunction with these transactions, the Company entered into a tolling agreement with ISG to provide electrogalvanizing and other coating and ancillary services to ISG until December 31, 2004, and ISG assumed all amounts payable by BSC to the Partnership. Through the expiration date of the tolling agreement, ISG has priority production rights for up to 25% of the available line time at the Walbridge, Ohio facility, and MSC markets the remaining 75% of the line time. For fiscal 2004, ISG utilized 30% of available line time at the Walbridge facility.

From July 23, 1999 to May 13, 2002, a subsidiary of LTV Steel Company (“LTV”) owned 16.5% equity interest in the Partnership, providing LTV with access to 33% of the facilities line time. A subsidiary of BSC owned 33.5% and MSC owned 50% of the Partnership during this period. On December 29, 2000, LTV commenced bankruptcy proceedings and on May 13, 2002, the Company completed the purchase of LTV’s ownership interest in the Partnership for $3,137. As a result of the purchase, MSC’s ownership interest in the Partnership increased to 66.5%, and it gained access to an additional 33% of the facility’s line time for a total of 37%.

During the rest of fiscal 2003, MSC served the electrogalvanizing market through its 66.5% ownership interest in the Partnership. Under the terms of the Partnership agreements, all significant operating actions required the consent of the management committee. MSC and BSC were each represented by two members on the four-member management committee. The Company did not have a controlling voting interest in the Partnership and, accordingly, accounted for the Partnership under the equity method.

On October 15, 2001, BSC filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Partnership was being treated as a critical vendor under BSC’s proceedings. As of February 28, 2003, the Partnership had no BSC pre-petition receivables outstanding and $2,041 of BSC post-petition receivables outstanding. The BSC post-petition receivables were judged to be collectible in full and, therefore, no reserve was recorded as of February 28, 2003. On February 5, 2003, BSC announced an agreement in principle with ISG for the sale of substantially all of BSC’s assets including BSC’s interest in the Partnership.

On December 15, 2001, a major fire significantly damaged an electrogalvanizing facility owned by the Double Eagle Steel Coating Company (“DESCO”), a joint venture between U.S. Steel Corporation and

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Rouge Steel Company. The Partnership serviced both U.S. Steel Corporation and Rouge Steel Company, in addition to BSC, ISPAT Inland Inc. and other customers with EG and other services in fiscal 2002 and 2003. The DESCO facility resumed production in September 2002, and the Company does not expect to continue to supply U.S. Steel Corporation’s and Rouge Steel Company’s long-term requirements. For fiscal 2003, sales of EG steel to U.S. Steel Corporation and Rouge Steel Company were $7,375 ($4,235 through the Partnership and $3,140 direct from the Company) and they utilized 8% of the Partnership’s available line time.

MSC’s net sales for electrogalvanizing primarily consisted of various fees charged to the Partnership for operating the facility. MSC had production rights to 4% of the available line time at the EG facility during fiscal 2002 and 37% of such rights during most of fiscal 2003. The fees charged to the Partnership consisted of a variable portion, based on the production volumes and product mix, and a fixed portion, including taxes, rent, insurance and the fixed portion of electricity. The overall profitability to MSC depended on the Company’s processing skill and efficiency. MSC had the right to utilize available line time to the extent BSC did not order Partnership services. In fiscal 2003, MSC utilized 34% of the total available line time.

There was $620 due from the Partnership included in MSC’s trade receivables as of February 28, 2003 and $1,621 due as of February 28, 2002.

Summarized financial information for the Partnership is presented below.

	2004			2003			2002
Income Statement Information
Net Sales	$	4,849		$	52,438		$	51,714
Loss from Operations		(446	)		(2,564	)		(3,146	)
Net Loss		(440	)		(2,468	)		(3,101	)
	2004			2003			2002
Balance Sheet Information
Current Assets	$	—		$	6,552		$	7,949
Total Assets		—			17,483			20,632
Total Liabilities		—			609			1,627
Partners’ Capital		—			16,874			19,005

The orders for the Partnership’s toll coating services were primarily and independently generated by BSC and MSC for their respective customers. The Partnership’s Net Sales included amounts billed to BSC, MSC and customers other than BSC. Sales to BSC through the Partnership were $37,379 in fiscal 2003. Third Party sales (Partnership sales to parties other than BSC and MSC) were $6,080 from March 1, 2002 to May 13, 2002. Subsequent to May 13, 2002, MSC sold EG services directly to its customers. The Partnership’s pricing of services to BSC and MSC was contractually based. The Partnership’s costs included fees paid to MSC for operating the facility, depreciation expense of the equipment (owned by the Partnership) and certain administrative expenses. The Loss from Operations was primarily related to the annual depreciation expense that is not included in the contractual pricing to the partners.

The Partnership assets consisted primarily of working capital and property, plant and equipment. The Partnership had $657 of receivables from MSC as of February 28, 2003. Liabilities consisted primarily of fees owed to MSC. The Company’s share of Partners’ Capital did not directly correlate to the Company’s 66.5% ownership interest due to contractual allocation requirements of the Partnership agreements.

In November 2000, a subsidiary of MSC formed a joint venture partnership with Tekno for the manufacture and sale of Quiet Steel^® and disc brake noise damper material for the South American market. Tekno’s sales were $1,260 in fiscal 2004 and $880 in fiscal 2003. The Equity in Results of Joint Venture was income of $82 in fiscal 2004 and $29 in fiscal 2003.

Under the equity method, MSC includes its portion of the Partnership’s and Tekno’s results of operations in the Consolidated Statements of Income (Loss) under Equity in Results of Joint Ventures. The Equity in Results of Joint Ventures was a net loss of $211 in fiscal 2004, $1,557 in fiscal 2003, and $1,560 in fiscal 2002.

Note 4: Contingencies

MSC is a party to various legal proceedings in connection with the remediation of certain environmental matters. The most significant proceedings relate to the Company’s involvement in Superfund sites in

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Kingsbury and Gary, Indiana. MSC has been named as a potentially responsible party (“PRP”) for the surface, soil and ground water contamination at these sites.

The United States District Court for the Northern District of Indiana has entered a Consent Decree between the government and certain PRPs on the scope of its remediation work at the Kingsbury site. The participating PRPs account for approximately 75% of the waste volume sent to this site. In December 2001, the PRPs established and funded a trust that has contracted with a remediation contractor to undertake all foreseeable activities necessary to achieve cleanup of the site pursuant to the decree. The trust has purchased an annuity that will pay the remediation contractor the anticipated expenses and oversight costs, including the purchase of stop-loss insurance coverage to reimburse the trust in the event of unforeseen cleanup expenses. The Company contributed $2,047 to the trust in December 2001, with no impact to income (loss) before income taxes, and expects that this payment will conclude its financial obligations with respect to the Kingsbury site. In addition, the trust is receiving periodic payments by a non-participating PRP equal to such PRP’s share of the trust’s ongoing remediation expenses, and the Company will receive credits (which may be distributed as cash at the discretion of the trustees) in the amount of its pro rata share of such periodic payments. Moreover, should site closure be achieved ahead of schedule, the Company will be entitled to receive its pro rata share of the computed value of the annuity less a 25% early closure incentive bonus payable to the remediation contractor. The Company has not recorded any amounts for such potential distributions.

The United States District Court for the Northern District of Indiana also has entered a Consent Decree between the government and certain PRPs on the scope of the remediation work at the Gary site. The estimate of the Company’s liability for this site is $900 to $1,100. This work has begun, and MSC has maintained a letter of credit for approximately $1,200 to secure its obligation to pay its currently estimated share of the remediation expenses at this site.

In November 2003, the Company received notice of a potential liability from the United States EPA regarding a Lake Calumet Cluster Site in Chicago, Illinois. To date, the Company has been unable to estimate the potential liability for this site, if any, due to the limited information that has been provided.

MSC believes its range of exposure for all known sites, based on allocations of liability among PRPs and the most recent estimate of remedial work, is $1,200 to $1,900. The Company’s environmental reserves were approximately $1,200 as of February 29, 2004.

On February 27, 2002, the Company received a notice of alleged violations of environmental laws, regulations or permits from the Illinois EPA related to volatile organic matter (“VOM”) air emissions and other permitting issues at its Elk Grove Village facility. The Company has filed a response and performed stack testing for one of its production lines (“Tested Line”) under the supervision of the Illinois EPA. Those recent stack test results, when considered with stack test results from the facility’s other production lines taken in the past, indicate the Company’s Elk Grove Village facility is in compliance with the overall VOM emission limitations in its Clean Air Act permit. However, the Company’s VOM coating application volume on its Tested Line is in excess of the permit limit. To address that issue, the Company has filed a permit modification request to reflect the current VOM application rates on the facility’s production lines, which the Illinois EPA granted. The Illinois EPA has indicated that resolution of the matters alleged in the February 27, 2002 Notice of Violation were referred to the office of the Illinois Attorney General for potential enforcement action, which could lead to the imposition of penalties on the Company. On December 22, 2003, the Company received a notice from the office of the Illinois Attorney General of their intent to file an enforcement action regarding the alleged violations. In the fourth quarter of fiscal 2004, the Company recorded a reserve of approximately $250 for its potential costs related to this action. The Illinois Attorney General filed a complaint on April 8, 2004.

The Company believes that the ultimate outcome of its environmental legal proceedings will not have a material adverse effect on the Company’s financial condition or results of operations, given the reserves recorded as of February 29, 2004 and, where applicable, taking into account contributions from other PRPs. However, there can be no assurance that the Company’s environmental legal proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s financial condition or results of operations due to a number of uncertainties, including without limitation, the costs of site cleanup, the discretionary authority of the Illinois Attorney General in bringing enforcement actions and other factors.

The Company is also party to various legal actions arising in the ordinary course of its business. These legal actions cover a broad variety of claims spanning the Company’s entire business. The Company believes that the resolution of these legal actions will not, individually or in the aggregate, have a material adverse effect on the Company’s financial condition or results of operations.

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Note 5: Indebtedness

Long-term debt, including a capital lease, consists of the obligations presented in the chart below. Projected principal payments of long-term debt, assuming no conversion or redemption, also are presented in this chart.

	2004		2003
Long-Term Debt Obligations
Borrowings Under Lines of Credit	$	—	$	—
1998 Senior Notes		43,944		55,222
Obligations Under Capital Lease (Note 6)		—		281
	$	43,944	$	55,503
Less Current Portion		36,944		11,559
Long-Term Debt	$	7,000	$	43,944
Projected Principal Payments of Long-Term Debt
2005			$	36,944
2006				—
2007				7,000
2008				—
2009				—
2010 and Thereafter				—
Total			$	43,944

The Company classified $7,000 as long-term debt based on its ability and intent to refinance that portion of debt on a long-term basis. The Company entered into an amended and restated line of credit agreement on April 30, 2004. On April 30, 2004, the Company notified the holders of the Senior Notes of its intent to prepay the notes on or before June 1, 2004 (see Note 17 of the Notes to the Consolidated Financial Statements entitled “Subsequent Events” on pages 55 and 56).

The Company entered into a $20,000 committed line of credit on October 11, 2001. The agreement expires on October 11, 2004. No borrowings were outstanding under the line as of February 29, 2004. There were $3,357 in outstanding letters of credit as of February 29, 2004. A fee of .25% is charged for the unused portion of the line. At the Company’s option, interest is at the bank’s reference rate (4.00% as of February 29, 2004) or at LIBOR plus a margin (.75% as long as the Company’s letters of credit continue to be cash collateralized). The financial covenants include a fixed charge coverage ratio of not less than 1.0 to 1.0 commencing February 28, 2002; a liquidity ratio of not less than 1.5 to 1.0 commencing November 30, 2001; a maximum leverage ratio (3.0 to 1.0 from February 28, 2003 to November 30, 2003, and 2.5 to 1.0 thereafter); and minimum net worth of $140,000 plus 50% of cumulative consolidated net income accruing for fiscal years ending after November 30, 2001, and only for such periods that the Company’s balance sheet leverage exceeds 2.0 to 1.0. However, compliance with the financial covenants is not required at times when the Company has no outstanding borrowings and has cash collateralized its obligations under the line of credit. As of February 29, 2004, there are no outstanding borrowings and the outstanding letters of credit have been cash collateralized. A total of $3,357 was classified as Restricted Cash in the Consolidated Balance Sheets. Other than the aforementioned restricted cash balance, there are no other restrictions on the Company’s use of its cash and cash equivalents at times when no borrowings are outstanding under the facility. The line of credit is secured by accounts receivable of the Company. In September 2003, a $1,077 letter of credit was issued. In January 2003, a $200 letter of credit was issued. In April 2002, one of the letters of credit for $3,235 was canceled and the related cash collateral was released to the Company.

On February 27, 1998, MSC authorized the issuance and sale of $61,500 Senior Notes (“1998 Senior Notes”) in two series. The interest rate on the Series A Note ($5,000) was 6.49%, and the Note matured on May 31, 2003. The interest rate on the Series B Notes ($56,500) is 6.80%, and the Notes mature on May 31, 2010. The 1998 Senior Notes were issued and funded on February 27, 1998. On June 2, 2003, the Company made a principal payment of $11,278 against the 1998 Senior Notes. The estimated fair value of the 1998 Senior Notes, based on discounted cash flows, was less than the carrying value by $5,493 as of February 29, 2004.

Interest payments for the 1998 Senior Notes are due semi-annually on May 31 and November 30 of each year. The 1998 Senior Note agreements require the Company to adhere to certain covenants. The most significant of these covenants includes maintenance of consolidated cumulative adjusted net worth

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of $118,341. This covenant may limit the Company’s ability to repurchase its common stock and pay dividends from time to time. As of February 29, 2004, the Company’s consolidated cumulative adjusted net worth was $110,978. In the fourth quarter of fiscal 2004, the results of operations, including the asset impairment charges, caused the Company to be out of compliance with the minimum net worth covenant under the terms of the 1998 Senior Notes. As discussed in Note 17 entitled “Subsequent Events”, the Company redeemed all but two of the 1998 Senior Notes on May 10, 2004. The remaining noteholders waived the noncompliance of the minimum net worth covenant until June 1, 2004 or earlier upon prepayment of the notes. Other covenants include consolidated senior debt ratio (maximum of 55.0% until agreement expiration), and total indebtedness ratio (maximum of 60.0% until agreement expiration).

Note 6: Leases

MSC leased one manufacturing facility (Walbridge, Ohio) under a capital lease which was included in Property, Plant and Equipment on the Consolidated Balance Sheets. The capital lease included renewal options and expired on June 30, 2003. In the fourth quarter of fiscal 2003, the Company renewed the term of the lease for five years ending June 30, 2008. The extension is being treated as an operating lease based on the terms of the extension. Other equipment is leased under non-cancelable operating leases.

The Walbridge, Ohio facility lease contains certain covenants with which the Company was in compliance. MSC subleased its interest in this facility to the Partnership prior to MSC’s purchase of 100% ownership interest on May 7, 2003.

The table below presents future minimum lease payments.

	Operating Leases
Minimum Lease Payments
2005	$	1,975
2006		1,755
2007		1,307
2008		1,288
2009		554
2010 and Thereafter		—
Total Minimum Lease Payments	$	6,879

Amortization of leased property was $279 in fiscal 2004, $812 in fiscal 2003 and $809 in fiscal 2002. Total rental expense under operating leases was $2,781 in fiscal 2004, $2,911 in fiscal 2003 and $2,431 in fiscal 2002.

Note 7: Retirement Plans

MSC has non-contributory defined benefit and defined contribution pension plans that cover a majority of its employees. The Company funds amounts required to meet ERISA funding requirements for the defined benefit plans. The Company makes an annual contribution to the defined contribution plan for the amount earned by participating employees after the end of each calendar year. The cost of this plan was $1,131 in fiscal 2004, $1,704 in fiscal 2003 and $1,691 in fiscal 2002. In addition to the benefits previously described, some MSC officers participate in a non-contributory supplemental pension plan.

The Company provides its retired employees with certain postretirement health care benefits, which MSC may periodically amend or modify. Certain employees may be eligible for these benefits if they reach normal retirement age while employed by the Company.

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The following tables present: a reconciliation of the change in benefit obligation, a reconciliation of the change in plan assets, a statement of the funded status of the plans, the components of net periodic benefit cost and the assumptions used in determining the plans’ funded status.

	Pension Benefits						Postretirement Benefits
	2004			2003			2004			2003
Change in Benefit Obligation:
Obligation, March 1	$	11,052		$	9,689		$	2,399		$	2,512
Service Cost Benefits Earned During the Period		172			297			111			124
Interest Cost on Benefit Obligation		738			672			126			143
Plan Amendments		270			98
Actuarial (Gain) Loss		1,537			761			114			(246	)
Benefit Payments		(609	)		(465	)		(100	)		(134	)
Curtailments		646			—			(741	)		—
Other Plan Changes		550			—			—			—
Obligation, February 28 or 29	$	14,356		$	11,052		$	1,909		$	2,399
Change in Plan Assets:
Plan Assets at Fair Value, March 1	$	4,774		$	5,006		$	64		$	66
Actual Return of Plan Assets		1,326			(219	)		1			(2	)
Company Contributions		544			452			100			134
Benefit Payments		(609	)		(465	)		(100	)		(134	)
Plan Assets at Fair Value, February 28 or 29	$	6,035		$	4,774		$	65		$	64
Funded Status:
Funded Status	$	(8,321	)	$	(6,277	)	$	(1,844	)	$	(2,335	)
Unrecognized Transition Obligation		7			9			—			—
Unrecognized Prior Service Cost		493			591			—			(741	)
Unrecognized Gain		1,481			1,187			42			(580	)
Net Amount Recognized	$	(6,340	)	$	(4,490	)	$	(1,802	)	$	(3,656	)

	Pension Benefits									Postretirement Benefits
	2004			2003			2002			2004			2003			2002
Components of Net Periodic Benefit Cost:
Service Cost Benefits Earned During the Period	$	172		$	297		$	275		$	111		$	124		$	145
Interest Cost on Benefit Obligation		738			672			653			126			143			172
Expected Return on Assets		(397	)		(400	)		(419	)		(6	)		(5	)		(4	)
Amortization of Transition Obligation		2			2			3			—			—			—
Amortization of Prior Service Cost		98			92			85			(34	)		(69	)		(69	)
Amortization of Net (Gain) Loss		44			—			(21	)		—			(53	)		(30	)
Expense Due to Plan Amendments		270			—			—			—			—			—
Curtailment/Settlements		1,467			—			—			(1,951	)		—			—
Net Periodic Benefit Cost	$	2,394		$	663		$	576		$	(1,754	)	$	140		$	214

	Pension Benefits						Postretirement Benefits
	2004			2003			2004			2003
Amounts Recognized in the Consolidated Balance Sheets
Prepaid Benefit Cost	$	466		$	626		$	—		$	—
Accrued Benefit Liability		(8,521	)		(6,622	)		(1,802	)		(3,656	)
Intangible Asset		501			354			—			—
Accumulated Other Comprehensive Income		1,214			1,152			—			—
Net Amount Recognized	$	(6,340	)	$	(4,490	)	$	(1,802	)	$	(3,656	)
		2004			2003
Additional Information
Increase in Minimum Liability Included in Other Comprehensive Income	$	62		$	1,152

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	2004		2003		2002
Assumptions Used in Determining the Plans’ Funded Status:
Discount Rate	6.00	%	6.33	%	7.00	%
Expected Long-Term Rate of Return on Assets	8.40	%	8.40	%	8.00	%
Rate of Increase in Compensation Levels	3.00	%	3.00	%	6.00	%

MSC continues to review its postretirement benefits, incorporating actual and anticipated benefit changes. In determining the present value of the accumulated postretirement benefit obligation, of which only a minor amount has been funded, and net cost, MSC used a 10% health care cost trend rate decreasing until leveling off at 5% in calendar 2010.

A 1% increase in assumed health care cost trend rates will raise the total of the service and interest cost components of net periodic postretirement benefit cost by $50 and the health care component of the accumulated postretirement benefit obligation by $247 as of February 29, 2004. A 1% decrease in assumed health care cost trend rates will lower the total of the service and interest cost components of net periodic postretirement benefit cost by $39 and the health care component of the accumulated postretirement benefit obligation by $201 as of February 29, 2004.

The provisions of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“Act”) have not been taken into account in the determination of MSC’s accumulated postretirement benefit obligation or net periodic benefit cost, pending further guidance on the accounting for the federal subsidy. The Company does not expect the effects of the Act will have a material impact on the results of operations, financial condition or cash flows.

During the second quarter of fiscal 2004, as part of a continuing major cost reduction program, the Company curtailed the future retiree health care benefits for certain active employees of the Company resulting in a one-time reduction in operating expenses and improvement of income from continuing operations of $1,951 which is included in Asset Impairments, Restructuring and Other in the Consolidated Statements of Income (Loss).

During the fourth quarter of fiscal 2004, the Company entered into agreements with certain employees for the buyout of certain Supplemental Pension Plan (“SERP”) obligations. Approximately, $917 was expensed in the fourth quarter of fiscal 2004 for SERP buyout. The payments will be made on May 31, 2004, and accordingly are classified as Current Liabilities on the accompanying Consolidated Balance Sheets.

Plan Assets

The Company’s pension plan weighted-average asset allocations at February 28 or 29, 2004 and 2003, by asset category, were as follows:

	2004		2003
Equity Securities	67	%	66	%
Debt Securities	33	%	34	%
Total	100	%	100	%

The investment objective of the Company’s pension plans is to meet the current and future defined benefit payments of participants and beneficiaries of Material Sciences Corporation retirement plans. The Company will invest its assets in funds whose goals and objectives are appropriate long-term. Individual funds included will seek to provide a long-term competitive rate of return, net of expenses, at appropriate risk levels, that over the long run is equal to or exceeds outlined benchmarks. In order to maximize diversification, the Plans will invest in portfolios within four broad asset classes – bonds, large company stocks, small company domestic stocks and foreign stocks. To provide additional diversification and further reduce the volatility of the portfolio, the Plans will divide the large and small stock domestic portions between value and growth managers.

The approach used to determine the expected long-term rate of return on plan assets assumption is based on weighting historical market index returns for various asset classes in proportion to the assets held in the Material Sciences Corporation Master Trust (“Trust”). Typically, the Trust holds approximately 63% of assets in equity securities and 37% in fixed income securities. Weighting 10-year compounded trailing returns on equity and fixed income indices in proportion to the above asset mix yields an expected long-term return of 8.4%.

The Company expects to contribute approximately $2,598 to its qualified and non-qualified pension plans in fiscal 2005.

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Note 8: Interest (Income) Expense, Net

The table presented below analyzes the components of interest (income) expense, net.

	2004			2003			2002
Interest (Income) Expense, Net
Interest Expense	$	3,273		$	5,173		$	8,322
Interest Income		(377	)		(936	)		(1,348	)
Interest Expense Allocated to Pinole Point Steel		—			(1,797	)		(8,100	)
Interest (Income) Expense, Net	$	2,896		$	2,440		$	(1,126	)

The table above excludes interest expense of $5, $62 and $127 for fiscal years 2004, 2003 and 2002, respectively, related to the Walbridge, Ohio facility. This facility was subleased to the Partnership. The interest expense and amortization relating to this lease was reduced by sublease income received from the Partnership, and the net result was included in Other, Net, shown in the Consolidated Statements of Income (Loss). The loss from discontinued operation, net of income taxes of Pinole Point Steel, includes an allocation of consolidated interest expense as noted in the table above. The allocations were based on the debt associated with the original purchase of Pinole Point Steel in December 1997 and Pinole Point Steel’s subsequent cash flow.

Note 9: Income Taxes

Deferred income taxes result from recognizing revenues and expenses in different periods for tax and financial reporting purposes.

The components of the provision (benefit) for income taxes and a reconciliation between the statutory rate for federal income taxes and the effective tax rate are summarized and presented below.

	2004			2003			2002
Tax Provision (Benefit)
Current:
Federal	$	—		$	(1,116	)	$	(4,251	)
State		—			(333	)		342
	$	—		$	(1,449	)	$	(3,909	)
Deferred:
Federal	$	(3,717	)	$	(183	)	$	1,451
State		76			259			(672	)
	$	(3,641	)	$	76		$	779
Tax Provision (Benefit)	$	(3,641	)	$	(1,373	)	$	(3,130	)
Tax Rate Reconciliation
Federal Statutory Rate		35.0	%		35.0	%		35.0	%
State and Local Taxes, Net of Federal Tax Benefit		4.3			4.3			4.3
Extraterritorial Income Exclusion/Foreign Sales Corp		—			4.3			5.4
State Tax Credits		—			—			—
Reserve Adjustment		—			39.3			—
Valuation Allowance		(15.6	)		—			—
Other, Net		(3.1	)		(2.7	)		(3.6	)
Effective Income Tax Rate		20.6	%		80.2	%		41.1	%

During fiscal 2004, the Company generated additional losses from its German subsidiary primarily due to its impairment of goodwill. As such, deferred tax assets were increased to reflect the additional net operating loss carryforward. The valuation allowance also increased due to the net operating loss carryforward that the Company anticipates will not be utilized in the foreseeable future.

During fiscal 2003, the Internal Revenue Service completed its review of fiscal years 1997, 1998 and 1999. The Company analyzed its income tax reserve position based on this event and reduced its previously provided income tax reserves by $673 in the fourth quarter of fiscal 2003.

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Temporary differences that give rise to deferred tax (assets) and liabilities were as follows:

	2004			2003
Reserves Not Deductible Until Paid	$	(2,357	)	$	(2,699	)
Employee Benefit Liabilities		(4,888	)		(5,286	)
Deferred State Income Taxes, Net		(1,656	)		—
Net Operating Loss and Tax Credit Carryforwards		(9,652	)		(650	)
Other		(196	)		—
Total Gross Deferred Tax Asset	$	(18,749	)	$	(8,635	)
Valuation Allowance		3,258			650
Total Deferred Tax Assets	$	(15,491	)	$	(7,985	)
Property and Equipment		8,176			11,003
Deferred State Income Taxes		—			145
Other		—			1,075
Total Deferred Tax Liabilities	$	8,176			12,223
Net Deferred Tax (Assets) Liabilities	$	(7,315	)	$	4,238

As of February 29, 2004, net operating losses and tax credit carryforwards of $6,397 were available with an unlimited expiration date, and the remaining $3,255 expires in varying amounts through fiscal 2024.

Deferred Tax (Assets) Liabilities, Net have been recorded on the Company’s Consolidated Balance Sheets as follows:

	2004			2003
Current Assets – Deferred Income Taxes	$	(2,235	)	$	(1,461	)
Long-Term Assets – Deferred Income Taxes		(5,080	)		—
Long-Term Liabilities – Deferred Income Taxes		—			5,699
	$	(7,315	)	$	4,238

Note 10: Significant Customers and Export Sales

Net sales to the Partnership represented 2%, 20% and 21% of MSC’s net sales in fiscal 2004, 2003 and 2002, respectively. One disk drive customer accounted for approximately 10%, 4%, and 7% of net sales in fiscal 2004, 2003 and 2002, respectively. Export sales represented 10% of the Company’s net sales in fiscal 2004, 8% in fiscal 2003 and 15% in fiscal 2002.

Note 11: Equity and Compensation Plans

The Company has four stock option plans: the 1985 Plan; the 1992 Plan; the 1996 Directors Plan; and the 2001 Directors Plan.

There are 2,512,500 shares authorized under the 1985 Plan to provide for the shares purchased by employees under the Material Sciences Corporation Employee Stock Purchase Program.

There are 3,262,500 shares authorized under the 1992 Plan to provide stock options and restricted stock under various programs. Non-qualified stock options generally vest over three years from the date of grant and expire 10 years from the date of grant. Incentive stock options (“ISOs”) were issued in fiscal 1994 at fair market value at the date of grant and expire 10 years from the date of grant. These ISOs were issued in tandem with a restricted stock grant and vest two years after the vesting of the restricted stock, if the corresponding restricted stock is still owned by the participant.

Under the 1992 Plan, restricted stock and cash awards generally vest over three to five years from the date of grant. Certain of these awards require a cash contribution from the employee. Shares of restricted stock are awarded in the name of the employee, who has all the rights of a shareowner, subject to certain restrictions or forfeitures. Restricted stock and cash awards have been issued with restrictions based upon time, stock price performance or a combination thereof. The market value of the restricted stock at the date of grant is amortized to compensation expense over the period in which the shares vest (time based awards). In the event of accelerated vesting due to the achievement of market value

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appreciation as defined by the plan, the recognition of the unamortized expense would be accelerated. For awards based on both time and performance (performance based awards), the Company determines the compensation cost to be recorded on the date the performance levels are achieved. On that date, compensation expense representing a pro rata portion of the total cost is recognized. The remaining compensation expense is recorded ratably over the remaining vesting period. If the specified stock performance levels are not achieved by the end of the five-year period from the date of grant, the employee contribution, elected restricted stock and the cash award are forfeited.

In fiscal 2003, the Company issued options under the 1992 Plan for the purchase of 857,333 shares of common stock at 100% of the fair market value at the date of grant. The options expire after five years from the date of grant and vest ratably over three years from the date of grant.

There are 250,000 shares authorized under the 1996 Directors Plan. This plan consisted of grants that provided for 50% of each non-employee director’s annual retainer (“Retainer Options”) and annual incentive stock options (“Incentive Options”). The Retainer Options vested on the date of grant and expire five years after that date. The Incentive Options vest one year from the date of grant and expire five years after the date of grant. No further shares will be issued under this plan, and 71,152 shares were outstanding as of February 29, 2004. The 1996 Directors Plan was replaced with the 2001 Directors Plan that was approved by the shareowners in June 2000 and was effective March 1, 2001.

There are 150,000 shares authorized under the 2001 Directors Plan. This plan consists of grants that provide for all or a portion of each non-employee director’s annual retainer, according to the non-employee director’s election to receive the annual retainer either in cash, shares of common stock, deferred stock units (entitles the non-employee director to receive shares at a later date), or a combination thereof. The shares and deferred stock units vest in four equal installments on the date of grant and the three, six and nine-month anniversaries of the date of grant. Any portion which has not vested prior to the date the non-employee director ceases to be a non-employee director shall expire and be forfeited. The 2001 Directors Plan also consists of grants to provide for annual incentive stock options (“Incentive Options”). The Incentive Options vest one year from the date of grant and expire ten years after the date of grant. As of February 29, 2004, 103,927 shares were outstanding under the 2001 Directors Plan. The 2001 Directors Plan expired on February 29, 2004 and no additional grants will be made under the plan.

The exercise price of all options equals the market price of the Company’s stock either on the date of grant or, in the case of the 1996 Directors Plan, on the day prior to the grant.

In fiscal 1998, the Company issued 52,941 stock options to a consultant for partial payment of services performed. The options were issued at fair market value as of February 26, 1998 and expired on February 26, 2003.

A summary of transactions under the stock option plans was as follows:

	Options Outstanding						Exercisable Options
	Directors		Key Employees		Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
Stock Option Activity
Outstanding as of February 28, 2001	203,659		1,303,234		$	13.74	1,348,026	$	13.75
Granted	36,273		9,000			8.80
Exercised	(14,400	)	(49,325	)		8.32
Canceled	(9,174	)	(538,409	)		12.81
Outstanding as of February 28, 2002	216,358		724,500		$	14.36	899,545	$	14.51
Granted	24,884		903,844			10.17
Exercised	(40,889	)	(24,537	)		9.17
Canceled	(23,291	)	(206,745	)		13.99
Outstanding as of February 28, 2003	177,062		1,397,062		$	12.12	983,535	$	13.11
Granted	37,453		—			9.61
Exercised	—		(107,749	)		10.00
Canceled	(47,589	)	(546,449	)		11.99
Outstanding as of February 29, 2004	166,926		742,864		$	12.36	785,803	$	12.73

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Options Outstanding as of February 29, 2004					Exercisable Options as of February 29, 2004
Range of Exercise Prices	Shares	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$  6.80–$10.13	62,610	4.58	$	8.10	45,271	$	7.66
$10.15–$12.34	433,246	3.58		10.06	344,569		10.06
$12.80–$14.44	188,258	2.43		14.04	170,288		14.15
$14.50–$18.75	225,676	2.19		16.55	225,675		16.55
$  4.95–$18.75	909,790	3.07	$	12.36	785,803	$	12.73

The weighted average fair value of individual options granted in fiscal 2004, 2003 and 2002 is $9.61, $10.17 and $8.80, respectively.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the option grants in fiscal 2004, 2003 and 2002, respectively: risk-free interest rates of 2.92%, 4.08% and 5.18%; expected life of 5.00 years, 3.07 years and 10.0 years; and expected volatility of 48.92%, 51.58% and 39.44%.

A summary of transactions under the restricted stock plans was as follows:

Restricted Stock Activity
Unvested as of February 28, 2001	525,100
Granted	378,440
Vested	(367,742	)
Canceled	(105,998	)
Unvested as of February 28, 2002	429,800
Granted	10,024
Vested	(163,352	)
Canceled	(30,055	)
Unvested as of February 28, 2003	246,417
Granted	76,104
Vested	(121,284	)
Canceled	(31,220	)
Unvested as of February 29, 2004	170,017

Compensation effects arising from issuing restricted stock and stock options were $800 in fiscal 2004, $1,442 in fiscal 2003 and $2,741 in fiscal 2002, and have been charged against income and recorded as Additional Paid-In Capital in the Consolidated Balance Sheets.

The Employee Stock Purchase Plan permits eligible employees to purchase shares of common stock at 85% of the lower fair market value of the stock as of two measurement dates six months apart. Common stock sold to employees under this plan was 57,535 in fiscal 2004, 60,811 in fiscal 2003 and 102,473 in fiscal 2002. MSC does not record expense related to the 15% stock purchase price discount permitted under the Employee Stock Purchase Plan for eligible employees to purchase shares of common stock. The 15% stock purchase price discount would have resulted in expense of $122 in fiscal 2004, $86 in fiscal 2003 and $104 in fiscal 2002.

On June 20, 1996, the Company issued a dividend to shareowners of record on July 2, 1996, of one right (“Right”) for each outstanding share of MSC’s common stock. Each Right entitled the shareowners to buy 1/100^th of a share of Series B Junior Participating Preferred Stock at an initial exercise price of $70.00. As amended on June 22, 1998, the Rights would have been exercisable only if a person or group acquired, or announced a tender offer, for 15% or more of MSC’s common stock. If 15% or more of MSC’s common stock was acquired by a person or group, the Rights (other than those held by that person or group) would have converted into the right to buy the number of shares of MSC’s common stock valued at two-times the exercise price of the Rights. In addition, if MSC entered into a merger or other business combination with a person or group owning 15% or more of MSC’s outstanding common stock, the Rights (other than those held by that person or group) then would have converted into the right to buy that number of shares of common stock of the acquiring company valued at two-times the exercise price of the Rights. MSC could have exchanged the Rights for its common stock on a one-for-one basis at any time after a person or group had acquired 15% or more of its outstanding common

50

stock. MSC would have been entitled to redeem the Rights at one cent per Right (payable in common stock of the Company, cash or other consideration, at MSC’s option) at any time before public disclosure that a 15% position had been acquired. The Rights would have expired on July 1, 2006, unless previously redeemed or exercised.

On January 30, 2003, an amendment to the shareholder rights agreement, dated as of June 20, 1996, became effective. The amendment increased the threshold amount (from 15% to 20%) upon which a beneficial owner of shares becomes an Acquiring Person as defined in the agreement.

On April 16, 2003, the Company’s Board of Directors voted to terminate the Company’s shareholder rights agreement. The agreement was terminated by redeeming all of the outstanding rights at a price of $0.01 per right, or approximately $148 in the aggregate, payable in cash and recorded as a charge to Shareowners’ Equity in the Consolidated Balance Sheets. There was one right attached to each outstanding share of common stock. The redemption payment was mailed on or about May 27, 2003 to shareowners of record on April 28, 2003. As a result of the redemption, the rights cannot become exercisable, and the shareholder rights agreement was terminated.

In conjunction with the Company’s review of several strategic business alternatives and the related fourth quarter business decisions, the Company entered into retention agreements with certain employees that relate to various periods ending on May 31, 2005. The Company also bought out the SERP benefits of these employees. Approximately, $322 and $917 were expensed in the fourth quarter of fiscal 2004 for retention and SERP, respectively.

Note 12: Discontinued Operations

On June 29, 2001, the Company completed the sale of substantially all of the assets of its Specialty Films segment, including its interest in Innovative Specialty Films, LLC, to Bekaert pursuant to the terms of the Purchase Agreement by and among MSC, MSC/SFI, Bekaert and N.V. Bekaert S.A., dated June 10, 2001. The Company received cash of $121,982 and recorded an after-tax gain of $38,787 in the second quarter of fiscal 2002. Net proceeds after taxes and transaction costs were $90,537. As a result of the sale, Specialty Films has been reported as a discontinued operation for all periods presented.

During the second quarter of fiscal 2003, the Company recorded an after-tax charge of $101 related to a decrease in the previously estimated insurance premium refund for the Specialty Films business.

On May 31, 2002, the Company completed the sale of substantially all of the assets of its Pinole Point Steel business. The Company is in the process of settling the net liabilities of the business. As of February 29, 2004, the Company has received $58,016 related to the disposition and liquidation of the business, consisting of $31,174 of sale proceeds from Grupo IMSA S.A. de C.V. and $26,842 from liquidating the Pinole Point Steel operations. The proceeds from liquidating the Pinole Point Steel operations include an income tax refund of $10,589 received during the second quarter of fiscal 2004 related to the sale of Pinole Point Steel. As of February 29, 2004, there were $414 in net liabilities remaining. The remaining net liabilities included liabilities (primarily workers compensation exposure) not assumed by Grupo IMSA S.A. de C.V. Pinole Point Steel has been reported as a discontinued operation, and the Consolidated Financial Statements have been reclassified to segregate the net assets or liabilities and operating results of the business.

As of February 28, 2002, the Company recorded a provision for loss on discontinued operation, net of income taxes, of $53,287. The loss on discontinued operation, net of income taxes, included the allocation of consolidated interest expense of $5,391 incurred from September 1, 2001 through May 31, 2002. The allocations were based on the debt associated with the original purchase of Pinole Point Steel in December 1997 and Pinole Point Steel’s subsequent cash flow. During fiscal 2003, the Company recorded an adjustment on sale of discontinued operation, net of income taxes, of $1,934 to reduce the previously provided loss on discontinued operation. The adjustment consisted of a favorable change in the estimated proceeds of the sale of $2,436 and a reduction for estimated operating losses of $1,247 due to higher plant utilization and customers’ willingness to accelerate product deliveries prior to the closing of the transaction. The adjustment also included an additional loss of $949 related to bad debt, product claims, workers compensation and employee expenses as well as a reduction of $800 primarily due to a change in the estimated apportionment of state income taxes.

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Net sales and loss from discontinued operation of Pinole Point Steel were as follows:

	For the Years Ended February 28 or 29,
	2004		2003
Net Sales	$	—	$	48,050
Loss from Discontinued Operation, Net of Income Tax		—		(2,136	)

The loss from discontinued operation, net of income taxes, for fiscal 2003 includes the allocation of consolidated interest expense of $1,797.

Note 13: Asset Impairments and Restructuring

Asset Impairments

As a result of the strategic review and fourth quarter events (industry wide metal shortages, higher metal pricing and the loss of a significant customer serviced by the Middletown, Ohio facility), the Company announced the closing of the Middletown facility in May 2004. The Board concluded that operating the remaining coil coating facilities would provide the best opportunities for a greater return to shareowners. This resulted in a pretax asset impairment charge of $9,071 being recorded in the fourth quarter of fiscal 2004. In addition, the Company expects to incur approximately $1,600 in fiscal 2005 related to location closing costs including severance and other expenses. The facility is expected to be closed by July 2004.

In the fourth quarter of fiscal 2004, MSC completed its annual assessment of goodwill under SFAS No. 142, “Goodwill and Other Intangible Assets.” Based on the assessment of the goodwill associated with the acquisition of GAC, the Company recorded a pretax impairment charge of $6,739. The impairment resulted from slower growth in the penetration of the European brake market than previously projected. In addition, the Company experienced delays in the negotiation of definitive agreements with a potential strategic partner related to the marketing and sales of Quiet Steel in Europe. The Company is reviewing various strategic alternatives, including strategic alliances, to commercialize these products in Europe.

In fiscal 2002, the Company reviewed its investment in its powder coating assets. MSC reevaluated its efforts to commercialize its proprietary powder coating capabilities and based on the projected cash flows from the powder coating assets, the Company recorded a $5,929 charge to earnings in fiscal 2002.

In fiscal 2002, the Company reviewed its investment in the capitalized intangible assets and equipment related to its license with Northwestern University to commercialize its Solid State Shear Pulverization (“SSSP”) technology. The Company completed research studies with potential licensees of the SSSP technology. Based on the projected cash flows from the SSSP assets, MSC recorded a $2,001 charge to earnings in fiscal 2002. The total impairment charge recorded in fiscal 2002 was $8,361.

Restructuring

On April 17, 2003, the Chairman, President and Chief Executive Officer resigned and was replaced by a non-executive Chairman of the Board and a new President and Chief Executive Officer. A separation arrangement was entered into resulting in a pretax charge to earnings of $1,821 in the first quarter of fiscal 2004. Of this amount, $1,543 is scheduled to be paid out over two years and the remainder relates to the executive’s non-contributory supplemental pension plan to be paid out in accordance with the plan. The Company recorded additional restructuring expenses of $143 in the first quarter of fiscal 2004. Total restructuring expense for fiscal 2004 was $1,964. Of this amount, net cash of $977 was paid during fiscal 2004. A total of $559 is recorded as Accrued Payroll Related Expenses and $122 is recorded as Other Long-Term Liabilities in the Consolidated Balance Sheet as of February 29, 2004.

On November 20, 2002, the Company announced it implemented a program to reduce overhead and improve efficiencies. The program involved restructuring MSC’s manufacturing organization, including terminations of 14 salaried personnel in the third quarter of fiscal 2003. The Company recorded a restructuring charge of $855 for severance and other related costs in the third quarter of fiscal 2003. Of this amount, $677 pertained to severance expenses and $178 for other related costs. Total cash paid in fiscal 2003 related to this restructuring program was $383. Total net cash paid in fiscal 2004 related to this restructuring program was $440, and the remaining reserve balance was zero as of February 29, 2004.

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On November 15, 2001, the Company announced it implemented a reorganization and cost reduction program. MSC terminated 41 employees primarily in sales, general and administrative departments of the Company and recorded a restructuring charge of $1,450 in fiscal 2002. Of this amount, $1,110 pertained to severance expenses and $340 for other related costs. As of February 28, 2003, all amounts under this restructuring program were paid.

The restructuring reserve as of February 29, 2004 was $681 as presented in the chart.

	Severance			Other			Total
Restructuring Reserve Recorded on November 15, 2001	$	1,110		$	340		$	1,450
Cash Payments, Net		(676	)		(236	)		(912	)
Restructuring Reserve as of February 28, 2002	$	434		$	104		$	538
Restructuring Reserve Recorded on November 20, 2002		677			178			855
Cash Payments, Net		(720	)		(201	)		(921	)
Restructuring Reserve as of February 28, 2003	$	391		$	81		$	472
Restructuring Reserve Recorded in Fiscal 2004		1,013			951			1,964
Reclassification of Supplemental Pension Reserve		—			(338	)		(338	)
Cash Payments, Net		(794	)		(623	)		(1,417	)
Restructuring Reserve as of February 29, 2004	$	610		$	71		$	681

Note 14: Contractual Commitment

On January 31, 2002, the Company entered into an exclusive license agreement with TouchSensor Technologies, LLC (“TST”). This agreement provides for MSC to manufacture, use, further develop and sell TST’s patented touch sensor technology for sensors, switches, displays and interface solutions in the consumer electronics and transportation markets. There were $470 of sales in fiscal 2004 and $272 of sales in fiscal 2003. Royalty expenses related to this agreement were $1,500, $1,000 and $167 in fiscal years 2004, 2003 and 2002, respectively. Royalty payments to TST, per the license agreement, consist of a certain percentage of net sales of licensed products plus a certain percentage of sublicense profits subject to a minimum annual royalty amount which is shown in the chart below.

Minimum Annual Royalties
2005	$	2,750
2006		2,750
Total	$	5,500

In order for the Company to retain exclusivity in fiscal 2007, the Company would be required to notify TST of its intent on or before March 1, 2006. The minimum royalty required for the fiscal 2007 exclusivity would be $2,000.

Note 15: Business Segments

MSC reports segment information based on how management views its business for evaluating performance and making operating decisions. The Company’s two reportable segments are: MSC Engineered Materials and Solutions Group (“EMS”) and MSC Electronic Materials and Devices Group (“EMD”). EMS focuses on providing material-based solutions for electronic, acoustical/thermal and coated metal applications. The electronic material-based solutions primarily include coated and laminated noise reducing materials used in electronic applications to solve customer specific problems and enhance performance. The acoustical/thermal material-based solutions include multilayer composites consisting of metals, polymeric coatings and other materials used to manage noise and thermal energy. The coated metal material-based solutions include coil coated and EG protective and decorative coatings applied to coils of metal in a continuous, high-speed, roll-to-roll process. The Company’s material-based solutions are designed to meet specific customer requirements for the automotive, building and construction, electronics, lighting and appliance markets. EMS domestic and foreign sales are presented in the chart below. Of the foreign sales, no one country comprised greater than 10% of consolidated EMS sales.

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Loss before income taxes for EMS includes $15,810 of asset impairments in fiscal 2004. EMD focuses on field-effect technology for sensors, switches and interface solutions in the consumer electronics and transportation markets. Corporate represents cash, certain fixed assets, income taxes receivable, deferred income taxes and unallocated general corporate expenses. Loss before income taxes for Corporate includes interest expense of $3,273, $3,376 and $222 not allocated to discontinued operations during fiscal 2004, 2003 and 2002, respectively. In addition, loss before income taxes for Corporate for fiscal 2004 includes $322 and $917 for retention and SERP buyout.

	2004			2003			2002
Net Sales
EMS – Domestic	$	230,676		$	254,043		$	249,185
EMS – Foreign		12,072			12,503			1,321
EMD		470			272			—
Total	$	243,218		$	266,818		$	250,506
Depreciation and Amortization
EMS	$	14,468		$	15,442		$	15,888
EMD		80			2			—
Corporate		381			953			1,938
Total	$	14,929		$	16,397		$	17,826
Income (Loss) Before Income Taxes
EMS	$	243		$	17,064		$	3,536
EMD		(5,061	)		(3,739	)		(167	)
Corporate		(12,871	)		(15,037	)		(10,990	)
Total	$	(17,689	)	$	(1,712	)	$	(7,621	)
Total Assets
EMS	$	157,154		$	167,494		$	167,203
EMD		1,257			319			—
Corporate		45,543			53,961			67,167
Subtotal		203,954			221,774			234,370
Discontinued Operations		—			16,035			65,104
Total	$	203,954		$	237,809		$	299,474
Capital Expenditures
EMS	$	3,737		$	6,064		$	5,243
EMD		773			58			—
Corporate		9			137			46
Total	$	4,519		$	6,259		$	5,289

54

Note 16: Earnings Per Share

Below is the computation of basic and diluted earnings per share for the years ended February 28 or 29, 2004, 2003 and 2002.

	2004			2003			2002
Loss from Continuing Operations	$	(14,048	)	$	(339	)	$	(4,491	)
Income from Discontinued Operation – Specialty Films		—			—			1,469
Loss from Discontinued Operation – Pinole Point Steel		—			—			(7,561	)
Gain (Loss) on Sale of Discontinued Operation – Specialty Films		—			(101	)		38,787
Gain (Loss) on Discontinued Operation – Pinole Point Steel		(489	)		1,934			(53,287	)
Net Income (Loss)	$	(14,537	)	$	1,494		$	(25,083	)
Weighted Average Number of Common Shares Outstanding Used for Basic Net Income (Loss) Per Share		13,990			13,941			14,007
Dilutive Stock Options		—			136			—
Dilutive Restricted Stock		—			149			—
Weighted Average Number of Common Shares Outstanding Plus Dilutive Shares		13,990			14,226			14,007
Basic Net Income (Loss) Per Share:
Loss from Continuing Operations	$	(1.00	)	$	(0.02	)	$	(0.32	)
Income from Discontinued Operation – Specialty Films		—			—			0.10
Loss from Discontinued Operation – Pinole Point Steel		—			—			(0.54	)
Gain (Loss) on Sale of Discontinued Operation – Specialty Films		—			(0.01	)		2.77
Gain (Loss) on Discontinued Operation – Pinole Point Steel		(0.04	)		0.14			(3.80	)
Basic Net Income (Loss) Per Share	$	(1.04	)	$	0.11		$	(1.79	)
Diluted Net Income (Loss) Per Share:
Loss from Continuing Operations	$	(1.00	)	$	(0.02	)	$	(0.32	)
Income from Discontinued Operation – Specialty Films		—			—			0.10
Loss from Discontinued Operation – Pinole Point Steel		—			—			(0.54	)
Gain (Loss) on Sale of Discontinued Operation – Specialty Films		—			(0.01	)		2.77
Gain (Loss) on Discontinued Operation – Pinole Point Steel		(0.04	)		0.14			(3.80	)
Diluted Net Income (Loss) Per Share	$	(1.04	)	$	0.11		$	(1.79	)

Options to purchase 427,487 shares of common stock at a price range of $11.31-$18.75 per share were outstanding during fiscal 2004 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.

Note 17: Subsequent Events

In May 2004, the Company announced the closing of the Middletown, Ohio facility. This action was taken due to the underutilization of the facility, recent industry wide metal availability and pricing issues and the loss of a significant customer which made the facility noncompetitive in the market place. This resulted in a pretax asset impairment charge of $9,071 being recorded in the fourth quarter. The facility is expected to be closed by July 2004.

On April 30, 2004, the Company entered into an amended and restated credit agreement with its banks. The line of credit is for $30,000 and expires on October 11, 2007.

In the fourth quarter of fiscal 2004, the results of operations, including the asset impairment charges, caused the Company to be out of compliance with the minimum net worth covenant under the terms of the 1998 Senior Notes. The Company opted to notify the holders of the 1998 Senior Notes that it intended to repay the principal, interest and contractual prepayment penalty on or before June 1, 2004. The Company paid principal of $36,167, interest of $1,086 and a contractual debt prepayment penalty of $3,318 to all but two noteholders on May 10, 2004. The remaining noteholders elected to receive payment on or before June 1, 2004. The Company expects to pay the remaining principal ($7,778), approximate interest ($264) and estimated contractual debt prepayment penalty ($713) on or before

55

June 1, 2004. The Company will fund this prepayment utilizing cash on hand and borrowing under its amended and restated line of credit.

Note 18: Selected Quarterly Results of Operations (Unaudited)

The table presented below is a summary of quarterly data for the years ended February 29, 2004 and February 28, 2003.

	2004
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net Sales	$	59,383		$	55,899		$	64,640		$	63,296
Gross Profit		9,470			8,311			11,763			11,471
Income (Loss) from Continuing Operations		(2,230	)		321			953			(13,092	)
Loss on Discontinued Operation – Pinole Point Steel		(123	)		(125	)		(200	)		(41	)
Net Income (Loss)		(2,353	)		196			753			(13,133	)
Basic Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	(0.16	)	$	0.02		$	0.07		$	(0.93	)
Loss on Discontinued Operation – Pinole Point Steel		(0.01	)		(0.01	)		(0.02	)		—
Basic Net Income (Loss) Per Share	$	(0.17	)	$	0.01		$	0.05		$	(0.93	)
Diluted Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	(0.16	)	$	0.02		$	0.07		$	(0.93	)
Loss on Discontinued Operation – Pinole Point Steel		(0.01	)		(0.01	)		(0.02	)		—
Diluted Net Income (Loss) Per Share	$	(0.17	)	$	0.01		$	0.05		$	(0.93	)
	2003
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net Sales	$	71,660		$	68,151		$	67,401		$	59,606
Gross Profit		12,839			14,358			11,808			8,570
Income (Loss) from Continuing Operations		2,170			(929	)		(298	)		(1,282	)
Loss on Sale of Discontinued Operation – Specialty Films		—			(101	)		—			—
Gain (Loss) on Discontinued Operation – Pinole Point Steel		3,683			(610	)		(145	)		(994	)
Net Income (Loss)		5,853			(1,640	)		(443	)		(2,276	)
Basic Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.15		$	(0.07	)	$	(0.02	)	$	(0.09	)
Loss on Sale of Discontinued Operation – Specialty Films		—			(0.01	)		—			—
Gain (Loss) on Discontinued Operation – Pinole Point Steel		0.26			(0.04	)		(0.01	)		(0.08	)
Basic Net Income (Loss) Per Share	$	0.41		$	(0.12	)	$	(0.03	)	$	(0.17	)
Diluted Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.15		$	(0.07	)	$	(0.02	)	$	(0.09	)
Loss on Sale of Discontinued Operation – Specialty Films		—			(0.01	)		—			—
Gain (Loss) on Discontinued Operation – Pinole Point Steel		0.25			(0.04	)		(0.01	)		(0.08	)
Diluted Net Income (Loss) Per Share	$	0.40		$	(0.12	)	$	(0.03	)	$	(0.17	)

56

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

The Audit Committee of the Board of Directors annually considers the selection of MSC’s independent public accountant. On May 20, 2002, the Audit Committee decided to dismiss Arthur Andersen LLP as MSC’s independent public accountant and to engage Deloitte & Touche LLP to serve as MSC’s independent auditors for fiscal 2004 and 2003.

Arthur Andersen LLP’s report on MSC’s Consolidated Financial Statements for fiscal 2002 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. During MSC’s fiscal 2002 and through May 20, 2002, there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen LLP’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on MSC’s Consolidated Financial Statements for such years; and there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K. MSC provided Arthur Andersen LLP with a copy of the foregoing disclosures in May 2002 and Arthur Andersen LLP stated its agreement with such statements.

During MSC’s fiscal 2002 and through May 20, 2002, MSC did not consult Deloitte & Touche LLP with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on MSC’s Consolidated Financial Statements, or any other matters or reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.

Item 9A. Controls and Procedures.

Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this annual report, have concluded that the Company’s disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in internal control over financial reporting. There were no significant changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

57

PART III

Item 10. Directors and Executive Officers of the Registrant

Information regarding the Company’s executive officers is included in Item 1 of Part I of this report.

Information regarding the background of the directors, matters related to the Audit Committee, and Section 16(a) compliance, appears under the captions “Election of Directors,” “Board of Directors and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement which is incorporated herein by reference.

The company has adopted a code of ethics entitled Material Sciences Corporation Code of Business Ethics (“MSC Code of Ethics”) that applies to all of its employees, officers and directors, including its principal executive officer and principal financial and accounting officer. The text of the MSC Code of Ethics is available on the Company’s website at www.matsci.com. The Company intends to disclose future amendments to, or waivers from, certain provisions of the MSC Code of Ethics for executive officers and directors on the Company’s website following the date of such amendment or waiver. Shareowners may request a free copy of the MSC Code of Ethics from:

Material Sciences Corporation

2200 East Pratt Boulevard

Elk Grove Village, Illinois 60007

MSC has also adopted written charters for its Audit, Compensation and Organization, and Nominating and Corporate Governance Committees, and Corporate Governance Guidelines, all of which are posted on the Company’s website at www.matsci.com. Shareowners may request a free copy of the charters and guidelines from the address set forth above.

Item 11. Executive Compensation

Information with respect to compensation of executive officers and directors of the Company can be found under the caption “Compensation of Executive Officers” in the Proxy Statement, which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Holders and Management and Related Shareholder Matters

Information with respect to security ownership by any person(s) known to the Company to beneficially own more than 5% of the Company’s stock and by each director of the Company, each named executive officer of the Company, and all directors and executive officers of the Company as a group can be found under the caption “Stock Ownership” in the Proxy Statement, which is incorporated herein by reference.

The following table presents information relating to securities authorized under the Company’s equity compensation plans. The Company’s shareowners have approved all of these plans.

Plan Category	(a) Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights	(b) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity Compensation Plans Approved by Security Holders	909,790	$	12.36	898,410
Equity Compensation Plans Not Approved by Security Holders	—		—	—
Total	909,790	$	12.36	898,410

58

Item 13. Certain Relationships and Related Transactions

Information with respect to certain relationships and related transactions can be found under the caption “Compensation of Executive Officers” set forth in the Proxy Statement, which is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information relating to the Company’s auditors and the Audit Committee’s pre-approval policies can be found under the caption “Independent Auditors” in the Proxy Statement, which is incorporated herein by reference.

59

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(A) Financial Statements and Schedule of the Company

I Financial Statements of the Company listed in the Index to Consolidated Financial Statements are filed as part of this report.

II Supplemental Schedule. The report and schedule listed below appear on pages 62 and 63 of this report.

(i) Report of Independent Public Accountants with respect to Supplemental Schedule to the Financial Statements

(ii) Schedule II – Reserve for Receivable Allowances

All other schedules have been omitted, since the required information is not significant, are included in the financial statements or the notes thereto or are not applicable.

(B) Reports on Form 8-K

On January 13, 2004, the Company furnished to the Securities and Exchange Commission a Current Report on Form 8-K, pursuant to Item 12, to announce financial results for the third quarter ended November 30, 2003.

On February 20, 2004, the Company filed with the Securities and Exchange Commission a Current Report on Form 8-K, pursuant to Items 5 and 7, to announce the naming of Ronald L. Stewart as President and Chief Executive Officer and director, effective March 1, 2004, and the retirement of Michael J. Callahan as President and Chief Executive Officer and member of the board of directors, effective February 29, 2004.

(C) Exhibits

Reference is made to the Index to Exhibits on pages 64–66.

60

Signatures

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

Material Sciences Corporation
By:	/s/    RONALD L. STEWART
	Ronald L. Stewart,
	President, Chief Executive Officer and Director

Date: May 14, 2004

Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on May 14, 2004.

/s/    RONALD L. STEWART         Ronald L. Stewart	President, Chief Executive Officer and Director (Principal Executive Officer)
/s/    JAMES J. WACLAWIK, SR.         James J. Waclawik, Sr.	Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)
/s/    G. ROBERT EVANS         G. Robert Evans	Director
/s/    AVRUM GRAY         Avrum Gray	Director
/s/    FRANK L. HOHMANN III         Frank L. Hohmann III	Director
/s/    RONALD A. MITSCH         Ronald A. Mitsch	Non-Executive Chairman of the Board
/s/    MARY P. QUIN         Mary P. Quin	Director
/s/    JOHN D. ROACH         John D. Roach	Director
/s/    CURTIS G. SOLSVIG III         Curtis G. Solsvig III	Director

61

Report of Independent Public Accountants with Respect to Supplemental Schedule

to the Financial Statements

The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP. This report applies to Supplemental Schedule II – Reserve for Receivable Allowances for the year ended February 28, 2002

We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in the Material Sciences Corporation 2002 Annual Report to Shareowners in this Form 10-K, and have issued our report thereon dated April 29, 2002. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplemental financial statement schedule is the responsibility of the Company’s management and is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic consolidated financial statements. The supplemental financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.

/s/    Arthur Andersen LLP        

Arthur Andersen LLP

Chicago, Illinois

April 29, 2002

62

Schedule II

Material Sciences Corporation and Subsidiaries (in thousands)

Reserve for Receivable Allowances

			Additions
	Balance at Beginning of Year		Charged to Costs and Expense		Charged to Other Accounts		Reclassifications and Acquisitions		Deductions from Reserve			Balance at End of Year
Fiscal 2002
Receivable Allowances	$	3,121	$	7,563	$	—	$	—	$	(5,930	)	$	4,754
Fiscal 2003
Receivable Allowances	$	4,754	$	8,880	$	—	$	—	$	(8,760	)	$	4,874
Fiscal 2004
Receivable Allowances	$	4,874	$	5,437	$	—	$	—	$	(6,126	)	$	4,185

The activity in the Receivable Allowances account includes the Company’s bad debt, claim and scrap allowance.

63

Index to Exhibits

Exhibit Number		Description of Exhibit
2	(a)	Asset Purchase Agreement by and among Colorstrip, Inc., the Registrant, and MSC Pinole Point Steel Inc., dated as of November 14, 1997.(7)
2	(b)	Purchase Agreement by and among Material Sciences Corporation, MSC Specialty Films, Inc., Bekaert Corporation and N.V. Bekaert S.A., dated June 10, 2001.(14)
2	(c)	First Amendment to Purchase Agreement, dated June 29, 2001.(14)
3	(a)	Registrant’s Restated Certificate of Incorporation.(6)
3	(b)	Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock.(2)
3	(c)	Registrant’s By-laws, as amended.(9)
4	(a)	Note Agreement dated as of February 15, 1998, by and among the Registrant and the purchasers described on Schedule I attached thereto.(8)
4	(b)	First Amendment to Note Agreement dated as of January 23, 1998, among the Registrant, Principal Mutual Life Insurance Company, Great-West Life & Annuity Insurance Company, The Great-West Life Assurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and West Coast Life Insurance Company.(8)
4	(d)	Second Amendment to Note Agreement dated as of February 27, 1998, among the Registrant, Principal Mutual Life Insurance Company, Great-West Life & Annuity Insurance Company, The Great-West Life Assurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and West Coast Life Insurance Company.(8)
4	(e)	Amended and Restated Loan and Security Agreement dated as of April 30, 2004 among Material Sciences Corporation and LaSalle Bank National Association, The Northern Trust Company and LaSalle Bank National Association, as Agent.*
4	(f)	Consolidated Amended and Restated Guaranty and Security Agreement dated as of April 30, 2004, among the Grantors party thereto and LaSalle Bank National Association, as Agent.*
		There are omitted certain instruments with respect to long-term debt, the total amount of securities authorized under each of which does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. A copy of each such instrument will be furnished to the Securities and Exchange Commission upon request.
10	(a)	Material Sciences Corporation Stock Purchase Plan.(1)†
10	(b)	Material Sciences Corporation Supplemental Pension Plan.(1)†
10	(c)	Material Sciences Corporation Employee Stock Purchase Plan.(10)†
10	(d)	Material Sciences Corporation 1985 Stock Option Plan for Key Employees.(10)†
10	(e)	Material Sciences Corporation 1985 Stock Option Plan for Directors.(10)†
10	(f)	Material Sciences Corporation 1992 Omnibus Stock Awards Plan for Key Employees.(3)†
10	(g)	Employment Agreement effective February 27, 1991, between Material Sciences Corporation and G. Robert Evans.(10)†
10	(h)	Material Sciences Corporation 1991 Stock Option Plan for Directors.(10)†
10	(i)	Material Sciences Corporation Directors Deferred Compensation Plan.(10)†

64

Exhibit Number		Description of Exhibit
10	(j)	Material Sciences Corporation 1996 Stock Option Plan for Non-Employee Directors.(4)†
10	(k)	Deferred Compensation Plan of Material Sciences Corporation and Certain Participating Subsidiaries.(10)†
10	(l)	Lease and Agreement dated as of December 1, 1980, between Line 6 Corp. and Pre Finish Metals Incorporated, relating to Walbridge, Ohio facility.(1)
10	(m)	First Amendment to Lease and Agreement dated as of May 30, 1986, between Corporate Property Associates and Corporate Property Associates 2 and Pre Finish Metals Incorporated.(10)
10	(n)	Lease Guaranty dated as of May 30, 1986, from Material Sciences Corporation to Corporate Property Associates and Corporate Property Associates 2.(10)
10	(o)	Agreement dated as of May 30, 1986, between Material Sciences Corporation and Corporate Property Associates and Corporate Property Associates 2.(10)
10	(p)	Form of Standstill Agreement dated as of January 29, 1986, among Material Sciences Corporation, Richard L. Burns and Joyce Burns.(10)
10	(q)	Form of Indemnification Agreement between Material Sciences Corporation and each of its officers and directors.(10)
10	(r)	Severance Benefits Agreement dated October 22, 1996, between Material Sciences Corporation and James J. Waclawik, Sr.(5)†
10	(s)	Tolling Agreement dated as of June 30, 1998, between Walbridge Coatings and Inland Steel Company.(10)(17)
10	(t)	Form of Change in Control Agreement.(9)†
10	(u)	Amendment to the Supplemental Employee Retirement Plan.(9)†
10	(v)	Form of Change in Control Agreement (MSC Executive Officers).(13)†
10	(w)	Form of Change in Control Agreement (Subsidiary Executive Officers).(13)†
10	(x)	License Agreement, dated as of January 31, 2002, by and between Material Sciences Corporation and TouchSensor Technologies, L.L.C.(15)(16)
10	(y)	Purchase Agreement, dated April 23, 2002, by and among Material Sciences Corporation, LTV Steel Company, Inc., LTV Walbridge, Inc. and MSC Walbridge Coatings Inc.(15)
10	(z)	Separation Agreement and General Release, dated April 23, 2003, by and between Material Sciences Corporation and Gerald G. Nadig.(17)
10	(aa)	Purchase Agreement, dated as of May 2, 2003, by and among ISG Acquisition Inc., ISG Venture Inc., MSC Walbridge Coatings Inc. and Material Sciences Corporation.(17)
10	(bb)	Tolling Agreement, dated as of May 6, 2003, by and among International Steel Group, Inc., MSC Walbridge Coatings Inc. and Material Sciences Corporation.(17)
10	(cc)	Material Sciences Corporation Supplemental Retirement Plan.(17)†
10	(dd)	Material Sciences Corporation Phantom Stock Unit Agreement, dated December 17, 2003, between Material Sciences Corporation and Michael J. Callahan.(18)†
10	(ee)	Material Sciences Corporation Phantom Stock Unit Agreement, dated December 17, 2003, between Material Sciences Corporation and Ronald A. Mitsch.(18)†
10	(ff)	Employment Agreement, dated May 5, 2004, between Material Sciences Corporation and James J. Waclawik, Sr.*†

65

Exhibit Number		Description of Exhibit
10	(gg)	Consulting Agreement, dated May 5, 2004, between Material Sciences Corporation and James J. Waclawik, Sr.*†
10	(hh)	Material Sciences Corporation Phantom Stock Unit Agreement, dated May 5, 2004, between Material Sciences Corporation and James J. Waclawik, Sr.*†
10	(ii)	Form of Material Sciences Corporation Fiscal 2005 Phantom Stock Unit Agreement.*†
10	(jj)	Form of Material Sciences Corporation, Engineered Materials and Devices Group, Inc. Incentive Compensation Agreement.*†
10	(kk)	Retention Agreement, dated February 29, 2004, between Material Sciences Corporation and John M. Klepper.*†
10	(ll)	Retention Agreement, dated February 29, 2004, between Material Sciences Corporation and Ronald L. Millar, Jr.*†
10	(mm)	Retention Agreement, dated April 6, 2004, between Material Sciences Corporation and Clifford D. Nastas.*†
21		Subsidiaries of the Registrant.*
23	(a)	Consent of Deloitte & Touche LLP.*
23	(b)	Notice Regarding Consent of Arthur Andersen LLP.*
31.1		Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer.*
31.2		Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer.*
32		Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.*

  * Filed herewith.

  † Management contract or compensatory plan.

 (1) Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (Registration No. 2-93414), which was declared effective on November 27, 1984.

 (2) Incorporated by reference to the Registrant’s Form 8-A filed on June 25, 1996 (File No. 1-8803).

 (3) Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-15679) which was filed on November 6, 1996.

 (4) Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-15677) which was filed on November 6, 1996.

 (5) Incorporated by reference to the Registrant’s Form 10-K Annual Report for the Fiscal Year Ended February 28, 1997 (File No. 1-8803).

 (6) Incorporated by reference to the Registrant’s Form 10-Q Quarterly Report for the Quarter Ended August 31, 1997 (File No. 1-8803).

 (7) Incorporated by reference to the Registrant’s Form 8-K filed on December 30, 1997 (File No. 1-8803).

 (8) Incorporated by reference to the Registrant’s Form 10-K Annual Report for the Fiscal Year Ended February 28, 1998 (File No. 1-8803).

 (9) Incorporated by reference to the Registrant’s Form 8-K filed on June 22, 1998 (File No. 1-8803).

(10) Incorporated by reference to the Registrant’s Form 10-K Annual Report for the Fiscal Year Ended February 28, 1999 (File No. 1-8803).

(11) Incorporated by reference to the Registrant’s Form 10-Q Quarterly Report for the Quarter Ended August 31, 1999 (File No. 1-8803).

(12) Incorporated by reference to the Registrant’s Form 10-K Annual Report for the Fiscal Year Ended February 28, 2001 (File No. 1-8803).

(13) Incorporated by reference to the Registrant’s Form 10-Q Quarterly Report for the Quarter Ended May 31, 2001 (File No. 1-8803).

(14) Incorporated by reference to the Registrant’s Form 8-K filed on June 29, 2001 (File No. 1-8803).

(15) Incorporated by reference to the Registrant’s Form 10-K Annual Report for the Fiscal Year Ended February 28, 2002 (File No. 1-8803).

(16) Certain information in this exhibit has been omitted and filed separately with Securities and Exchange Commission pursuant to a confidential treatment request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

(17) Incorporated by reference to the Registrant’s Form 10-K Annual Report for the Fiscal Year Ended February 28, 2003 (File No. 1-8803).

(18) Incorporated by reference to the Registrant’s Form 10-Q Quarterly Report for the Quarter Ended November 30, 2003 (File No. 1-8803).

66

EX-4.(E)

Exhibit 4(e)

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

dated as of April 30, 2004

among

MATERIAL SCIENCES CORPORATION,

as the Company

THE VARIOUS FINANCIAL INSTITUTIONS PARTY HERETO,

as Lenders,

and

LASALLE BANK NATIONAL ASSOCIATION,

as Administrative Agent

LASALLE BANK NATIONAL ASSOCIATION,

as Arranger

Table of Contents

SECTION 1    DEFINITIONS.		1
1.1	UCC Definitions	1
1.2	General Definitions	1
1.3	Other Interpretive Provisions	21
SECTION 2    COMMITMENTS OF THE LENDERS; BORROWING, CONVERSION AND LETTER OF CREDIT PROCEDURES.		22
2.1	Commitments	22
2.2	Loan Procedures.	23
2.3	Letter of Credit Procedures	24
2.4	Commitments Several	27
2.5	Certain Conditions	27
SECTION 3    EVIDENCING OF LOANS.		27
3.1	Notes	27
3.2	Recordkeeping	27
SECTION 4    INTEREST.		27
4.1	Interest Rates	27
4.2	Interest Payment Dates	28
4.3	Setting and Notice of LIBOR Rates	28
4.4	Computation of Interest	28
SECTION 5    FEES.		28
5.1	Non-Use Fee	28
5.2	Letter of Credit Fees	28
5.3	Amendment Fee	29
5.4	Administrative Agent’s Fees	29
SECTION 6    REDUCTION OR TERMINATION OF THE COMMITMENT; PREPAYMENTS.		29
6.1	Reduction or Termination of the Commitment	29
6.2	Prepayments	29
6.3	Manner of Prepayments	30
6.4	Repayments	30
SECTION 7    MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES.		31
7.1	Making of Payments	31
7.2	Application of Certain Payments	31
7.3	Due Date Extension	31
7.4	Setoff	31
7.5	Proration of Payments	31
7.6	Taxes	32
SECTION 8    INCREASED COSTS; SPECIAL PROVISIONS FOR LIBOR LOANS.		33
8.1	Increased Costs	33
8.2	Basis for Determining Interest Rate Inadequate or Unfair	34

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8.3	Changes in Law Rendering LIBOR Loans Unlawful	35
8.4	Funding Losses	35
8.5	Right of Lenders to Fund through Other Offices	35
8.6	Discretion of Lenders as to Manner of Funding	35
8.7	Mitigation of Circumstances; Replacement of Lenders	36
8.8	Conclusiveness of Statements; Survival of Provisions	36
SECTION 9    GRANT OF SECURITY INTEREST; COLLATERAL		36
9.1	Grant	36
9.2	Representations and Warranties Regarding Collateral	37
9.3	Covenants Regarding Collateral	38
9.4	Certain Matters Relating to Receivables.	42
9.5	Communications with Obligors; Company Remains Liable.	42
9.6	[Reserved.]	43
9.7	Proceeds to be Turned Over to Administrative Agent	43
SECTION 10    REPRESENTATIONS AND WARRANTIES.		43
10.1	Organization	44
10.2	Authorization; No Conflict	44
10.3	Validity and Binding Nature	44
10.4	Solvency, etc	44
10.5	Compliance with Laws	44
10.6	Litigation and Contingent Liabilities	45
10.7	Intellectual Property	45
10.8	Financial Condition	45
10.9	No Material Adverse Change	45
10.10	Environmental Laws	45
10.11	Permits and Licenses	46
10.12	ERISA	46
10.13	Public Utility Holding Company Act	46
10.14	Insurance	46
10.15	Full Disclosure	47
10.16	No Default	47
10.17	Customer and Trade Relations	47
10.18	Tax Obligations	47
10.19	Employee Controversies	47
10.20	Investment Company Act	48
10.21	Subsidiaries	48
10.22	Regulation U	48
10.23	Capital Securities	48
10.24	Occupational Safety and Health	48
10.25	Swap Obligations	49
10.26	Ownership of Properties; Liens	49
SECTION 11    AFFIRMATIVE COVENANTS.		49
11.1	Reports, Certificates and Other Information	49
11.2	Taxes	52

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11.3	Compliance with Laws	52
11.4	Maintenance of Property; Insurance	52
11.5	Books, Records and Inspections	53
11.6	Maintenance of Existence, etc	54
11.7	Ownership	54
11.8	Employee Benefit Plans	54
11.9	Environmental Matters	54
11.10	Further Assurances	54
11.11	Use of Proceeds	55
11.12	Omaha Senior Notes	55
11.13	EMD Opinion	55
SECTION 12    NEGATIVE COVENANTS		55
12.1	Liens	55
12.2	Guaranties	57
12.3	Change in Business	57
12.4	Investments	57
12.5	Indebtedness	59
12.6	Transactions with Affiliates	60
12.7	Mergers, Consolidations, Sales	60
12.8	Liquidations	61
12.9	Suspension of Business	61
12.10	Restricted Payments	61
12.11	ERISA	62
12.12	Inconsistent Agreements	62
12.13	Fiscal Year	62
12.14	Financial Covenants.	62
12.15	Operating Leases	62
SECTION 13    EFFECTIVENESS; CONDITIONS OF LENDING, ETC.		62
13.1	Initial Credit Extension	62
13.2	Conditions	64
SECTION 14    EVENTS OF DEFAULT AND THEIR EFFECT.		65
14.1	Events of Default	65
14.2	Effect of Event of Default	67
14.3	Code and Other Remedies	67
14.4	[Reserved.]	68
14.5	Application of Proceeds	68
14.6	Waiver; Deficiency	68
SECTION 15    THE AGENT.		69
15.1	Appointment and Authorization	69
15.2	Issuing Lender	69
15.3	Delegation of Duties	69
15.4	Exculpation of Administrative Agent	69
15.5	Reliance by Administrative Agent	70

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15.6	Notice of Default	70
15.7	Credit Decision	71
15.8	Indemnification	71
15.9	Administrative Agent in Individual Capacity	72
15.10	Successor Administrative Agent	72
15.11	Collateral Matters	72
15.12	Administrative Agent May File Proofs of Claim	73
15.13	Other Agents; Arrangers and Managers	73
SECTION 16    GENERAL.		74
16.1	Waiver; Amendments	74
16.2	Confirmations	74
16.3	Notices	74
16.4	Computations	75
16.5	Costs, Expenses and Taxes	75
16.6	Assignments; Participations.	75
16.7	Register	77
16.8	GOVERNING LAW	77
16.9	Confidentiality	77
16.10	Severability	78
16.11	Nature of Remedies	78
16.12	Entire Agreement	78
16.13	Counterparts	78
16.14	Successors and Assigns	78
16.15	Captions	79
16.16	INDEMNIFICATION BY THE COMPANY	79
16.17	Nonliability of Lenders	80
16.18	FORUM SELECTION AND CONSENT TO JURISDICTION	80
16.19	WAIVER OF JURY TRIAL	81

iv

ANNEXES

ANNEX A	Lenders and Pro Rata Shares
ANNEX B	Addresses for Notices
SCHEDULES
SCHEDULE 9.2.3	Grantor Information
SCHEDULE 9.2.4	Collateral Locations
SCHEDULE 9.2.8	Intellectual Property
SCHEDULE 9.3.9	Commercial Tort Claims
SCHEDULE 10.6	Litigation and Contingent Liabilities
SCHEDULE 10.10	Environmental Matters
SCHEDULE 10.12	ERISA
SCHEDULE 10.14	Insurance
SCHEDULE 10.17	Customer and Trade Relations
SCHEDULE 10.19	Labor Matters
SCHEDULE 10.21	Subsidiaries
SCHEDULE 10.23	Capital Securities
SCHEDULE 11.7	Ownership
SCHEDULE 12.1	Existing Liens
SCHEDULE 12.4	Investments
SCHEDULE 12.5	Existing Indebtedness
SCHEDULE 12.11	Pension Plans
EXHIBITS
EXHIBIT A	Form of Note
EXHIBIT B	Form of Compliance Certificate
EXHIBIT C	Form of Borrowing Base Certificate
EXHIBIT D	Form of Assignment Agreement
EXHIBIT E	Form of Notice of Borrowing
EXHIBIT F	Form of Notice of Conversion/Continuation

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated as of April 30, 2004 (this “Agreement”) is entered into among MATERIAL SCIENCES CORPORATION (the “Company”), the financial institutions that are or may from time to time become parties hereto (together with their respective successors and assigns, the “Lenders”) and LASALLE BANK NATIONAL ASSOCIATION (in its individual capacity, “LaSalle”), as administrative agent for the Lenders.

RECITALS:

WHEREAS, the Company, the Lenders and the Administrative Agent entered into that certain Loan and Security Agreement dated as of October 11, 2001 (as heretofore amended, the “Existing Loan Agreement”), pursuant to which the Lenders have made certain letter of credit and revolving facilities available to the Company;

WHEREAS, the Company has requested that the Existing Loan Agreement be amended and restated in order to increase the amount of the revolving credit facility available thereunder and to make certain other amendments thereto; and

WHEREAS, the Company, the Lenders and the Administrative Agent desire to amend and restate the Existing Loan Agreement to effect such amendments;

NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree to amend the Existing Loan Agreement as follows:

SECTION 1 DEFINITIONS.

1.1 UCC Definitions. Unless otherwise defined herein, the following terms are used herein as defined in the UCC: Accounts, Commercial Tort Claims, Documents, Electronic Chattel Paper, Equipment, Farm Products, Goods, Health Care Insurance Receivables, Instruments, Inventory, Leases, Letter-of-Credit Rights, Payment Intangibles, Supporting Obligations and Tangible Chattel Paper.

1.2 General Definitions. When used herein the following terms shall have the following meanings:

Account Debtor means any Person who is obligated to the Company under an Account.

Acquisition means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of all or substantially all of any business or division of a Person, (b) the acquisition of in excess of 50% of the Capital Securities of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is already a Subsidiary).

Administrative Agent means LaSalle in its capacity as administrative agent for the Lenders hereunder and any successor thereto in such capacity.

Affected Loan - see Section 8.3.

Affiliate of any Person means (a) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, and (b) with respect to any Lender, any entity administered or managed by such Lender or an Affiliate or investment advisor thereof and which is engaged in making, purchasing, holding or otherwise investing in commercial loans. A Person shall be deemed to be “controlled by” any other Person if such Person possesses, directly or indirectly, power to vote 25% (or, with respect to any Lender, 5%) or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managers or power to direct or cause the direction of the management and policies of such Person whether through the ownership of voting securities, membership interests, by contract or otherwise.

Agent Fee Letter means the Fee letter dated as of April 30, 2004 between the Company and the Administrative Agent.

Agreement - see the Preamble.

Applicable Margin means, for any day, the rate per annum set forth below opposite the level (the “Level”) then in effect, it being understood that the Applicable Margin for (i) LIBOR Loans shall be the percentage set forth under the column “LIBOR Margin”, (ii) Base Rate Loans shall be the percentage set forth under the column “Base Rate Margin”, (iii) the Non-Use Fee Rate shall be the percentage set forth under the column “Non-Use Fee Rate” and (iv) the L/C Fee shall be the percentage set forth under the column “L/C Fee Rate”:

Level	Leverage Ratio	LIBOR Margin		Base Rate Margin		Non-Use Fee Rate		L/C Fee Rate
I	Greater than 2.00:1	2.25	%	0.25	%	0.50	%	2.25	%
II	Greater than 1.00:1 but less than or equal to 2.00:1	1.75	%	0.00	%	0.375	%	1.75	%
III	Less than or equal to 1.00:1	1.50	%	0.00	%	0.25	%	1.50	%

The LIBOR Margin, the Base Rate Margin, the Non-Use Fee Rate and the L/C Fee Rate shall be adjusted, to the extent applicable, on the fifth (5th) Business Day after the Company provides or is required to provide the annual and quarterly financial statements and other information pursuant Section 11.1.1 or 11.1.2, as applicable, and the related Compliance Certificate, pursuant to Section 11.1.3. Notwithstanding anything contained in this paragraph to the contrary, (a) if the Company fails to deliver the such financial statements and Compliance Certificate in accordance with the provisions of Section 11.1.1, 11.1.2 and 11.1.3, the LIBOR Margin, the Base Rate Margin, the Non-Use Fee Rate and the L/C Fee Rate shall be based upon Level I above beginning on the date such financial statements and Compliance Certificate were required to be delivered until the fifth (5th) Business Day after such financial statements and Compliance Certificate are actually delivered, whereupon the Applicable Margin shall be determined by the then current Level; (b) no reduction to any Applicable Margin shall become effective at any time when an Event of Default or Unmatured Event of Default has occurred and is continuing; and (c) the initial Applicable Margin on the Closing Date shall be based on Level II until the date on which the financial statements and Compliance Certificate are required to be delivered for the Fiscal Quarter ending August 31, 2004.

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Asset Disposition means the sale, lease, assignment or other transfer for value (each, a “Disposition”) by any Loan Party to any Person (other than a Loan Party) of any asset or right of such Loan Party other than (a) the Disposition of any asset which is to be replaced, and is in fact replaced, within 180 days with another asset performing the same or a similar function and (b) the sale or lease of inventory in the ordinary course of business.

Assignee - see Section 16.6.1.

Assignment Agreement - see Section 16.6.1.

Attorney Costs means, with respect to any Person, all reasonable fees and charges of any counsel to such Person, the reasonable allocable cost of internal legal services of such Person, all reasonable disbursements of such internal counsel and all court costs and similar legal expenses.

Bank Product Agreements means those certain cash management service agreements entered into from time to time between any Loan Party and a Lender or its Affiliates in connection with any of the Bank Products.

Bank Product Obligations means all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by the Loan Parties to any Lender or its Affiliates pursuant to or evidenced by the Bank Product Agreements and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all such amounts that a Loan Party is obligated to reimburse to the Administrative Agent or any Lender as a result of the Administrative Agent or such Lender purchasing participations or executing indemnities or reimbursement obligations with respect to the Bank Products provided to the Loan Parties pursuant to the Bank Product Agreements.

Bank Products means any service or facility extended to any Loan Party by any Lender or its Affiliates including: (a) credit cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) ACH Transactions, (f) cash management, including controlled disbursement, accounts or services, or (g) Swap Contracts.

Base Rate means at any time the greater of (a) the Federal Funds Rate plus 0.5% and (b) the Prime Rate.

Base Rate Loan means any Loan which bears interest at or by reference to the Base Rate.

Base Rate Margin - see the definition of Applicable Margin.

Benefit Plan means an employee pension benefit plan of the Company or any ERISA Affiliate, as defined in Section 3(2) of ERISA which is subject to Title IV of ERISA.

Borrowing Base means an amount equal to the total of (a) 80% of the unpaid amount (net of such reserves and allowances as the Administrative Agent deems necessary in its reasonable discretion) of all Eligible Accounts plus (b) the lesser of (i) 50% of the value of all Eligible Inventory valued at the lower of cost or market (net of such reserves and allowances as the Administrative Agent deems necessary in its reasonable discretion) and (ii) $15,000,000.

3

Borrowing Base Certificate means a certificate substantially in the form of Exhibit C.

BSA - see Section 11.3.

Business Day means any day on which LaSalle is open for commercial banking business in Chicago, Illinois and, in the case of a Business Day which relates to a LIBOR Loan, on which dealings are carried on in the London interbank eurodollar market.

Capital Expenditures means all expenditures which, in accordance with GAAP, would be required to be capitalized and shown on the consolidated balance sheet of the Company but excluding (a) expenditures made in connection with Acquisitions and (b) expenditures made in connection with the replacement, substitution or restoration of assets to the extent financed (i) from insurance proceeds (or other similar recoveries) paid on account of the loss of or damage to the assets being replaced or restored, (ii) with awards of compensation arising from the taking by eminent domain or condemnation of the assets being replaced or (iii) with proceeds from Asset Dispositions).

Capital Lease means, with respect to any Person, any lease of (or other agreement conveying the right to use) any real or personal property by such Person that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of such Person.

Capital Securities means, with respect to any Person, all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person’s capital, whether now outstanding or issued or acquired after the Closing Date, including common shares, preferred shares, membership interests in a limited liability company, limited or general partnership interests in a partnership, interests in a Trust, interests in other unincorporated organizations or any other equivalent of such ownership interest.

Cash Balances means all cash or deposit account balances of the Company and the Guarantors plus any Cash Equivalent investments thereof.

Cash Collateralize means (a) as used in Section 14.1.2, to pledge and deposit with or deliver to the Administrative Agent, the Issuing Lender and the Lenders, as collateral for the Obligations, cash or deposit account balances pursuant to documentation in form and substance satisfactory to the Administrative Agent and the Issuing Lender (which documents are hereby consented to by the Lenders), in an amount of at least 100% of the aggregate amount of the outstanding Obligations, and (b) in all other cases, to deliver cash collateral to the Administrative Agent, to be held as cash collateral for outstanding Letters of Credit, pursuant to documentation satisfactory to the Administrative Agent (which documents are hereby consented to by the Lenders). Derivatives of such term have corresponding meanings.

Cash Equivalent Investment means, at any time, (a) any evidence of Indebtedness, maturing not more than one year after such time, issued or guaranteed by the United States Government or any agency thereof, (b) commercial paper, maturing not more than one year from the date of issue, or corporate demand notes, in each case (unless issued by a Lender or its

4

holding company) rated at least A-l by Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. or P-l by Moody’s Investors Service, Inc. and (c) any certificate of deposit, time deposit or banker’s acceptance, maturing not more than one year after such time, or any overnight Federal Funds transaction that is issued or sold by any Lender or its holding company (or by a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $500,000,000).

CERCLA means the Comprehensive Environmental Response, Compensation and Liability Act of 1980.

Change of Control means the occurrence, after the date of this Agreement, of any of the following: (a) any Person or two or more Persons acting in concert acquiring beneficial ownership (within the meaning of Rule 13d-3 of the SEC under the Exchange Act), directly or indirectly, of securities of the Company (or other securities convertible into such securities) representing more than 50% of the combined voting power of all securities of the Company entitled to vote in the election of directors; or (b) during any period of up to 12 consecutive months, individuals who at the beginning of such 12-month period were directors of the Company ceasing for any reason to constitute a majority of the Board of Directors unless the Persons replacing such individuals were nominated by the Board of Directors of the Company.

Chattel Paper means all “chattel paper” as such term is defined in Section 9-102(a)(11) of the UCC and, in any event, including with respect to the Company, all Electronic Chattel Paper and Tangible Chattel Paper.

Closing Date - see Section 13.1.

Code means the Internal Revenue Code of 1986.

Collateral means all of the following personal property now owned or at any time hereafter acquired by the Company or in which the Company now has or at any time in the future may acquire any right, title or interest: (a) all of the Company’s Accounts, Chattel Paper, Commercial Tort Claims, Documents, Equipment, Fixtures, General Intangibles, Goods, Instruments, Intellectual Property, Inventory, Leases, Letter-of-Credit Rights, Supporting Obligations and Identified Claims; (b) all books and records pertaining to any of the foregoing; (c) all Proceeds and products of any of the foregoing; and (d) all collateral security and guaranties given by any Person with respect to any of the foregoing; provided, however, that solid state shear pulverization technology and equipment owned or licensed by the Company shall not constitute Collateral.

Collateral Access Agreement means an agreement in form and substance reasonably satisfactory to the Administrative Agent pursuant to which a mortgagee or lessor of real property on which collateral is stored or otherwise located, or a warehouseman, processor or other bailee of Inventory or other property owned by any Loan Party, acknowledges the Liens of the Administrative Agent and waives any Liens held by such Person on such property, and, in the case of any such agreement with a mortgagee or lessor, permits the Administrative Agent reasonable access to and use of such real property following the occurrence and during the continuance of an Event of Default to assemble, complete and sell any collateral stored or otherwise located thereon.

5

Collateral Documents means, collectively, the Guaranty and Collateral Agreement, each Collateral Access Agreement, each control agreement and any other agreement or instrument pursuant to which the Company, any Subsidiary or any other Person grants or purports to grant collateral to the Administrative Agent for the benefit of the Lenders or otherwise relates to such collateral.

Commitment means, as to any Lender, such Lender’s commitment to make Loans, and to issue or participate in Letters of Credit, under this Agreement. The initial amount of each Lender’s commitment to make Loans is set forth on Annex A.

Company - see the Preamble.

Compliance Certificate means a Compliance Certificate in substantially the form of Exhibit B.

Computation Period means each period of four consecutive Fiscal Quarters ending on the last day of a Fiscal Quarter.

Consolidated Net Income means, with respect to the Company and its Subsidiaries for any period, the net income (or loss) of the Company and its Subsidiaries for such period, excluding (a) any gains (or losses) from the disposition of MSC Pinole Point Steel Inc., (b) any gain (or loss) in excess of $100,000 from any Asset Disposition and (c) any gain (or loss) from discontinued operations.

Consolidated Net Worth means, on any date, the sum of the total of all assets which are recorded as assets on the consolidated balance sheet of the Company and its Subsidiaries in accordance with GAAP minus (a) all obligations of the Company and its Subsidiaries which are recorded as liabilities on the consolidated balance sheet of the Company and its Subsidiaries in accordance with GAAP and (b) the cumulative effect of foreign currency translation adjustments beginning March 1, 2004.

Controlled Group means all members of a controlled group of corporations, all members of a controlled group of trades or businesses (whether or not incorporated) under common control and all members of an affiliated service group which, together with the Company or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code or Section 4001 of ERISA.

Copyrights means all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, including those listed on Schedule 9.2.8, all registrations and recordings thereof, and all applications in connection therewith, including all registrations, recordings and applications in the United States Copyright Office, and the right to obtain all renewals of any of the foregoing.

6

Copyright Licenses means all written agreements naming the Company as licensor or licensee, including those listed on Schedule 9.2.8, granting any right under any Copyright, including the grant of rights to manufacture, distribute, exploit and sell materials derived from any Copyright.

Designated Proceeds - see Section 6.2.2(a).

Disposal or Disposed has the meaning specified in RCRA; provided, that in the event RCRA is amended so as to change the meaning of any term defined thereby, such amended meaning shall apply as of the effective date of such amendment.

Dollar and the sign “$” mean lawful money of the United States of America.

EBITDA means, for any period, Consolidated Net Income for such period plus, to the extent deducted in determining such Consolidated Net Income, Interest Expense, income tax expense, depreciation and amortization for such period, the Make-Whole Amount, the Middletown Charges and non-cash impairment charges with respect to long-lived assets and goodwill; provided, that such non-cash impairment charges shall not include obsolescence or other reserves applied to Receivables and Inventory.

Eligible Account means an Account owing to the Company or any Guarantor (other than EMD) which meets each of the following requirements:

(a) it arises from the sale or lease of goods or the rendering of services which have been fully performed by the Company or the applicable Guarantor; and if it arises from the sale or lease of goods, (i) such goods are intended to comply with such Account Debtor’s specifications (if any) and have been delivered to such Account Debtor and (ii) the Company or the applicable Guarantor has possession of, or if requested by the Administrative Agent has delivered to the Administrative Agent, delivery receipts evidencing such delivery;

(b) it (i) is subject to a perfected, first priority Lien in favor of the Administrative Agent and (ii) is not subject to any other assignment, claim or Lien;

(c) it is a valid, legally enforceable and unconditional obligation of the Account Debtor with respect thereto, and is not subject to the fulfillment of any condition whatsoever or any counterclaim, credit, allowance, discount, rebate or adjustment by the Account Debtor with respect thereto, or to any claim by such Account Debtor denying liability thereunder in whole or in part and the Account Debtor has not refused to accept and/or has not returned or offered to return any of the goods or services which are the subject of such Account;

(d) there is no bankruptcy, insolvency or liquidation proceeding pending by or against the Account Debtor with respect thereto;

(e) the Account Debtor with respect thereto is a resident or citizen of, and is located within, the United States, unless the sale of goods or services giving rise to such Account is on letter of credit, banker’s acceptance or other credit support terms reasonably satisfactory to the Administrative Agent;

7

(f) it is not an Account arising from a “sale on approval,” “sale or return,” “consignment” or “bill and hold” or subject to any other repurchase or return agreement;

(g) it is not an Account with respect to which possession and/or control of the goods sold giving rise thereto is held, maintained or retained by the Company or any Guarantor (or by any agent or custodian of the Company or any Guarantor) for the account of or subject to further and/or future direction from the Account Debtor with respect thereto;

(h) it arises in the ordinary course of business of the Company or the applicable Guarantor;

(i) if the Account Debtor is the United States or any department, agency or instrumentality thereof, the Company or the applicable Guarantor has assigned its right to payment of such Account to the Administrative Agent pursuant to the Assignment of Claims Act of 1940, and evidence (satisfactory to the Administrative Agent) of such assignment has been delivered to the Administrative Agent;

(j) if the Company maintains a credit limit for an Account Debtor, the aggregate dollar amount of Accounts due from such Account Debtor, including such Account, does not exceed such credit limit;

(k) if the Account is evidenced by chattel paper or an instrument, the originals of such chattel paper or instrument shall have been endorsed and/or assigned and delivered to the Administrative Agent or, in the case of electronic chattel paper, shall be in the control of the Administrative Agent, in each case in a manner satisfactory to the Administrative Agent;

(l) such Account is evidenced by an invoice delivered to the related Account Debtor and is not more than (i) 60 days past the due date thereof or (ii) 90 days past the original invoice date thereof, in each case according to the original terms of sale;

(m) the Account Debtor with respect thereto is not the Company or an Affiliate of the Company;

(n) it is not owed by an Account Debtor with respect to which 25% or more of the aggregate amount of outstanding Accounts owed at such time by such Account Debtor is classified as ineligible under clause (l) of this definition;

(o) if the aggregate amount of all Accounts owed by the Account Debtor thereon exceeds 25% of the aggregate amount of all Accounts at such time, then all Accounts owed by such Account Debtor in excess of such amount shall be deemed ineligible; and

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(q) it is otherwise not unacceptable to the Administrative Agent in its reasonable discretion for any other reason.

An Account which is at any time an Eligible Account, but which subsequently fails to meet any of the foregoing requirements, shall forthwith cease to be an Eligible Account. Further, with respect to any Account, if the Administrative Agent or the Required Lenders at any time hereafter determine in its or their reasonable discretion that the prospect of payment or performance by the Account Debtor with respect thereto is materially impaired for any reason whatsoever, such Account shall cease to be an Eligible Account after notice of such determination is given to the Company.

Eligible Inventory means Inventory of the Company or any Guarantor (other than EMD) which meets each of the following requirements:

(a) it (i) is subject to a perfected, first priority Lien in favor of the Administrative Agent and (ii) is not subject to any other assignment, claim or Lien;

(b) it is salable and not slow-moving (twelve months or older), obsolete or discontinued;

(c) it is in the possession and control of the Company or any Guarantor and it is stored and held in facilities owned by the Company or any Guarantor or, if such facilities are not so owned, the Administrative Agent is in possession of a Collateral Access Agreement with respect thereto;

(d) it is not Inventory produced in violation of the Fair Labor Standards Act and subject to the “hot goods” provisions contained in Title 29 U.S.C. §215;

(e) it is not subject to any agreement or license which would restrict the Administrative Agent’s ability to sell or otherwise dispose of such Inventory;

(f) it is located in the United States or in any territory or possession of the United States that has adopted Article 9 of the Uniform Commercial Code;

(g) it is not “in transit” to the Company or any Guarantor or held by the Company or any Guarantor on consignment;

(h) it is not “work-in-progress” Inventory;

(i) it is not supply items or packaging;

(j) it is not identified to any purchase order or contract to the extent progress or advance payments are received with respect to such Inventory;

(k) it does not breach any of the representations, warranties or covenants pertaining to Inventory set forth in the Loan Documents; and

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(l) the Administrative Agent shall not have determined in its reasonable discretion that it is unacceptable due to age, type, category, quality, quantity and/or any other reason whatsoever.

Inventory which is at any time Eligible Inventory but which subsequently fails to meet any of the foregoing requirements shall forthwith cease to be Eligible Inventory.

EMD means Material Sciences Corporation, Electronic Materials and Devices Group, Inc., a Delaware corporation.

EMD Guaranty means the Guaranty dated as of the date hereof executed and delivered by EMD in favor of the Administrative Agent and the Lenders.

Environmental Claims means all claims, however asserted, by any governmental, regulatory or judicial authority or other Person alleging potential liability or responsibility for violation of any Environmental Law.

Environmental Laws means any applicable laws, statutes, rules, regulations, orders, consent decrees, permits or licenses of any governmental authority relating to prevention, remediation, reduction or control of pollution, or protection of the environment, natural resources and/or human health and safety, including, without limitation, such applicable laws, statutes, rules, regulations, orders, consent decrees, permits or licenses relating to (a) solid waste and/or Hazardous Materials treatment, storage, disposal, general and transactions, (b) air, water and noise pollution, (c) soil, ground, water or groundwater contamination, (d) the generation, handling, storage, transportation or Release into the environment of Hazardous Materials, and (e) regulation of underground and above ground storage tanks.

Environmental Matters means any matter arising out of or relating to health and safety, or pollution or protection of the environment or workplace, including any of the foregoing relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, discharge, release, control or cleanup of any Hazardous Materials.

ERISA means the Employee Retirement Income Security Act of 1974, as amended, and all references to sections thereof shall include such sections and any predecessor and successor provisions thereto.

ERISA Affiliate means each trade or business (whether or not incorporated) which, together with the Company, would be treated as a single employer under Section 4001(a)(14) of ERISA or Code Section 414(b), (c), (m), (n) or (o), as applicable.

Event of Default means any of the events described in Section 14.1.

Excluded Taxes means taxes based upon, or measured by, the Lender’s or Administrative Agent’s (or a branch of the Lender’s or Administrative Agent’s) overall net income, overall net receipts, or overall net profits (including franchise taxes imposed in lieu of such taxes), but only to the extent such taxes are imposed by a taxing authority (a) in a jurisdiction in which such Lender or Administrative Agent is organized, (b) in a jurisdiction which the Lender’s or Administrative Agent’s principal office is located, or (c) in a jurisdiction in which such Lender’s or Administrative Agent’s lending office (or branch) in respect of which payments under this Agreement are made is located.

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Federal Funds Rate means, for any day, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by the Administrative Agent. The Administrative Agent’s determination of such rate shall be binding and conclusive absent manifest error.

Fiscal Quarter means a fiscal quarter of a Fiscal Year.

Fiscal Year means the fiscal year of the Company and its Subsidiaries, which period shall be the 12-month period ending on February 28 or 29 of each year. References to a Fiscal Year with a number corresponding to any calendar year (e.g., “Fiscal Year 2003”) refer to the Fiscal Year ending on February 28 or 29 of such calendar year.

Fixed Charge Coverage Ratio means, for any Computation Period, the ratio of (a) the total for such period of EBITDA minus the sum of income taxes paid in cash by the Loan Parties and all Unfinanced Capital Expenditures to (b) the sum for such period of (i) cash Interest Expense plus (ii) scheduled payments of principal of Funded Debt (excluding the final principal payment of the Loans due on the Termination Date) for the four consecutive Fiscal Quarters immediately succeeding the Computation Period.

Fixtures means all of the following, whether now owned or hereafter acquired by the Company: plant fixtures; business fixtures; other fixtures and storage facilities, wherever located; and all additions and accessories thereto and replacements therefor.

FRB means the Board of Governors of the Federal Reserve System or any successor thereto.

Funded Debt means, as to any Person, all Indebtedness of such Person (including, without limitation, all Obligations, Indebtedness with respect to Capital Leases and Unfunded Pension Liabilities and Indebtedness incurred to finance payment of the Make-Whole Amount) minus Cash Balances; provided, that Funded Debt shall not include Subordinated Debt.

GAAP means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession) and the Securities and Exchange Commission, which are applicable to the circumstances as of the date of determination.

General Intangibles means all “general intangibles” as such term is defined in Section 9-102(a)(42) of the UCC and, in any event, including with respect to the Company, all Payment

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Intangibles, all contracts, agreements, instruments and indentures in any form, and portions thereof, to which the Company is a party or under which the Company has any right, title or interest or to which the Company or any property of the Company is subject, as the same from time to time may be amended, supplemented or otherwise modified, including, without limitation, (a) all rights of the Company to receive moneys due and to become due to it thereunder or in connection therewith, (b) all rights of the Company to damages arising thereunder and (c) all rights of the Company to perform and to exercise all remedies thereunder; provided, that the foregoing limitation shall not affect, limit, restrict or impair the grant by the Company of a security interest pursuant to this Agreement in any Receivable or any money or other amounts due or to become due under any such Payment Intangible, contract, agreement, instrument or indenture.

Group - see Section 2.2.1.

Guaranty and Collateral Agreement means the Consolidated Amended and Restated Guaranty and Security Agreement dated as of the date hereof executed and delivered by the Guarantors (other than EMD) and the Administrative Agent, together with any joinders thereto and any other guaranty and collateral agreement executed by a Loan Party, in each case in form and substance satisfactory to the Administrative Agent.

Guaranty Effective Date means the earlier to occur of (a) June 1, 2004 and (b) the date on which the Omaha Senior Notes are paid in full.

Guarantors mean, collectively, (a) Material Sciences Corporation, Engineered Materials and Solutions Group, Inc. (formerly known as MSC Pre Finish Metals Inc.), an Illinois corporation, (b) MSC Laminates and Composites Inc., a Delaware corporation, (c) MSC Pre Finish Metals (EGV) Inc., a Delaware corporation, (d) MSC Walbridge Coatings Inc., a Delaware corporation, (e) MSC Pre Finish Metals (MV) Inc., a Delaware corporation, (f) MSC Laminates & Composites (EGV) Inc., a Delaware corporation, (g) any domestic Subsidiary acquired or created after the Closing Date and (h) from and after the Guaranty Effective Date, EMD.

Hazardous Materials means any flammable or explosive materials, petroleum (including crude oil and its fractions), radioactive materials, hazardous wastes, toxic substances or related hazardous materials, including without limitation polychlorinated biphenyls, friable asbestos, and any substances defined as, or included in the definition of, toxic or hazardous substances, wastes or materials under any Environmental Laws.

Indebtedness means, with respect to any Person, (a) indebtedness for borrowed money or for the deferred purchase price of property or services (other than trade or account payables entered into in the ordinary course of business on normal trade terms, payments under earn-out agreements and wages, benefits, deferred compensation and other accrued benefits) in respect of which such Person is liable, contingently or otherwise, as obligor or otherwise, including without limitation non-contingent obligations of such Person to reimburse any other Person in respect of amounts paid under a letter of credit or similar instruments, (b) indebtedness guaranteed in any manner by such Person, including guarantees in the form of an agreement to repurchase or reimburse, (c) obligations under leases which shall have been or should be, in accordance with

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GAAP, recorded as Capital Leases, in respect of which obligations such Person is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations such Person assures a creditor against loss, (d) any Unfunded Pension Liabilities, (e) any Swap Obligation of such Person, (f) all Suretyship Liabilities of such Person and (g) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person; provided that if such Person has not assumed or otherwise become liable for such indebtedness, such indebtedness shall be measured at the fair market value of such property securing such indebtedness at the time of determination.

Indemnified Liabilities - see Section 16.16.

Identified Claims means the Commercial Tort Claims described on Schedule 9.3.9, as such schedule shall be supplemented from time to time.

Intellectual Property means the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks and the Trademark Licenses, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.

Interest Expense means for any period (a) the sum of (i) consolidated interest expense of the Company and its Subsidiaries for such period (including all imputed interest on Capital Leases but excluding the Make-Whole Amount) and (ii) any payments made by the Company and its Subsidiaries under interest rate Swap Contracts to the extent not included in consolidated interest expense, minus (b) the sum of (i) interest income of the Company and its Subsidiaries for such period and (ii) payments received by the Company and its Subsidiaries under interest rate Swap Contracts.

Interest Period means, as to any LIBOR Loan, the period commencing on the date such Loan is borrowed or continued as, or converted into, a LIBOR Loan and ending on the date one, two, three or six months thereafter as selected by the Company pursuant to Section 2.2.2 or 2.2.3, as the case may be; provided that:

(a) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day;

(b) any Interest Period that begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period shall end on the last Business Day of the calendar month at the end of such Interest Period; and

(c) the Company may not select any Interest Period for a Loan which would extend beyond the scheduled Termination Date;

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Investment means, with respect to any Person, any investment in another Person, whether by acquisition of any debt or Capital Security, by making any loan or advance, by becoming obligated with respect to a Suretyship Liability in respect of obligations of such other Person (other than travel and similar advances to employees in the ordinary course of business) or by making an Acquisition.

Issuing Lender means LaSalle, in its capacity as the issuer of Letters of Credit hereunder, or any Affiliate of LaSalle that may from time to time issue Letters of Credit, and their successors and assigns in such capacity.

LaSalle - see the Preamble.

L/C Application means, with respect to any request for the issuance of a Letter of Credit, a letter of credit application in the form being used by the Issuing Lender at the time of such request for the type of letter of credit requested.

L/C Fee Rate - see the definition of Applicable Margin.

Lender - see the Preamble. References to the “Lenders” shall include the Issuing Lender; for purposes of clarification only, to the extent that LaSalle (or any successor Issuing Lender) may have any rights or obligations in addition to those of the other Lenders due to its status as Issuing Lender, its status as such will be specifically referenced. In addition to the foregoing, for the purpose of identifying the Persons entitled to share in the Collateral and the proceeds thereof under, and in accordance with the provisions of, this Agreement and the Collateral Documents, the term “Lender” shall include Affiliates of a Lender providing a Bank Product.

Lender Party - see Section 16.16.

Letter of Credit - see Section 2.1.2.

Leverage Ratio means, as of the last day of any Fiscal Quarter, the ratio of (a) Funded Debt less Cash Balances of the Company and its Subsidiaries as of such day to (b) EBITDA for the Computation Period ending on such day.

LIBOR Loan means any Loan which bears interest at a rate determined by reference to the LIBOR Rate.

LIBOR Margin - see the definition of Applicable Margin.

LIBOR Office means with respect to any Lender the office or offices of such Lender which shall be making or maintaining the LIBOR Loans of such Lender hereunder. A LIBOR Office of any Lender may be, at the option of such Lender, either a domestic or foreign office.

LIBOR Rate means a rate of interest equal to (a) the per annum rate of interest at which United States dollar deposits in an amount comparable to the amount of the relevant LIBOR Loan and for a period equal to the relevant Interest Period are offered in the London Interbank Eurodollar market at 11:00 A.M. (London time) two (2) Business Days prior to the commencement of such Interest Period (or three (3) Business Days prior to the commencement

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of such Interest Period if banks in London, England were not open and dealing in offshore United States dollars on such second preceding Business Day), as displayed in the Bloomberg Financial Markets system (or other authoritative source selected by the Administrative Agent in its sole discretion) or, if the Bloomberg Financial Markets system or another authoritative source is not available, as the LIBOR Rate is otherwise determined by the Administrative Agent in its sole and absolute discretion, divided by (b) a number determined by subtracting from 1.00 the then stated maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D), such rate to remain fixed for such Interest Period. The Administrative Agent’s determination of the LIBOR Rate shall be conclusive, absent manifest error.

Lien means, with respect to any Person, any mortgage, deed of trust, pledged, fixed or floating charge, lien, security interest or encumbrance or security agreement of any nature whatsoever, whether arising by agreement or by operation of law, including without limitation any conditional sale or title retention arrangement and any assignment, deposit arrangement or lease intended as or having the effect of, security.

Loan Documents means this Agreement, the Notes, the EMD Guaranty, the Letters of Credit, the Master Letter of Credit Agreement, the L/C Applications, the Agent Fee Letter, the Collateral Documents and all documents, instruments and agreements delivered in connection with the foregoing.

Loan Party means the Company and each Subsidiary.

Loan - see Section 2.1.1.

Make-Whole Amount means the Make-Whole Amount to be paid by the Company to the Purchasers pursuant to the Senior Note Agreement in connection with the prepayment of the Senior Notes.

Mandatory Prepayment Event - see Section 6.2.2(a).

Margin Stock means any “margin stock” as defined in Regulation U.

Master Letter of Credit Agreement means, at any time, with respect to the issuance of Letters of Credit, a master letter of credit agreement or reimbursement agreement in the form, if any, being used by the Issuing Lender at such time.

Material Adverse Effect means (a) a material adverse change in, or a material adverse effect upon, the financial condition, operations, assets, business, properties or prospects of the Loan Parties taken as a whole, (b) a material impairment of the ability of any Loan Party to perform in any material respects its obligations under any Loan Document or (c) a material adverse effect upon any substantial portion of the collateral under the Collateral Documents or upon the legality, validity, binding effect or enforceability against any Loan Party of any Loan Document.

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Middletown Charges means all current and future cash and non-cash charges from the closing or idling of MSC Pre Finish Metals (MT) Inc.’s facility in Middletown, Ohio.

Multiemployer Plan means a plan described in Section 4001(a)(3) of ERISA which covers employees of the Company or any ERISA Affiliate.

Net Cash Proceeds means:

(a) with respect to any Asset Disposition, the aggregate cash proceeds (including cash proceeds received pursuant to policies of insurance or by way of deferred payment of principal pursuant to a note, installment receivable or otherwise, but only as and when received) received by any Loan Party pursuant to such Asset Disposition net of (i) the direct costs relating to such sale, transfer or other disposition calculated in accordance with GAAP (including sales commissions and legal, accounting and investment banking fees), (ii) taxes paid or reasonably estimated by the Company to be payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements) and (iii) amounts required to be applied to the repayment of any Indebtedness secured by a Lien on the asset subject to such Asset Disposition (other than the Loans);

(b) with respect to any issuance of Capital Securities, the aggregate cash proceeds received by any Loan Party pursuant to such issuance, net of the direct costs relating to such issuance (including sales and underwriters’ commissions); and

(c) with respect to any issuance of Indebtedness, the aggregate cash proceeds received by any Loan Party pursuant to such issuance, net of the direct costs of such issuance (including up-front, underwriters’ and placement fees).

Non-U.S. Participant - see Section 7.6(d).

Non-Use Fee Rate - see the definition of Applicable Margin.

Note means a promissory note substantially in the form of Exhibit A.

Notice of Borrowing - see Section 2.2.2.

Notice of Conversion/Continuation - see Section 2.2.3(b).

Obligations means all obligations (monetary (including post-petition interest, allowed or not) or otherwise) of any Loan Party under this Agreement and any other Loan Document including Attorney Costs and any reimbursement obligations of each Loan Party in respect of Letters of Credit and surety bonds, all Permitted Swap Obligations which are owed to any Lender or its Affiliate, and all Bank Products Obligations, all in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due.

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OFAC - see Section 11.3.

Omaha Senior Notes means, collectively, (a) the Senior Notes held by Mutual of Omaha Insurance Company which had an outstanding principal balance of $3,888,888 on the Closing Date and (b) the Senior Notes held by United of Omaha Life Insurance Company which had an outstanding principal balance of $3,888,888 on the Closing Date.

Operating Lease means any lease of (or other agreement conveying the right to use) any real or personal property by any Loan Party, as lessee, other than any Capital Lease.

Paid In Full means (a) the payment in full in cash and performance of all Obligations, (b) the termination of all Commitments and (c) either (i) the cancellation and return to the Administrative Agent of all Letters of Credit or (ii) the Cash Collateralization of all Letters of Credit.

Participant - see Section 16.6.2.

Patent Licenses means all agreements, whether written or oral, providing for the grant by or to the Company of any right to manufacture, use or sell any invention covered in whole or in part by a Patent, including any of the foregoing referred to in Schedule 9.2.8.

Patents means (a) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof and all goodwill associated therewith, including any of the foregoing referred to in Schedule 9.2.8, (b) all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, including any of the foregoing referred to in Schedule 9.2.8, and (c) all rights to obtain any reissues or extensions of the foregoing.

PBGC means the Pension Benefit Guaranty Corporation or any successor agency.

Pension Plan means a “pension plan”, as such term is defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA or the minimum funding standards of ERISA (other than a Multiemployer Plan), and as to which the Company or any member of the Controlled Group may have any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under Section 4069 of ERISA.

Permitted Disposition means any one of the following: (a) dispositions of Inventory, or used, worn-out or surplus Equipment, all in the ordinary course of business; (b) the sale of Equipment to the extent such Equipment is exchanged for credit against the purchase price of a similar replacement thereof, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement; (c) during any period that no Obligations are outstanding hereunder, dispositions of property in connection with leases arising from sale/lease-back transactions entered into by the Company relating to real property and fixtures and based upon its business needs, and otherwise during any period that Obligations are outstanding hereunder, such transactions as to which the proceeds thereof are utilized to pay down the Obligations outstanding; (d) transfers of equipment and licenses of patents, technology and know-how associated therewith to joint ventures permitted under this Agreement (other than (i) licenses of patents, technology and know-how in connection with the commercialization of Quiet Steel in Europe and (ii) licenses entered into between EMD and any Person which is not an Affiliate of

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the Company), provided that the fair market value of such equipment shall not exceed $5,000,000 during the term of this Agreement; (e) dispositions of property by the Company or any Guarantor to the Company or any Guarantor; and (f) other dispositions but in any event not involving the sale or transfer of Accounts; provided, that (i) at the time of any disposition, no Event of Default or Unmatured Event of Default shall exist or shall result from such disposition, (ii) the aggregate sales price from such disposition shall be paid in cash, and (iii) the aggregate book value of all assets sold by the Loan Parties, together, shall not exceed in any Fiscal Year $2,000,000.

Permitted Lien means a Lien expressly permitted hereunder pursuant to Section 12.1.

Permitted Swap Obligation means any Swap Obligation of any Person with respect to which each of the following criteria is satisfied: (a) such Swap Obligation is entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments or assets held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person in conjunction with a securities repurchase program not otherwise prohibited hereunder, and not for purposes of speculation; (b) the Swap Contract with respect to such Swap Obligation does not (i) contain any provision exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party or (ii) contain, for any Swap Contract entered into with any counterparty other than a Lender, any provisions creating or permitting the declaration of an event of default, termination event or similar event upon the occurrence of an Event of Default hereunder (other than an Event of Default under Section 14.1.1) and (iii) such Swap Contracts do not exceed the Termination Date, provided that forward contracts to not exceed a term of one (1) year.

Person means any natural person, corporation, partnership, trust, limited liability company, association, governmental authority or unit, or any other entity, whether acting in an individual, fiduciary or other capacity.

Prime Rate means, for any day, the rate of interest in effect for such day as publicly announced from time to time by the Administrative Agent as its prime rate (whether or not such rate is actually charged by the Administrative Agent), which is not intended to be the Administrative Agent’s lowest or most favorable rate of interest at any one time. Any change in the Prime Rate announced by the Administrative Agent shall take effect at the opening of business on the day specified in the public announcement of such change; provided that the Administrative Agent shall not be obligated to give notice of any change in the Prime Rate.

Proceeds means all “proceeds” as such term is defined in Section 9-102(a)(64) of the UCC.

Prohibited Transaction means any transaction described in Section 406 of ERISA which is not exempt by reason of Section 408 of ERISA, and any transaction described under Section 4975(c) of the Code which is not exempt by reason of Sections 4975(c)(2) or (d) of the Code, and which could reasonably be expected to result in any excise tax, fine, penalty or other liability (in an amount of at least $100,000) being imposed on the Company or any Guarantor.

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Pro Rata Share means with respect to a Lender’s obligation to make Loans, participate in Letters of Credit, reimburse the Issuing Lender, and receive payments of principal, interest, fees, costs, and expenses with respect thereto, (a) prior to the Commitment being terminated or reduced to zero, the percentage obtained by dividing (i) such Lender’s Commitment by (ii) the aggregate Commitment of all Lenders and (b) from and after the time the Commitment has been terminated or reduced to zero, the percentage obtained by dividing (i) the aggregate unpaid principal amount of such Lender’s Revolving Outstandings by (ii) the aggregate unpaid principal amount of all Revolving Outstandings.

RCRA means the Resource Conservation and Recovery Act.

Receivable means any right to payment for goods sold or leased or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper and whether or not it has been earned by performance (including any Accounts).

Regulation D means Regulation D of the FRB.

Regulation U means Regulation U of the FRB.

Release has the meaning specified in CERCLA including, but not limited to, any actual or threatened past, present or future releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, seeping, injecting, escaping, leaching, dumping or disposing, whether intentional or not; provided, that in the event CERCLA is amended so as to change the meaning of any term defined thereby, such amended meaning shall apply as of the effective date of such amendment.

Replacement Lender - see Section 8.7(b).

Reportable Event means a reportable event described in Section 4043 of ERISA or the regulations thereunder for which the thirty (30) day notice requirement has not been waived.

Required Lenders means, at any time, Lenders whose Pro Rata Shares exceed 66 ¹/2%; provided that Required Lenders shall mean all Lenders at any time when there are two or fewer Lenders.

Revolving Loan Availability means the lesser of (i) the Commitment and (ii) the Borrowing Base.

Revolving Outstandings means, at any time, the sum of (a) the aggregate principal amount of all outstanding Loans, plus (b) the Stated Amount of all Letters of Credit.

SEC means the Securities and Exchange Commission or any other governmental authority succeeding to any of the principal functions thereof.

Securities Act means the Securities Act of 1933, as amended.

Senior Note Agreement means that certain Note Agreement dated as of February 15, 1998 among the Company and the Purchasers party thereto, as heretofore amended.

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Senior Notes means the 6.80% Series B Senior Notes due May 30, 2010 which were issued pursuant to the Senior Note Agreement.

Senior Officer means, with respect to any Loan Party, any of the chief executive officer, the chief financial officer, the chief operating officer or the treasurer of such Loan Party.

Stated Amount means, with respect to any Letter of Credit at any date of determination, (a) the maximum aggregate amount available for drawing thereunder under any and all circumstances plus (b) the aggregate amount of all unreimbursed payments and disbursements under such Letter of Credit.

Subordinated Debt means any Indebtedness that is subordinated, in form and substance satisfactory to the Administrative Agent in all respects, to the Obligations.

Subsidiary means, with respect to any Person, a corporation, partnership, limited liability company or other entity of which such Person owns, directly or indirectly, such number of outstanding Capital Securities that have more than 50% of the ordinary voting power for the election of directors or other managers of such corporation, partnership, limited liability company or other entity. Unless the context otherwise requires, each reference to Subsidiaries herein shall be a reference to Subsidiaries of the Company.

Suretyship Liability means any agreement, undertaking or arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to or otherwise to assure a creditor against loss) any indebtedness, obligation or other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person’s obligation in respect of any Suretyship Liability shall (subject to any limitation set forth therein) be deemed to be the principal amount of the debt, obligation or other liability supported thereby.

Swap Contract means any agreement, whether or not in writing, relating to any transaction that is a rate swap, basis swap, forward rate transaction, forward exchange contract or strategy, commodity swap, equity or equity index swap, interest rate option, cap, collar or floor transaction, currency swap, cross currency rate swap, currency option or any other similar interest rate or currency hedging transaction (including the option to enter into any of the foregoing) or any combination of the foregoing and, unless the context otherwise requires, any master agreement relating to or governing all or any of the foregoing.

Swap Obligation means, with respect to any Person, any liability of such Person under any Swap Contract. The amount of any Person’s obligation in respect of any Swap Obligation shall be deemed to be the incremental obligation that would be reflected in the financial statements of such Person in accordance with GAAP.

Taxes means any and all present and future taxes, duties, levies, imposts, deductions, assessments, charges or withholdings, and any and all liabilities (including interest and penalties and other additions to taxes) with respect to the foregoing, but excluding Excluded Taxes.

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Termination Date means the earlier to occur of (a) October 11, 2007 or (b) such other date on which the Commitments terminate pursuant to Section 6 or 14.

Trademarks means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common-law rights related thereto, including any of the foregoing referred to in Schedule 9.2.8, and (b) the right to obtain all renewals thereof.

Trademark Licenses means, collectively, each agreement, whether written or oral, providing for the grant by or to the Company of any right to use any Trademark, including any of the foregoing referred to in Schedule 9.2.8.

type - see Section 2.2.1.

UCC means the Uniform Commercial Code as in effect on the date hereof and from time to time in the State of Illinois; provided, that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the security interests in any Collateral or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction, “UCC” means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection or availability of such remedy.

Unfinanced Capital Expenditures means the sum of all Capital Expenditures of the Company and its Subsidiaries as to which they have not incurred Indebtedness with a third party (other than the Lenders).

Unfunded Pension Liabilities means any unfunded obligation of any Person to any Benefit Plan or Multiempoyer Plan.

Unmatured Event of Default means any event that, if it continues uncured, will, with lapse of time or notice or both, constitute an Event of Default.

Withholding Certificate - see Section 7.6(d).

Wholly-Owned Subsidiary means, as to any Person, a Subsidiary all of the Capital Securities of which (except directors’ qualifying Capital Securities) are at the time directly or indirectly owned by such Person and/or another Wholly-Owned Subsidiary of such Person.

1.3 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.

(b) Section, Annex, Schedule and Exhibit references are to this Agreement unless otherwise specified.

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(c) The term “including” is not limiting and means “including without limitation.”

(d) In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”; the words “to” and “until” each mean “to but excluding”, and the word “through” means “to and including.”

(e) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement and the other Loan Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, supplements and other modifications thereto, but only to the extent such amendments, restatements, supplements and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation.

(f) This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms.

(g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Administrative Agent, the Company, the Lenders and the other parties thereto and are the products of all parties. Accordingly, they shall not be construed against the Administrative Agent or the Lenders merely because of the Administrative Agent’s or Lenders’ involvement in their preparation.

SECTION 2 COMMITMENTS OF THE LENDERS; BORROWING, CONVERSION AND LETTER OF CREDIT PROCEDURES.

2.1 Commitments. On and subject to the terms and conditions of this Agreement, each of the Lenders, severally and for itself alone, agrees to make loans to, and to issue or participate in letters of credit for the account of, the Company as follows:

2.1.1 Revolving Loan Commitment. Each Lender agrees to make loans on a revolving basis (“Loans”) from time to time until the Termination Date in such Lender’s Pro Rata Share of its Commitment as the Company may request from all Lenders; provided that the Revolving Outstandings will not at any time exceed Revolving Loan Availability.

2.1.2 L/C Commitment. Subject to Section 2.3.1, the Issuing Lender agrees to issue letters of credit, in each case containing such terms and conditions as are permitted by this Agreement and are reasonably satisfactory to the Issuing Lender (each, a “Letter of Credit”), at the request of and for the account of the Company from time to time before the scheduled Termination Date and, as more fully set forth in Section 2.3.2, each Lender agrees to purchase a participation in each such Letter of Credit; provided that (a) the aggregate Stated Amount of all Letters of Credit shall not at any time exceed $10,000,000 and (b) the Revolving Outstandings shall not at any time exceed Revolving Loan Availability.

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2.2 Loan Procedures.

2.2.1 Various Types of Loans. Each Loan shall be divided into tranches which are either a Base Rate Loan or a LIBOR Loan (each a “type” of Loan), as the Company shall specify in the related notice of borrowing or conversion pursuant to Section 2.2.2 or 2.2.3. LIBOR Loans having the same Interest Period are sometimes called a “Group” or collectively “Groups”. Base Rate Loans and LIBOR Loans may be outstanding at the same time, provided that not more than ten (10) different Groups of LIBOR Loans shall be outstanding at any one time. All borrowings, conversions and repayments of Loans shall be effected so that each Lender will have a ratable share (according to its Pro Rata Share) of all types and Groups of Loans.

2.2.2 Borrowing Procedures. The Company shall give written notice (each such written notice, a “Notice of Borrowing”) substantially in the form of Exhibit E or telephonic notice (followed immediately by a Notice of Borrowing) to the Administrative Agent of each proposed borrowing not later than (a) in the case of a Base Rate borrowing, 12:00 P.M., Chicago time, on the proposed date of such borrowing, and (b) in the case of a LIBOR borrowing, 12:00 P.M., Chicago time, at least two Business Days prior to the proposed date of such borrowing. Each such notice shall be effective upon receipt by the Administrative Agent, shall be irrevocable, and shall specify the date, amount and type of borrowing and, in the case of a LIBOR borrowing, the initial Interest Period therefor. Promptly upon receipt of such notice, the Administrative Agent shall advise each Lender thereof. Not later than 1:30 P.M., Chicago time, on the date of a proposed borrowing, each Lender shall provide the Administrative Agent at the office specified by the Administrative Agent with immediately available funds covering such Lender’s Pro Rata Share of such borrowing and, so long as the Administrative Agent has not received written notice that the conditions precedent set forth in Section 13 with respect to such borrowing have not been satisfied, the Administrative Agent shall pay over the funds received by the Administrative Agent to the Company on the requested borrowing date. Each borrowing shall be on a Business Day. Each Base Rate borrowing shall be in an aggregate amount of at least $500,000 or a higher integral multiple of $100,000, and each LIBOR borrowing shall be in an aggregate amount of at least $500,000 or a higher integral multiple of $100,000.

2.2.3 Conversion and Continuation Procedures. (a) Subject to Section 2.2.1, the Company may, upon irrevocable written notice to the Administrative Agent in accordance with clause (b) below:

(A) elect, as of any Business Day, to convert any Loans (or any part thereof in an aggregate amount not less than $500,000 or a higher integral multiple of $100,000) into Loans of the other type; or

(B) elect, as of the last day of the applicable Interest Period, to continue any LIBOR Loans having Interest Periods expiring on such day (or any part thereof in an aggregate amount not less than $500,000 or a higher integral multiple of $100,000) for a new Interest Period;

provided that after giving effect to any prepayment, conversion or continuation, the aggregate principal amount of each Group of LIBOR Loans shall be at least $500,000 or a higher integral multiple of $100,000.

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(b) The Company shall give written notice (each such written notice, a “Notice of Conversion/Continuation”) substantially in the form of Exhibit F or telephonic notice (followed immediately by a Notice of Conversion/Continuation) to the Administrative Agent of each proposed conversion or continuation not later than (i) in the case of conversion into Base Rate Loans, 12:00 P.M., Chicago time, on the proposed date of such conversion and (ii) in the case of conversion into or continuation of LIBOR Loans, 12:00 P.M., Chicago time, at least two Business Days prior to the proposed date of such conversion or continuation, specifying in each case:

(A) the proposed date of conversion or continuation;

(B) the aggregate amount of Loans to be converted or continued;

(C) the type of Loans resulting from the proposed conversion or continuation; and

(D) in the case of conversion into, or continuation of, LIBOR Loans, the duration of the requested Interest Period therefor.

(c) If upon the expiration of any Interest Period applicable to LIBOR Loans, the Company has failed to select timely a new Interest Period to be applicable to such LIBOR Loans, the Company shall be deemed to have elected to convert such LIBOR Loans into Base Rate Loans effective on the last day of such Interest Period.

(d) The Administrative Agent will promptly notify each Lender of its receipt of a notice of conversion or continuation pursuant to this Section 2.2.3 or, if no timely notice is provided by the Company, of the details of any automatic conversion.

(e) Any conversion of a LIBOR Loan on a day other than the last day of an Interest Period therefor shall be subject to Section 8.4.

2.3 Letter of Credit Procedures.

2.3.1 L/C Applications. The Company shall execute and deliver to the Issuing Lender the Master Letter of Credit Agreement from time to time in effect. The Company shall give notice to the Administrative Agent and the Issuing Lender of the proposed issuance of each Letter of Credit on a Business Day which is at least two Business Days (or such lesser number of days as the Administrative Agent and the Issuing Lender shall agree in any particular instance in their sole discretion) prior to the proposed date of issuance of such Letter of Credit. Each such notice shall be accompanied by an L/C Application, duly executed by the Company and in all respects satisfactory to the Administrative Agent and the Issuing Lender, together with such other documentation as the Administrative Agent or the Issuing Lender may request in support thereof, it being understood that each L/C Application shall specify, among other things, the date on which the proposed Letter of Credit is to be issued, the expiration date of such Letter of Credit (which shall not be later than the scheduled Termination Date (unless such Letter of Credit is Cash Collateralized)) and whether such Letter of Credit is to be transferable in whole or in part. Any Letter of Credit outstanding after the scheduled Termination Date which is Cash Collateralized for the benefit of the Issuing Lender shall be the sole responsibility of the Issuing

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Lender. So long as the Issuing Lender has not received written notice that the conditions precedent set forth in Section 13 with respect to the issuance of such Letter of Credit have not been satisfied, the Issuing Lender shall issue such Letter of Credit on the requested issuance date. The Issuing Lender shall promptly advise the Administrative Agent of the issuance of each Letter of Credit and of any amendment thereto, extension thereof or event or circumstance changing the amount available for drawing thereunder. In the event of any inconsistency between the terms of the Master Letter of Credit Agreement, any L/C Application and the terms of this Agreement, the terms of this Agreement shall control.

2.3.2 Participations in Letters of Credit. Concurrently with the issuance of each Letter of Credit, the Issuing Lender shall be deemed to have sold and transferred to each Lender, and each such Lender shall be deemed irrevocably and unconditionally to have purchased and received from the Issuing Lender, without recourse or warranty, an undivided interest and participation, to the extent of such Lender’s Pro Rata Share, in such Letter of Credit and the Company’s reimbursement obligations with respect thereto. If the Company does not pay any reimbursement obligation when due, the Company shall be deemed to have immediately requested that the Lenders make a Loan which is a Base Rate Loan in a principal amount equal to such reimbursement obligations. The Administrative Agent shall promptly notify such Lenders of such deemed request and, without the necessity of compliance with the requirements of Section 2.2.2, 13.2 or otherwise such Lender shall make available to the Administrative Agent its Pro Rata Share of such Loan. The proceeds of such Loan shall be paid over by the Administrative Agent to the Issuing Lender for the account of the Company in satisfaction of such reimbursement obligations. For the purposes of this Agreement, the unparticipated portion of each Letter of Credit shall be deemed to be the Issuing Lender’s “participation” therein. The Issuing Lender hereby agrees, upon request of the Administrative Agent or any Lender, to deliver to the Administrative Agent or such Lender a list of all outstanding Letters of Credit issued by the Issuing Lender, together with such information related thereto as the Administrative Agent or such Lender may reasonably request.

2.3.3 Reimbursement Obligations. (a) The Company hereby unconditionally and irrevocably agrees to reimburse the Issuing Lender for each payment or disbursement made by the Issuing Lender under any Letter of Credit honoring any demand for payment made by the beneficiary thereunder, in each case on the date that such payment or disbursement is made. Any amount not reimbursed on the date of such payment or disbursement shall bear interest from the date of such payment or disbursement to the date that the Issuing Lender is reimbursed by the Company therefor, payable on demand, at a rate per annum equal to the Base Rate from time to time in effect plus the Base Rate Margin from time to time in effect plus, beginning on the third Business Day after receipt of notice from the Issuing Lender of such payment or disbursement, 2%. The Issuing Lender shall notify the Company and the Administrative Agent whenever any demand for payment is made under any Letter of Credit by the beneficiary thereunder; provided that the failure of the Issuing Lender to so notify the Company or the Administrative Agent shall not affect the rights of the Issuing Lender or the Lenders in any manner whatsoever.

(b) The Company’s reimbursement obligations hereunder shall be irrevocable and unconditional under all circumstances, including (i) any lack of validity or enforceability of any Letter of Credit, this Agreement or any other Loan Document, (ii) the existence of any claim, set-off, defense or other right which any Loan Party may have at any time against a

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beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, the Issuing Lender, any Lender or any other Person, whether in connection with any Letter of Credit, this Agreement, any other Loan Document, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between any Loan Party and the beneficiary named in any Letter of Credit), (iii) the validity, sufficiency or genuineness of any document which the Issuing Lender has determined complies on its face with the terms of the applicable Letter of Credit, even if such document should later prove to have been forged, fraudulent, invalid or insufficient in any respect or any statement therein shall have been untrue or inaccurate in any respect or (iv) the surrender or impairment of any security for the performance or observance of any of the terms hereof; provided that the Company shall not be obligated to reimburse the Issuing Lender for any wrongful payment or disbursement made under any Letter of Credit as a result of acts or omissions constituting gross negligence or willful misconduct on the part of the Issuing Lender or any of its officers, employees or agents. Without limiting the foregoing, no action or omission whatsoever by the Administrative Agent or any Lender (excluding any Lender in its capacity as the Issuing Lender) under or in connection with any Letter of Credit or any related matters shall result in any liability of the Administrative Agent or any Lender to the Company, or relieve the Company of any of its obligations hereunder to any such Person.

2.3.4 Funding by Lenders to Issuing Lender. If the Issuing Lender makes any payment or disbursement under any Letter of Credit and (a) the Company has not reimbursed the Issuing Lender in full for such payment or disbursement by 12:00 P.M., Chicago time, on the date of such payment or disbursement, (b) a Loan may not be made in accordance with Section 2.3.2 or (c) any reimbursement received by the Issuing Lender from the Company is or must be returned or rescinded upon or during any bankruptcy or reorganization of the Company or otherwise, each other Lender shall be obligated to pay to the Administrative Agent for the account of the Issuing Lender, in full or partial payment of the purchase price of its participation in such Letter of Credit, its Pro Rata Share of such payment or disbursement (but no such payment shall diminish the obligations of the Company under Section 2.3.3), and, upon notice from the Issuing Lender, the Administrative Agent shall promptly notify each other Lender thereof. Each other Lender irrevocably and unconditionally agrees to so pay to the Administrative Agent in immediately available funds for the Issuing Lender’s account the amount of such other Lender’s Pro Rata Share of such payment or disbursement. If and to the extent any Lender shall not have made such amount available to the Administrative Agent by 2:00 P.M., Chicago time, on the Business Day on which such Lender receives notice from the Administrative Agent of such payment or disbursement (it being understood that any such notice received after noon, Chicago time, on any Business Day shall be deemed to have been received on the next following Business Day), such Lender agrees to pay interest on such amount to the Administrative Agent for the Issuing Lender’s account forthwith on demand, for each day from the date such amount was to have been delivered to the Administrative Agent to the date such amount is paid, at a rate per annum equal to (a) for the first three days after demand, the Federal Funds Rate from time to time in effect and (b) thereafter, the Base Rate from time to time in effect. Any Lender’s failure to make available to the Administrative Agent its Pro Rata Share of any such payment or disbursement shall not relieve any other Lender of its obligation hereunder to make available to the Administrative Agent such other Lender’s Pro Rata Share of such payment, but no Lender shall be responsible for the failure of any other Lender to make available to the Administrative Agent such other Lender’s Pro Rata Share of any such payment or disbursement.

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2.4 Commitments Several. The failure of any Lender to make a requested Loan on any date shall not relieve any other Lender of its obligation (if any) to make a Loan on such date, but no Lender shall be responsible for the failure of any other Lender to make any Loan to be made by such other Lender.

2.5 Certain Conditions. Except as otherwise provided in Section 2.3.4 of this Agreement, no Lender shall have an obligation to make any Loan, or to permit the continuation of or any conversion into any LIBOR Loan, and the Issuing Lender shall not have any obligation to issue any Letter of Credit, if an Event of Default or Unmatured Event of Default exists.

SECTION 3 EVIDENCING OF LOANS.

3.1 Notes. The Loans of each Lender shall be evidenced by a Note, with appropriate insertions, payable to the order of such Lender in a face principal amount equal to the sum of such Lender’s Commitment.

3.2 Recordkeeping. The Administrative Agent, on behalf of each Lender, shall (a) record in its records, the date and amount of each Loan made by each Lender, each repayment or conversion thereof and, in the case of each LIBOR Loan, the dates on which each Interest Period for such Loan shall begin and end and (b) shall issue monthly statements to the Company providing such recorded information. The aggregate unpaid principal amount so recorded shall be rebuttably presumptive evidence of the principal amount of the Loans owing and unpaid. The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the Obligations of the Company hereunder or under any Note to repay the principal amount of the Loans hereunder, together with all interest accruing thereon.

SECTION 4 INTEREST.

4.1 Interest Rates. The Company promises to pay interest on the unpaid principal amount of each Loan for the period commencing on the date of such Loan until such Loan is paid in full as follows:

(a) at all times while such Loan is a Base Rate Loan, at a rate per annum equal to the sum of the Base Rate from time to time in effect plus the Base Rate Margin from time to time in effect; and

(b) at all times while such Loan is a LIBOR Loan, at a rate per annum equal to the sum of the LIBOR Rate applicable to each Interest Period for such Loan plus the LIBOR Margin from time to time in effect;

provided that the Required Lenders may, at their option by notice to the Company, at any time an Event of Default exists, declare that the interest rate applicable to each Loan shall be increased by 2% (and, in the case of Obligations not bearing interest, such Obligations shall bear interest at the Base Rate plus 2%), provided further that such increase may thereafter be rescinded by the

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Required Lenders, notwithstanding Section 16.1. Notwithstanding the foregoing, upon the occurrence of an Event of Default under Section 14.1.1 as a result of the failure to pay principal or interest on the Loans when due and payable or Section 14.1.7, such increase shall occur automatically.

4.2 Interest Payment Dates. Accrued interest on each Base Rate Loan shall be payable in arrears on the last day of each calendar month and at maturity. Accrued interest on each LIBOR Loan shall be payable on the last day of each Interest Period relating to such Loan (and, in the case of a LIBOR Loan with an Interest Period in excess of three months, on the three-month anniversary of the first day of such Interest Period), upon a prepayment of such Loan, and at maturity. After maturity, and at any time an Event of Default exists, accrued interest on all Loans shall be payable on demand.

4.3 Setting and Notice of LIBOR Rates. The applicable LIBOR Rate for each Interest Period shall be determined by the Administrative Agent, and notice thereof shall be given by the Administrative Agent promptly to the Company and each Lender. Each determination of the applicable LIBOR Rate by the Administrative Agent shall be conclusive and binding upon the parties hereto, in the absence of demonstrable error. The Administrative Agent shall, upon written request of the Company or any Lender, deliver to the Company or such Lender a statement showing the computations used by the Administrative Agent in determining any applicable LIBOR Rate hereunder.

4.4 Computation of Interest. Interest shall be computed for the actual number of days elapsed on the basis of a year of (a) 360 days for interest calculated at the LIBOR Rate and (b) 365/366 days for interest calculated at the Base Rate. The applicable interest rate for each Base Rate Loan shall change simultaneously with each change in the Base Rate.

SECTION 5 FEES.

5.1 Non-Use Fee. The Company agrees to pay to the Administrative Agent for the account of each Lender a non-use fee, for the period from the Closing Date to the Termination Date, at the Non-Use Fee Rate in effect from time to time of such Lender’s Pro Rata Share (as adjusted from time to time) of the unused amount of the Commitment. For purposes of calculating usage under this Section, the Commitment shall be deemed used to the extent of Revolving Outstandings. Such non-use fee shall be payable in arrears on the last day of each calendar quarter and on the Termination Date for any period then ending for which such non-use fee shall not have previously been paid. The non-use fee shall be computed for the actual number of days elapsed on the basis of a year of 360 days.

5.2 Letter of Credit Fees. (a) The Company agrees to pay to the Administrative Agent for the account of each Lender a letter of credit fee for each Letter of Credit equal to the L/C Fee Rate in effect from time to time of such Lender’s Pro Rata Share (as adjusted from time to time) of the undrawn amount of such Letter of Credit (computed for the actual number of days elapsed on the basis of a year of 360 days); provided that that the Required Lenders may, at their option by notice to the Company, at any time an Event of Default exists, declare that the rate applicable to each Letter of Credit shall be increased by 2% at any time that an Event of Default exists. Such letter of credit fee shall be payable in arrears on the last day of each calendar

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quarter and on the Termination Date (or such later date on which such Letter of Credit expires or is terminated) for the period from the date of the issuance of each Letter of Credit (or the last day on which the letter of credit fee was paid with respect thereto) to the date such payment is due or, if earlier, the date on which such Letter of Credit expired or was terminated.

(b) In addition, with respect to each Letter of Credit, the Company agrees to pay to the Issuing Lender, for its own account, (i) such fees and expenses as the Issuing Lender customarily requires in connection with the issuance, negotiation, processing and/or administration of letters of credit in similar situations and (ii) a letter of credit fronting fee in the amount and at the times agreed to by the Company and the Issuing Lender.

5.3 Amendment Fee. The Company agrees to pay to the Administrative Agent for the account of each Lender an amendment fee in the amount of $50,000, which fee shall be due and payable (to the extent not paid earlier pursuant to an agreement between the Company and the Administrative Agent) on the date hereof.

5.4 Administrative Agent’s Fees. The Company agrees to pay to the Administrative Agent such agent’s fees as are mutually agreed to from time to time by the Company and the Administrative Agent including the fees set forth in the Agent Fee Letter.

SECTION 6 REDUCTION OR TERMINATION OF THE COMMITMENT; PREPAYMENTS.

6.1 Reduction or Termination of the Commitment.

6.1.1 Voluntary Reduction or Termination of the Revolving Commitment. The Company may from time to time on at least five Business Days’ prior written notice received by the Administrative Agent (which shall promptly advise each Lender thereof) permanently reduce the Commitment to an amount not less than the Revolving Outstandings. Any such reduction shall be in an amount not less than $1,000,000 or a higher integral multiple of $100,000. Concurrently with any reduction of the Commitment to zero, the Company shall pay all interest on the Loans, all non-use fees and all letter of credit fees and shall Cash Collateralize in full all obligations arising with respect to the Letters of Credit.

6.1.2 All Reductions of the Commitment. All reductions of the Commitment shall be made ratably among the Lenders according to their respective Pro Rata Shares.

6.2 Prepayments.

6.2.1 Voluntary Prepayments. The Company may from time to time prepay the Loans in whole or in part; provided that the Company shall give the Administrative Agent (which shall promptly advise each Lender) notice thereof not later than 12:00 P.M., Chicago time, on the day of such prepayment (which shall be a Business Day), specifying the Loans to be prepaid and the date and amount of prepayment.

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6.2.2 Mandatory Prepayments.

(a) The Company shall make a prepayment of the Loans until paid in full upon the occurrence of any of the following (each a “Mandatory Prepayment Event”) at the following times and in the following amounts (such applicable amounts being referred to as “Designated Proceeds”):

(i) Concurrently with the receipt by any Loan Party of any Net Cash Proceeds from any Asset Disposition, in an amount equal to 100% of such Net Cash Proceeds in excess of $1,000,000 realized upon all Asset Dispositions in any Fiscal Year of the Company.

(ii) Concurrently with the receipt by any Loan Party of any Net Cash Proceeds from any issuance of Capital Securities of any Loan Party (excluding (x) any issuance of Capital Securities pursuant to any employee or director option program, benefit plan or compensation program, (y) any issuance by a Subsidiary to the Company or another Subsidiary and (z) any issuance of Capital Securities by EMD if the proceeds of such issuance are retained by EMD for use in its business), in an amount equal to 100% of such Net Cash Proceeds.

(iii) Concurrently with the receipt by any Loan Party of any Net Cash Proceeds from any issuance of any Indebtedness of any Loan Party (other than Indebtedness permitted pursuant to Section 12.5(k)), in an amount equal to 100% of such Net Cash Proceeds.

Notwithstanding the foregoing, neither the occurrence of a Mandatory Prepayment Event nor the prepayment of Designated Proceeds pursuant thereto shall, in and of itself, result in a reduction of the Commitment.

(b) If on any day the Revolving Outstandings exceed the Borrowing Base, the Company shall immediately prepay Loans and/or Cash Collateralize the outstanding Letters of Credit, or do a combination of the foregoing, in an amount sufficient to eliminate such excess.

(c) Subject to Section 8.4, any prepayment of the Obligations by the Company shall be without premium or penalty.

6.3 Manner of Prepayments. Each voluntary partial prepayment shall be in a principal amount of $100,000 or a higher integral multiple of $100,000. Any partial prepayment of a Group of LIBOR Loans shall be subject to the proviso to Section 2.2.3(a). Any prepayment of a LIBOR Loan on a day other than the last day of an Interest Period therefor shall include interest on the principal amount being repaid and shall be subject to Section 8.4. Except as otherwise provided by this Agreement, all principal payments in respect of the Loans shall be applied first, to repay outstanding Base Rate Loans and then to repay outstanding LIBOR Rate Loans in direct order of Interest Period maturities.

6.4 Repayments. The Loans of each Lender shall be paid in full and the Commitment shall terminate on the Termination Date.

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SECTION 7 MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES.

7.1 Making of Payments. All payments of principal or interest on the Notes, and of all fees, shall be made by the Company to the Administrative Agent in immediately available funds at the office specified by the Administrative Agent not later than noon, Chicago time, on the date due; and funds received after that hour shall be deemed to have been received by the Administrative Agent on the following Business Day. The Administrative Agent shall promptly remit to each Lender its share of all such payments received in collected funds by the Administrative Agent for the account of such Lender. All payments under this Section 7.1 shall be made by the Company without setoff, counterclaim or other defense.

7.2 Application of Certain Payments. So long as no Unmatured Event of Default or Event of Default has occurred and is continuing, voluntary and mandatory prepayments shall be applied as set forth in Sections 6.2 and 6.3. After the occurrence and during the continuance of an Unmatured Event of Default or Event of Default, all amounts collected or received by the Administrative Agent or any Lender as proceeds from the sale of, or other realization upon, all or any part of the collateral shall be applied as the Administrative Agent shall determine in its discretion. Concurrently with each remittance to any Lender of its share of any such payment, the Administrative Agent shall advise such Lender as to the application of such payment.

7.3 Due Date Extension. If any payment of principal or interest with respect to any of the Loans, or of any fees, falls due on a day which is not a Business Day, then such due date shall be extended to the immediately following Business Day (unless, in the case of a LIBOR Loan, such immediately following Business Day is the first Business Day of a calendar month, in which case such due date shall be the immediately preceding Business Day) and, in the case of principal, additional interest shall accrue and be payable for the period of any such extension.

7.4 Setoff. The Company agrees that the Administrative Agent and each Lender have all rights of set-off and bankers’ lien provided by applicable law, and in addition thereto, the Company agrees that at any time any Event of Default exists, the Administrative Agent and each Lender may apply to the payment of any Obligations of the Company hereunder, whether or not then due, any and all balances, credits, deposits, accounts or moneys of the Company then or thereafter with the Administrative Agent or such Lender.

7.5 Proration of Payments. If any Lender shall obtain any payment or other recovery (whether voluntary, involuntary, by application of offset or otherwise, on account of (a) principal of or interest on any Loan, but excluding (i) any payment pursuant to Section 8.7 or 16.6 and (ii) payments of interest on any Affected Loan) or (b) its participation in any Letter of Credit) in excess of its applicable Pro Rata Share of payments and other recoveries obtained by all Lenders on account of principal of and interest on the Loans (or such participation) then held by them, then such Lender shall purchase from the other Lenders such participations in the Loans (or sub-participations in Letters of Credit) held by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery.

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7.6 Taxes.

(a) All payments made by the Company hereunder or under any Loan Documents shall be made without setoff, counterclaim, or other defense. To the extent permitted by applicable law, all payments hereunder or under the Loan Documents (including any payment of principal, interest, or fees) to, or for the benefit, of any person shall be made by the Company free and clear of and without deduction or withholding for, or account of, any Taxes now or hereinafter imposed by any taxing authority.

(b) If the Company makes any payment hereunder or under any Loan Document in respect of which it is required by applicable law to deduct or withhold any Taxes, the Company shall increase the payment hereunder or under any such Loan Document such that after the reduction for the amount of Taxes withheld (and any taxes withheld or imposed with respect to the additional payments required under this Section 7.6(b)), the amount paid to the Lenders or the Administrative Agent equals the amount that was payable hereunder or under any such Loan Document without regard to this Section 7.6(b). To the extent the Company withholds any Taxes on payments hereunder or under any Loan Document, the Company shall pay the full amount deducted to the relevant taxing authority within the time allowed for payment under applicable law and shall deliver to the Administrative Agent within 30 days after it has made payment to such authority a receipt issued by such authority (or other evidence satisfactory to the Administrative Agent) evidencing the payment of all amounts so required to be deducted or withheld from such payment.

(c) If any Lender or the Administrative Agent is required by law to make any payments of any Taxes on or in relation to any amounts received or receivable hereunder or under any other Loan Document, or any Tax is assessed against a Lender or the Administrative Agent with respect to amounts received or receivable hereunder or under any other Loan Document, the Company will indemnify such person against (i) such Tax (and any reasonable counsel fees and expenses associated with such Tax) and (ii) any taxes imposed as a result of the receipt of the payment under this Section 7.6(c). A certificate prepared in good faith as to the amount of such payment by such Lender or the Administrative Agent shall, absent manifest error, be final, conclusive, and binding on all parties.

(d) (i) To the extent permitted by applicable law, each Lender that is not a United States person within the meaning of Code section 7701(a)(30) (a “Non-U.S. Participant”) shall deliver to the Company and the Administrative Agent on or prior to the Closing Date (or in the case of a Lender that is an Assignee, on the date of such assignment to such Lender) two accurate and complete original signed copies of IRS Form W-8BEN, W-8ECI, or W-8IMY (or any successor or other applicable form prescribed by the IRS) certifying to such Lender’s entitlement to a complete exemption from, or a reduced rate in, United States withholding tax on interest payments to be made hereunder on any Loan. If a Lender that is a Non-U.S. Participant is claiming a complete exemption from withholding on interest pursuant to Sections 871(h) or 881(c) of the Code, the Lender shall deliver (along with two accurate and complete original signed copies of IRS Form W-8BEN) a certificate in form and substance reasonably acceptable to Administrative Agent (any such certificate, a “Withholding Certificate”). In addition, each Lender that is a Non-U.S. Participant agrees that from time to time after the Closing Date, (or in the case of a Lender that is an Assignee, after the date of the assignment to such Lender), when a

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lapse in time (or change in circumstances occurs) renders the prior certificates hereunder obsolete or inaccurate in any material respect, such Lender shall, to the extent permitted under applicable law, deliver to the Company and the Administrative Agent two new and accurate and complete original signed copies of an IRS Form W-8BEN, W-8ECI, or W-8IMY (or any successor or other applicable forms prescribed by the IRS), and if applicable, a new Withholding Certificate, to confirm or establish the entitlement of such Lender or the Administrative Agent to an exemption from, or reduction in, United States withholding tax on interest payments to be made hereunder or any Loan.

(ii) Each Lender that is not a Non-U.S. Participant (other than any such Lender which is taxed as a corporation for U.S. federal income tax purposes) shall provide two properly completed and duly executed copies of IRS Form W-9 (or any successor or other applicable form) to the Company and the Administrative Agent certifying that such Lender is exempt from United States backup withholding tax. To the extent that a form provided pursuant to this Section 7.6(d)(ii) is rendered obsolete or inaccurate in any material respects as result of change in circumstances with respect to the status of a Lender, such Lender shall, to the extent permitted by applicable law, deliver to the Company and the Administrative Agent revised forms necessary to confirm or establish the entitlement to such Lender’s or Agent’s exemption from United States backup withholding tax.

(iii) The Company shall not be required to pay additional amounts to a Lender, or indemnify any Lender, under this Section 7.6 to the extent that such obligations would not have arisen but for the failure of such Lender to comply with Section 7.6(d).

(iv) Each Lender agrees to indemnify the Administrative Agent and hold the Administrative Agent harmless for the full amount of any and all present or future Taxes and related liabilities (including penalties, interest, additions to tax and expenses, and any Taxes imposed by any jurisdiction on amounts payable to the Administrative Agent under this Section 7.6) which are imposed on or with respect to principal, interest or fees payable to such Lender hereunder and which are not paid by the Company pursuant to this Section 7.6, whether or not such Taxes or related liabilities were correctly or legally asserted. This indemnification shall be made within 30 days from the date the Administrative Agent makes written demand therefor.

SECTION 8 INCREASED COSTS; SPECIAL PROVISIONS FOR LIBOR LOANS.

8.1 Increased Costs. (a) If, after the date hereof, the adoption of, or any change in, any applicable law, rule or regulation, or any change in the interpretation or administration of any applicable law, rule or regulation by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall impose, modify or deem applicable any reserve (including any reserve imposed by the FRB, but excluding any reserve included in the determination of the LIBOR Rate pursuant to Section 4), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by any Lender; or (ii) shall impose on any Lender any other condition affecting its LIBOR Loans, its Note or its obligation to make LIBOR Loans; and the result of anything described in clauses (i) and (ii)

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above is to increase the cost to (or to impose a cost on) such Lender (or any LIBOR Office of such Lender) of making or maintaining any LIBOR Loan, or to reduce the amount of any sum received or receivable by such Lender (or its LIBOR Office) under this Agreement or under its Note with respect thereto, then upon demand by such Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail, a copy of which shall be furnished to the Administrative Agent), the Company shall pay directly to such Lender such additional amount as will compensate such Lender for such increased cost or such reduction, so long as such amounts have accrued on or after the day which is 180 days prior to the date on which such Lender first made demand therefor.

(b) If any Lender shall reasonably determine that any change in, or the adoption or phase-in of, any applicable law, rule or regulation regarding capital adequacy, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or the compliance by any Lender or any Person controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender’s or such controlling Person’s capital as a consequence of such Lender’s obligations hereunder or under any Letter of Credit to a level below that which such Lender or such controlling Person could have achieved but for such change, adoption, phase-in or compliance (taking into consideration such Lender’s or such controlling Person’s policies with respect to capital adequacy) by an amount deemed by such Lender or such controlling Person to be material, then from time to time, upon demand by such Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail, a copy of which shall be furnished to the Administrative Agent), the Company shall pay to such Lender such additional amount as will compensate such Lender or such controlling Person for such reduction so long as such amounts have accrued on or after the day which is 180 days prior to the date on which such Lender first made demand therefor.

8.2 Basis for Determining Interest Rate Inadequate or Unfair. If:

(a) the Administrative Agent reasonably determines (which determination shall be binding and conclusive on the Company) that by reason of circumstances affecting the interbank LIBOR market adequate and reasonable means do not exist for ascertaining the applicable LIBOR Rate; or

(b) the Required Lenders advise the Administrative Agent that the LIBOR Rate as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Lenders of maintaining or funding LIBOR Loans for such Interest Period (taking into account any amount to which such Lenders may be entitled under Section 8.1) or that the making or funding of LIBOR Loans has become impracticable as a result of an event occurring after the date of this Agreement which in the opinion of such Lenders materially affects such Loans;

then the Administrative Agent shall promptly notify the other parties thereof and, so long as such circumstances shall continue, (i) no Lender shall be under any obligation to make or convert any Base Rate Loans into LIBOR Loans and (ii) on the last day of the current Interest Period for each LIBOR Loan, such Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan.

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8.3 Changes in Law Rendering LIBOR Loans Unlawful. If any change in, or the adoption of any new, law or regulation, or any change in the interpretation of any applicable law or regulation by any governmental or other regulatory body charged with the administration thereof, should make it (or in the good faith judgment of any Lender cause a substantial question as to whether it is) unlawful for any Lender to make, maintain or fund LIBOR Loans, then such Lender shall promptly notify each of the other parties hereto and, so long as such circumstances shall continue, (a) such Lender shall have no obligation to make or convert any Base Rate Loan into a LIBOR Loan (but shall make Base Rate Loans concurrently with the making of or conversion of Base Rate Loans into LIBOR Loans by the Lenders which are not so affected, in each case in an amount equal to the amount of LIBOR Loans which would be made or converted into by such Lender at such time in the absence of such circumstances) and (b) on the last day of the current Interest Period for each LIBOR Loan of such Lender (or, in any event, on such earlier date as may be required by the relevant law, regulation or interpretation), such LIBOR Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan. Each Base Rate Loan made by a Lender which, but for the circumstances described in the foregoing sentence, would be a LIBOR Loan (an “Affected Loan”) shall remain outstanding as a Base Rate Loan for the period corresponding to the Group of LIBOR Loans of which such Affected Loan would be a part absent such circumstances.

8.4 Funding Losses. The Company hereby agrees that upon demand by any Lender (which demand shall be accompanied by a statement setting forth the basis for the amount being claimed, a copy of which shall be furnished to the Administrative Agent), the Company will indemnify such Lender against any net loss or expense which such Lender may sustain or incur (including any net loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund or maintain any LIBOR Loan), as reasonably determined by such Lender, as a result of (a) any payment, prepayment or conversion of any LIBOR Loan of such Lender on a date other than the last day of an Interest Period for such Loan (including any conversion pursuant to Section 8.3) or (b) any failure of the Company to borrow, convert or continue any Loan on a date specified therefor in a notice of borrowing, conversion or continuation pursuant to this Agreement. For this purpose, all notices to the Administrative Agent pursuant to this Agreement shall be deemed to be irrevocable.

8.5 Right of Lenders to Fund through Other Offices. Each Lender may, if it so elects, fulfill its commitment as to any LIBOR Loan by causing a foreign branch or Affiliate of such Lender to make such Loan; provided that in such event for the purposes of this Agreement such Loan shall be deemed to have been made by such Lender and the obligation of the Company to repay such Loan shall nevertheless be to such Lender and shall be deemed held by it, to the extent of such Loan, for the account of such branch or Affiliate.

8.6 Discretion of Lenders as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, each Lender shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if such Lender had actually funded and maintained each LIBOR Loan during each Interest Period for such Loan through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the LIBOR Rate for such Interest Period.

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8.7 Mitigation of Circumstances; Replacement of Lenders. (a) Each Lender shall promptly notify the Company and the Administrative Agent of any event of which it has knowledge which will result in, and will use reasonable commercial efforts available to it (and not, in such Lender’s sole judgment, otherwise disadvantageous to such Lender) to mitigate or avoid, (i) any obligation by the Company to pay any amount pursuant to Section 7.6 or 8.1 or (ii) the occurrence of any circumstances described in Section 8.2 or 8.3 (and, if any Lender has given notice of any such event described in clause (i) or (ii) above and thereafter such event ceases to exist, such Lender shall promptly so notify the Company and the Administrative Agent). Without limiting the foregoing, each Lender will designate a different funding office if such designation will avoid (or reduce the cost to the Company of) any event described in clause (i) or (ii) above and such designation will not, in such Lender’s sole judgment, be otherwise disadvantageous to such Lender.

(b) If the Company becomes obligated to pay additional amounts to any Lender pursuant to Section 7.6 or 8.1, or any Lender gives notice of the occurrence of any circumstances described in Section 8.2 or 8.3, the Company may designate another bank which is acceptable to the Administrative Agent and the Issuing Lender in their reasonable discretion (such other bank being called a “Replacement Lender”) to purchase the Loans of such Lender and such Lender’s rights hereunder, without recourse to or warranty by, or expense to, such Lender, for a purchase price equal to the outstanding principal amount of the Loans payable to such Lender plus any accrued but unpaid interest on such Loans and all accrued but unpaid fees owed to such Lender and any other amounts payable to such Lender under this Agreement, and to assume all the obligations of such Lender hereunder, and, upon such purchase and assumption (pursuant to an Assignment Agreement), such Lender shall no longer be a party hereto or have any rights hereunder (other than rights with respect to indemnities and similar rights applicable to such Lender prior to the date of such purchase and assumption) and shall be relieved from all obligations to the Company hereunder, and the Replacement Lender shall succeed to the rights and obligations of such Lender hereunder.

8.8 Conclusiveness of Statements; Survival of Provisions. Determinations and statements of any Lender pursuant to Section 8.1, 8.2, 8.3 or 8.4 shall be conclusive absent demonstrable error. Lenders may use reasonable averaging and attribution methods in determining compensation under Sections 8.1 and 8.4, and the provisions of such Sections shall survive repayment of the Obligations, cancellation of any Notes, expiration or termination of the Letters of Credit and termination of this Agreement.

SECTION 9 GRANT OF SECURITY INTEREST; COLLATERAL

9.1 Grant. The Company hereby grants to the Administrative Agent, for the ratable benefit of the Lenders and (to the extent provided herein) their Affiliates, a continuing security interest in all of its Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations.

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9.2 Representations and Warranties Regarding Collateral. The Company hereby represents and warrants to the Administrative Agent and each Lender that:

9.2.1 Title; No Other Liens. Except for Permitted Liens, the Company owns each item of the Collateral free and clear of any and all Liens or claims of others. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except filings evidencing Permitted Liens and filings for which termination statements have been delivered to the Administrative Agent.

9.2.2 Perfected First Priority Liens. The security interests granted pursuant to this Agreement (a) constitute valid perfected security interests in all of the Collateral in favor of the Administrative Agent, for the ratable benefit of the Lenders, as collateral security for the Obligations, enforceable in accordance with the terms hereof against all creditors of the Company and any Persons purporting to purchase any Collateral from the Company and (b) are prior to all other Liens on the Collateral in existence on the date hereof except for Permitted Liens for which priority is accorded under applicable law.

9.2.3 Company Information. On the date hereof, Schedule 9.2.3 sets forth (a) the Company’s jurisdiction of organization, (b) the location of the Company’s chief executive office, (c) the Company’s exact legal name as it appears on its organizational documents and (d) the Company’s organizational identification number (to the extent the Company is organized in a jurisdiction which assigns such numbers) and federal employer identification number.

9.2.4 Collateral Locations. On the date hereof, Schedule 9.2.4 sets forth (a) each place of business of the Company (including its chief executive office), (b) all locations where all Inventory and the Equipment owned by the Company are kept, except with respect to Inventory and Equipment with a fair market value of less than $5,000,000 (in the aggregate for the Company and all Guarantors) which may be located at other locations and (c) whether each such Collateral location and place of business (including the Company’s chief executive office) is owned or leased (and if leased, specifies the complete name and notice address of each lessor). No Collateral is located outside the United States or in the possession of any lessor, bailee, warehouseman or consignee, except as indicated on Schedule 9.2.4.

9.2.5 Certain Property. None of the Collateral constitutes, or is the Proceeds of, (a) Farm Products, (b) Health Care Insurance Receivables or (c) vessels, aircraft or any other property subject to any certificate of title or other registration statute of the United States, any State or other jurisdiction, except for personal vehicles owned by the Company and used by employees of the Company in the ordinary course of business with an aggregate fair market value of less than $5,000,000 (in the aggregate for the Company and all Guarantors).

9.2.6 [Reserved.]

9.2.7 Receivables. (a) No material amount payable to the Company under or in connection with any Receivable is evidenced by any Instrument or Chattel Paper which has not been delivered to the Administrative Agent.

(b) No obligor on any Receivable is a governmental authority.

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(c) The amounts represented by the Company to the Lenders from time to time as owing to the Company in respect of the Receivables (to the extent such representations are required by any of the Loan Documents) will at all such times be accurate in all material respects.

9.2.8 Intellectual Property. Schedule 9.2.8 lists all registered Intellectual Property owned by the Company in its own name on the date hereof. Except as set forth in Schedule 9.2.8, none of the material Intellectual Property is the subject of any licensing or franchise agreement pursuant to which the Company is the licensor or franchisor.

9.2.9 [Reserved.]

9.3 Covenants Regarding Collateral. Until the expiration or termination of the Commitments and thereafter until all Obligations hereunder and under the other Loan Documents are paid in full and all Letters of Credit have been terminated, the Company agrees that, unless at any time the Required Lenders shall otherwise expressly consent in writing, it will:

9.3.1 Delivery of Instruments and Chattel Paper. If any amount payable under or in connection with any of the Collateral in excess of $5,000,000 (in the aggregate for the Company and all Guarantors) shall be or become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper shall be immediately delivered to the Administrative Agent, duly indorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Agreement. In the event that an Unmatured Event of Default or Event of Default shall have occurred and be continuing, upon the request of the Administrative Agent, any Instrument or Chattel Paper not theretofore delivered to the Administrative Agent and at such time being held by the Company shall be immediately delivered to the Administrative Agent, duly indorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Agreement.

9.3.2 Maintenance of Perfected Security Interest; Further Documentation. (a) The Company shall maintain the security interest created by this Agreement as a perfected security interest having at least the priority described in Section 9.2.2 and shall defend such security interest against the claims and demands of all Persons whomsoever.

(b) The Company will furnish to the Administrative Agent and the Lenders from time to time statements and schedules further identifying and describing its assets and property and such other reports in connection therewith as the Administrative Agent may reasonably request, all in reasonable detail.

(c) At any time and from time to time, upon the written request of the Administrative Agent, and at the sole expense of the Company, the Company will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Administrative Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including filing any financing or continuation statements under the UCC (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby.

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9.3.3 Changes in Locations, Name, etc. The Company shall not, except upon 30 days’ prior written notice to the Administrative Agent and delivery to the Administrative Agent of (x) all additional financing statements and other documents reasonably requested by the Administrative Agent as to the validity, perfection and priority of the security interests provided for herein and (y) if applicable, a written supplement to Schedule 9.2.4 showing any additional location at which Inventory or Equipment shall be kept:

(a) permit any of the Inventory or Equipment to be kept at a location other than those listed on Schedule 9.2.4; provided, that up to $5,000,000 (in the aggregate for the Company and all Guarantors) in fair market value of any such Inventory and Equipment may be kept at other locations;

(b) change its jurisdiction of organization or the location of its chief executive office from that specified on Schedule 9.2.3 or in any subsequent notice delivered pursuant to this Section 9.3.3; or

(c) change its name, identity or corporate structure.

9.3.4 Notices. The Company will advise the Administrative Agent and the Lenders promptly, in reasonable detail, of (a) any Lien (other than Permitted Liens) on any of the Collateral which would adversely affect the ability of the Administrative Agent to exercise any of its remedies hereunder and (b) the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the Liens created hereby.

9.3.5 [Reserved.]

9.3.6 Receivables. (a) Other than in the ordinary course of business consistent with its past practice and in amounts which are not material to the Company, the Company will not (i) grant any extension of the time of payment of any Receivable, (ii) compromise or settle any Receivable for less than the full amount thereof, (iii) release, wholly or partially, any Person liable for the payment of any Receivable, (iv) allow any credit or discount whatsoever on any Receivable or (v) amend, supplement or modify any Receivable in any manner that could adversely affect the value thereof. Notwithstanding the foregoing, the Company may compromise or settle any Receivable if, after giving effect to such compromise or settlement, the excess of Revolving Loan Availability minus Revolving Outstandings is greater than or equal to $5,000,000.

(b) The Company will deliver to the Administrative Agent a copy of each material demand, notice or document received by it that questions or calls into doubt the validity or enforceability of more than 5% of the aggregate amount of the then outstanding Receivables for the Company and all Guarantors.

9.3.7 Intellectual Property. (a) With respect to each Trademark material to the Company’s business, the Company (either itself or through licensees) will (i) continue to use such Trademark in order to maintain such Trademark in full force free from any claim of abandonment for non-use, (ii) maintain as in the past the quality of products and services offered under such Trademark, (iii) use such Trademark with the appropriate notice of registration and

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all other notices and legends required by applicable law, and (iv) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby such Trademark may become invalidated or impaired in any way.

(b) The Company (either itself or through licensees) will not do any act, or omit to do any act, whereby any Patent material to its business may become forfeited, abandoned or dedicated to the public.

(c) With respect to each Copyright material to the Company’s business, the Company (either itself or through licensees) (i) will employ such Copyright and (ii) will not (and will not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any material portion of such Copyright may become invalidated or otherwise impaired.

(d) The Company (either itself or through licensees) will not do any act that knowingly uses any Intellectual Property material to its business to infringe the intellectual property rights of any other Person.

(e) The Company will notify the Administrative Agent and the Lenders promptly if it knows, or has reason to know, that any application or registration relating to any material Intellectual Property may become forfeited, abandoned or dedicated to the public, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court or tribunal in any country) regarding, the Company’s ownership of, or the validity of, any material Intellectual Property or the Company’s right to register the same or to own and maintain the same.

(f) Upon the occurrence and during the continuance of an Event of Default, (i) the Company shall update the information on Schedule 9.2.8 and (ii) whenever the Company, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, the Company shall report such filing to the Administrative Agent concurrently with the next delivery of financial statements of the Company pursuant to Section 11.1. Upon the request of the Administrative Agent during the continuance of an Event of Default, the Company shall execute and deliver, and have recorded, any and all agreements, instruments, documents, and papers as the Administrative Agent may request to evidence the Administrative Agent’s and the Lenders’ security interest in any Copyright, Patent or Trademark and the goodwill and general intangibles of the Company relating thereto or represented thereby.

(g) The Company will take all reasonable and necessary steps to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of all Intellectual Property owned by it and material to its business.

(h) In the event that any Intellectual Property material to the Company’s business is infringed upon or misappropriated or diluted by a third party, the Company shall (i) take such actions as the Company shall reasonably deem appropriate under the circumstances to protect such Intellectual Property and (ii) if such Intellectual Property is of material economic value,

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promptly notify the Administrative Agent after it learns thereof and, to the extent, in its reasonable judgment, the Company determines it appropriate under the circumstances, sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution.

9.3.8 [Reserved.]

9.3.9 Other Matters.

(a) [Reserved.]

(b) The Company authorizes the Administrative Agent to, at any time and from time to time, file financing statements, continuation statements, and amendments thereto that describe the Collateral as “all assets” of the Company, or words of similar effect, and which contain any other information required pursuant to the UCC for the sufficiency of filing office acceptance of any financing statement, continuation statement, or amendment, and the Company agrees to furnish any such information to the Administrative Agent promptly upon request. Any such financing statement, continuation statement, or amendment may be signed by the Administrative Agent on behalf of the Company and may be filed at any time in any jurisdiction.

(c) The Company shall, at any time and from time and to time, take such steps as the Administrative Agent may reasonably request for the Administrative Agent (i) to obtain an acknowledgement, in form and substance reasonably satisfactory to the Administrative Agent, of any bailee having possession of any of the Collateral, stating that the bailee holds such Collateral for the Administrative Agent, (ii) to obtain “control” of any letter-of-credit rights, or electronic chattel paper (as such terms are defined by the UCC with corresponding provisions thereof defining what constitutes “control” for such items of Collateral), with any agreements establishing control to be in form and substance reasonably satisfactory to the Administrative Agent, and (iii) otherwise to insure the continued perfection and priority of the Administrative Agent’s security interest in any of the Collateral and of the preservation of its rights therein. If the Company shall at any time, acquire a “commercial tort claim” (as such term is defined in the UCC) in excess of $2,000,000, the Company shall promptly notify the Administrative Agent thereof in writing and supplement Schedule 9.3.9, therein providing a reasonable description and summary thereof, and upon delivery thereof to the Administrative Agent, the Company shall be deemed to thereby grant to the Administrative Agent (and the Company hereby grants to the Administrative Agent) a security interest and lien in and to such commercial tort claim and all proceeds thereof, all upon the terms of and governed by this Agreement.

(d) Without limiting the generality of the foregoing, if the Company at any time holds or acquires an interest in any electronic chattel paper or any “transferable record”, as that term is defined in Section 201 of the federal Electronic Signatures in Global and National Commerce Act, or in §16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, the Company shall promptly notify the Administrative Agent thereof and, at the request of the Administrative Agent, shall take such action as the Administrative Agent may reasonably request to vest in the Administrative Agent “control” under Section 9-105 of the UCC of such electronic chattel paper or control under Section 201 of the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, §16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record.

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9.4 Certain Matters Relating to Receivables.

9.4.1 At any time and from time to time after the occurrence and during the continuance of an Event of Default, the Administrative Agent shall have the right to make test verifications of the Receivables in any manner and through any medium that it reasonably considers advisable, and the Company shall furnish all such assistance and information as the Administrative Agent may require in connection with such test verifications. At any time and from time to time after the occurrence and during the continuance of an Event of Default, upon the Administrative Agent’s request and at the expense of the Company, the Company shall cause independent public accountants or others satisfactory to the Administrative Agent to furnish to the Administrative Agent reports showing reconciliations, agings and test verifications of, and trial balances for, the Receivables.

9.4.2 The Administrative Agent hereby authorizes the Company to collect its Receivables, and the Administrative Agent may curtail or terminate such authority at any time after the occurrence and during the continuance of an Event of Default. If required by the Administrative Agent at any time after the occurrence and during the continuance of an Event of Default, any payments of Receivables, when collected by the Company, (a) shall be forthwith (and, in any event, within 2 Business Days) deposited by the Company in the exact form received, duly indorsed by the Company to the Administrative Agent if required, in a collateral account maintained under the sole dominion and control of the Administrative Agent, subject to withdrawal by the Administrative Agent for the account of the Lenders only as provided in Section 14.5, and (b) until so turned over, shall be held by the Company in trust for the Administrative Agent and the Lenders, segregated from other funds of the Company. Each such deposit of Proceeds of Receivables shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit.

9.4.3 At any time and from time to time after the occurrence and during the continuance of an Event of Default, at the Administrative Agent’s request, the Company shall deliver to the Administrative Agent all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Receivables, including all original orders, invoices and shipping receipts.

9.5 Communications with Obligors; Company Remains Liable.

9.5.1 The Administrative Agent in its own name or in the name of others may at any time communicate with obligors under the Receivables to verify with them to the Administrative Agent’s satisfaction the existence, amount and terms of any Receivables.

9.5.2 Upon the request of the Administrative Agent at any time after the occurrence and during the continuance of an Event of Default, the Company shall notify obligors on the Receivables that the Receivables have been assigned to the Administrative Agent for the ratable benefit of the Lenders and that payments in respect thereof shall be made directly to the Administrative Agent.

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9.5.3 Anything herein to the contrary notwithstanding, the Company shall remain liable in respect of each of the Receivables to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. Neither the Administrative Agent nor any Lender shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Administrative Agent or any Lender of any payment relating thereto, nor shall the Administrative Agent or any Lender be obligated in any manner to perform any of the obligations of the Company under or pursuant to any Receivable (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.

9.5.4 For the purpose of enabling the Administrative Agent to exercise rights and remedies under this Agreement, the Company hereby grants to the Administrative Agent, for the benefit of the Administrative Agent and the Lenders, an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to the Company) to use, license or sublicense any Intellectual Property now owned or hereafter acquired by the Company, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof.

9.6 [Reserved.]

9.7 Proceeds to be Turned Over to Administrative Agent. In addition to the rights of the Administrative Agent and the Lenders specified in Section 9.4 with respect to payments of Receivables, if an Event of Default shall occur and be continuing, at the request of the Required Lenders and by notice to the Company, all Proceeds received by the Company consisting of cash, checks and other cash equivalent items shall be held by the Company in trust for the Administrative Agent and the Lenders, segregated from other funds of the Company, and shall, forthwith upon receipt by the Company, be turned over to the Administrative Agent in the exact form received by the Company (duly indorsed by the Company to the Administrative Agent, if required). All Proceeds received by the Administrative Agent hereunder shall be held by the Administrative Agent in a collateral account maintained under its sole dominion and control. All Proceeds, while held by the Administrative Agent in any collateral account (or by the Company in trust for the Administrative Agent and the Lenders) established pursuant hereto, shall continue to be held as collateral security for the Obligations and shall not constitute payment thereof until applied as provided in Section 14.5.

SECTION 10 REPRESENTATIONS AND WARRANTIES.

To induce the Administrative Agent and the Lenders to enter into this Agreement and to induce the Lenders to make Loans and issue and participate in Letters of Credit hereunder, the Company represents and warrants to the Administrative Agent and the Lenders that:

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10.1 Organization. Each Loan Party is validly existing and in good standing under the laws of its jurisdiction of organization; and each Loan Party is duly qualified to do business in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, except for such jurisdictions where the failure to so qualify would not have a Material Adverse Effect.

10.2 Authorization; No Conflict. Each Loan Party is duly authorized to execute and deliver each Loan Document to which it is a party, the Company is duly authorized to borrow monies hereunder and each Loan Party is duly authorized to perform its Obligations under each Loan Document to which it is a party. The execution, delivery and performance by each Loan Party of each Loan Document to which it is a party, and the borrowings by the Company hereunder, do not and will not (a) require any consent or approval of any governmental agency or authority (other than any consent or approval which has been obtained and is in full force and effect), (b) conflict with (i) any provision of law, (ii) the charter, by-laws or other organizational documents of any Loan Party or (iii) any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon any Loan Party or any of their respective properties or (c) require, or result in, the creation or imposition of any Lien on any asset of any Loan Party (other than Liens in favor of the Administrative Agent created pursuant to the Collateral Documents).

10.3 Validity and Binding Nature. Each of this Agreement and each other Loan Document to which any Loan Party is a party is the legal, valid and binding obligation of such Person, enforceable against such Person in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the enforceability of creditors’ rights generally and to general principles of equity.

10.4 Solvency, etc. On the Closing Date, and immediately prior to and after giving effect to the issuance of each Letter of Credit and each borrowing hereunder and the use of the proceeds thereof, with respect to each Loan Party, individually, (a) the fair value of its assets is greater than the amount of its liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated, (b) the present fair saleable value of its assets is not less than the amount that will be required to pay the probable liability on its debts as they become absolute and matured, (c) it is able to realize upon its assets and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business, (d) it does not intend to, and does not believe that it will, incur debts or liabilities beyond its ability to pay as such debts and liabilities mature and (e) it is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which its property would constitute unreasonably small capital.

10.5 Compliance with Laws. Each Loan Party is in compliance with all applicable laws, rules and regulations of any governmental authority, including but not limited to the Securities Act, the Securities Exchange Act of 1934, the Fair Labor Standards Act, Environmental Laws, laws relating to income, unemployment, payroll or social security taxes and employee benefit plans (as defined in Section 3(3) of ERISA) as required by ERISA, except for those laws, rules and regulations the violation of which would not have a Material Adverse Effect.

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10.6 Litigation and Contingent Liabilities. No litigation (including derivative actions), arbitration proceeding or governmental investigation or proceeding is pending or, to the Company’s knowledge, threatened against any Loan Party which might reasonably be expected to have a Material Adverse Effect, except as set forth in Schedule 10.6. Other than any liability incident to such litigation or proceedings, no Loan Party has any known material contingent liabilities not listed on Schedule 10.6 or permitted by Section 12.5.

10.7 Intellectual Property. Each Loan Party owns and possesses or has a license or other right to use all material licenses, patents, patent applications, copyrights, service marks, trademarks and trade names required to continue to conduct its respective business as presently conducted. To any such Person’s knowledge, no such license or trademark has been declared invalid, been limited by order of any governmental authority or by agreement, or is the subject of any infringement, interference or similar proceeding or challenge, except for those licenses or trademarks which if challenged, limited or rendered invalid, would not have a Material Adverse Effect.

10.8 Financial Condition. The audited consolidated financial statements of the Company and its Subsidiaries as at February 28, 2003 and the unaudited consolidated financial statements of the Company and the Subsidiaries as at February 29, 2004, copies of each of which have been delivered to each Lender, were prepared in accordance with GAAP (subject, in the case of such unaudited statements, to the absence of footnotes and to normal year-end adjustments) and present fairly the consolidated financial condition of the Company and its Subsidiaries as at such dates and the results of their operations for the periods then ended.

10.9 No Material Adverse Change. Since February 29, 2004, there has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of the Loan Parties taken as a whole.

10.10 Environmental Laws. Except as set forth on Schedule 10.10: (a) each Loan Party and its properties comply in all respects with all applicable Environmental Laws, except such non-compliance which could not (if enforced in accordance with applicable law) reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect; (b) no Loan Party is subject to any actual or, to such Person’s knowledge, threatened judicial or administrative proceeding, investigation or inquiry into the possibility of material violation of any Environmental Laws; (c) no Loan Party or its properties is the subject of an actual or threatened investigation or inquiry of any governmental authority evaluating whether any material remedial action is needed to respond to a Release of any Hazardous Material or other substance into the environment, and no such Person has knowledge or notice of the presence on or under any property owned or operated by any of them, or of the Release of, any Hazardous Material in violation of applicable Environmental Laws, the violation of which could reasonably be expected to have a Material Adverse Effect; (d) there are no Environmental Claims pending or, to any such Person’s knowledge, threatened against any such Person relating to damage, contribution, cost recovery compensation, loss, or injury resulting from the Release of, or exposure to, any Hazardous Material (which Hazardous Material is stored in or under ay such Person’s property in the ordinary course of its business in accordance with Environmental Laws) which could reasonably be expected to have a Material Adverse Effect; and (e) no Loan Party has filed nor was it required to file, any notice under any law, regulation or rule indicating past or

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present generation, transportation, treatment, storage or disposal of a Hazardous Material or reporting a Release of a Hazardous Material into the environment, nor has any Loan Party engaged in such activity other than in accordance with Environmental Laws, in each case if such generation, transportation, treatment, storage, disposal, Release or other activity could reasonably be expected to have a Material Adverse Effect.

10.11 Permits and Licenses. Each Loan Party is current and in good standing with respect to all material governmental approvals, permits, certificates, licenses, inspections, consents and franchises (collectively, the “Licenses”) necessary to continue to conduct its business and to own or lease and operate its properties as heretofore conducted, owned, leased or operated.

10.12 ERISA. Except as could not reasonably be expected to result in a loss, liability or cost in excess of $1,000,000: no Loan Party, no ERISA Affiliate of such Person and no Benefit Plan is in violation in any material respect of any of the provisions of ERISA or any of the qualification requirements of Section 401(a) of the Code; no Prohibited Transaction or Reportable Event has occurred with respect to any Benefit Plan, nor has any Benefit Plan been the subject of a waiver of the minimum funding standard under Section 412 of the Code; nor has any Benefit Plan experienced an accumulated funding deficiency under Section 412 of the Code; nor has any lien been imposed upon any such Person or any ERISA Affiliate of such Person under Section 412(n) of the Code; nor has any Benefit Plan been amended in such a way that the security requirements of Section 401(a)(29) of the Code apply; no notice of intent to terminate a Benefit Plan has been distributed to affected parties or filed with the PBGC under Section 4041 of ERISA, nor has any Benefit Plan been terminated under Section 4041(e) of ERISA; the PBGC has not instituted proceedings to terminated, or appoint a trustee to administer, a Benefit Plan and no event has occurred or condition exists which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan; no such Person nor any ERISA Affiliate of such Person would be liable for any amount pursuant to Sections 4062, 4063 or 4064 of ERISA if all Benefit Plans terminated as of the most recent valuation dates of such Benefit Plans except as set forth on Schedule 10.12, no such Person nor any ERISA Affiliate of such Person maintains any employee welfare benefit plan, as defined in Section 3(1) of ERISA, which provides any benefits to any employee or the employee’s dependents with respect to claims incurred after the employee separates from service other than is required by applicable law; and no such Person nor any ERISA Affiliate of such Person has incurred or expects to incur any withdrawal liability to any Multiemployer Plan.

10.13 Public Utility Holding Company Act. No Loan Party is a “holding company”, or a “subsidiary company” of a “holding company,” or an “affiliate” of a “holding company” or of a “subsidiary company” of a “holding company,” within the meaning of the Public Utility Holding Company Act of 1935.

10.14 Insurance. Set forth on Schedule 10.14 is a complete and accurate summary of the property and casualty insurance program of the Loan Parties as of the Closing Date (including the names of all insurers, policy numbers, expiration dates, amounts and types of coverage, annual premiums, exclusions, deductibles, self-insured retention, and a description in reasonable detail of any self-insurance program, retrospective rating plan, fronting arrangement or other risk assumption arrangement involving any Loan Party). Each Loan Party and its

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properties are insured with financially sound and reputable insurance companies which are not Affiliates of the Loan Parties, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where such Loan Parties operate.

10.15 Full Disclosure. To the best knowledge of the senior executive officers of the Loan Parties after diligent inquiry, all information heretofore or contemporaneously herewith furnished in writing by any Loan Party to the Administrative Agent or any Lender for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all written information hereafter furnished by or on behalf of any Loan Party to the Administrative Agent or any Lender pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading in light of the circumstances under which made (it being recognized by the Administrative Agent and the Lenders that any projections and forecasts provided by the Company are based on good faith estimates and assumptions believed by the Company to be reasonable as of the date of the applicable projections or assumptions and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results).

10.16 No Default. No Event of Default or Unmatured Event of Default exists or would result from the incurrence by any Loan Party of any Indebtedness hereunder or under any other Loan Document.

10.17 Customer and Trade Relations. Except as disclosed on Schedule 10.17, on the Closing Date there exists no termination, cancellation or limitation of, or any adverse modification or change in, the business relationship between any Loan Party and any material customer or any material group of customers, or with any material supplier, where the termination, cancellation, limitation, modification or change, individually or in the aggregate, could materially and adversely affect the business of the Loan Parties, taken as a whole. There exists no present condition or state of facts or circumstances which could reasonably be expected to materially and adversely affect any Loan Party or prevent such Person from conducting its business with any material customer, material group of customers or material supplier after the consummation of the transactions contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted.

10.18 Tax Obligations. Each Loan Party has filed all federal, material state and material local tax reports and returns required to be filed thereby, and except for extensions duly obtained, have either duly paid all material taxes, duties and charges owed thereby, or made adequate provision for the payment thereof, unless such Person is contesting in good faith, by an appropriate proceeding, the validity, amount or imposition of the above while maintaining adequate reserves to cover the above, and such contest does not have or cause a Material Adverse Effect.

10.19 Employee Controversies. Each Loan Party has withheld all material amounts required by law or agreement to be withheld by it from the wages, salaries and other payments to its employees, and is not liable for any material arrears or wages or any material taxes or

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penalties for failure to comply with the foregoing. Except as set forth on Schedule 10.19, as of the Closing Date no such Person is a party to any collective bargaining agreement; provided, that the Company shall promptly notify the Lenders if any such Person hereafter becomes a party to any such agreement. Except in cases where the potential liability, cost or expense could not reasonably be expected to exceed $1,000,000, there are no pending, threatened or anticipated (a) employment discrimination or unfair labor practice charges or complaints against or involving such Person before any federal, state or local board, department, commission or agency, (b) material grievances, disputes or controversies with any union or other organization of any such Person’s employees, or (c) pending or threatened strikes, slowdowns, work stoppages or lockouts. As of the date hereof, there are no asserted pending demands for collective bargaining by any union or organization or efforts to organize any of the employees of any such Person; provided, that the Company shall promptly notify the Lenders if such demands or efforts hereinafter occur.

10.20 Investment Company Act. No Loan Party is an “investment company” or a company “controlled” by an “investment company” or a “subsidiary” of an “investment company,” within the meaning of the Investment Company Act of 1940.

10.21 Subsidiaries. As of the Closing Date, neither the Company nor any Guarantor has any Subsidiaries other than those specifically disclosed on Schedule 10.21 hereto, and neither the Company nor any Guarantor has equity investments in any other Person other than those specifically disclosed on Schedule 10.21 hereto

10.22 Regulation U. The Company is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock.

10.23 Capital Securities. The authorized Capital Securities of the Company and each Guarantor is set forth on Schedule 10.23 hereto. As of the Closing Date: (a) except as set forth on Schedule 10.23, the Company has no shares of common stock held as treasury shares; (b) all outstanding shares of Capital Securities of the Company and each Guarantor have been duly authorized and validly issued and are fully paid and non-assessable; (c) all of the outstanding Capital Securities of the Company and each Guarantor were issued in compliance with all applicable federal and state securities laws; and (d) none of the outstanding securities of the Company or any Guarantor have been issued in violation of any preemptive rights, rights of first refusal or similar rights. As of the Closing Date, there are no outstanding obligations, contingent or otherwise, of the Company or any Guarantor to purchase, redeem or otherwise acquire any Capital Securities of such Person.

10.24 Occupational Safety and Health. Except as could not reasonably be expected to result in a loss, liability or cost in excess of $1,000,000, no Loan Party has nor, to the Company’s knowledge, has any Affiliate of such Person received any notice, citation, claim, assessment or proposed assessment as to or alleging any material violation by any such Person or any such Affiliate from any division of any Federal or state occupational safety and health administrations or agencies and no such violation presently exists. As of the Closing Date, no Loan Party nor, to the best knowledge of any Loan Party, any Affiliate thereof is a party to any pending dispute involving $1,000,000 or more with respect to such Person’s or any such Affiliate’s compliance with any Federal or state occupational safety and health laws.

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10.25 Swap Obligations. No Loan Party has any outstanding obligations under any Swap Contracts other than Permitted Swap Obligations. The Company has undertaken its own independent assessment of its consolidated assets, liabilities and commitments and has considered appropriate means of mitigating and managing risks associated with such matters.

10.26 Ownership of Properties; Liens. Each Loan Party has ownership of or sufficient rights to use all of its properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, service marks, copyrights and the like) except for Permitted Liens.

SECTION 11 AFFIRMATIVE COVENANTS.

Until the expiration or termination of the Commitments and thereafter until all Obligations hereunder and under the other Loan Documents are paid in full and all Letters of Credit have been terminated, the Company agrees that, unless at any time the Required Lenders shall otherwise expressly consent in writing, it will:

11.1 Reports, Certificates and Other Information. Furnish to the Administrative Agent and each Lender:

11.1.1 Annual Report. Promptly when available and in any event within 120 days after the close of each Fiscal Year: (a) a copy of the annual audit report of the Company and its Subsidiaries for such Fiscal Year, including therein consolidated balance sheets and statements of earnings and cash flows of the Company and its Subsidiaries as at the end of such Fiscal Year, certified without adverse reference to going concern value and without qualification by (i) independent auditors of recognized standing selected by the Company and reasonably acceptable to the Administrative Agent or (ii) any “big 4” accounting firm, together with a comparison with the previous Fiscal Year; and (b) a consolidating balance sheet of the Company and its Subsidiaries as of the end of such Fiscal Year and consolidating statement of earnings and cash flows for the Company and its Subsidiaries for such Fiscal Year, certified by a Senior Officer of the Company.

11.1.2 Interim Reports. (a) Promptly when available and in any event within 45 days after the end of each Fiscal Quarter (except the last Fiscal Quarter of each Fiscal Year), consolidated and consolidating balance sheets of the Company and its Subsidiaries as of the end of such Fiscal Quarter, together with consolidated and consolidating statements of earnings and cash flows for such Fiscal Quarter and for the period beginning with the first day of such Fiscal Year and ending on the last day of such Fiscal Quarter, together with a comparison with the corresponding period of the previous Fiscal Year, certified by a Senior Officer of the Company that such statements fairly present the financial condition of the Company and its Subsidiaries in accordance with GAAP, subject to changes resulting from normal year-end adjustments and the absence of footnotes; and (b) promptly when available and in any event within 30 days after the end of each fiscal month, consolidated balance sheets of the Company and its Subsidiaries as of

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the end of such month, together with consolidated statements of earnings for such month, certified by a Senior Officer of the Company that such statements fairly present the financial condition of the Company and its Subsidiaries in accordance with GAAP, subject to changes resulting from normal year-end adjustments and the absence of footnotes.

11.1.3 Compliance Certificates. Contemporaneously with the furnishing of a copy of each annual audit report pursuant to Section 11.1.1 and each set of quarterly statements pursuant to Section 11.1.2, a duly completed compliance certificate in the form of Exhibit B, with appropriate insertions, dated the date of such annual report or such quarterly statements and signed by a Senior Officer of the Company, containing (i) a computation of each of the financial ratios and restrictions set forth in Section 12.14 and to the effect that such officer has not become aware of any Event of Default or Unmatured Event of Default that has occurred and is continuing or, if there is any such event, describing it and the steps, if any, being taken to cure it and (ii) a written statement of the Company’s management setting forth a discussion of the Company’s financial condition, changes in financial condition and results of operations.

11.1.4 SEC Reports. Within ten (10) Business Days of the filing or sending thereof, copies of all regular, periodic or special reports of any Loan Party filed with the SEC, copies of all registration statements of such Persons filed with the SEC (other than Form S-8) and copies of all proxy statements or communications made to the security holders generally.

11.1.5 Forms 10-K and 10-Q. Promptly upon the filing or sending thereof and in any event within (a) 120 days after the end of each Fiscal year, a copy of the Company’s 10-K and (b) 45 days after the end of each Fiscal Quarter (other than the last Fiscal Quarter of each Fiscal Year), a copy of the Company’s 10-Q, in each case as filed with the SEC.

11.1.6 Notice of Default and Other Matters. Promptly upon becoming aware of any of the following, written notice describing the same and the steps being taken by the Company or the Subsidiary affected thereby with respect thereto:

(a) the occurrence of an Event of Default or an Unmatured Event of Default;

(b) any litigation, arbitration or governmental investigation or proceeding not previously disclosed by the Company to the Lenders which has been instituted or, to the knowledge of the Company, is threatened against any Loan Party or to which any of the properties of any thereof is subject which (i) involves money or property or seeks damages in excess of $1,000,000, or (ii) could reasonably be expected to have a Material Adverse Effect;

(c) any cancellation or material change in any insurance maintained by any Loan Party; or

(d) any other event (including (i) any violation of any Environmental Law or the assertion of any Environmental Claim or (ii) the enactment or effectiveness of any law, rule or regulation) which has or could reasonably be expected to have, a Material Adverse Effect.

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11.1.7 ERISA Reportable Events.

(a) As soon as possible, but in no event later then thirty (30) days after the Company knows or has reason to know that any material Reportable Event with respect to any Benefit Plan of any Loan Party has occurred, a statement of the chief financial officer of such Person setting forth the details concerning such Reportable Event and the action with the Company proposes to take with respect thereto, together with a copy of the notice of such Reportable Event given to the PBGC, if a copy of such notice is available to the Company.

(b) Promptly after the filing thereof with the United States Internal Revenue Service or the PBGC, copies of each annual report with respect to each Benefit Plan.

(c) Promptly after receipt thereof, a copy of any notice of any potential material liability, adverse determination letter, ruling or opinion received from the PBGC or the Internal Revenue Service with respect to any Benefit Plan.

(d) When the same is made available to participants in a Benefit Plan, all notices of a significant reduction in the rate of benefit accrual or plan termination to the participants by the administrator of such Benefit Plan.

(e) Promptly after receipt thereof, any notice from any Multiemployer Plan to which the Company or any ERISA Affiliate of any Loan Party contributes which quantifies any actual or potential withdrawal liability which will or may be imposed upon the withdrawal of the Company or any ERISA Affiliate of any Loan Party from such Multiemployer Plan.

11.1.8 Borrowing Base Certificates. Within 30 days of the end of each month, a Borrowing Base Certificate dated as of the end of such month and executed by a Senior Officer of the Company on behalf of the Company (provided that (a) the Company may deliver a Borrowing Base Certificate more frequently if it chooses and (b) at any time an Event of Default exists, the Administrative Agent may require the Company to deliver Borrowing Base Certificates more frequently).

11.1.9 Collateral Reports. Within 30 days after the end of each month, a report, in form and substance acceptable to the Administrative Agent, dated as of the end of such month and executed by a Senior Officer of the Company including: (a) an aged trial balance of the Loan Parties’ Accounts; (b) a trial balance of the Loan Parties’ accounts payable prepared in a manner reasonably acceptable to the Administrative Agent and showing the name of each party to whom a payable is due and when the amounts due to such party are to be paid; (c) a summary of Inventory by location and type with a supporting perpetual Inventory report; and (d) a reconciliation of the Loan Parties’ Accounts and Inventory between the amount shown on the Company’s books.

11.1.10 Management Reports. Promptly upon receipt thereof and in any event within thirty (30) days after receipt thereof, copies of all detailed financial and management reports submitted to the Company by independent auditors in connection with each annual or interim audit made by such auditors of the books of the Company.

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11.1.11 Projections. As soon as practicable after approval by the Company’s board of directors, and in any event not later than 30 days after the commencement of each Fiscal Year, financial projections for the Company and its Subsidiaries for such Fiscal Year (including monthly operating and cash flow budgets) prepared in a manner consistent with the projections delivered by the Company to the Lenders prior to the Closing Date or otherwise in a manner reasonably satisfactory to the Administrative Agent, accompanied by a certificate of a Senior Officer of the Company on behalf of the Company to the effect that (a) such projections were prepared by the Company in good faith, (b) the Company has a reasonable basis for the assumptions contained in such projections and (c) such projections have been prepared in accordance with such assumptions.

11.1.12 Other Information. Promptly from time to time, such other information concerning the business, properties, condition or operations (financial or otherwise) of the Loan Parties as any Lender or the Administrative Agent may reasonably request.

11.2 Taxes. Pay before delinquency all material assessments and taxes, whether real, person or otherwise, due or payable by, or imposed, levied or assessed against, the Company or any of its property or the property of any other Loan Party, except those assessments and taxes the validity of which is being contested in good faith and by appropriate proceedings, do not impair the priority of the Administrative Agent’s Liens on the Collateral and as to which the Company shall have caused the set aside of adequate reserves (as determined in accordance with GAAP). The Company will, and will cause each other Loan Party to, make timely payment or deposit of all material FICA payments and withholding taxes required of them by applicable laws, and will, upon request, furnish the Administrative Agent with proof satisfactory that such payments or deposits have been made.

11.3 Compliance with Laws. (a) Comply, and cause each other Loan Party to comply, in all material respects with all applicable laws, rules, regulations, decrees, orders, judgments, licenses and permits, except where failure to comply could not reasonably be expected to have a Material Adverse Effect; (b) without limiting clause (a) above, ensure, and cause each other Loan Party to ensure, that no person who owns a controlling interest in or otherwise controls a Loan Party is or shall be (i) listed on the Specially Designated Nationals and Blocked Person List maintained by the Office of Foreign Assets Control (“OFAC”), Department of the Treasury, and/or any other similar lists maintained by OFAC pursuant to any authorizing statute, Executive Order or regulation or (ii) a person designated under Section 1(b), (c) or (d) of Executive Order No. 13224 (September 23, 2001), any related enabling legislation or any other similar Executive Orders and (c) without limiting clause (a) above, comply, and cause each other Loan Party to comply, with all applicable Bank Secrecy Act (“BSA”) and anti-money laundering laws and regulations.

11.4 Maintenance of Property; Insurance. (a) Keep, and cause each other Loan Party to keep, all property useful and necessary in the business of the Loan Parties in good working order and condition, ordinary wear and tear excepted.

(b) Maintain, and cause each other Loan Party to maintain, with responsible insurance companies, such insurance coverage as may be required by any law or governmental regulation or court decree or order applicable to it and such other insurance, to such extent and

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against such hazards and liabilities, as is customarily maintained by companies similarly situated, but which shall insure against all risks and liabilities of the type identified on Schedule 10.14 and shall have insured amounts no less than, and deductibles no higher than, those set forth on such schedule; and, upon request of the Administrative Agent or any Lender, furnish to the Administrative Agent or such Lender a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by the Loan Parties. The Company shall cause each issuer of an insurance policy to provide the Administrative Agent with an endorsement (i) showing the Administrative Agent as loss payee with respect to each policy of property or casualty insurance and naming the Administrative Agent and each Lender as an additional insured with respect to each policy of liability insurance, (ii) providing that 30 days’ notice will be given to the Administrative Agent prior to any cancellation of, material reduction or change in coverage provided by or other material modification to such policy and (iii) reasonably acceptable in all other respects to the Administrative Agent.

(c) UNLESS THE COMPANY PROVIDES THE ADMINISTRATIVE AGENT WITH EVIDENCE OF THE INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT, THE ADMINISTRATIVE AGENT MAY PURCHASE INSURANCE AT THE COMPANY’S EXPENSE TO PROTECT THE ADMINISTRATIVE AGENT’S AND THE LENDERS’ INTERESTS IN THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT ANY LOAN PARTY’S INTERESTS. THE COVERAGE THAT THE ADMINISTRATIVE AGENT PURCHASES MAY NOT PAY ANY CLAIM THAT IS MADE AGAINST ANY LOAN PARTY IN CONNECTION WITH THE COLLATERAL. THE COMPANY MAY LATER CANCEL ANY INSURANCE PURCHASED BY THE ADMINISTRATIVE AGENT, BUT ONLY AFTER PROVIDING THE ADMINISTRATIVE AGENT WITH EVIDENCE THAT THE COMPANY HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT. IF THE ADMINISTRATIVE AGENT PURCHASES INSURANCE FOR THE COLLATERAL, THE COMPANY WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST AND ANY OTHER CHARGES THAT MAY BE IMPOSED WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE PRINCIPAL AMOUNT OF THE LOANS OWING HEREUNDER. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF THE INSURANCE THE LOAN PARTIES MAY BE ABLE TO OBTAIN ON THEIR OWN.

11.5 Books, Records and Inspections. Keep, and cause each other Loan Party to keep, its books and records in accordance with sound business practices sufficient to allow the preparation of financial statements in accordance with GAAP; permit, and cause each other Loan Party to permit, any Lender or the Administrative Agent or any representative thereof to inspect the properties and operations of the Loan Parties; and permit, and cause each other Loan Party to permit, at any reasonable time and with reasonable notice (or at any time without notice if an Event of Default exists), any Lender or the Administrative Agent or any representative thereof to visit any or all of its offices, to discuss its financial matters with its officers and its independent auditors (and the Company hereby authorizes such independent auditors to discuss such financial matters with any Lender or the Administrative Agent or any representative thereof), and to examine (and, at the expense of the Loan Parties, photocopy extracts from) any of its books or

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other records; and permit, and cause each other Loan Party to permit, the Administrative Agent and its representatives to inspect the Inventory and other tangible assets of the Loan Parties, to perform appraisals of the equipment of the Loan Parties, and to inspect, audit, check and make copies of and extracts from the books, records, computer data, computer programs, journals, orders, receipts, correspondence and other data relating to Inventory, Accounts and any other collateral. All such inspections or audits by the Administrative Agent shall be at the Company’s expense; provided, that so long as no Event of Default exists, the Company shall not be required to reimburse the Administrative Agent for inspections or audits more frequently than once each Fiscal Year.

11.6 Maintenance of Existence, etc. Maintain and preserve, and (subject to Section 12.7) cause each Guarantor to maintain and preserve, (a) its existence and good standing in the jurisdiction of its organization and (b) its qualification to do business and good standing in each jurisdiction where the nature of its business makes such qualification necessary (other than such jurisdictions in which the failure to be qualified or in good standing could not reasonably be expected to have a Material Adverse Effect).

11.7 Ownership. Except as provided on Schedule 11.7, own, beneficially and of record, one hundred percent (100%) of the issued and outstanding Capital Securities of each Guarantor listed on Schedule 11.7 and as to all other Guarantors (other than EMD) have majority ownership.

11.8 Employee Benefit Plans. Maintain, and cause each other member of the Controlled Group to maintain, each Pension Plan in substantial compliance with all applicable requirements of law and regulations.

11.9 Environmental Matters. If any Release or Disposal of Hazardous Materials shall occur or shall have occurred on any real property or any other assets of any Loan Party, the Company shall, or shall cause the applicable Loan Party to, cause the prompt containment and removal of such Hazardous Materials and the remediation of such real property or other assets as necessary to comply, in all material respects, with all Environmental Laws and to preserve the value of such real property or other assets. Without limiting the generality of the foregoing, the Company shall, and shall cause each other Loan Party to, comply in all material respects with any Federal or state judicial or administrative order requiring the performance at any real property of any Loan Party of activities in response to the Release or threatened Release of a Hazardous Material. To the extent that the transportation of “hazardous waste,” as defined by RCRA, is permitted by this Agreement, the Company shall, and shall cause each Loan Party to, dispose of such hazardous waste only at licensed disposal facilities operating in compliance with Environmental Laws.

11.10 Further Assurances. Take, and cause each other Loan Party to take, such actions as are necessary or as the Administrative Agent or the Required Lenders may reasonably request from time to time to ensure that the Obligations of each Loan Party under the Loan Documents are secured by substantially all of the Collateral of the Company and each Guarantor other than EMD (including, upon the acquisition or creation thereof, any domestic Subsidiary acquired or created after the Closing Date) and guaranteed by each Guarantor (including, upon the acquisition or creation thereof, any Subsidiary acquired or created after the Closing Date), in

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each case as the Administrative Agent may determine, including the execution and delivery of guaranties, security agreements, financing statements and other documents, and the filing or recording of any of the foregoing.

11.11 Use of Proceeds. Use the proceeds of the Loans, and the Letters of Credit, solely for working capital purposes, for repayment of the Senior Notes, for Capital Expenditures and for other general business purposes; and not use or permit any proceeds of any Loan to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of “purchasing or carrying” any Margin Stock.

11.12 Omaha Senior Notes. Cause the Omaha Senior Notes to be paid in full and the Senior Note Agreement and all other agreements and instruments governing the Senior Notes to be terminated on or before June 1, 2004 and deliver to the Administrative Agent on or before the applicable termination date evidence reasonably satisfactory to the Administrative Agent regarding repayment in full of the Omaha Senior Notes.

11.13 EMD Opinion. Deliver to the Administrative Agent on or before the Guaranty Effective Date an opinion of counsel to EMD, which opinion shall be in form and substance satisfactory to the Administrative Agent.

SECTION 12 NEGATIVE COVENANTS

Until the expiration or termination of the Commitments and thereafter until all Obligations hereunder and under the other Loan Documents are paid in full and all Letters of Credit have been terminated, the Company agrees that, unless at any time the Required Lenders shall otherwise expressly consent in writing, it will:

12.1 Liens. Not, and not permit any other Loan Party to, create or permit to exist any Lien on any of its real or personal properties, assets or rights of whatsoever nature (whether now owned or hereafter acquired), except:

(a) Liens described on Schedule 12.1 as of the Closing Date;

(b) Liens arising under the Loan Documents;

(c) Liens for taxes or other governmental charges not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and, in each case, for which it maintains adequate reserves;

(d) carriers’, warehousemen’s, mechanics’, landlords’, materialmen’s, repairmen’s or other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith or by the appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto;

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(e) Liens (other than any Lien imposed by ERISA) consisting of pledges or deposits required in the ordinary course of business in connection with workers’ compensation, unemployment insurance or other social security legislation;

(f) Liens on property of any Loan Party securing (i) the non-delinquent performance of bids, trade contracts (other than for borrowed money), leases or statutory obligations, (ii) contingent obligations on surety or appeal bonds, (iii) other non-delinquent obligations of a like nature; in each case, incurred in the ordinary course of business; provided all such Liens in the aggregate would not (even if enforced) cause a Material Adverse Effect;

(g) to the extent not covered by insurance, Liens consisting of judgment or judicial attachment Liens, for sums not exceeding $1,000,000 in the aggregate at any time outstanding; provided, that such Liens have been in existence less than thirty (30) days and the enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings;

(h) Liens on assets which are the subject to an Acquisition permitted under Section 12.7 or Liens on assets of Persons which become Subsidiaries after the Closing Date; provided, that (i) such Liens existed at the time of such Acquisition or at the time the respective Persons became Subsidiaries, were not created in anticipation thereof and attach only to property or assets so acquired or of such Subsidiary, as the case may be, and (ii) if such Acquisition had occurred or such Person had become a Subsidiary, as the case may be, on the last day of the most recent Fiscal Quarter or Fiscal Year for which the Administrative Agent has received financial statements pursuant to Sections 11.1.1 or 11.1.2 above, as the case may be, no Event of Default or Unmatured Event of Default would have occurred or resulted therefrom;

(i) Liens that constitute purchase money security interests on any property acquired or held by any Loan Party in the ordinary course of business, securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such property; provided, that (i) any such Lien attaches to such property concurrently with or within ninety (90) days after the acquisition thereof, (ii) such Lien attaches solely to the property so acquired in such transaction, (iii) the principal amount of the Indebtedness secured thereby does not exceed 100% of the cost of such property, and (iv) the principal amount of the Indebtedness secured by any and all such purchase money security interests shall not at any time exceed $5,000,000;

(j) Liens arising in connection with Capital Leases (and attaching only to the property being leased); provided, that such Capital Leases permitted under Section 12.5(f);

(k) Liens arising solely by virtue of any statutory or common law provision relating to banker’s liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by any Loan Party in excess of those set forth by regulations promulgated by the Board of Governors of the Federal Reserve System or of any successor governmental authority thereof, and (ii) such deposit account is not intended by any Loan Party to provide collateral to the depository institution;

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(l) Liens consisting of pledges of cash collateral or government securities to secure on a mark-to-market basis Permitted Swap Obligations only; provided that (i) the counterparty to any Swap Contract relating to such Permitted Swap Obligation is under a similar requirement to deliver similar collateral from time to time to the Loan Party thereto on a mark-to-market basis and (ii) the aggregate value of all collateral pledged by the Loan Parties pursuant to this Section 12.1(l) does not at any time exceed $1,000,000;

(m) Liens consisting of leases or subleases granted to third Persons not interfering in any material respect with the business of the Loan Parties or any interest or title of a lessor or sublessor under any lease permitted by this Agreement;

(n) with respect to real property, (i) those liens, encumbrances and other matters affecting title to any property listed in any applicable title insurance policies in respect thereof but not securing any obligation for borrowed money, (ii) easements, encroachments, covenants, rights of way, restrictions, minor defects, irregularities and encumbrances on title and other similar charges and encumbrances that do not, individually or in the aggregate, interfere in any material respect with the ordinary conduct of the business of the Loan Parties, and (iii) municipal and zoning ordinances that are not violated by the existing improvements and the present and proposed uses by the Loan Parties;

(o) “netting rights” and setoff rights of counterparties under Swap Contracts or similar hedging agreements;

(p) Liens of banks arising under Article 4 of the Code on items of collection and accompanying documents and proceeds;

(q) Liens on assets owned by foreign Subsidiaries; and

(r) other Liens securing Indebtedness not exceeding $1,000,000 in the aggregate at any time outstanding, so long as such Liens do not attach to any Accounts or Inventory.

12.2 Guaranties. Except in the ordinary course of business and subject to the provisions of Section 12.4 hereof, guaranty or otherwise become or allow any other Loan Party to guaranty or become in any way liable with respect to the obligations of any third party except by endorsement of instruments or items of payments for deposit to the general account of the Company or any other Loan Party or which are transmitted or turned over to the Administrative Agent; provided, that the Company and any Guarantor may guarantee such obligations on behalf of the Company (in the case of a Guarantor) or any other Guarantor.

12.3 Change in Business. Not, and not permit any Guarantor to, enter into any business not related to the Loan Parties’ present businesses or make any change in such Person’s financial structure or in any of its business objectives, purposes or operations, in each case which could reasonably be expected to materially and adversely affect (a) the ability of such Person to repay the Obligations, (b) the value of the Collateral or (c) the rights and remedies of the Administrative Agent and the Lenders hereunder.

12.4 Investments. Not, and not permit any other Loan Party to, make or permit to exist any Investment in any other Person, except the following:

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(a) any Acquisition or Investment in a joint venture or partnership by the Company or any domestic Wholly-Owned Subsidiary where:

(i) the business or division acquired or invested in is for use, or the Person acquired or invested in is engaged, in the businesses engaged in by the Loan Parties on the Closing Date;

(ii) immediately before and after giving effect to such Acquisition or Investment, no Event of Default or Unmatured Event of Default shall exist;

(iii) the aggregate consideration to be paid by the Loan Parties (including any Indebtedness assumed or issued in connection therewith, the amount thereof to be calculated in accordance with GAAP) in connection with all Acquisitions and Investments in joint ventures and partnerships is no greater than $5,000,000;

(iv) immediately after giving effect to such Acquisition or Investment, (1) the Company is in pro forma compliance with all of the financial ratios and restrictions set forth in Section 12.14 and (2) the Leverage Ratio, determined on a pro rata basis as of the last day of the Fiscal Quarter immediately preceding such Acquisition or Investment as if such Acquisition or Investment had occurred on the first day of such Fiscal Quarter, is less than or equal to 2.50:1.00

(v) in the case of the Acquisition of any Person, the Board of Directors of such Person has approved such Acquisition;

(vi) reasonably prior to such Acquisition or Investment, the Administrative Agent shall have received complete executed or conformed copies of each material document, instrument and agreement to be executed in connection with such Acquisition or Investment together (in the case of an Acquisition) with all lien search reports and lien release letters and other documents as the Administrative Agent may require to evidence the termination of Liens on the assets or business to be acquired;

(vii) in the case of any such Acquisition: (x) not less than ten Business Days prior to any such Acquisition, the Administrative Agent shall have received an acquisition summary with respect to the Person and/or business or division to be acquired, such summary to include a reasonably detailed description thereof (including financial information) and operating results (including financial statements for the most recent 12 month period for which they are available and as otherwise available), the terms and conditions, including economic terms, of the proposed Acquisition, and the Company’s calculation of pro forma EBITDA relating thereto; (y) the Administrative Agent and Required Lenders shall have approved the Company’s computation of pro forma EBITDA in connection with any such Acquisition; and (z) consents have been obtained in favor of the Administrative Agent and the Lenders to the collateral assignment of rights and indemnities under the related acquisition documents and opinions of counsel for the Loan Parties and (if delivered to the Loan Party) the selling party in favor of the Administrative Agent and the Lenders have been delivered; and

(viii) the provisions of Section 11.10 have been satisfied.

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(b) contributions by the Company to the capital of any of its Subsidiaries, or by any such Subsidiary to the capital of any of its Subsidiaries;

(c) Investments constituting Indebtedness permitted by Section 12.5.

(d) extensions of credit to Account Debtors with respect to Accounts arising from the sale or lease of goods or services in the ordinary course of business;

(e) Cash Equivalent Investments;

(f) bank deposits in the ordinary course of business, provided that the aggregate amount of all such deposits (excluding amounts in payroll accounts or for accounts payable, in each case to the extent that checks have been issued to third parties) which are maintained with any bank other than a Lender shall not at any time exceed $100,000;

(g) short term loans to officers and employees of the Loan Parties not to exceed $750,000 in the aggregate at any time outstanding, and travel and other advances to employees in the ordinary course of business;

(h) Investments in securities of Account Debtors received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such Account Debtors;

(i) Investments listed on Schedule 12.4 as of the Closing Date;

(j) Capital Expenditures; and

(k) Investments constituting Permitted Swap Obligations or payments or advances under Swap Contracts related to Permitted Swap Obligations;

provided that (x) any Investment which when made complies with the requirements of the definition of the term “Cash Equivalent Investment” may continue to be held notwithstanding that such Investment if made thereafter would not comply with such requirements; (y) no Investment otherwise permitted by clause (b) shall be permitted to be made if, immediately before or after giving effect thereto, any Event of Default or Unmatured Event of Default exists; provided, further, that at such time as any Obligations (other than undrawn Letters of Credit) are outstanding hereunder, the aggregate amount of all advances or loans to any Subsidiary of the Company which is not a Guarantor shall not exceed $5,000,000.

12.5 Indebtedness. Not, and not permit any other Loan Party to, create, incur, assume or suffer to exist any Indebtedness, except:

(a) Obligations under this Agreement and the other Loan Documents;

(b) Indebtedness described on Schedule 12.5;

(c) Indebtedness arising or accruing in the ordinary course of business which does not give rise to a Lien other than a Permitted Lien;

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(d) Permitted Swap Obligations;

(e) the Senior Notes (so long as (i) all Senior Notes other than the Omaha Senior Notes are repaid on the Closing Date with the proceeds of the initial Loans hereunder and (ii) the Omaha Senior Notes are repaid on or before June 1, 2004);

(f) Indebtedness incurred in connection with Capital Leases; provided that the aggregate principal amount of all such Indebtedness at any time outstanding shall not exceed $5,000,000;

(g) Indebtedness secured by Liens permitted by Section 12.1(h); provided, that the aggregate amount of all such Indebtedness at any time outstanding shall not exceed $5,000,000;

(h) guaranties permitted under Section 12.2;

(i) renewals, extensions, refinancings and refundings of Indebtedness permitted by clauses (a), (b), (f), (g) and (h) of this Section 12.5; provided, that any such renewal, extension, refinancing or refunding is in an aggregate principal amount not greater than the principal amount of, and is on terms no less favorable to such Loan Party, including as to weighted average maturity, than the Indebtedness being renewed, extended, refinanced or refunded;

(j) Indebtedness of any Guarantor to the Company or Indebtedness of the Company or any Subsidiary to any Guarantor; provided, that the obligations under such demand note shall be subordinated to the Obligations of the Company hereunder in a manner reasonably satisfactory to the Administrative Agent; and

(k) Indebtedness of MSC Pre Finish Metals (MT) Inc. to the Company aggregating not more than $23,000,000 at any one time outstanding.

(l) Indebtedness not otherwise permitted hereunder aggregating not more than $1,000,000 at any one time outstanding.

12.6 Transactions with Affiliates. Except for transactions between the Company and any Guarantor or between any Guarantor and any other Guarantor, not enter or allow any other Loan Party to enter into any transaction, directly or indirectly, with an Affiliate, or provide services or sell goods to, or for the benefit of, or pay or otherwise distribute monies, goods or other valuable consideration to, an Affiliate, except upon fair and reasonable terms no less favorable than terms in a reasonable arm’s length transaction with an unaffiliated Person and except for intercompany Indebtedness permitted by Section 12.5.

12.7 Mergers, Consolidations, Sales. Not, and not permit any other Loan Party to, (x) be a party to any merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or any Capital Securities of any class of any other Person, (y) sell, transfer, convey or lease its assets or Capital Securities (including the sale of Capital Securities of any Subsidiary) except for Permitted Dispositions, or (z) sell or assign with or without recourse any receivables, except for:

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(a) any merger, consolidation, sale, transfer, conveyance, lease or assignment of or by any Subsidiary into the Company or into any Guarantor;

(b) any purchase or other acquisition by the Company or any Guarantor of the assets or Capital Securities of any Subsidiary;

(c) any Acquisition or Investment in a joint venture or partnership permitted by Section 12.4;

(d) the Disposition of (i) the coil coating line owned by MSC Pre Finish Metals (EGV) Inc. and commonly known as “Production Line 3,” (ii) the facility owned by MSC Pre Finish Metals (EGV) Inc. which is located at 2111 Pratt, Elk Grove Village, Illinois and commonly known as “Plant #1,” (iii) solid state shear pulverization technology and equipment owned or licensed by the Company, (iv) all or substantially all of the assets of EMD or the Capital Securities of EMD; and

(e) Dispositions not otherwise permitted hereunder aggregating not more than $5,000,000 in the aggregate.

12.8 Liquidations. Not undertake or allow any material Loan Party to undertake a plan of liquidation or dissolution.

12.9 Suspension of Business. Not suspend or terminate or allow any Guarantor to suspend or terminate the transaction of its business.

12.10 Restricted Payments. Not, and not permit any other Loan Party to, (a) make any distribution to holders of its Capital Securities, (b) purchase or redeem any of its Capital Securities, or (c) set aside funds for the foregoing. Notwithstanding the foregoing, (i) any Subsidiary may pay dividends or make other distributions to the Company or to a Guarantor, (ii) the Company may purchase or redeem Capital Stock from its employees in connection with customary employee stock repurchase programs, (iii) the Company may purchase or redeem any shares of its Capital Securities (x) for an aggregate consideration not to exceed $10,000,000 in cash if the Pro Forma Leverage Ratio is less than or equal to 2:00:1.00, (y) for an aggregate consideration not to exceed $20,000,000 in cash if the Pro Forma Leverage Ratio is less than or equal to 1.00:1.00 and (z) for an aggregate consideration in excess of $20,000,000 in cash if, after giving effect to such purchase or redemption, there are no Revolving Outstandings; provided, that after giving effect to each such purchase or redemption no Event of Default or Unmatured Event of Default has occurred and is continuing and (iv) the Company may make cash distributions to holders of its Capital Securities in an aggregate amount not to exceed $5,000,000; provided, that (A) after giving effect to each distribution no Event of Default or Unmatured Event of Default has occurred and is continuing, and (B) the Pro Forma Leverage Ratio is less than or equal to 2.00:1.00. As used in this Section 12.10, “Pro Forma Leverage Ratio” shall mean the Leverage Ratio, determined on a pro rata basis as of the last day of the Fiscal Quarter immediately preceding the applicable purchase, redemption or distribution as if such purchase, redemption or distribution had occurred on the first day of such Fiscal Quarter.

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12.11 ERISA. Not adopt or agree, or allow any Loan Party to adopt or agree, to contribute to any Pension Plan that is intended to be tax-qualified under Section 401(a) of the Code, except for those Plans currently in effect on the date hereof and listed on Schedule 12.11.

12.12 Inconsistent Agreements. Not, and not permit any other Loan Party to, enter into any agreement containing any provision which would (a) be violated or breached by any borrowing by the Company hereunder or by the performance by any Loan Party of any of its Obligations hereunder or under any other Loan Document, (b) prohibit any Loan Party from granting to the Administrative Agent and the Lenders, a Lien on any of its assets or (c) create or permit to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to (i) pay dividends or make other distributions to the Company or any other Subsidiary, or pay any Indebtedness owed to the Company or any other Subsidiary, (ii) make loans or advances to any Loan Party or (iii) transfer any of its assets or properties to any Loan Party, other than (A) customary restrictions and conditions contained in agreements relating to the sale of all or a substantial part of the assets of any Subsidiary pending such sale, provided that such restrictions and conditions apply only to the Subsidiary to be sold and such sale is permitted hereunder) (B) restrictions or conditions imposed by any agreement relating to purchase money Indebtedness, Capital Leases and other secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (C) customary provisions in leases and other contracts restricting the assignment thereof.

12.13 Fiscal Year. Not change its Fiscal Year.

12.14 Financial Covenants.

12.14.1 Fixed Charge Coverage Ratio. Not permit the Fixed Charge Coverage Ratio for any Computation Period to be less than 1.25:1.00.

12.14.2 Leverage Ratio. Not permit the Leverage Ratio for any Computation Period to be more than 3.00:1.00.

12.14.3 Net Worth. Not permit Consolidated Net Worth (measured as of each Computation Period) to be less than (a) $80,000,000 plus (b) fifty percent (50%) of the Company’s positive Consolidated Net Income for each Fiscal Quarter ending on and after May 31, 2004.

12.15 Operating Leases. Not permit the aggregate amount of all rental payments under Operating Leases made (or schedule to be made) by the Loan Parties (on a consolidated basis) to exceed $4,000,000 in any Fiscal Year.

SECTION 13 EFFECTIVENESS; CONDITIONS OF LENDING, ETC.

The obligation of each Lender to make its Loans and of the Issuing Lender to issue Letters of Credit is subject to the following conditions precedent:

13.1 Initial Credit Extension. The obligation of the Lenders to make the initial Loans and the obligation of the Issuing Lender to issue its initial Letter of Credit (whichever first

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occurs) is, in addition to the conditions precedent specified in Section 13.2, subject to the conditions precedent that (a) the Senior Notes (other than the Omaha Senior Notes) have been (or concurrently with the initial borrowing will be) paid in full and (b) the Administrative Agent shall have received all of the following, each duly executed and dated the Closing Date (or such earlier date as shall be satisfactory to the Administrative Agent), in form and substance satisfactory to the Administrative Agent (and the date on which all such conditions precedent have been satisfied or waived in writing by the Administrative Agent and the Lenders is called the “Closing Date”):

13.1.1 Notes. A Note for each Lender.

13.1.2 Authorization Documents. For each Loan Party, such Person’s (a) charter (or similar formation document), certified by the appropriate governmental authority; (b) good standing certificates in its state of incorporation (or formation) and in each other state requested by the Administrative Agent; (c) bylaws (or similar governing document); (d) resolutions of its board of directors (or similar governing body) approving and authorizing such Person’s execution, delivery and performance of the Loan Documents to which it is party and the transactions contemplated thereby; and (e) signature and incumbency certificates of its officers executing any of the Loan Documents (it being understood that the Administrative Agent and each Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein), all certified by its secretary or an assistant secretary (or similar officer) as being in full force and effect without modification.

13.1.3 Consents, etc. Certified copies of all documents evidencing any necessary corporate or partnership action, consents and governmental approvals (if any) required for the execution, delivery and performance by the Loan Parties of the documents referred to in this Section 13.

13.1.4 Guaranty and Collateral Agreement. A counterpart of the Guaranty and Collateral Agreement executed by each Loan Party, together with all instruments, transfer powers and other items required to be delivered in connection therewith.

13.1.5 EMD Guaranty. A counterpart of the EMD Guaranty executed by EMD.

13.1.6 Opinions of Counsel. Opinions of counsel for each Loan Party other than EMD.

13.1.7 Insurance. Evidence of the existence of insurance required to be maintained pursuant to Section 11.4(b), together with evidence that the Administrative Agent has been named as a lender’s loss payee and an additional insured on all related insurance policies.

13.1.8 Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with all Attorney Costs of the Administrative Agent to the extent invoiced prior to the Closing Date, plus such additional amounts of Attorney Costs as shall constitute the Administrative Agent’s reasonable estimate of Attorney Costs incurred or to be incurred by the Administrative Agent through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and the Administrative Agent).

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13.1.9 Solvency Certificate. A Solvency Certificate executed by a Senior Officer of the Company.

13.1.10 Search Results. Certified copies of Uniform Commercial Code search reports dated a date reasonably near to the Closing Date, listing all effective financing statements which name any Loan Party (under their present names and any previous names) as debtors.

13.1.11 Payoff Letter. A copy of the payoff letter regarding repayment in of the Senior Notes other than the Omaha Senior Notes.

13.1.12 Filings, Registrations and Recordings. The Administrative Agent shall have received each document (including UCC financing statements) required by the Collateral Documents or under law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Administrative Agent, for the benefit of the Lenders, a perfected Lien on the collateral described therein, prior to any other Liens (subject only to Liens permitted pursuant to Section 12.1), in proper form for filing, registration or recording.

13.1.13 Borrowing Base Certificate. A Borrowing Base Certificate dated as of the Closing Date.

13.1.14 Closing Certificate. A certificate executed by an officer of the Company on behalf of the Company certifying the matters set forth in Section 13.2.1 as of the Closing Date.

13.1.15 Other. Such other documents as the Administrative Agent or any Lender may reasonably request.

13.2 Conditions. The obligation (a) of each Lender to make each Loan and (b) of the Issuing Lender to issue each Letter of Credit is subject to the following further conditions precedent that:

13.2.1 Compliance with Warranties, No Default, etc. Both before and after giving effect to any borrowing and the issuance of any Letter of Credit, the following statements shall be true and correct:

(a) the representations and warranties of each Loan Party set forth in this Agreement and the other Loan Documents shall be true and correct in all respects with the same effect as if then made (except to the extent stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); and

(b) no Event of Default or Unmatured Event of Default shall have then occurred and be continuing.

13.2.2 Confirmatory Certificate. If requested by the Administrative Agent or any Lender, the Administrative Agent shall have received (in sufficient counterparts to provide one to each Lender) a certificate dated the date of such requested Loan or Letter of Credit and signed by a duly authorized representative of the Company as to the matters set out in Section 13.2.1 (it

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being understood that each request by the Company for the making of a Loan or the issuance of a Letter of Credit shall be deemed to constitute a representation and warranty by the Company that the conditions precedent set forth in Section 13.2.1 will be satisfied at the time of the making of such Loan or the issuance of such Letter of Credit), together with such other documents as the Administrative Agent or any Lender may reasonably request in support thereof.

SECTION 14 EVENTS OF DEFAULT AND THEIR EFFECT.

14.1 Events of Default. Each of the following shall constitute an Event of Default under this Agreement:

14.1.1 Non-Payment of the Loans, etc. Failure by the Company or any Guarantor to pay when due and payable, all or any portion of the Obligations owing to the Administrative Agent or the Lenders (whether of principal, interest, taxes, reimbursement of out-of-pocket fees and costs) which is not cured within five (5) days of when due and payable.

14.1.2 Non-Compliance with Loan Documents.

(a) Failure by the Company to comply with or perform any covenant set forth in Sections 11.1, 11.2, 11.3, 11.4, 11.6, 11.12, 12.1, 12.3, 12.4, 12.5, 12.7, 12.10 or 12.14; provided, however, that such failure with respect to any of the covenants set forth in Section 12.14 shall not constitute an Event of Default in the event that the Company, at the Company’s option and within fifteen (15) days of the initial occurrence of the failure, fully Cash Collateralizes the full amount of the Obligations then in existence and the Company continually Cash Collateralizes such full amount as said amount increases at any time(s) thereafter; provided, however, that failure by the Company to so Cash Collateralize within such fifteen (15) day period shall constitute an immediate Event of Default.

(b) Failure by the Company or any party to the Loan Documents to comply with or to perform any other provision of this Agreement or any other Loan Document (and not constituting an Event of Default under any other provision of this Section 14) and continuance of such failure described in this clause (b) for thirty (30) days.

14.1.3 Breach of Representation. Any representation or warranty now or hereafter made by any Loan Party or affiliates hereunder or any other Loan Document is untrue or incorrect in any material respect on the date as of which the facts therein set forth are stated or certified or fails to state a material fact necessary to make such warranty or representation not misleading in light of the circumstances in which it was made, or any schedule, certificate, statement, report, financial data, notice or writing furnished to the Administrative Agent at any time by the Company or by a party or signatory to the Loan Documents is untrue or incorrect in any material respect on the date as of which the facts therein set forth are stated or certified or fails to state a material fact needed to make the foregoing not misleading in light of the circumstances in which the foregoing was furnished.

14.1.4 Other Material Obligations. Subject to applicable grace periods or notice requirements under the following, default in the payment when due, or in the performance or observance of any obligation of, or condition agreed to by, any Loan Party with respect to any of the following: (a) any Indebtedness in excess of $5,000,000; (b) any material purchase or lease

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of goods or services where such default, singly or in the aggregate with all other such default, could reasonably be expected to have a Material Adverse Effect; or (c) any other material agreement, document or instrument, whether for borrowed money or otherwise, the effect of which default shall be to cause any obligations thereunder to become due prior to its stated maturity or to otherwise be accelerated.

14.1.5 Pension Plans. (a) Institution of any steps by the Company or any other Person to terminate a Pension Plan if as a result of such termination the Company or any other Loan Party could reasonably be expected to be required to make a contribution to such Pension Plan, or could reasonably be expected to incur a liability or obligation to such Pension Plan, in excess of $1,000,000; (b) a contribution failure in excess of $1,000,000 occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; or (c) there shall occur any withdrawal or partial withdrawal from a Multiemployer Plan resulting in a liability, loss or cost in excess of $1,000,000.

14.1.6 Judgments. Any judgment or order requiring payment of monies in excess of $1,000,000 which is not covered by insurance shall be rendered against the Company or any Loan Party, and such judgment or order shall remain unsatisfied or undischarged and in effect for thirty (30) consecutive days without a stay of enforcement or execution thereof or posting of a bond pending appeal.

14.1.7 Bankruptcy, Insolvency, etc. Any Loan Party becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due; or any Loan Party applies for, consents to, or acquiesces in the appointment of a trustee, receiver or other custodian for such Loan Party or any property thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for any Loan Party or for a substantial part of the property of any thereof and is not discharged within 60 days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is commenced in respect of any Loan Party, and if such case or proceeding is not commenced by such Loan Party, it is consented to or acquiesced in by such Loan Party, or remains for 60 days undismissed; or any Loan Party takes any action to authorize, or in furtherance of, any of the foregoing.

14.1.8 State Action. The institution or commencement of any proceeding by any state or office thereof, including the States of Illinois and Delaware, the Secretary of State of Illinois and the State of Delaware, or the Secretary of State of or any commission or other instrumentality of the State of Illinois or Delaware, seeking a forfeiture of the Company’s or any Guarantor’s articles or certificate of incorporation, and the failure of such Person to vacate any order entered in such proceeding within thirty (30) days.

14.1.9 Tax Liens. The filing or recording of a notice of lien or assessment other than a Permitted Lien with respect to all or a substantial part of the Collateral owned by the Loan Parties by the United States or any department, agency or instrumentality thereof, or by any state, county, municipality or other governmental agency; or any taxes or debts owing at any time or times hereafter to any one or more of the foregoing become a lien other than a Permitted Lien, upon all or a substantial part of the Collateral owned by such Person unless such notice or lien is removed within thirty (30) days after the filing or recording of such notice or becoming such lien.

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14.1.10 Insurance. Any insurer of any policy of insurance respecting a material portion of the assets of the Company or any Guarantor issues any notice of cancellation of such a policy, or any such policy is allowed to lapse, and in either case, is not replaced by a substitute policy having an effective date prior to or contemporaneous with such cancellation or lapse.

14.1.11 Change of Control. A Change of Control shall occur.

14.1.12 Guarantor Documents. Any Guarantor fails to perform or observe any term, covenant or agreement in the Guaranty and Collateral Agreement; or the Guaranty and Collateral Agreement is for any reason partially (including with respect to future advances) or wholly revoked or invalidated, or otherwise ceases to be in full force and effect, or any Guarantor contests in any manner the validity or enforceability thereof or denies that it has any further liability or obligation thereunder.

14.1.13 Invalidity of Collateral Documents, etc. Any Collateral Document shall cease to be in full force and effect; or any Loan Party (or any Person by, through or on behalf of any Loan Party) shall contest in any manner the validity, binding nature or enforceability of any Collateral Document.

14.2 Effect of Event of Default. If any Event of Default described in Section 14.1.7 shall occur in respect of the Company, the Commitments shall immediately terminate and the Loans and all other Obligations hereunder shall become immediately due and payable and the Company shall become immediately obligated to Cash Collateralize all Letters of Credit, all without presentment, demand, protest or notice of any kind; and, if any other Event of Default shall occur and be continuing, the Administrative Agent may (and, upon the written request of the Required Lenders shall) declare the Commitments to be terminated in whole or in part and/or declare all or any part of the Loans and all other Obligations hereunder to be due and payable and/or demand that the Company immediately Cash Collateralize all or any Letters of Credit, whereupon the Commitments shall immediately terminate (or be reduced, as applicable) and/or the Loans and other Obligations hereunder shall become immediately due and payable (in whole or in part, as applicable) and/or the Company shall immediately become obligated to Cash Collateralize the Letters of Credit (all or any, as applicable), all without presentment, demand, protest or notice of any kind. The Administrative Agent shall promptly advise the Company of any such declaration, but failure to do so shall not impair the effect of such declaration. Any cash collateral delivered hereunder shall be held by the Administrative Agent (without liability for interest thereon) and applied to the Obligations arising in connection with any drawing under a Letter of Credit. After the expiration or termination of all Letters of Credit, such cash collateral shall be applied by the Administrative Agent to any remaining Obligations hereunder and any excess shall be delivered to the Company or as a court of competent jurisdiction may elect.

14.3 Code and Other Remedies. If an Event of Default shall occur and be continuing, the Administrative Agent, on behalf of the Lenders, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement

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securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the UCC or any other applicable law. Without limiting the generality of the foregoing, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Company or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of the Administrative Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery with assumption of any credit risk. The Administrative Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Company, which right or equity is hereby waived and released. The Company further agrees, at the Administrative Agent’s request, to assemble the Collateral and make it available to the Administrative Agent at places which the Administrative Agent shall reasonably select, whether at the Company’s premises or elsewhere. The Administrative Agent shall apply the net proceeds of any action taken by it pursuant to this Section 14.3, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Lenders hereunder, including Attorney Costs to the payment in whole or in part of the Secured Obligations, in such order as the Administrative Agent may elect, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of law, need the Administrative Agent account for the surplus, if any, to the Company. To the extent permitted by applicable law, the Company waives all claims, damages and demands it may acquire against the Administrative Agent or any Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition.

14.4 [Reserved.]

14.5 Application of Proceeds. If an Event of Default shall have occurred and be continuing, at any time at the Administrative Agent’s election, the Administrative Agent may apply all or any part of Proceeds from the sale of, or other realization upon, all or any part of the Collateral in payment of the Obligations in such order as the Administrative Agent shall determine in its discretion. Any part of such funds which the Administrative Agent elects not so to apply and deems not required as collateral security for the Obligations shall be paid over from time to time by the Administrative Agent to the Company or to whomsoever may be lawfully entitled to receive the same. Any balance of such Proceeds remaining after the Obligations shall have been Paid in Full shall be paid over to the Company or to whomsoever may be lawfully entitled to receive the same.

14.6 Waiver; Deficiency. The Company waives and agrees not to assert any rights or privileges which it may acquire under Section 9-626 of the UCC. The Company shall remain

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liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations in full and the fees and disbursements of any attorneys employed by the Administrative Agent or any Lender to collect such deficiency.

SECTION 15 THE AGENT.

15.1 Appointment and Authorization. Each Lender hereby irrevocably (subject to Section 15.10) appoints, designates and authorizes the Administrative Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Administrative Agent shall not have any duty or responsibility except those expressly set forth herein, nor shall the Administrative Agent have or be deemed to have any fiduciary relationship with any Lender or participant, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. Without limiting the generality of the foregoing sentence, the use of the term “agent” herein and in other Loan Documents with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties.

15.2 Issuing Lender. The Issuing Lender shall act on behalf of the Lenders (according to their Pro Rata Shares) with respect to any Letters of Credit issued by it and the documents associated therewith. The Issuing Lender shall have all of the benefits and immunities (a) provided to the Administrative Agent in this Section 15 with respect to any acts taken or omissions suffered by the Issuing Lender in connection with Letters of Credit issued by it or proposed to be issued by it and the applications and agreements for letters of credit pertaining to such Letters of Credit as fully as if the term “Administrative Agent”, as used in this Section 15, included the Issuing Lender with respect to such acts or omissions and (b) as additionally provided in this Agreement with respect to the Issuing Lender.

15.3 Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel and other consultants or experts concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct.

15.4 Exculpation of Administrative Agent. None of the Administrative Agent nor any of its directors, officers, employees or agents shall (a) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except to the extent resulting from its own gross negligence or willful misconduct in connection with its duties expressly set forth herein as determined by a final, nonappealable judgment by a court of competent jurisdiction), or (b) be responsible in any manner to any Lender or participant for any recital, statement, representation

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or warranty made by any Loan Party or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document (or the creation, perfection or priority of any Lien or security interest therein), or for any failure of the Company or any other party to any Loan Document to perform its Obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company’s Subsidiaries or Affiliates.

15.5 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, communication, signature, resolution, representation, notice, consent, certificate, electronic mail message, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, confirmation from the Lenders of their obligation to indemnify the Administrative Agent against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon each Lender. For purposes of determining compliance with the conditions specified in Section 13, each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received written notice from such Lender prior to the proposed Closing Date specifying its objection thereto.

15.6 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default or Unmatured Event of Default except with respect to defaults in the payment of principal, interest and fees required to be paid to the Administrative Agent for the account of the Lenders, unless the Administrative Agent shall have received written notice from a Lender or the Company referring to this Agreement, describing such Event of Default or Unmatured Event of Default and stating that such notice is a “notice of default”. The Administrative Agent will notify the Lenders of its receipt of any such notice. The Administrative Agent shall take such action with respect to such Event of Default or Unmatured Event of Default as may be requested by the Required Lenders in accordance with Section 14; provided that unless and until the Administrative Agent has received any such request, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default or Unmatured Event of Default as it shall deem advisable or in the best interest of the Lenders.

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15.7 Credit Decision. Each Lender acknowledges that the Administrative Agent has not made any representation or warranty to it, and that no act by the Administrative Agent hereafter taken, including any consent and acceptance of any assignment or review of the affairs of the Loan Parties, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender as to any matter, including whether the Administrative Agent has disclosed material information in its possession. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Loan Parties, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by the Administrative Agent, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial or other condition or creditworthiness of the Company which may come into the possession of the Administrative Agent.

15.8 Indemnification. Whether or not the transactions contemplated hereby are consummated, each Lender shall indemnify upon demand the Administrative Agent and its directors, officers, employees and agents (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), according to its applicable Pro Rata Share, from and against any and all Indemnified Liabilities (as hereinafter defined); provided that no Lender shall be liable for any payment to any such Person of any portion of the Indemnified Liabilities to the extent determined by a final, nonappealable judgment by a court of competent jurisdiction to have resulted from the applicable Person’s own gross negligence or willful misconduct. No action taken in accordance with the directions of the Required Lenders shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section. Without limitation of the foregoing, each Lender shall reimburse the Administrative Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs and Taxes) incurred by the Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Administrative Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive repayment of the Loans, cancellation of the Notes, expiration or termination of the Letters of Credit, any foreclosure under, or modification, release or discharge of, any or all of the Collateral Documents, termination of this Agreement and the resignation or replacement of the Administrative Agent.

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15.9 Administrative Agent in Individual Capacity. LaSalle and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Loan Parties and Affiliates as though LaSalle were not the Administrative Agent hereunder and without notice to or consent of any Lender. Each Lender acknowledges that, pursuant to such activities, LaSalle or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Affiliate) and acknowledge that the Administrative Agent shall be under no obligation to provide such information to them. With respect to their Loans (if any), LaSalle and its Affiliates shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though LaSalle were not the Administrative Agent, and the terms “Lender” and “Lenders” include LaSalle and its Affiliates, to the extent applicable, in their individual capacities.

15.10 Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon 30 days’ notice to the Lenders. If the Administrative Agent resigns under this Agreement, the Required Lenders shall, with (so long as no Event of Default exists) the consent of the Company (which shall not be unreasonably withheld or delayed), appoint from among the Lenders a successor agent for the Lenders. If no successor agent is appointed prior to the effective date of the resignation of the Administrative Agent, the Administrative Agent may appoint, after consulting with the Lenders and the Company, a successor agent from among the Lenders. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Administrative Agent and the term “Administrative Agent” shall mean such successor agent, and the retiring Administrative Agent’s appointment, powers and duties as Administrative Agent shall be terminated. After any retiring Administrative Agent’s resignation hereunder as Administrative Agent, the provisions of this Section 15 and Sections 16.5 and 16.16 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. If no successor agent has accepted appointment as Administrative Agent by the date which is 30 days following a retiring Administrative Agent’s notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above.

15.11 Collateral Matters. The Lenders irrevocably authorize the Administrative Agent, at its option and in its discretion, (a) to release any Lien granted to or held by the Administrative Agent hereunder or under any Collateral Document (i) upon termination of the Commitments and payment in full of all Loans and all other obligations of the Company hereunder and the expiration or termination of all Letters of Credit; (ii) constituting property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder; or (iii) subject to Section 16.1, if approved, authorized or ratified in writing by the Required Lenders; or (b) to subordinate its interest in any collateral to any holder of a Lien on such collateral which is permitted by Section 12.1(h) or (i) (it being understood that the Administrative Agent may conclusively rely on a certificate from the Company in determining whether the Indebtedness secured by any such Lien is permitted by Section 12.1(h) or (i)). Upon request by the Administrative Agent at any time, the Lenders will confirm in writing the Administrative Agent’s authority to release, or subordinate its interest in, particular types or items of collateral

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pursuant to this Section 15.11. The provisions of Sections 7.1 and 7.2 of the Guaranty and Collateral Agreement are incorporated herein by reference (with the Company as “Grantor”) as if fully set forth herein.

15.12 Administrative Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to any Loan Party, the Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Company) shall be entitled and empowered, by intervention in such proceeding or otherwise:

(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Sections 5, 16.5 and 16.16) allowed in such judicial proceedings; and

(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 5, 16.5 and 16.16.

Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.

15.13 Other Agents; Arrangers and Managers. None of the Lenders or other Persons identified on the facing page or signature pages of this Agreement as a “syndication agent,” “documentation agent,” “co-agent,” “book manager,” “lead manager,” “arranger,” “lead arranger” or “co-arranger”, if any, shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than, in the case of such Lenders, those applicable to all Lenders as such. Without limiting the foregoing, none of the Lenders or other Persons so identified shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders or other Persons so identified in deciding to enter into this Agreement or in taking or not taking action hereunder.

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SECTION 16 GENERAL.

16.1 Waiver; Amendments. No delay on the part of the Administrative Agent or any Lender in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or the other Loan Documents shall in any event be effective unless the same shall be in writing and acknowledged by Lenders having an aggregate Pro Rata Shares of not less than the aggregate Pro Rata Shares expressly designated herein with respect thereto or, in the absence of such designation as to any provision of this Agreement, by the Required Lenders, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No amendment, modification, waiver or consent shall (a) extend or increase the Commitment of any Lender without the written consent of such Lender, (b) extend the date scheduled for payment of any principal (excluding mandatory prepayments) of or interest on the Loans or any fees payable hereunder without the written consent of each Lender directly affected thereby, (c) reduce the principal amount of any Loan, the rate of interest thereon or any fees payable hereunder, without the consent of each Lender directly affected thereby; or (d) release any party from its obligations under the Guaranty and Collateral Agreement or all or any substantial part of the collateral granted hereunder or under the Collateral Documents, change the definition of Required Lenders, any provision of this Section 16.1 or reduce the aggregate Pro Rata Share required to effect an amendment, modification, waiver or consent, without, in each case, the written consent of all Lenders. No provision of Section 15 or other provision of this Agreement affecting the Administrative Agent in its capacity as such shall be amended, modified or waived without the consent of the Administrative Agent. No provision of this Agreement relating to the rights or duties of the Issuing Lender in its capacity as such shall be amended, modified or waived without the consent of the Issuing Lender.

16.2 Confirmations. The Company and each holder of a Note agree from time to time, upon written request received by it from the other, to confirm to the other in writing (with a copy of each such confirmation to the Administrative Agent) the aggregate unpaid principal amount of the Loans then outstanding under such Note.

16.3 Notices. Except as otherwise provided in Sections 2.2.2 and 2.2.3, all notices hereunder shall be in writing (including facsimile transmission) and shall be sent to the applicable party at its address shown on Annex B or at such other address as such party may, by written notice received by the other parties, have designated as its address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given three Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier service shall be deemed to have been given when received. For purposes of Sections 2.2.2 and 2.2.3, the Administrative Agent shall be entitled to rely on telephonic instructions from any person that the Administrative Agent in good faith believes is an authorized officer or employee of the Company, and the Company shall hold the Administrative Agent and each other Lender harmless from any loss, cost or expense resulting from any such reliance.

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16.4 Computations. Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made, for the purpose of this Agreement, such determination or calculation shall, to the extent applicable and except as otherwise specified in this Agreement, be made in accordance with GAAP, consistently applied; provided that if the Company notifies the Administrative Agent that the Company wishes to amend any covenant in Section 12 (or any related definition) to eliminate or to take into account the effect of any change in GAAP on the operation of such covenant (or if the Administrative Agent notifies the Company that the Required Lenders wish to amend Section 12 (or any related definition) for such purpose), then the Company’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant (or related definition) is amended in a manner satisfactory to the Company and the Required Lenders.

16.5 Costs, Expenses and Taxes. The Company agrees to pay within fifteen (15) Business Days after demand all reasonable out-of-pocket costs and expenses of the Administrative Agent (including Attorney Costs and any Taxes) in connection with the preparation, execution, syndication, delivery and administration (including perfection and protection of any collateral and the costs of Intralinks (or other similar service), if applicable) of this Agreement, the other Loan Documents and all other documents provided for herein or delivered or to be delivered hereunder or in connection herewith (including any amendment, supplement or waiver to any Loan Document), whether or not the transactions contemplated hereby or thereby shall be consummated, and all reasonable out-of-pocket costs and expenses (including Attorney Costs and any Taxes) incurred by the Administrative Agent and each Lender during the continuance of an Event of Default in connection with the collection of the Obligations or the enforcement of this Agreement the other Loan Documents or any such other documents or during any workout, restructuring or negotiations in respect thereof. In addition, the Company agrees to pay, and to save the Administrative Agent and the Lenders harmless from all liability for, any fees of the Company’s auditors in connection with any reasonable exercise by the Administrative Agent and the Lenders of their rights pursuant to Section 11.5. All Obligations provided for in this Section 16.5 shall survive repayment of the Loans, cancellation of the Notes, expiration or termination of the Letters of Credit and termination of this Agreement.

16.6 Assignments; Participations.

16.6.1 Assignments. (a) Any Lender may at any time assign to one or more Persons (any such Person, an “Assignee”) all or any portion of such Lender’s Loans and Commitments, with the prior written consent of the Administrative Agent, the Issuing Lender and, so long as no Event of Default exists, the Company (which consents shall not be unreasonably withheld or delayed and shall not be required for an assignment by a Lender to a Lender or an Affiliate of a Lender). Except as the Administrative Agent may otherwise agree, any such assignment shall be in a minimum aggregate amount equal to $5,000,000 or, if less, the remaining Commitment and Loans held by the assigning Lender. The Company and the Administrative Agent shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned to an Assignee until the Administrative Agent shall have received and accepted an effective assignment agreement in substantially the form of Exhibit D hereto (an “Assignment

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Agreement”) executed, delivered and fully completed by the applicable parties thereto and a processing fee of $3,500. No assignment may be made to any Person if at the time of such assignment the Company would be obligated to pay any greater amount under Section 7.6 or 8 to the Assignee than the Company is then obligated to pay to the assigning Lender under such Sections (and if any assignment is made in violation of the foregoing, the Company will not be required to pay such greater amounts). Any attempted assignment not made in accordance with this Section 16.6.1 shall be treated as the sale of a participation under Section 16.6.2. The Company shall be deemed to have granted its consent to any assignment requiring its consent hereunder unless the Company has expressly objected to such assignment within three Business Days after notice thereof.

(b) From and after the date on which the conditions described above have been met, (i) such Assignee shall be deemed automatically to have become a party hereto and, to the extent that rights and obligations hereunder have been assigned to such Assignee pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (ii) the assigning Lender, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, shall be released from its rights (other than its indemnification rights) and obligations hereunder. Upon the request of the Assignee (and, as applicable, the assigning Lender) pursuant to an effective Assignment Agreement, the Company shall execute and deliver to the Administrative Agent for delivery to the Assignee (and, as applicable, the assigning Lender) a Note in the principal amount of the Assignee’s Pro Rata Share of the Commitment (and, as applicable, a Note in the principal amount of the Pro Rata Share of the Commitment retained by the assigning Lender). Each such Note shall be dated the effective date of such assignment. Upon receipt by the assigning Lender of such Note, the assigning Lender shall return to the Company any prior Note held by it.

(c) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

16.6.2 Participations. Any Lender may at any time sell to one or more Persons participating interests in its Loans, Commitments or other interests hereunder (any such Person, a “Participant”). In the event of a sale by a Lender of a participating interest to a Participant, (a) such Lender’s obligations hereunder shall remain unchanged for all purposes, (b) the Company and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations hereunder and (c) all amounts payable by the Company shall be determined as if such Lender had not sold such participation and shall be paid directly to such Lender. No Participant shall have any direct or indirect voting rights hereunder except with respect to any event described in Section 16.1 expressly requiring the unanimous vote of all Lenders or, as applicable, all affected Lenders. Each Lender agrees to incorporate the requirements of the preceding sentence into each participation agreement which such Lender enters into with any Participant. The Company agrees that if amounts outstanding under this Agreement are due and payable (as a result of acceleration or otherwise), each Participant shall be deemed to have the right of set-off in respect of its participating interest in

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amounts owing under this Agreement and with respect to any Letter of Credit to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement; provided that such right of set-off shall be subject to the obligation of each Participant to share with the Lenders, and the Lenders agree to share with each Participant, as provided in Section 7.5. The Company also agrees that each Participant shall be entitled to the benefits of Section 7.6 or 8 as if it were a Lender (provided that on the date of the participation no Participant shall be entitled to any greater compensation pursuant to Section 7.6 or 8 than would have been paid to the participating Lender on such date if no participation had been sold and that each Participant complies with Section 7.6(d) as if it were an Assignee).

16.7 Register. The Administrative Agent shall maintain a copy of each Assignment Agreement delivered and accepted by it and register (the “Register”) for the recordation of names and addresses of the Lenders and the Commitment of each Lender from time to time and whether such Lender is the original Lender or the Assignee. No assignment shall be effective unless and until the Assignment Agreement is accepted and registered in the Register. All records of transfer of a Lender’s interest in the Register shall be conclusive, absent manifest error, as to the ownership of the interests in the Loans. The Administrative Agent shall not incur any liability of any kind with respect to any Lender with respect to the maintenance of the Register.

16.8 GOVERNING LAW. THIS AGREEMENT AND EACH NOTE SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.

16.9 Confidentiality. As required by federal law and the Administrative Agent’s policies and practices, the Administrative Agent may need to obtain, verify, and record certain customer identification information and documentation in connection with opening or maintaining accounts, or establishing or continuing to provide services. The Administrative Agent and each Lender agree to use commercially reasonable efforts (equivalent to the efforts the Administrative Agent or such Lender applies to maintain the confidentiality of its own confidential information) to maintain as confidential all information provided to them by any Loan Party and designated as confidential, except that the Administrative Agent and each Lender may disclose such information (a) to Persons employed or engaged by the Administrative Agent or such Lender in evaluating, approving, structuring or administering the Loans and the Commitments; (b) to any assignee or participant or potential assignee or participant that has agreed to comply with the covenant contained in this Section 16.9 (and any such assignee or participant or potential assignee or participant may disclose such information to Persons employed or engaged by them as described in clause (a) above); (c) as required or requested by any federal or state regulatory authority or examiner, or any insurance industry association, or as reasonably believed by the Administrative Agent or such Lender to be compelled by any court decree, subpoena or legal or administrative order or process; (d) as, on the advice of the Administrative Agent’s or such Lender’s counsel, is required by law; (e) in connection with the exercise of any right or remedy under the Loan Documents or in connection with any litigation to which the Administrative Agent or such Lender is a party; (f) to any nationally recognized rating agency that requires access to information about a Lender’s investment portfolio in connection

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with ratings issued with respect to such Lender; (g) to any Affiliate of the Administrative Agent, the Issuing Lender or any other Lender who may provide Bank Products to the Loan Parties; or (h) that ceases to be confidential through no fault of the Administrative Agent or any Lender. Notwithstanding the foregoing, the Company consents to the publication by the Administrative Agent or any Lender of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement, and the Administrative Agent reserves the right to provide to industry trade organizations information necessary and customary for inclusion in league table measurements.

16.10 Severability. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. All obligations of the Company and rights of the Administrative Agent and the Lenders expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law.

16.11 Nature of Remedies. All Obligations of the Company and rights of the Administrative Agent and the Lenders expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law. No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.

16.12 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the parties hereto and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof (except as relates to the fees described in Section 5.3) and any prior arrangements made with respect to the payment by the Company of (or any indemnification for) any fees, costs or expenses payable to or incurred (or to be incurred) by or on behalf of the Administrative Agent or the Lenders.

16.13 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. Electronic records of executed Loan Documents maintained by the Lenders shall deemed to be originals.

16.14 Successors and Assigns. This Agreement shall be binding upon the Company, the Lenders and the Administrative Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Lenders and the Administrative Agent and the successors and assigns of the Lenders and the Administrative Agent. No other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. The Company may not assign or transfer any of its rights or Obligations under this Agreement without the prior written consent of the Administrative Agent and each Lender.

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16.15 Captions. Section captions used in this Agreement are for convenience only and shall not affect the construction of this Agreement.

16.16 INDEMNIFICATION BY THE COMPANY. IN CONSIDERATION OF THE EXECUTION AND DELIVERY OF THIS AGREEMENT BY THE ADMINISTRATIVE AGENT AND THE LENDERS AND THE AGREEMENT TO EXTEND THE COMMITMENTS PROVIDED HEREUNDER, THE COMPANY HEREBY AGREES TO INDEMNIFY, EXONERATE AND HOLD THE ADMINISTRATIVE AGENT, EACH LENDER AND EACH OF THE OFFICERS, DIRECTORS, EMPLOYEES, AFFILIATES AND AGENTS OF THE ADMINISTRATIVE AGENT AND EACH LENDER (EACH A “LENDER PARTY”) FREE AND HARMLESS FROM AND AGAINST ANY AND ALL ACTIONS, CAUSES OF ACTION, SUITS, LOSSES, LIABILITIES, DAMAGES AND EXPENSES, INCLUDING ATTORNEY COSTS (COLLECTIVELY, THE “INDEMNIFIED LIABILITIES”), INCURRED BY THE LENDER PARTIES OR ANY OF THEM AS A RESULT OF, OR ARISING OUT OF, OR RELATING TO (A) ANY TENDER OFFER, MERGER, PURCHASE OF CAPITAL SECURITIES, PURCHASE OF ASSETS OR OTHER SIMILAR TRANSACTION FINANCED OR PROPOSED TO BE FINANCED IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, WITH THE PROCEEDS OF ANY OF THE LOANS, (B) THE USE, HANDLING, RELEASE, EMISSION, DISCHARGE, TRANSPORTATION, STORAGE, TREATMENT OR DISPOSAL OF ANY HAZARDOUS SUBSTANCE AT ANY PROPERTY OWNED OR LEASED BY ANY LOAN PARTY, (C) ANY VIOLATION OF ANY ENVIRONMENTAL LAWS WITH RESPECT TO CONDITIONS AT ANY PROPERTY OWNED OR LEASED BY ANY LOAN PARTY OR THE OPERATIONS CONDUCTED THEREON, (D) THE INVESTIGATION, CLEANUP OR REMEDIATION OF OFFSITE LOCATIONS AT WHICH ANY LOAN PARTY OR THEIR RESPECTIVE PREDECESSORS ARE ALLEGED TO HAVE DIRECTLY OR INDIRECTLY DISPOSED OF HAZARDOUS SUBSTANCES OR (E) THE EXECUTION, DELIVERY, PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BY ANY OF THE LENDER PARTIES, EXCEPT FOR ANY SUCH INDEMNIFIED LIABILITIES ARISING ON ACCOUNT OF THE APPLICABLE LENDER PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS DETERMINED BY A FINAL, NONAPPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION. IF AND TO THE EXTENT THAT THE FOREGOING UNDERTAKING MAY BE UNENFORCEABLE FOR ANY REASON, THE COMPANY HEREBY AGREES TO MAKE THE MAXIMUM CONTRIBUTION TO THE PAYMENT AND SATISFACTION OF EACH OF THE INDEMNIFIED LIABILITIES WHICH IS PERMISSIBLE UNDER APPLICABLE LAW. ALL OBLIGATIONS PROVIDED FOR IN THIS SECTION 16.16 SHALL SURVIVE REPAYMENT OF THE LOANS, CANCELLATION OF THE NOTES, EXPIRATION OR TERMINATION OF THE LETTERS OF CREDIT, ANY FORECLOSURE UNDER, OR ANY MODIFICATION, RELEASE OR DISCHARGE OF, ANY OR ALL OF THE COLLATERAL DOCUMENTS AND TERMINATION OF THIS AGREEMENT.

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16.17 Nonliability of Lenders. The relationship between the Company on the one hand and the Lenders and the Administrative Agent on the other hand shall be solely that of borrower and lender. Neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to any Loan Party arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Loan Parties, on the one hand, and the Administrative Agent and the Lenders, on the other hand, in connection herewith or therewith is solely that of debtor and creditor. Neither the Administrative Agent nor any Lender undertakes any responsibility to any Loan Party to review or inform any Loan Party of any matter in connection with any phase of any Loan Party’s business or operations. The Company agrees, on behalf of itself and each other Loan Party, that neither the Administrative Agent nor any Lender shall have liability to any Loan Party (whether sounding in tort, contract or otherwise) for losses suffered by any Loan Party in connection with, arising out of, or in any way related to the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. NO LENDER PARTY SHALL BE LIABLE FOR ANY DAMAGES ARISING FROM THE USE BY OTHERS OF ANY INFORMATION OR OTHER MATERIALS OBTAINED THROUGH INTRALINKS OR OTHER SIMILAR INFORMATION TRANSMISSION SYSTEMS IN CONNECTION WITH THIS AGREEMENT, NOR SHALL ANY LENDER PARTY HAVE ANY LIABILITY WITH RESPECT TO, AND THE COMPANY ON BEHALF OF ITSELF AND EACH OTHER LOAN PARTY, HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ARISING OUT OF ITS ACTIVITIES IN CONNECTION HEREWITH OR THEREWITH (WHETHER BEFORE OR AFTER THE CLOSING DATE). The Company acknowledges that it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party. No joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Loan Parties and the Lenders

16.18 FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE ADMINISTRATIVE AGENT FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES,

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TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

16.19 WAIVER OF JURY TRIAL. EACH OF THE COMPANY, THE ADMINISTRATIVE AGENT AND EACH LENDER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

[signature pages follow]

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The parties hereto have caused this Agreement to be duly executed and delivered by their duly authorized officers as of the date first set forth above.

MATERIAL SCIENCES CORPORATION
By:	/s/ James J. Waclawik, Sr.
	James J. Waclawik, Sr.
	Chief Financial Officer
LASALLE BANK NATIONAL ASSOCIATION, as Administrative Agent, as Issuing Lender and as a Lender
By:	/s/ June M. Courtney
	June M. Courtney
	Senior Vice President
THE NORTHERN TRUST COMPANY, as a Lender
By:	/s/ Fredric W. McClendon
Title:	Vice President

[TO AMENDED AND RESTATED LOAN

AND SECURITY AGREEMENT]

S-1

ANNEX A

LENDERS AND PRO RATA SHARES

Lender	Commitment Amount		Pro Rata Share
LaSalle Bank National Association	$	20,000,000	66.666666667	%
The Northern Trust Company	$	10,000,000	33.333333333	%
TOTALS	$	30,000,000	100	%

ANNEX B

ADDRESSES FOR NOTICES

MATERIAL SCIENCES CORPORATION

2200 East Pratt Boulevard

Elk Grove Village, Illinois 60007

Attention: Chief Financial Officer

Telephone: (847) 718-8243

Facsimile: (847) 718-8643

LASALLE BANK NATIONAL ASSOCIATION, as Administrative Agent, Issuing Lender and a Lender

Notices of Borrowing, Conversion, Continuation and Letter of Credit Issuance

135 South LaSalle Street

Chicago, Illinois 60603

Attention:                     

Telephone: (312)                    

Facsimile: (312)                     

All Other Notices

135 South LaSalle Street

Chicago, Illinois 60603

Attention: June M. Courtney

Telephone: (312) 904-8948

Facsimile: (312) 904-4483

THE NORTHERN TRUST COMPANY, as a Lender

50 South LaSalle Street

Chicago, Illinois 60675

Attention: Frederic McClendon

Telephone: (312) 557-1893

Facsimile: (312) 444-7028

EXHIBIT A

FORM OF NOTE

            ,            

$                             Chicago, Illinois

The undersigned, for value received, promises to pay to the order of                      (the “Lender”) at the principal office of LaSalle Bank National Association (the “Administrative Agent”) in Chicago, Illinois the aggregate unpaid amount of all Loans made to the undersigned by the Lender pursuant to the Loan Agreement referred to below (as shown on the schedule attached hereto (and any continuation thereof) or in the records of the Lender), such principal amount to be payable on the dates set forth in the Loan Agreement.

The undersigned further promises to pay interest on the unpaid principal amount of each Loan from the date of such Loan until such Loan is paid in full, payable at the rate(s) and at the time(s) set forth in the Loan Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America.

This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Amended and Restated Loan and Security Agreement, dated as of April 30, 2004 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”; terms not otherwise defined herein are used herein as defined in the Loan Agreement), among the undersigned, certain financial institutions (including the Lender) and the Administrative Agent, to which Loan Agreement reference is hereby made for a statement of the terms and provisions under which this Note may or must be paid prior to its due date or its due date accelerated.

[This Note constitutes a renewal and restatement of, and replacement and substitution for, that certain [Note] dated as of October 11, 2001 in the maximum principal amount of                      and 00/100 Dollars ($            .00), executed by the Company and made payable to the order of the Lender (the “Prior Note”). The indebtedness evidenced by the Prior Note is continuing indebtedness evidenced hereby and nothing herein shall be deemed to constitute a payment, settlement or novation of the Prior Note or to release or otherwise adversely affect any lien, mortgage or security interest securing such indebtedness or any rights of the Lender against any guarantor, surety or other party primarily or secondarily liable for such indebtedness.]

This Note is made under and governed by the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State.

MATERIAL SCIENCES CORPORATION

By:

Title:

EXHIBIT B

FORM OF COMPLIANCE CERTIFICATE

To: LaSalle Bank National Association, as Administrative Agent

Please refer to the Amended and Restated Loan and Security Agreement dated as of April 30, 2004 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”) among Material Sciences Corporation (the “Company”), various financial institutions and LaSalle Bank National Association, as Administrative Agent. Terms used but not otherwise defined herein are used herein as defined in the Loan Agreement.

I. Reports. Enclosed herewith is a copy of the [annual audited/quarterly] report of the Company as at                     ,          (the “Computation Date”), which report fairly presents in all material respects the financial condition and results of operations [(subject to the absence of footnotes and to normal year-end adjustments)] of the Company as of the Computation Date and has been prepared in accordance with GAAP consistently applied.

II. Financial Tests. The Company hereby certifies and warrants to you that the following is a true and correct computation as at the Computation Date of the following ratios and/or financial restrictions contained in the Loan Agreement:

A. Section 12.14.1 - Minimum Fixed Charge Coverage Ratio

1.	Net income (or loss)	$
2.	Minus: Gains from the disposition of Pinole	$
	Gains from discontinued operations	$
	Plus: Losses from the disposition of Pinole	$
	Losses from discontinued operations	$
3.	Sum of (1) and (2) (Consolidated Net Income)	$
4.	Plus: Interest expense (net)	$
	Income tax expense	$
	Depreciation and amortization	$
	Make-Whole Amount	$
	Middletown Charges	$
	Non-Cash Impairment Charges	$
5.	Sum of (3) and (4) (EBITDA)	$
6.	Income taxes paid	$
7.	Unfinanced Capital Expenditures	$

8.	Sum of (6) and (7)	$
9.	(4) minus (8)	$
10.	Interest Expense	$
11.	Required payments of principal of Funded Debt	$
12.	Sum of (10) and (11)	$
13.	Ratio of (9) to (12)		to 1
14.	Minimum Required		1.25 to 1

B. Section 12.14.2 - Maximum Leverage Ratio

1.	Funded Debt	$
2.	EBITDA (from Item A(3) above)	$
3.	Ratio of (1) to (2)		to 1
4.	Maximum allowed		3.00 to 1

C. Section 12.14.3 - Minimum Net Worth

1.	Assets	$
2.	Liabilities	$
3.	Foreign Currency Adjustments after March 1, 2004	$
4.	Sum of (2) and (3)	$
5.	(1) minus (4) (Consolidated Net Worth)	$
6.	Positive Consolidated Net Income Since 5/31/04	$
7.	50% of (6)	$
8.	$80,000,000 + (7) (Minimum Allowed)	$

The Company further certifies to you that no Event of Default or Unmatured Event of Default has occurred and is continuing.

The Company has caused this Certificate to be executed and delivered by its duly authorized officer on             ,     .

MATERIAL SCIENCES CORPORATION

By:

Title:

EXHIBIT C

FORM OF BORROWING BASE CERTIFICATE

To: LaSalle Bank National Association, as Administrative Agent

Please refer to the Amended and Restated Loan and Security Agreement dated as of April 30, 2004 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”) among Material Sciences Corporation (the “Company”), various financial institutions and LaSalle Bank National Association, as Administrative Agent. This certificate (this “Certificate”), together with supporting calculations attached hereto, is delivered to you pursuant to the terms of the Loan Agreement. Capitalized terms used but not otherwise defined herein shall have the same meanings herein as in the Loan Agreement.

The Company hereby certifies and warrants to the Administrative Agent and the Lenders that at the close of business on                     ,          (the “Calculation Date”), the Borrowing Base was $                    , computed as set forth on the schedule attached hereto.

The Company has caused this Certificate to be executed and delivered by its officer thereunto duly authorized on                     ,             .

MATERIAL SCIENCES CORPORATION

By:

Title:

SCHEDULE TO BORROWING BASE CERTIFICATE

Dated as of [                                    ]

[form of schedule to be agreed upon by the Company and the Administrative Agent]

EXHIBIT D

FORM OF ASSIGNMENT AGREEMENT

Date:                     

To: Material Sciences Corporation

and

LaSalle Bank National Association, as Administrative Agent

Re: Assignment under the Loan Agreement referred to below

Gentlemen and Ladies:

Please refer to Section 16.6.1 of the Amended and Restated Loan and Security Agreement dated as of April 30, 2004 (as amended or otherwise modified from time to time, the “Loan Agreement”) among Material Sciences Corporation (the “Company”), various financial institutions and LaSalle Bank National Association, as administrative agent (in such capacity, the “Administrative Agent”). Unless otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Loan Agreement.

                     (the “Assignor”) hereby sells and assigns, without recourse, to                      (the “Assignee”), and the Assignee hereby purchases and assumes from the Assignor, that interest in and to the Assignor’s rights and obligations under the Loan Agreement as of the date hereof equal to     % of all of the Loans, of the participation interests in the Letters of Credit and of the Commitments, such sale, purchase, assignment and assumption to be effective as of                     ,     , or such later date on which the Company and the Administrative Agent shall have consented hereto (the “Effective Date”). After giving effect to such sale, purchase, assignment and assumption, the Assignee’s and the Assignor’s respective Percentages for purposes of the Loan Agreement will be as set forth opposite their names on the signature pages hereof.

The Assignor hereby instructs the Administrative Agent to make all payments from and after the Effective Date in respect of the interest assigned hereby directly to the Assignee. The Assignor and the Assignee agree that all interest and fees accrued up to, but not including, the Effective Date are the property of the Assignor, and not the Assignee. The Assignee agrees that, upon receipt of any such interest or fees, the Assignee will promptly remit the same to the Assignor.

The Assignor represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim.

The Assignee represents and warrants to the Company and the Administrative Agent that, as of the date hereof, the Company will not be obligated to pay any greater amount under Section 7.6 or 8 of the Loan Agreement than the Company is obligated to pay to the Assignor under such Section. [The Assignee has delivered, or is delivering concurrently herewith, to the Company and the Administrative Agent the forms required by Section 7.6 of the Loan Agreement.] [INSERT IF ASSIGNEE IS ORGANIZED UNDER THE LAWS OF A JURISDICTION OTHER THAN THE UNITED STATES OF AMERICA OR A STATE THEREOF.] The [Assignee/Assignor] [Company] shall pay the fee payable to the Administrative Agent pursuant to Section 16.6.1.

The Assignee hereby confirms that it has received a copy of the Loan Agreement. Except as otherwise provided in the Loan Agreement, effective as of the Effective Date:

(a) the Assignee (i) shall be deemed automatically to have become a party to the Loan Agreement and to have all the rights and obligations of a “Lender” under the Loan Agreement as if it were an original signatory thereto to the extent specified in the second paragraph hereof; and (ii) agrees to be bound by the terms and conditions set forth in the Loan Agreement as if it were an original signatory thereto; and

(b) the Assignor shall be released from its obligations under the Loan Agreement to the extent specified in the second paragraph hereof.

The Assignee hereby advises each of you of the following administrative details with respect to the assigned Loans and Commitment:

(A) Institution Name:

Address:

Attention:

Telephone:

Facsimile:

(B) Payment Instructions:

This Assignment shall be governed by and construed in accordance with the laws of the State of Illinois.

Please evidence your receipt hereof and your consent to the sale, assignment, purchase and assumption set forth herein by signing and returning counterparts hereof to the Assignor and the Assignee.

Percentage =    %	[ASSIGNEE]
	By:
	Title:
Adjusted Percentage =    %	[ASSIGNOR]
	By:
	Title:
ACKNOWLEDGED AND CONSENTED TO this          day of             ,
LASALLE BANK NATIONAL ASSOCIATION, as Administrative Agent

By:

Title:

ACKNOWLEDGED AND CONSENTED TO

this      day of             ,         

MATERIAL SCIENCES CORPORATION

By:

Title:

EXHIBIT E

FORM OF NOTICE OF BORROWING

To: LaSalle Bank National Association, as Administrative Agent

Please refer to the Amended and Restated Loan and Security Agreement dated as of April 30, 2004 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”) among Material Sciences Corporation (the “Company”), various financial institutions and LaSalle Bank National Association, as Administrative Agent. Terms used but not otherwise defined herein are used herein as defined in the Loan Agreement.

The undersigned hereby gives irrevocable notice, pursuant to Section 2.2.2 of the Loan Agreement, of a request hereby for a borrowing as follows:

(i) The requested borrowing date for the proposed borrowing (which is a Business Day) is                     ,     .

(ii) The aggregate amount of the proposed borrowing is $            .

(iii) The type of Loans comprising the proposed borrowing are [Base Rate] [LIBOR] Loans.

(iv) The duration of the Interest Period for each LIBOR Loan made as part of the proposed borrowing, if applicable, is                      months (which shall be 1, 2, 3 or 6 months).

The undersigned hereby certifies that on the date hereof and on the date of borrowing set forth above, and immediately after giving effect to the borrowing requested hereby: (i) there exists and there shall exist no Unmatured Event of Default or Event of Default under the Loan Agreement; and (ii) each of the representations and warranties contained in the Loan Agreement and the other Loan Documents is true and correct as of the date hereof, except to the extent that such representation or warranty expressly relates to another date and except for changes therein expressly permitted or expressly contemplated by the Loan Agreement.

The Company has caused this Notice of Borrowing to be executed and delivered by its officer thereunto duly authorized on             ,     .

MATERIAL SCIENCES CORPORATION

By:

Title:

EXHIBIT F

FORM OF NOTICE OF CONVERSION/CONTINUATION

To: LaSalle Bank National Association, as Administrative Agent

Please refer to the Amended and Restated Loan and Security Agreement dated as of April 30, 2004 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”) among Material Sciences Corporation (the “Company”), various financial institutions and LaSalle Bank National Association, as Administrative Agent. Terms used but not otherwise defined herein are used herein as defined in the Loan Agreement.

The undersigned hereby gives irrevocable notice, pursuant to Section 2.2.3 of the Loan Agreement, of its request to:

(a) on [ date ] convert $[            ]of the aggregate outstanding principal amount of the [            ] Loan, bearing interest at the [            ] Rate, into a(n) [            ] Loan [and, in the case of a LIBOR Loan, having an Interest Period of [            ] month(s)];

[(b) on [    date    ] continue $[            ]of the aggregate outstanding principal amount of the [            ] Loan, bearing interest at the LIBOR Rate, as a LIBOR Loan having an Interest Period of [            ] month(s)].

The undersigned hereby represents and warrants that all of the conditions contained in Section 13.2 of the Loan Agreement have been satisfied on and as of the date hereof, and will continue to be satisfied on and as of the date of the conversion/continuation requested hereby, before and after giving effect thereto.

The Company has caused this Notice of Conversion/Continuation to be executed and delivered by its officer thereunto duly authorized on                     ,             .

MATERIAL SCIENCES CORPORATION

By:

Title:

EX-4.(F)

Exhibit 4(f)

CONSOLIDATED AMENDED AND RESTATED

GUARANTY AND SECURITY AGREEMENT

dated as of April 30, 2004

among

THE GRANTORS

FROM TIME TO TIME PARTY HERETO

and

LASALLE BANK NATIONAL ASSOCIATION,

as the Administrative Agent

CONSOLIDATED AMENDED AND RESTATED

GUARANTY AND SECURITY AGREEMENT

THIS CONSOLIDATED AMENDED AND RESTATED GUARANTY AND SECURITY AGREEMENT dated as of April 30, 2004 (this “Agreement”) is entered into among each Person signatory hereto as a Grantor (together with any other Person that becomes a party hereto as provided herein, the “Grantors”) in favor of LASALLE BANK NATIONAL ASSOCIATION, as the Administrative Agent for all the Lenders party to the Loan Agreement (each as hereafter defined).

RECITALS:

WHEREAS, Material Sciences Corporation, a Delaware corporation (the “Company”), the financial institutions party thereto (the “Lenders”) and LaSalle Bank National Association, as agent for the Lenders (the “Administrative Agent”) are parties to a Loan and Security Agreement dated as of October 11, 2001 (the “Existing Loan Agreement”);

WHEREAS, the obligations of the Company under the Existing Loan Agreement are guaranteed by, among others, the Grantors, pursuant to separate Guaranty agreements dated as of October 11, 2001 (the “Existing Guaranties”) in favor of the Administrative Agent and the Lenders, and the Existing Guaranties are secured by separate Security Agreements dated as of October 11, 2001 (the “Existing Security Agreements”) executed by each of the Grantors in favor of the Administrative Agent and the Lenders;

WHEREAS, the Company, the Administrative Agent and the Lenders desire to amend the Existing Loan Agreement pursuant to the terms and conditions of that certain Amended and Restated Loan and Security Agreement dated as of even date herewith (the “Loan Agreement”);

WHEREAS, for the sake of convenience, the parties hereto desire to amend and restate the Existing Guaranties and the Existing Security Agreements in one consolidated agreement pursuant to which the Existing Guarantors shall guaranty the Company Obligations and secure their obligations under such guaranty with the Collateral;

NOW, THEREFORE, in consideration of the premises, to induce the Administrative Agent and the Lenders to enter into the Loan Agreement and to induce the Lenders to extend credit thereunder, (a) the parties hereto hereby agree that the Existing Guaranties and the Existing Security Agreements shall be consolidated into this Agreement and (b) each Grantor hereby agrees with the Administrative Agent, for the ratable benefit of the Lenders, as follows:

SECTION 1 DEFINITIONS.

1.1 Unless otherwise defined herein, terms defined in the Loan Agreement and used herein shall have the meanings given to them in the Loan Agreement, and the following terms are used herein as defined in the UCC: Accounts, Commercial Tort Claims, Documents, Electronic Chattel Paper, Equipment, Farm Products, Goods, Health Care Insurance Receivables, Instruments, Inventory, Leases, Letter-of-Credit Rights, Money, Payment Intangibles, Supporting Obligations, Tangible Chattel Paper.

1.2 When used herein the following terms shall have the following meanings:

Agreement has the meaning set forth in the recitals hereto.

Chattel Paper means all “chattel paper” as such term is defined in Section 9-102(a)(11) of the UCC and, in any event, including with respect to any Grantor, all Electronic Chattel Paper and Tangible Chattel Paper.

Collateral means all of the following personal property now owned or at any time hereafter acquired by any Grantor or in which any Grantor now has or at any time in the future may acquire any right, title or interest: (a) all of each Grantor’s Accounts, Chattel Paper, Commercial Tort Claims, Documents, Equipment, Fixtures, General Intangibles, Goods, Instruments, Intellectual Property, Inventory, Leases, Letter-of-Credit Rights, Supporting Obligations and Identified Claims; (b) all books and records pertaining to any of the foregoing; (c) all Proceeds and products of any of the foregoing; and (d) all collateral security and guaranties given by any Person with respect to any of the foregoing; provided, that Collateral shall not include (i) the coil coating line owned by MSC Pre Finish Metals (EGV) Inc. and commonly known as “Production Line 3” or (ii) any Fixtures located at the facility located at 2111 Pratt, Elk Grove Village, Illinois and commonly known as Plant #1 or (iii) documents, goods and general intangibles specifically associated with the items described in clauses (i) and (ii). Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Grantor, shall refer to such Grantor’s Collateral or the relevant part thereof.

Company Obligations means all Obligations of the Company.

Copyrights means all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, including those listed on Schedule 5, all registrations and recordings thereof, and all applications in connection therewith, including all registrations, recordings and applications in the United States Copyright Office, and the right to obtain all renewals of any of the foregoing.

Copyright Licenses means all written agreements naming any Grantor as licensor or licensee, including those listed on Schedule 5, granting any right under any Copyright, including the grant of rights to manufacture, distribute, exploit and sell materials derived from any Copyright.

Fixtures means all of the following, whether now owned or hereafter acquired by a Grantor: plant fixtures; business fixtures; other fixtures and storage facilities, wherever located; and all additions and accessories thereto and replacements therefor.

General Intangibles means all “general intangibles” as such term is defined in Section 9-102(a)(42) of the UCC and, in any event, including with respect to any Grantor, all Payment Intangibles, all contracts, agreements, instruments and indentures in any form, and portions thereof, to which such Grantor is a party or under which such Grantor has any right, title or interest or to which such Grantor or any property of such Grantor is subject, as the same from time to time may be amended, supplemented or otherwise modified, including, without limitation, (a) all rights of such Grantor to receive moneys due and to become due to it

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thereunder or in connection therewith, (b) all rights of such Grantor to damages arising thereunder and (c) all rights of such Grantor to perform and to exercise all remedies thereunder; provided, that the foregoing limitation shall not affect, limit, restrict or impair the grant by such Grantor of a security interest pursuant to this Agreement in any Receivable or any money or other amounts due or to become due under any such Payment Intangible, contract, agreement, instrument or indenture.

Guarantor Obligations means, with respect to any Guarantor, all Obligations of such Guarantor.

Guarantors means the collective reference to each Grantor.

Identified Claims means the Commercial Tort Claims described on Schedule 7, as such schedule shall be supplemented from time to time.

Intellectual Property means the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks and the Trademark Licenses, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.

Loan Agreement has the meaning set forth in the recitals hereto.

Paid in Full means (a) the payment in full in cash and performance of all Secured Obligations, (b) the termination of all Commitments and (c) either (i) the cancellation and return to the Administrative Agent of all Letters of Credit or (ii) the cash collateralization of all Letters of Credit in accordance with the Loan Agreement.

Patent Licenses means all agreements, whether written or oral, providing for the grant by or to any Grantor of any right to manufacture, use or sell any invention covered in whole or in part by a Patent, including any of the foregoing referred to in Schedule 5.

Patents means (a) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof and all goodwill associated therewith, including any of the foregoing referred to in Schedule 5, (b) all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, including any of the foregoing referred to in Schedule 5, and (c) all rights to obtain any reissues or extensions of the foregoing.

Proceeds means all “proceeds” as such term is defined in Section 9-102(a)(64) of the UCC.

Receivable means any right to payment for goods sold or leased or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper and whether or not it has been earned by performance (including any Accounts).

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Secured Obligations means, collectively, the Company Obligations and all Guarantor Obligations.

Securities Act means the Securities Act of 1933, as amended.

Trademarks means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common-law rights related thereto, including any of the foregoing referred to in Schedule 5, and (b) the right to obtain all renewals thereof.

Trademark Licenses means, collectively, each agreement, whether written or oral, providing for the grant by or to any Grantor of any right to use any Trademark, including any of the foregoing referred to in Schedule 5.

UCC means the Uniform Commercial Code as in effect on the date hereof and from time to time in the State of Illinois, provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the security interests in any Collateral or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction, “UCC” means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection or availability of such remedy.

SECTION 2 GUARANTY.

2.1 Guaranty.

(a) Each of the Guarantors hereby, jointly and severally, unconditionally and irrevocably guaranties to the Administrative Agent, for the ratable benefit of the Lenders and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Company when due (whether at the stated maturity, by acceleration or otherwise) of the Company Obligations.

(b) Anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Loan Documents shall in no event exceed the amount which can be guarantied by such Guarantor under applicable federal and state laws relating to the insolvency of debtors (after giving effect to the right of contribution established in Section 2.2).

(c) Each Guarantor agrees that the Secured Obligations may at any time and from time to time exceed the amount of the liability of such Guarantor hereunder without impairing the guaranty contained in this Section 2 or affecting the rights and remedies of the Administrative Agent or any Lender hereunder.

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(d) The guaranty contained in this Section 2 shall remain in full force and effect until all of the Secured Obligations shall have been Paid in Full.

(e) No payment made by the Company, any of the Guarantors, any other guarantor or any other Person or received or collected by the Administrative Agent or any Lender from the Company, any of the Guarantors, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Secured Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment (other than any payment made by such Guarantor in respect of the Secured Obligations or any payment received or collected from such Guarantor in respect of the Secured Obligations), remain liable for the Secured Obligations up to the maximum liability of such Guarantor hereunder until the Secured Obligations are Paid in Full.

2.2 Right of Contribution. Each Guarantor hereby agrees that to the extent a Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor hereunder which has not paid its proportionate share of such payment. Each Guarantor’s right of contribution shall be subject to the terms and conditions of Section 2.3. The provisions of this Section 2.2 shall in no respect limit the obligations and liabilities of any Guarantor to the Administrative Agent and the Lenders, and each Guarantor shall remain liable to the Administrative Agent and the Lenders for the full amount guarantied by such Guarantor hereunder.

2.3 No Subrogation. Notwithstanding any payment made by any Guarantor hereunder or any set-off or application of funds of any Guarantor by the Administrative Agent or any Lender, no Guarantor shall be entitled to be subrogated to any of the rights of the Administrative Agent or any Lender against the Company or any other Guarantor or any collateral security or guaranty or right of offset held by the Administrative Agent or any Lender for the payment of the Secured Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Company or any other Guarantor in respect of payments made by such Guarantor hereunder, until all of the Secured Obligations are Paid in Full, no Letter of Credit shall be outstanding and the Commitments are terminated. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Secured Obligations shall not have been Paid in Full, such amount shall be held by such Guarantor in trust for the Administrative Agent and the Lenders, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Administrative Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Administrative Agent, if required), to be applied against the Secured Obligations, whether matured or unmatured, in such order as the Administrative Agent may determine.

2.4 Amendments, etc. with respect to the Secured Obligations. Each Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against any Guarantor and without notice to or further assent by any Guarantor, any demand for payment of any of the Secured Obligations made by the Administrative Agent or any Lender may be rescinded by the Administrative Agent or such Lender and any of the Secured

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Obligations continued, and the Secured Obligations, or the liability of any other Person upon or for any part thereof, or any collateral security or guaranty therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Administrative Agent or any Lender, and the Loan Agreement and the other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Administrative Agent (or the Required Lenders or all the Lenders, as the case may be) may deem advisable from time to time. Neither the Administrative Agent nor any Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Secured Obligations or for the guaranty contained in this Section 2 or any property subject thereto.

The Administrative Agent or any Lender may, from time to time, at its sole discretion and without notice to any Guarantor (or any of them), take any or all of the following actions: (a) retain or obtain a security interest in any property to secure any of the Secured Obligations or any obligation hereunder, (b) retain or obtain the primary or secondary obligation of any obligor or obligors, in addition to the undersigned, with respect to any of the Secured Obligations, (c) extend or renew any of the Secured Obligations for one or more periods (whether or not longer than the original period), alter or exchange any of the Secured Obligations, or release or compromise any obligation of any of the undersigned hereunder or any obligation of any nature of any other obligor with respect to any of the Secured Obligations, (d) release any guaranty or right of offset or its security interest in, or surrender, release or permit any substitution or exchange for, all or any part of any property securing any of the Secured Obligations or any obligation hereunder, or extend or renew for one or more periods (whether or not longer than the original period) or release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such property and (e) resort to the undersigned (or any of them) for payment of any of the Secured Obligations when due, whether or not the Administrative Agent or such Lender shall have resorted to any property securing any of the Secured Obligations or any obligation hereunder or shall have proceeded against any other of the undersigned or any other obligor primarily or secondarily obligated with respect to any of the Secured Obligations.

2.5 Waivers. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Secured Obligations and notice of or proof of reliance by the Administrative Agent or any Lender upon the guaranty contained in this Section 2 or acceptance of the guaranty contained in this Section 2. The Secured Obligations, and any of them, shall conclusively be deemed to have been created, contracted, incurred, renewed, extended, amended or waived in reliance upon the guaranty contained in this Section 2 and all dealings between the Company and any of the Guarantors, on the one hand, and the Administrative Agent and the Lenders, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the guaranty contained in this Section 2. Each Guarantor waives (a) diligence, presentment, protest, demand for payment and notice of default, dishonor or nonpayment and all other notices whatsoever to or upon the Company or any of the Guarantors with respect to the Secured Obligations, (b) notice of the existence or creation or non-payment of all or any of the Secured Obligations and (c) all diligence in collection or protection of or realization upon any Secured Obligations or any security for or guaranty of any Secured Obligations.

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2.6 Payments. Each Guarantor hereby guaranties that payments hereunder will be paid to the Administrative Agent without set-off or counterclaim in Dollars at the office of the Administrative Agent specified in the Loan Agreement.

SECTION 3 GRANT OF SECURITY INTEREST. Each Grantor hereby grants to the Administrative Agent, for the ratable benefit of the Lenders, a continuing security interest in all of its Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of its Guarantor Obligation.

SECTION 4 REPRESENTATIONS AND WARRANTIES.

To induce the Administrative Agent and the Lenders to enter into the Loan Agreement and to induce the Lenders to make their respective extensions of credit to the Company thereunder, each Grantor jointly and severally hereby represents and warrants to the Administrative Agent and each Lender that:

4.1 Title; No Other Liens. Except for Permitted Liens, the Grantors own each item of the Collateral free and clear of any and all Liens or claims of others. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except filings evidencing Permitted Liens and filings for which termination statements have been delivered to the Administrative Agent.

4.2 Perfected First Priority Liens. The security interests granted pursuant to this Agreement (a) will constitute valid perfected security interests in all of the Collateral in favor of the Administrative Agent, for the ratable benefit of the Lenders, as collateral security for each Grantor’s Obligations, enforceable in accordance with the terms hereof against all creditors of each Grantor and any Persons purporting to purchase any Collateral from each Grantor and (b) are prior to all other Liens on the Collateral in existence on the date hereof except for Permitted Liens for which priority is accorded under applicable law.

4.3 Grantor Information. On the date hereof, Schedule 3 sets forth (a) each Grantor’s jurisdiction of organization, (b) the location of each Grantor’s chief executive office, (c) each Grantor’s exact legal name as it appears on its organizational documents and (d) each Grantor’s organizational identification number (to the extent a Grantor is organized in a jurisdiction which assigns such numbers) and federal employer identification number.

4.4 Collateral Locations. On the date hereof, Schedule 4 sets forth (a) each place of business of each Grantor (including its chief executive office), (b) all locations where all Inventory and the Equipment owned by each Grantor is kept, except with respect to Inventory and Equipment with a fair market value of less than $5,000,000 (in the aggregate for the Company and all Grantors) which may be located at other locations and (c) whether each such Collateral location and place of business (including each Grantor’s chief executive office) is owned or leased (and if leased, specifies the complete name and notice address of each lessor). No Collateral is located outside the United States or in the possession of any lessor, bailee, warehouseman or consignee, except as indicated on Schedule 4.

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4.5 Certain Property. None of the Collateral constitutes, or is the Proceeds of, (a) Farm Products, (b) Health Care Insurance Receivables or (c) vessels, aircraft or any other property subject to any certificate of title or other registration statute of the United States, any State or other jurisdiction, except for personal vehicles owned by the Grantors and used by employees of the Grantors in the ordinary course of business with an aggregate fair market value of less than $5,000,000 (in the aggregate for the Company and all Grantors).

4.6 [Reserved.]

4.7 Receivables.

(a) No material amount payable to such Grantor under or in connection with any Receivable is evidenced by any Instrument or Chattel Paper which has not been delivered to the Administrative Agent.

(b) No obligor on any Receivable is a governmental authority.

(c) The amounts represented by such Grantor to the Lenders from time to time as owing to such Grantor in respect of the Receivables (to the extent such representations are required by any of the Loan Documents) will at all such times be accurate.

4.8 Intellectual Property. Schedule 5 lists all registered Intellectual Property owned by such Grantor in its own name on the date hereof. Except as set forth in Schedule 5, none of the material Intellectual Property is the subject of any licensing or franchise agreement pursuant to which such Grantor is the licensor or franchisor.

SECTION 5 COVENANTS.

Each Grantor covenants and agrees with the Administrative Agent and the Lenders that, from and after the date of this Agreement until the Secured Obligations shall have been Paid in Full:

5.1 Delivery of Instruments and Chattel Paper. If any amount payable under or in connection with any of the Collateral in excess of $5,000,000 (in the aggregate for the Company and all Grantors) shall be or become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper shall be immediately delivered to the Administrative Agent, duly indorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Agreement. In the event that an Unmatured Event of Default or Event of Default shall have occurred and be continuing, upon the request of the Administrative Agent, any Instrument or Chattel Paper not theretofore delivered to the Administrative Agent and at such time being held by any Grantor shall be immediately delivered to the Administrative Agent, duly indorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Agreement.

5.2 Maintenance of Perfected Security Interest; Further Documentation.

(a) Such Grantor shall maintain the security interest created by this Agreement as a perfected security interest having at least the priority described in Section 4.2

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and shall defend such security interest against the claims and demands of all Persons whomsoever.

(b) Such Grantor will furnish to the Administrative Agent and the Lenders from time to time statements and schedules further identifying and describing the assets and property of such Grantor and such other reports in connection therewith as the Administrative Agent may reasonably request, all in reasonable detail.

(c) At any time and from time to time, upon the written request of the Administrative Agent, and at the sole expense of such Grantor, such Grantor will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Administrative Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including filing any financing or continuation statements under the UCC (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby.

5.3 Changes in Locations, Name, etc. Such Grantor shall not, except upon 30 days’ prior written notice to the Administrative Agent and delivery to the Administrative Agent of (a) all additional financing statements and other documents reasonably requested by the Administrative Agent as to the validity, perfection and priority of the security interests provided for herein and (b) if applicable, a written supplement to Schedule 4 showing any additional location at which Inventory or Equipment shall be kept:

(i) permit any of the Inventory or Equipment to be kept at a location other than those listed on Schedule 4; provided, that up to $5,000,000 (in the aggregate for the Company and all Grantors) in fair market value of any such Inventory and Equipment may be kept at other locations;

(ii) change its jurisdiction of organization or the location of its chief executive office from that specified on Schedule 3 or in any subsequent notice delivered pursuant to this Section 5.3; or

(iii) change its name, identity or corporate structure.

5.4 Notices. Such Grantor will advise the Administrative Agent and the Lenders promptly, in reasonable detail, of (a) any Lien (other than Permitted Liens) on any of the Collateral which would adversely affect the ability of the Administrative Agent to exercise any of its remedies hereunder and the (b) occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the Liens created hereby.

5.5 [Reserved.]

5.6 Receivables.

(a) Other than in the ordinary course of business consistent with its past practice and in amounts which are not material to such Grantor, such Grantor will not (i) grant any extension of the time of payment of any Receivable, (ii) compromise or settle any

9

Receivable for less than the full amount thereof, (iii) release, wholly or partially, any Person liable for the payment of any Receivable, (iv) allow any credit or discount whatsoever on any Receivable or (v) amend, supplement or modify any Receivable in any manner that could adversely affect the value thereof. Notwithstanding the foregoing, any Grantor may compromise or settle any Receivable if, after giving effect to such compromise or settlement, the excess of Revolving Loan Availability minus Revolving Outstandings is greater than or equal to $5,000,000.

(b) Such Grantor will deliver to the Administrative Agent a copy of each material demand, notice or document received by it that questions or calls into doubt the validity or enforceability of more than 5% of the aggregate amount of the then outstanding Receivables for all Grantors.

5.7 Intellectual Property.

(a) With respect to each Trademark material to such Grantor’s business, such Grantor (either itself or through licensees) will (i) continue to use each Trademark in order to maintain such Trademark in full force free from any claim of abandonment for non-use, (ii) maintain as in the past the quality of products and services offered under such Trademark, (iii) use such Trademark with the appropriate notice of registration and all other notices and legends required by applicable law, and (iv) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby such Trademark may become invalidated or impaired in any way.

(b) Such Grantor (either itself or through licensees) will not do any act, or omit to do any act, whereby any Patent material to its business may become forfeited, abandoned or dedicated to the public.

(c) With respect to each Copyright material to such Grantor’s business, such Grantor (either itself or through licensees) (i) will employ such Copyright and (ii) will not (and will not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any material portion of such Copyright may become invalidated or otherwise impaired.

(d) Such Grantor (either itself or through licensees) will not do any act that knowingly uses any Intellectual Property material to its business to infringe the intellectual property rights of any other Person.

(e) Such Grantor will notify the Administrative Agent and the Lenders promptly if it knows, or has reason to know, that any application or registration relating to any material Intellectual Property may become forfeited, abandoned or dedicated to the public, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court or tribunal in any country) regarding such Grantor’s ownership of, or the validity of, any material Intellectual Property or such Grantor’s right to register the same or to own and maintain the same.

(f) Upon the occurrence and during the continuance of an Event of Default, (i) such Grantor shall update the information on Schedule 5 and (ii) whenever such Grantor,

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either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, such Grantor shall report such filing to the Administrative Agent concurrently with the next delivery of financial statements of the Company pursuant to Section 11.1 of the Loan Agreement. Upon the request of the Administrative Agent during the continuance of an Event of Default, such Grantor shall execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the Administrative Agent may request to evidence the Administrative Agent’s and the Lenders’ security interest in any Copyright, Patent or Trademark and the goodwill and general intangibles of such Grantor relating thereto or represented thereby.

(g) Such Grantor will take all reasonable and necessary steps to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of all material Intellectual Property owned by it and material to its business.

(h) In the event that any Intellectual Property material to such Grantor’s business is infringed upon or misappropriated or diluted by a third party, such Grantor shall (i) take such actions as such Grantor shall reasonably deem appropriate under the circumstances to protect such Intellectual Property and (ii) if such Intellectual Property is of material economic value, promptly notify the Administrative Agent after it learns thereof and, to the extent, in its reasonable judgment, such Grantor determines it appropriate under the circumstances, sue for infringement, misappropriation or dilution, seek injunctive relief where appropriate and recover any and all damages for such infringement, misappropriation or dilution.

5.8 [Reserved.]

5.9 Other Matters.

(a) [Reserved.]

(b) Each Grantor authorizes the Administrative Agent to, at any time and from time to time, file financing statements, continuation statements and amendments thereto that describe the Collateral as “all assets” of each Grantor, or words of similar effect, and which contain any other information required pursuant to the UCC for the sufficiency of filing office acceptance of any financing statement, continuation statement or amendment, and each Grantor agrees to furnish any such information to the Administrative Agent promptly upon request. Any such financing statement, continuation statement or amendment may be signed by the Administrative Agent on behalf of any Grantor and may be filed at any time in any jurisdiction.

(c) Each Grantor shall, at any time and from time and to time, take such steps as the Administrative Agent may reasonably request for the Administrative Agent (i) to obtain an acknowledgement, in form and substance reasonably satisfactory to the Administrative Agent, of any bailee having possession of any of the Collateral, stating that the bailee holds such Collateral for the Administrative Agent, (ii) to obtain “control” of any letter-of-credit rights or electronic chattel paper (as such terms are defined by the UCC with corresponding provisions thereof defining what constitutes “control” for such items of Collateral), with any agreements

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establishing control to be in form and substance reasonably satisfactory to the Administrative Agent, and (iii) otherwise to insure the continued perfection and priority of the Administrative Agent’s security interest in any of the Collateral and of the preservation of its rights therein. If any Grantor shall, at any time, acquire a “commercial tort claim” (as such term is defined in the UCC) in excess of $2,000,000, such Grantor shall promptly notify the Administrative Agent thereof in writing and supplement Schedule 7, therein providing a reasonable description and summary thereof, and upon delivery thereof to the Administrative Agent, such Grantor shall be deemed to thereby grant to the Administrative Agent (and such Grantor hereby grants to the Administrative Agent) a security interest and lien in and to such commercial tort claim and all proceeds thereof, all upon the terms of and governed by this Agreement.

(d) Without limiting the generality of the foregoing, if any Grantor at any time holds or acquires an interest in any electronic chattel paper or any “transferable record”, as that term is defined in Section 201 of the federal Electronic Signatures in Global and National Commerce Act, or in §16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, such Grantor shall promptly notify the Administrative Agent thereof and, at the request of the Administrative Agent, shall take such action as the Administrative Agent may reasonably request to vest in the Administrative Agent “control” under Section 9-105 of the UCC of such electronic chattel paper or control under Section 201 of the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, §16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record.

SECTION 6 REMEDIAL PROVISIONS.

6.1 Certain Matters Relating to Receivables.

(a) At any time and from time to time after the occurrence and during the continuance of an Event of Default, the Administrative Agent shall have the right to make test verifications of the Receivables in any manner and through any medium that it reasonably considers advisable, and each Grantor shall furnish all such assistance and information as the Administrative Agent may require in connection with such test verifications. At any time and from time to time after the occurrence and during the continuance of an Event of Default, upon the Administrative Agent’s request and at the expense of the relevant Grantor, such Grantor shall cause independent public accountants or others satisfactory to the Administrative Agent to furnish to the Administrative Agent reports showing reconciliations, agings and test verifications of, and trial balances for, the Receivables.

(b) The Administrative Agent hereby authorizes each Grantor to collect such Grantor’s Receivables and the Administrative Agent may curtail or terminate such authority at any time after the occurrence and during the continuance of an Event of Default. If required by the Administrative Agent at any time after the occurrence and during the continuance of an Event of Default, any payments of Receivables, when collected by any Grantor, (i) shall be forthwith (and, in any event, within 2 Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Administrative Agent if required, in a collateral account maintained under the sole dominion and control of the Administrative Agent, subject to withdrawal by the Administrative Agent for the account of the Lenders only as provided in Section 6.5, and (ii) until so turned over, shall be held by such Grantor in trust for the

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Administrative Agent and the Lenders, segregated from other funds of such Grantor. Each such deposit of Proceeds of Receivables shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit.

(c) At any time and from time to time after the occurrence and during the continuance of an Event of Default, at the Administrative Agent’s request, each Grantor shall deliver to the Administrative Agent all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Receivables, including all original orders, invoices and shipping receipts.

6.2 Communications with Obligors; Grantors Remain Liable.

(a) The Administrative Agent in its own name or in the name of others may communicate with obligors under the Receivables to verify with them, to the Administrative Agent’s satisfaction, the existence, amount and terms of any Receivables.

(b) Upon the request of the Administrative Agent at any time after the occurrence and during the continuance of an Event of Default, each Grantor shall notify obligors on the Receivables that the Receivables have been assigned to the Administrative Agent for the ratable benefit of the Lenders and that payments in respect thereof shall be made directly to the Administrative Agent.

(c) Anything herein to the contrary notwithstanding, each Grantor shall remain liable in respect of each of the Receivables to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. Neither the Administrative Agent nor any Lender shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Administrative Agent or any Lender of any payment relating thereto, nor shall the Administrative Agent or any Lender be obligated in any manner to perform any of the obligations of any Grantor under or pursuant to any Receivable (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.

(d) For the purpose of enabling the Administrative Agent to exercise rights and remedies under this Agreement, each Grantor hereby grants to the Administrative Agent, for the benefit of the Administrative Agent and the Lenders, an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to such Grantor) to use, license or sublicense any Intellectual Property now owned or hereafter acquired by such Grantor, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof.

6.3 [Reserved.]

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6.4 Proceeds to be Turned Over to Administrative Agent. In addition to the rights of the Administrative Agent and the Lenders specified in Section 6.1 with respect to payments of Receivables, if an Event of Default shall occur and be continuing, at the request of the Required Lenders and by notice to such Grantor, all Proceeds received by any Grantor consisting of cash, checks and other cash equivalent items shall be held by such Grantor in trust for the Administrative Agent and the Lenders, segregated from other funds of such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over to the Administrative Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Administrative Agent, if required). All Proceeds received by the Administrative Agent hereunder shall be held by the Administrative Agent in a collateral account maintained under its sole dominion and control. All Proceeds, while held by the Administrative Agent in any collateral account (or by such Grantor in trust for the Administrative Agent and the Lenders) established pursuant hereto, shall continue to be held as collateral security for the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 6.5.

6.5 Application of Proceeds. At such intervals as may be agreed upon by the Company and the Administrative Agent, or, if an Event of Default shall have occurred and be continuing, at any time at the Administrative Agent’s election, the Administrative Agent may apply all or any part of Proceeds from the sale of, or other realization upon, all or any part of the Collateral in payment of the Secured Obligations in such order as the Administrative Agent shall determine in its discretion. Any part of such funds which the Administrative Agent elects not so to apply and deems not required as collateral security for the Secured Obligations shall be paid over from time to time by the Administrative Agent to the applicable Grantor or to whomsoever may be lawfully entitled to receive the same. Any balance of such Proceeds remaining after the Secured Obligations shall have been Paid in Full shall be paid over to the applicable Grantor or to whomsoever may be lawfully entitled to receive the same.

6.6 Code and Other Remedies. If an Event of Default shall occur and be continuing, the Administrative Agent, on behalf of the Lenders, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the UCC or any other applicable law. Without limiting the generality of the foregoing, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of the Administrative Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery with assumption of any credit risk. The Administrative Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Grantor, which right or equity is hereby waived and released. Each Grantor further agrees, at the Administrative Agent’s request, to assemble the Collateral and make it available to

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the Administrative Agent at places which the Administrative Agent shall reasonably select, whether at such Grantor’s premises or elsewhere. The Administrative Agent shall apply the net proceeds of any action taken by it pursuant to this Section 6.6, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Lenders hereunder, including Attorney Costs to the payment in whole or in part of the Secured Obligations, in such order as the Administrative Agent may elect, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of law, need the Administrative Agent account for the surplus, if any, to any Grantor. To the extent permitted by applicable law, each Grantor waives all claims, damages and demands it may acquire against the Administrative Agent or any Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition.

6.7 [Reserved.]

6.8 Waiver; Deficiency. Each Grantor waives and agrees not to assert any rights or privileges which it may acquire under Section 9-626 of the UCC. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Secured Obligations in full and the fees and disbursements of any attorneys employed by the Administrative Agent or any Lender to collect such deficiency.

SECTION 7 THE ADMINSTRATIVE AGENT.

7.1 Administrative Agent’s Appointment as Attorney-in-Fact, etc.

(a) Each Grantor hereby irrevocably constitutes and appoints the Administrative Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives the Administrative Agent the power and right, on behalf of and at the expense of such Grantor, without notice to or assent by such Grantor, to do any or all of the following:

(i) in the name of such Grantor or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Receivable or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Administrative Agent for the purpose of collecting any and all such moneys due under any Receivable or with respect to any other Collateral whenever payable;

(ii) in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the

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Administrative Agent may request to evidence the Administrative Agent’s security interest in such Intellectual Property and the goodwill and general intangibles of such Grantor relating thereto or represented thereby;

(iii) discharge Liens levied or placed on or threatened against the Collateral and effect any repairs or insurance called for by the terms of this Agreement and pay all or any part of the premiums therefor and the costs thereof;

(iv) execute, in connection with any sale provided for in Section 6.6 or 6.7, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and

(v) (1) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Administrative Agent or as the Administrative Agent shall direct; (2) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (3) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (4) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (5) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (6) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Administrative Agent may deem appropriate; (7) assign any Copyright, Patent or Trademark, throughout the world for such term or terms, on such conditions, and in such manner, as the Administrative Agent shall in its sole discretion determine; (8) order good standing certificates and conduct lien searches in respect of such jurisdictions or offices as the Administrative Agent may deem appropriate; and (9) generally sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Administrative Agent were the absolute owner thereof for all purposes, and do, at the Administrative Agent’s option and such Grantor’s expense, at any time, or from time to time, all acts and things which the Administrative Agent deems necessary to protect, preserve or realize upon the Collateral and the Administrative Agent’s security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do.

Anything in this Section 7.1(a) to the contrary notwithstanding, the Administrative Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 7.1(a) unless an Event of Default shall have occurred and be continuing.

(b) If any Grantor fails to perform or comply with any of its agreements contained herein, the Administrative Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement.

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(c) Each Grantor hereby ratifies all that such attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released.

7.2 Duty of Administrative Agent. The Administrative Agent’s sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession shall be to deal with it in the same manner as the Administrative Agent deals with similar property for its own account. Neither the Administrative Agent or any Lender nor any of their respective officers, directors, employees or agents shall be liable for any failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Administrative Agent and the Lenders hereunder are solely to protect the Administrative Agent’s and the Lenders’ interests in the Collateral and shall not impose any duty upon the Administrative Agent or any Lender to exercise any such powers. The Administrative Agent and the Lenders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers and neither they nor any of their officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder.

7.3 Authority of Administrative Agent. Each Grantor acknowledges that the rights and responsibilities of the Administrative Agent under this Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Administrative Agent and the Lenders, be governed by the Loan Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Grantors, the Administrative Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting and no Grantor shall be under any obligation or entitlement to make any inquiry respecting such authority.

SECTION 8 MISCELLANEOUS.

8.1 Amendments in Writing. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Section 16.1 of the Loan Agreement.

8.2 Notices. All notices, requests and demands to or upon the Administrative Agent or any Grantor hereunder shall be addressed to the Company and effected in the manner provided for in Section 16.3 of the Loan Agreement and each Grantor hereby appoints the Company as its agent to receive notices hereunder.

8.3 Indemnification by Grantors. THE GRANTORS, JOINTLY AND SEVERALLY, HEREBY AGREE TO INDEMNIFY, EXONERATE AND HOLD EACH LENDER PARTY FREE AND HARMLESS FROM AND AGAINST ANY AND ALL INDEMNIFIED LIABILITIES INCURRED BY THE LENDER PARTIES OR ANY OF

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THEM AS A RESULT OF, OR ARISING OUT OF, OR RELATING TO (A) ANY TENDER OFFER, MERGER, PURCHASE OF EQUITY INTERESTS, PURCHASE OF ASSETS OR OTHER SIMILAR TRANSACTION FINANCED OR PROPOSED TO BE FINANCED IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, WITH THE PROCEEDS OF ANY OF THE LOANS, (B) THE USE, HANDLING, RELEASE, EMISSION, DISCHARGE, TRANSPORTATION, STORAGE, TREATMENT OR DISPOSAL OF ANY HAZARDOUS SUBSTANCE AT ANY PROPERTY OWNED OR LEASED BY ANY GRANTOR, (C) ANY VIOLATION OF ANY ENVIRONMENTAL LAWS WITH RESPECT TO CONDITIONS AT ANY PROPERTY OWNED OR LEASED BY ANY GRANTOR OR THE OPERATIONS CONDUCTED THEREON, (D) THE INVESTIGATION, CLEANUP OR REMEDIATION OF OFFSITE LOCATIONS AT WHICH ANY LOAN PARTY OR THEIR RESPECTIVE PREDECESSORS ARE ALLEGED TO HAVE DIRECTLY OR INDIRECTLY DISPOSED OF HAZARDOUS SUBSTANCES OR (E) THE EXECUTION, DELIVERY, PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BY ANY OF THE LENDER PARTIES, EXCEPT FOR ANY SUCH INDEMNIFIED LIABILITIES ARISING ON ACCOUNT OF THE APPLICABLE LENDER PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS DETERMINED BY A FINAL, NONAPPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION. IF AND TO THE EXTENT THAT THE FOREGOING UNDERTAKING MAY BE UNENFORCEABLE FOR ANY REASON, EACH GRANTOR HEREBY AGREES TO MAKE THE MAXIMUM CONTRIBUTION TO THE PAYMENT AND SATISFACTION OF EACH OF THE INDEMNIFIED LIABILITIES WHICH IS PERMISSIBLE UNDER APPLICABLE LAW. ALL OBLIGATIONS PROVIDED FOR IN THIS SECTION 8.3 SHALL SURVIVE REPAYMENT OF THE LOANS, CANCELLATION OF THE NOTES, EXPIRATION OR TERMINATION OF THE LETERS OF CREDIT, ANY FORECLOSURE UNDER, OR ANY MODIFICATION, RELEASE OR DISCHARGE OF, ANY OR ALL OF THE COLLATERAL DOCUMENTS AND TERMINATION OF THIS AGREEMENT.

8.4 Enforcement Expenses.

(a) Each Grantor agrees, on a joint and several basis, (i) to pay or reimburse on demand each Lender and the Administrative Agent for all reasonable out-of-pocket costs and expenses (including Attorney Costs) incurred in collecting against any Guarantor under the guaranty contained in Section 2 or otherwise enforcing any rights under this Agreement and the other Loan Documents and (ii) to pay or reimburse on demand the Administrative Agent for all reasonable out-of-pocket costs and expenses (including Attorney Costs) incurred in preserving any rights under this Agreement and the other Loan Documents

(b) Each Grantor agrees to pay, and to save the Administrative Agent and the Lenders harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.

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(c) The agreements in this Section 8.4 shall survive repayment of all (and shall be) Secured Obligations (and termination of all commitments under the Loan Agreement), any foreclosure under, or any modification, release or discharge of, any or all of the Collateral Documents and termination of this Agreement.

8.5 Captions. Section captions used in this Agreement are for convenience only and shall not affect the construction of this Agreement.

8.6 Nature of Remedies. All Secured Obligations of each Grantor and rights of the Administrative Agent and the Lenders expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law. No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.

8.7 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. Receipt by telecopy of any executed signature page to this Agreement or any other Loan Document shall constitute effective delivery of such signature page.

8.8 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder.

8.9 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the parties hereto and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof and any prior arrangements made with respect to the payment by any Grantor of (or any indemnification for) any fees, costs or expenses payable to or incurred (or to be incurred) by or on behalf of the Administrative Agent or the Lenders.

8.10 Successors; Assigns. This Agreement shall be binding upon Grantors, the Lenders and the Administrative Agent and their respective successors and assigns, and shall inure to the benefit of Grantors, Lenders and the Administrative Agent and the successors and permitted assigns of the Lenders and the Administrative Agent. No other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. No Grantor may assign or transfer any of its rights or Obligations under this Agreement without the prior written consent of the Administrative Agent.

8.11 Governing Law. THIS AGREEMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF

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ILLINOIS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.

8.12 Forum Selection; Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE ADMINISTRATIVE AGENT FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION. EACH GRANTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH GRANTOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. EACH GRANTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

8.13 Waiver of Jury Trial. EACH GRANTOR, THE ADMINISTRATIVE AGENT AND EACH LENDER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

8.14 Set-off. Each Grantor agrees that the Administrative Agent and each Lender have all rights of set-off and bankers’ lien provided by applicable law, and in addition thereto, each Grantor agrees that at any time any Event of Default exists, the Administrative Agent and each Lender may apply to the payment of any Secured Obligations, whether or not then due, any and all balances, credits, deposits, accounts or moneys of such Grantor then or thereafter with the Administrative Agent or such Lender.

8.15 Acknowledgements. Each Grantor hereby acknowledges that:

(a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party;

(b) neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to any Grantor arising out of or in connection with this Agreement or any of the other Loan Documents and the relationship between the

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Grantors, on the one hand, and the Administrative Agent and the Lenders, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and

(c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Grantors and the Lenders.

8.16 Additional Grantors. Each Loan Party that is required to become a party to this Agreement pursuant to Section 11.10 of the Loan Agreement shall become a Grantor for all purposes of this Agreement upon execution and delivery by such Loan Party of a joinder agreement in the form of Annex I hereto.

8.17 Releases.

(a) At such time as the Secured Obligations have been Paid in Full, the Collateral shall be released from the Liens created hereby and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Administrative Agent and each Grantor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party and all rights to the Collateral shall revert to the Grantors. At the request and sole expense of any Grantor following any such termination, the Administrative Agent shall deliver to the Grantors any Collateral held by the Administrative Agent hereunder and execute and deliver to the Grantors such documents as the Grantors shall reasonably request to evidence such termination.

(b) If any of the Collateral shall be sold, transferred or otherwise disposed of by any Grantor in a transaction permitted by the Loan Agreement, then the Administrative Agent, at the request and sole expense of such Grantor, shall execute and deliver to such Grantor all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. At the request and sole expense of the Company, a Guarantor shall be released from its obligations hereunder in the event that all the equity interests of such Guarantor shall be sold, transferred or otherwise disposed of in a transaction permitted by the Loan Agreement; provided that the Company shall have delivered to the Administrative Agent, with reasonable notice prior to the date of the proposed release, a written request for release identifying the relevant Guarantor and the terms of the sale or other disposition in reasonable detail, including the price thereof and any expenses in connection therewith, together with a certification by the Company stating that such transaction is in compliance with the Loan Agreement and the other Loan Documents.

8.18 Obligations and Liens Absolute and Unconditional. Each Grantor understands and agrees that the obligations of each Grantor under this Agreement shall be construed as a continuing, absolute and unconditional without regard to (a) the validity or enforceability of any Loan Document, any of the Secured Obligations or any other collateral security therefor or guaranty or right of offset with respect thereto at any time or from time to time held by the Administrative Agent or any Lender, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by any Grantor or any other Person against the Administrative Agent or any Lender or (c) any other circumstance whatsoever (with or without notice to or knowledge of any Grantor)

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which constitutes, or might be construed to constitute, an equitable or legal discharge of any Grantor for the Secured Obligations, in bankruptcy or in any other instance. When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Grantor, the Administrative Agent or any Lender may, but shall be under no obligation to, make a similar demand on or otherwise pursue such rights and remedies as it may have against any other Grantor or any other Person or against any collateral security or guaranty for the Secured Obligations or any right of offset with respect thereto, and any failure by the Administrative Agent or any Lender to make any such demand, to pursue such other rights or remedies or to collect any payments from any other Grantor or any other Person or to realize upon any such collateral security or guaranty or to exercise any such right of offset, or any release of any other Grantor or any other Person or any such collateral security, guaranty or right of offset, shall not relieve any Grantor of any obligation or liability hereunder and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Administrative Agent or any Lender against any Grantor. For the purposes hereof “demand” shall include the commencement and continuance of any legal proceedings.

8.19 Reinstatement. This Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against Grantor or any Issuer for liquidation or reorganization, should Grantor or any Issuer become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of Grantor’s or Issuer’s assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Secured Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Secured Obligations, whether as a “voidable preference”, “fraudulent conveyance”, or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Secured Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.

[signature pages follow]

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Each of the undersigned has caused this Consolidated Amended and Restated Guaranty and Security Agreement to be duly executed and delivered as of the date first above written.

MATERIAL SCIENCES CORPORATION, ENGINEERED MATERIALS AND SOLUTIONS GROUP, INC.
By:	/s/    James J. Waclawik, Sr.
	James J. Waclawik, Sr. Chief Financial Officer
MSC LAMINATES AND COMPOSITES INC.
By:	/s/    James J. Waclawik, Sr.
	James J. Waclawik, Sr. Chief Financial Officer
MSC PRE FINISH METALS (EGV) INC
By:	/s/    James J. Waclawik, Sr.
	James J. Waclawik, Sr. Chief Financial Officer
MSC WALBRIDGE COATINGS INC.
By:	/s/    James J. Waclawik, Sr.
	James J. Waclawik, Sr. Chief Financial Officer
MSC PRE FINISH METALS (MV) INC.
By:	/s/    James J. Waclawik, Sr.
	James J. Waclawik, Sr. Chief Financial Officer

[TO CONSOLIDATED AMENDED AND RESTATED

GUARANTY AND SECURITY AGREEMENT]

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MSC LAMINATES & COMPOSITES (EGV) INC.
By:	/s/    James J. Waclawik, Sr.
	James J. Waclawik, Sr. Chief Financial Officer
LASALLE BANK NATIONAL ASSOCIATION, as Administrative Agent
By:	/s/    June M. Courtney
	June M. Courtney Senior Vice President

[TO CONSOLIDATED AMENDED AND RESTATED

GUARANTY AND SECURITY AGREEMENT]

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EX-10.(FF)

Exhibit 10(ff)

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT (this “Agreement”) dated as of May 5, 2004 and effective as of February 27, 2004 by and between MATERIAL SCIENCES CORPORATION, a Delaware corporation and its subsidiaries (collectively, the “Company”), and James J. Waclawik (“Employee”) (capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in Section 9 hereof).

W I T N E S S E T H:

WHEREAS, Employee is employed by the Company;

WHEREAS, the Board of Directors of the Company has determined that appropriate steps should be taken to reinforce and encourage the continued employment and dedication of the Company’s key personnel; and

WHEREAS, as an inducement for and in consideration of Employee providing services as an employee and a consultant, and taking into account Employee’s previous agreement to terminate his supplemental employee retirement benefits and certain long term incentive awards and stock options, the Company agrees that Employee shall receive the compensation and other benefits set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing, of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties, intending legally to be bound, hereby agree as follows:

1. Commencement Date. This Agreement, and all rights and obligations of the parties hereunder, shall commence on the date hereof.

2. Employment Terms.

(a) Position and Compensation. The Company hereby agrees to continue to employ Employee, and Employee hereby agrees to remain employed by the Company, from the date of this Agreement through December 31, 2004 (at which time his employment shall terminate). During this period, Employee shall hold the position of Vice President, Chief Financial Officer and Secretary; provided that the Company will change Employee’s position to a non-officer role reporting to the Chief Executive Officer (with duties and responsibilities of the type described in Section 3(b) of this Agreement) at such time as the Company has appointed (1) another individual to serve as its acting or permanent Chief Financial Officer and (2) another (or the same) individual to serve as its Secretary (which appointments may occur at the same or different times); and further provided that the Company shall have the right to terminate Employee at any time with or without Cause and Employee shall have the right to terminate his

employment with or without Good Reason. During the period from March 1, 2004 through December 31, 2004, Employee shall be entitled to the following compensation and benefits:

(i) Employee shall receive a base salary of $272,000 per annum (the “Base Salary”), payable by the Company in regular installments in accordance with the Company’s general payroll practices (in effect from time to time). Employee’s Base Salary shall be retroactive to March 1, 2004.

(ii) At the time of payment of Employee’s fiscal 2004 bonus of $50,164 under the EVA Plan (which was approved by the Compensation and Organization Committee in April 2004), Employee shall receive an additional discretionary cash bonus of $200,000 for services performed in fiscal 2004, in each case less any withholding taxes. Employee shall be entitled to participate in the Management Incentive Plan (the “MIP”) with respect to fiscal 2005 at a 50% bonus level subject to attainment of the targets set forth in the MIP (which shall be determined on a basis consistent with the performance achievement of other MSC officers); provided that Employee’s fiscal 2005 bonus shall be pro-rated to reflect the portion of the fiscal year from March 1, 2004 through December 31, 2004 (i.e., an 83.33% pro ration factor).

(iii) Employee shall participate in all Company-sponsored employee benefit programs and receive all fringe benefits for which employees of his level are eligible, including, without limitation, medical, dental and vision plans, long-term disability plans, life insurance plans, and incentive, savings, reimbursement and retirement plans; provided that (A) Employee shall not be entitled to a car allowance and (B) Employee has forfeited the benefits described in Sections 2(b) and 4(k) below; and provided further that Employee’s eligibility to participate in Company-sponsored employee benefit programs and to receive fringe benefits shall not be adversely affected in the event the Company changes Employee’s position to a non-officer role pursuant to Section 2(a) above.

(b) Termination of Supplemental Employee Retirement Plan. The Company shall pay to Employee, in full and complete satisfaction of the Company’s obligations under that certain Supplemental Pension Plan Agreement dated October 1, 1990 between the Company and Employee, an amount equal to $326,000 (less any withholding taxes) on May 31, 2004 or, if earlier, the date of termination of employment for any reason.

(c) Phantom Units. On the execution date of this Agreement, Employee shall receive a grant of (i) 19,070 phantom stock units with a vesting price of $14 per share and an expiration date of July 31, 2006 (which includes 4,000 units granted to Employee as his fiscal year 2005 long term incentive award) and (ii) 18,066 phantom units with a vesting price of $15 per share and an expiration date of July 31, 2007 (which includes 4,000 units granted to Employee as his fiscal year 2005 long term incentive award). The phantom units shall be evidenced by an agreement in the form of Exhibit A hereto (the “Phantom Unit Agreement”). The Phantom Unit Agreement shall govern the treatment of Employee’s units.

(d) Transaction Bonuses. If the Company decides to explore the possible disposition of one or more of its operating groups (i.e., coil coating, Quiet Steel or Electronic

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Materials and Devices) in whole or in part, then Employee shall have the opportunity to earn one or more performance-based transaction bonuses, not to exceed $100,000 in the aggregate. The full $100,000 bonus shall be payable upon the closing of the sale of one of the three operating groups in its entirety (in which case, no further bonuses shall be payable under this Section). In the event of a partial sale of an operating group, a partial bonus shall be paid based on (1) the percentage of the total assets of the operating group represented by the divested assets multiplied by (2) $100,000, but in no event shall total bonuses under this Section exceed $100,000. In order to be eligible to receive a bonus with respect to any particular transaction, the definitive agreement for that transaction must be signed during the period of Employee’s service as an employee or consultant (but the closing of that transaction may occur after the service period ends). The bonus for any transaction will be contingent on the closing of that transaction, and the bonus will be paid within 10 business days following the closing.

3. Termination of Employment; Consulting Services.

(a) Employee’s employment with the Company shall terminate at the close of business on December 31, 2004. For thirty (30) months following December 31, 2004, the Company, at its expense, shall continue Employee’s participation in the medical, dental and vision plans, long-term disability plans and life insurance plans specified in Section 2(a)(iii) (or substantially comparable benefits); provided that the Company shall not be required to make DC pension contributions on behalf of Employee or continue Employee’s participation in other savings, retirement or benefit plans. Following expiration of the 30-month period, Employee shall be entitled to 18 months of COBRA coverage at his expense. Except as set forth in Section 4(k), all vested stock options, shares of restricted stock and other stock or stock based awards granted by the Company to Employee shall remain exercisable by Employee subject to the terms and conditions of any plans which such grants or awards were made under.

(b) From January 1, 2005 through December 31, 2005, Employee shall serve as a consultant to the Company. Employee’s consulting relationship shall be evidenced by a consulting agreement in the form attached as Exhibit B hereto.

4. Additional Understandings.

(a) Death While an Employee. If Employee’s employment by the Company is terminated as a result of the occurrence of Employee’s death, the Company shall pay to Employee’s estate (i) vacation pay (for earned but unused vacation), (ii) the compensation and benefits specified in Section 2(a) through December 31, 2004 and the payment specified in Section 2(b) (to the extent not previously paid), (iii) the bonus payable under Section 2(d) with respect to any transaction for which a definitive agreement was signed prior to Employee’s death (contingent on closing of such transaction) and (iv) any death benefits available under any Company plan or policy. Following December 31, 2004, the Company shall continue to provide employee benefits and COBRA coverage on the terms set forth in Section 3(a).

(b) Disability While an Employee. If Employee’s employment is terminated by the Company as a result of the occurrence of Disability, the Company shall pay to Employee (i) vacation pay (for earned but unused vacation), (ii) the compensation and other benefits specified in Section 2(a) through December 31, 2004 and the payment specified in Section 2(b)

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(to the extent not previously paid), (iii) the bonus payable under Section 2(d) with respect to any transaction for which a definitive agreement was signed prior to Employee’s termination (contingent on closing of such transaction) and (iv) any disability benefits available under any Company plan or policy. Following December 31, 2004, the Company shall continue to provide employee benefits and COBRA coverage on the terms set forth in Section 3(a).

(c) Termination for Cause or without Good Reason. If the Company terminates Employee’s employment for Cause or Employee terminates his employment without Good Reason, the Company shall pay to Employee vacation pay (for earned but unused vacation), the compensation and other benefits specified in Section 2(a) through the Termination Date and the payment specified in Section 2(b) (to the extent not previously paid).

(d) Termination of Employment without Cause or for Good Reason. If Employee’s employment with the Company is terminated by the Company without Cause or the Employee terminates his employment with the Company for Good Reason, the Company shall pay to Employee, (x) on the Termination Date, any vacation pay (for earned but unused vacation) and the compensation and benefits specified in Section 2 through the Termination Date, and (y) severance, payable in a lump sum in cash within 5 business days following the Termination Date, in an amount equal to his Base Salary through December 31, 2004, his consulting compensation for 2005 and the Consulting Bonus (in each case to the extent unpaid). The Company also shall continue to provide employee benefits under Section 2(a)(iii) through December 31, 2004 and, following December 31, 2004, shall provide employee benefits and COBRA coverage on the terms set forth in Section 3(a).

(e) Notice of Termination. Any purported termination of Employee’s employment by the Company or by Employee shall be communicated to the other party hereto by a written notice which shall indicate the specific termination provision of this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee’s employment under the provision so indicated.

(f) No Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation earned by Employee as the result of employment by another employer or Successor, by retirement benefits, by offset against any amount claimed to be owed by Employee to the Company or otherwise.

(g) Employee’s Insurance Policy. Employee agrees to be solely responsible for the payment of the premiums under his long-term care insurance policy.

(h) Personal Property. On December 31, 2005, the Company shall transfer to Employee title to his Company-issued laptop computer and peripherals, subject to the deletion or removal of all Company specific and proprietary information (financial or otherwise). At any time, Employee shall have the right to remove from the Company’s premises and retain the photographs and art work in his office (as well as his personal effects). Except as described above, Employee shall return and relinquish all rights to all Company owned or leased property (including without limitation his Company-issued cellular telephone) on December 31, 2005 (or such earlier date as the Company may specify, but not prior to the termination of his employment).

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(i) Transition Services. Commencing on June 1, 2005 (or earlier if the Company terminates Employee’s employment or consulting services without Cause), the Company shall provide outplacement services at an executive level through one or more outside firms up to an aggregate cost of $20,000 and in accordance with the Company’s past practice, with such services to extend until the earlier of (x) thirty (30) months following the termination of Employee’s employment or (y) the date Employee secures a permanent position. Employee shall have access to the Company’s voicemail and electronic mail systems while a consultant and access to the Company’s voicemail system for sixty (60) days after the end of the consulting period.

(j) Directors’ and Officers’ Insurance. Prior to a Change of Control, the Company shall maintain a directors’ and officers’ liability insurance policy (with coverage for the Employee) consistent with past practice. Employee shall be entitled to tail coverage under such policy (to apply following the earlier of December 31, 2004, the Termination Date or a Change of Control) on the same terms applicable to members of the Board of Directors of the Company; provided that such period shall be no less than three years from the earlier of the Termination Date or Change of Control.

(k) Long-Term Incentive. Employee expressly agrees and acknowledges, effective as of February 27, 2004, that Employee forfeited all right, title and interest to (i) the long-term incentive award granted to Employee on March 1, 2003 pursuant to the 2003 Long-Term Incentive Stock Award Program, and (ii) options to purchase 21,596 shares of Common Stock at $10 per share which were originally scheduled to vest on February 28, 2005.

(l) Indemnification Agreement. Employee expressly acknowledges and agrees that, notwithstanding any provision or statement to the contrary contained in this Agreement, the Indemnification Agreement between the Company and Employee dated March 1, 2002 shall remain in full force and effect and continue to be binding upon Employee and the Company in accordance with its terms.

(m) Previous Agreements. Employee and the Company expressly acknowledge and agree that this Agreement replaces, and amends and restates in its entirety, the Retention Agreement between the Company and Employee dated February 17, 2004 and signed on February 27, 2004. Employee and the Company further acknowledge and agree that, effective as of February 27, 2004, the Change of Control Agreement entered into between the Company and Employee dated June 30, 2001 and the Technology Agreement between the Company and the Employee dated June 14, 1990 became null and void and ceased to have any force or effect.

(n) Press Releases. Prior to issuing any press release or otherwise making a public announcement with respect to any termination of Employee, the Company shall provide Employee for his review and comment a copy of such press release or announcement and accommodate any reasonable modifications suggested by Employee; provided that the Company shall in any event be entitled to comply with its disclosure obligations under the securities laws (as determined by the Company in good faith).

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(o) Retirement Accounts. The Company shall take all necessary actions to cause the Employee’s defined contribution plan account balance and 401(k) plan account balance to be distributed or transferred in accordance with the Employee’s instructions as expeditiously as possible following the Termination Date pursuant to the Company’s then current practice and applicable law.

(p) Company Successors. The Company will require any acquiror of all or substantially all of the business and/or assets of the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) (a “Successor”) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor which assumes and agrees to perform this Agreement by operation of law, or otherwise.

(q) Excise Tax Gross-Up.

(i) In the event that Employee becomes entitled to the payments and benefits provided under Section 3 above and/or any other payments or benefits in connection with a change in control or termination of Employee’s employment with the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change in control or any person affiliated with the Company or such person) (collectively, the “Payments”), and if any of the Payments will be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Code, then (A) if the aggregate amount of the Payments is equal to or greater than 330% of the “base amount” as defined in Section 280G(b)(3) of the Code, then the Company shall pay to Employee, at least 30 days prior to the time payment of any such Excise Tax is due, an additional amount (the “Gross-Up Payment”) such that the net amount retained by Employee, after deduction of any Excise Tax and any federal and state and local income tax imposed on the Gross-Up Payment, shall be equal to the Excise Tax imposed on the Payments; and (B) if the aggregate amount of the Payments is less than 330% of the “base amount,” then the aggregate present value of the payments made pursuant to the terms of this Agreement alone without taking into account payments made pursuant to any other agreements between the Company and Employee shall be reduced so that the Payment equals 299.99% of the “base amount” (it being understood that in no event shall the amount of the payment made pursuant to the terms of this Agreement be less than $0).

(ii) For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) the Payments shall be treated as “parachute payments” within the meaning of Section 280G(b)(2) of the Code, and all “excess parachute payments” within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax, unless, in the opinion of tax counsel selected by the Company’s tax advisors and reasonably acceptable to Employee, the Payments (in whole or in part) do not constitute parachute payments or excess parachute

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payments or are otherwise not subject to the Excise Tax, (B) the amount of the Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (y) the total amount of the Payments or (z) the amount of excess parachute payments within the meaning of Section 280G(b)(l) (after applying clause (A) above), and (C) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company’s tax advisors in accordance with the principles of Section 280G(d)(3) and (4) of the Code.

(iii) For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee’s residence on the Termination Date, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

(iv) In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Employee’s employment, Employee shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by Employee if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee’s employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined.

5. Confidential Information and Ownership of Property.

(a) Confidential Information. Employee agrees to use all Confidential Information solely in connection with the performance of services for or on behalf of the Company. Employee shall not, during the term of this Agreement, or at any time after the termination of this Agreement, in any manner, either directly or indirectly, (i) disseminate, disclose, use or communicate any Confidential Information to any person or entity, regardless of whether such Confidential Information is considered to be confidential by third parties, or (ii) otherwise directly or indirectly misuse any Confidential Information; provided, however, that (y) none of the provisions of this Section shall apply to disclosures made for valid business purposes of the Company or (z) that Employee shall not be obligated to treat as confidential any Confidential Information that (I) was publicly known at the time of disclosure to Employee; (II) becomes publicly known or available thereafter other than by means in violation of this Agreement or any other duty owed to the Company or any of its Affiliates by any person or entity; or (III) is lawfully disclosed to Employee by a third party. Notwithstanding the

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foregoing, Employee shall be permitted to disclose Confidential Information to the extent required to enforce Employee’s rights hereunder in any litigation arising under, or pertaining to, this Agreement provided that Employee shall give prior written notice to the Company of any such disclosure so that the Company may have an opportunity to protect the confidentiality of such Confidential Information in such litigation.

(b) Ownership of Property. Employee agrees that all works of authorship developed, authored, written, created or contributed to during his service as an employee or consultant for the benefit of the Company, whether solely or jointly with others, shall be considered works-made-for-hire. Employee agrees that such works shall be the sole and exclusive property of the Company (or its appropriate Affiliate) and that all right, title and interest therein or thereto, including all intellectual property rights existing or obtained in connection therewith, shall likewise be the sole and exclusive property of the Company (or its appropriate Affiliate). Employee agrees further that, in the event that any work is not considered to be work-made-for-hire by operation of law, Employee will immediately, and without further compensation, assign all of Employee’s right, title and interest therein to the Company (or its designated Affiliate), its successors and assigns. At the request and expense of the Company, Employee agrees to perform in a timely manner such further acts as may be necessary or desirable to transfer, defend or perfect the Company’s ownership of such work and all rights incident thereto.

6. Covenant Not to Compete. Employee covenants and agrees that Employee shall not anywhere in North America (including, without limitation, the United States, Canada and Mexico), during the term of Employee’s employment by the Company or any Affiliate thereof and for the Non-Compete Period, directly or indirectly own an interest in, operate, join, control, advise, work for, consult to, have a financial interest which provides any control of, or participate in any corporation, partnership, proprietorship, firm, association, person, or other entity producing, designing, providing, soliciting orders for, selling, distributing, consulting to, or marketing or re-marketing products, goods, equipment, or services competitive with or in substantially the same line of business as the Company or any Affiliate thereof, or any part thereof, as of the commencement of the Non-Compete Period. This covenant does not prohibit the mere ownership of less than three percent (3%) of the outstanding stock of any publicly-traded corporation as long as Employee is not otherwise in violation of this Agreement.

7. Covenant Against Solicitation of Employees. During the term of Employee’s employment by the Company and for the Non-Compete Period, Employee shall not employ employees or agents or former employees or agents of the Company or its Affiliates or, directly or indirectly, solicit or otherwise encourage the employment of employees or agents or former employees or agents of the Company or its Affiliates; provided, however, that this restriction shall not apply to former employees or agents (y) who, as of the date of termination of Employee’s employment by the Company, have not worked for any of the Company or its Affiliates during the twelve preceding months or (z) whose employment by the Company or any Affiliate thereof was terminated by the Company.

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8. Remedies.

(a) Employee Acknowledgements. Employee acknowledges (i) that the covenants contained in Sections 5, 6 and 7, including, without limitation, the time and geographic limits (collectively, the “Restrictive Covenants”), are reasonable and appropriate and that Employee will not any claim to the contrary in any action brought by the Company or its Affiliates to enforce any of such provisions and (ii) that should Employee violate any of the Restrictive Covenants, it will be difficult to determine the resulting damages to the Company and its Affiliates and, in addition to any other remedies the Company and its Affiliates may have, (A) the Company and its Affiliates shall be entitled to temporary injunctive relief without being required to post a bond and permanent injunctive relief without the necessity of proving actual damage; and (B) the Company shall have the right to offset against its obligation to make any payments to Employee under this Agreement or otherwise to the extent of any money damages incurred or suffered by the Company and its Affiliates. The Company may elect to seek one or more of these remedies at its sole discretion on a case by case basis. Failure to seek any or all remedies in one case shall not restrict the Company from seeking any remedies in another situation. Such action by the Company shall not constitute a waiver of any of its rights.

(b) Intent. It is the parties’ intent that each of the Restrictive Covenants be read and interpreted with every reasonable inference given to its enforceability. However, it is also the parties’ intent that if any term, provision or condition of the Restrictive Covenants is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions thereof shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Finally, it is also the parties’ intent that if a court should determine any of the Restrictive Covenants are unenforceable because of over-breadth, then the court shall modify said covenant so as to make it reasonable and enforceable under the prevailing circumstances.

(c) Tolling. In the event of any breach by Employee of any Restrictive Covenant, the running of the period of restriction shall be automatically tolled and suspended for the duration of such breach, and shall automatically recommence when such breach is remedied in order that the Company shall receive the full benefit of Employee’s compliance with each of the Restrictive Covenants.

(d) Independent Enforcement. Employee agrees that the Restrictive Covenants shall be enforced independently of any other obligations between the Company, on the one hand, and Employee, on the other, and that the existence of any other claim or defense shall not affect the enforceability of the Restrictive Covenants or the remedies provided herein. The Restrictive Covenants shall be in addition to and shall not replace any other restrictive covenant agreement that Employee may currently have (or hereafter enter into) with the Company or any of its Affiliates.

(e) Survival. The provisions of this Section 8 shall survive the termination of this Agreement.

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9. Certain Defined Terms. For purposes of this Agreement the following terms and phrases shall have the following meanings:

“Affiliate” means any person or entity who or which, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, a specified person or entity (the term “control” for these purposes meaning the ability, whether by ownership of shares or other equity interests, by contract or otherwise, to elect a majority of the directors of a corporation, to act as or select the managing or general partner of a partnership, or otherwise to select, or have the power to remove and then select, a majority of those persons exercising governing authority over an entity).

“Cause”, with respect to the termination of Employee’s employment by the Company, means (i) the willful and continued refusal by Employee to perform a lawful and reasonable order, direction or instruction of the Board of Directors within a reasonable period of time after a written demand for substantial performance is delivered to Employee by the Board of Directors which demand specifically identifies the manner in which the Board believes that Employee has not substantially performed such an order, direction or instruction; or (ii) the willful misconduct by Employee in the performance of Employee’s duties to the Company or the willful engaging by Employee in conduct which, in either case, is illegal or materially injurious to the Company. For purposes of this definition, no act, or failure to act, on Employee’s part shall be deemed “willful” unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee’s action or omission was in the best interest of the Company. In addition, notwithstanding the foregoing, Employee’s employment by the Company shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for such purpose (after reasonable notice to Employee and an opportunity for Employee, together with counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors, Employee was guilty of conduct set forth above in clauses (i) or (ii) of the first sentence of this definition and specifying the particulars thereof in detail.

“Change in Control” means the occurrence of any one of the following events:

(i) there is an acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors;

(ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in paragraphs (i) or (iii) of this definition) whose election by the Board of Directors of the Company or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or

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(iii) the closing of (A) a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or through the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (B) the sale or disposition by the Company of all or substantially all of the assets of each of its three businesses (i.e., the coated metal business, the laminates and composites business and the electronic materials and devices business).

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

“Confidential Information” means all software, trade secrets, work products created by Employee for the Company or any of its Affiliates, know-how, ideas, techniques, theories, discoveries, formulas, plans, charts, designs, drawings, lists of current or prospective clients, business plans and proposals, current or prospective business opportunities, financial records, research and development, marketing strategies and programs and reports and other proprietary information created or obtained by Employee for the benefit of the Company or any of its Affiliates during the course of employment by the Company.

“Consulting Agreement” has the meaning assigned in Section 3.

“Disability” means the inability of Employee to perform substantially all Employee’s duties and responsibilities to the Company by reason of a physical or mental illness or infirmity for either (i) a continuous period of six months or (ii) 180 days during any consecutive twelve-month period.

“Employment Period” means the date commencing on the Effective Date and terminating on the Termination Date.

“EVA Plan” means the annual variable compensation plan adopted by the Company’s Compensation Committee of the Board of Directors, as the same may be amended, modified, supplemented or restated from time to time (including any successor thereto or replacement therefor).

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Good Reason” means the occurrence, without the express written consent of Employee, of any one of the following events, unless such circumstances are fully corrected prior to the Termination Date specified in the applicable notice of termination delivered pursuant to Section 2(b):

(i) except in connection with (A) the search for an individual to replace Employee, (B) the hiring and training of such individual and (C) the replacement of Employee as Chief Financial Officer and/or Secretary, the assignment to Employee of any duties significantly inconsistent with Employee’s position and status with the Company or a substantial adverse alteration in the nature or status of Employee’s employment responsibilities from those in existence on the date hereof;

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(ii) the relocation of Employee’s office or job location to a location not within seventy-five miles of Employee’s present office or job location, except for required travel on the Company’s business to an extent substantially consistent with Employee’s present business travel obligations;

(iii) the failure by the Company to pay to Employee any portion of the compensation required hereunder, within ten business days of the date such compensation is due;

(iv) the occurrence of a Change of Control; or

(v) any purported termination of Employee’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(d).

“Non-Compete Period” means the period commencing on the date upon which Employee ceases to be an employee or consultant of the Company or any Affiliate thereof and terminating 30 months later.

“Successor” has the meaning set forth in Section 4(p).

“Termination Date” means December 31, 2004 or, if earlier, any of the following dates:

(i) if Employee’s employment is terminated for Death, the date of Employee’s death;

(ii) if Employee’s employment is terminated for Disability, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee’s duties during such 30 day period); and

(iii) if Employee’s employment is terminated for any other reason (other than death or Disability), the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than 30 days, and in the case of a termination for Good Reason shall not be less than 15 nor more than 60 days, respectively, from the date such Notice of Termination is given).

provided; however, that if prior to the Termination Date (as determined without regard to this provision), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Termination Date shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided; further, however, that the Termination Date shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. During the pendency of any such dispute, the Company will continue to pay Employee’s full compensation and benefits under this Agreement, until the dispute is finally resolved in accordance with this definition (or, if earlier, December 31, 2004), subject to receipt of an undertaking from Employee to repay to the Company any amounts that Employee was not entitled to receive (as determined as part of

12

the resolution of such dispute). Amounts paid under this paragraph are not in addition to other amounts due under this Agreement and shall be offset against and reduce any other amounts due under this Agreement.

10. Miscellaneous.

(a) Amendment. This Agreement may be amended, modified or supplemented but only in writing signed by each of the parties hereto.

(b) Waivers. The failure of a party hereto at any time or times to require performance of any provision hereof shall in no manner affect its right at a later time to enforce the same. No waiver by a party of any condition or of any breach of any term, covenant, representation or warranty contained in this Agreement shall be effective unless in writing, and no waiver in any one or more instances shall be deemed to be a further or continuing waiver of any such condition or breach in other instances or a waiver of any other condition or breach of any other term, covenant, representation or warranty.

(c) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.

(d) Forum Selection and Consent to Jurisdiction. EACH OF THE COMPANY AND EMPLOYEE AGREE THAT ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT BETWEEN OR AMONG SUCH PARTIES, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS LOCATED IN COOK COUNTY, ILLINOIS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS. EACH OF THE COMPANY AND EMPLOYEE HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS LOCATED IN COOK COUNTY, ILLINOIS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS. EACH OF THE COMPANY AND EMPLOYEE HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

(e) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

(f) Interpretation. The headings preceding the text of Articles and Sections included in this Agreement are for convenience only and shall not be deemed part of this Agreement or be given any effect in interpreting this Agreement. The use of the masculine, feminine or neuter gender herein shall not limit any provision of this Agreement. The use of the

13

terms “including” or “include” shall in all cases herein mean “including, without limitation” or “include, without limitation,” respectively. References to employment by the Company in this Agreement shall also refer to employment by one of the Company’s subsidiaries if applicable.

(g) Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No assignment of any rights or obligations shall be made by any party without the written consent of each other party.

(h) No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and, to the extent provided herein, their respective affiliates, directors, officers, employees, agents, estate and/or heirs and representatives, and no provision of this Agreement shall be deemed to confer upon other third parties any remedy, claim, liability, reimbursement, cause of action or other right.

(i) Severability. If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions hereof shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.

(j) Remedies Cumulative. The remedies provided in this Agreement shall be cumulative and shall not preclude the assertion or exercise of any other rights or remedies available by law, in equity or otherwise.

(k) Entire Understanding. This Agreement, together with attached exhibits and the plans and other agreements referred to herein, sets forth the entire agreement and understanding of the parties hereto with respect to the matters set forth herein and supersedes any and all prior agreements, arrangements and understandings among the parties.

(l) Conflicts With Existing Agreements. In the event that any term or provision of this Agreement conflicts with or differs from any term or provision of other existing agreement, understanding or plan between the Company and Employee or to which Employee is a participant, such term or provision of this Agreement shall govern for all purposes and respects.

(m) Tax Withholding. Any payments provided for hereunder shall be paid net of any applicable tax withholding required under federal, state or local law.

(n) General Release. On December 31, 2004, Employee shall be required to sign a general release in the form attached as Exhibit C hereto and to abide by the provisions of such general release.

(o) Attorneys’ Fees and Other Costs. In the event a dispute arises between the parties hereto and suit is instituted, the prevailing party or parties in such litigation shall be entitled to recover reasonable attorneys’ fees and other costs and expenses from the non-prevailing party or parties, whether incurred at the trial level or in any appellate proceeding. Unless prohibited by Section 13(k) of the Exchange Act (or the rules or regulations promulgated thereunder) or Employee otherwise elects, expenses incurred by Employee in connection with any dispute described in this Section will be paid by the Company in advance of the final

14

disposition of such dispute within 20 days after presentation by Employee of written documentation therefor reasonably satisfactory to the Company if Employee furnishes the Company a written undertaking to repay any amounts advanced if it is ultimately determined that Employee is not entitled to attorneys’ fees and other costs pursuant to this Section (which written undertaking will provide that the Company shall be entitled to collect its attorneys’ fees and other out-of-pocket costs incurred in connection with the enforcement of such undertaking).

(p) Notices. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to (i) the Company at 2200 East Pratt Boulevard, Elk Grove Village, Illinois 60007-5995 and (ii) Employee                                                           thereafter, provided that all notices to the Company shall be directed to the attention of the Board of Directors, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change in address shall be effective only upon receipt.

(q) Employee Representations. EMPLOYEE REPRESENTS AND AGREES THAT: (A) HE HAS READ THIS AGREEMENT CAREFULLY; (B) HE UNDERSTANDS ALL OF ITS TERMS AND KNOWS THAT HE IS GIVING UP IMPORTANT RIGHTS; (C) HE VOLUNTARILY CONSENTS TO EVERYTHING IN IT; (D) HE HAS BEEN ADVISED TO CONSULT WITH AN ATTORNEY BEFORE EXECUTING IT AND HE HAS DONE SO OR, AFTER CAREFUL READING AND CONSIDERATION HE HAS CHOSEN NOT TO DO SO ON HIS OWN VOLITION; AND (E) HE HAS SIGNED THIS AGREEMENT KNOWINGLY AND VOLUNTARILY AND WITH THE ADVICE OF ANY COUNSEL RETAINED TO ADVISE HIM WITH RESPECT TO IT.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.

THE COMPANY:
MATERIAL SCIENCES CORPORATION, a Delaware corporation
By:	/s/ Ronald Stewart
Name:	Ronald Stewart
Title:	President and Chief Executive Officer
EMPLOYEE:
	/s/ James J. Waclawik, Sr.
Name:	James J. Waclawik, Sr.

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EXHIBIT A

FORM OF GENERAL RELEASE

Dear [employee]:

This letter will confirm the agreement between you and Material Sciences Corporation (including its subsidiaries, the “Company”) as follows:

1. Separation from the Company.

By signing this letter agreement you acknowledge that the termination of your employment with the Company will be effective on                          (the “Termination Date”). As of the Termination Date, you will cease to be an employee of the Company, and you will no longer be required to fulfill any of the duties and responsibilities associated with your position.

2. Severance Payment.

You acknowledge and agree that the severance payments paid or granted to you pursuant to that certain Employment Agreement, dated April         , 2004 and effective as of February 27, 2004, by and between you and the Company (“Employment Agreement”), represents consideration for signing this Release and is not salary, wages or benefits to which you were already entitled. Such payments shall not be considered compensation for purposes of any employee benefit plan, program, policy or arrangement maintained or hereafter established by the Company or any of its affiliates.

3. Release by You.

(a) You (for yourself, your heirs, assigns or executors) release and forever discharge the Company, any of its affiliates, and its and their directors, officers, agents and employees from any and all claims, suits, demands, causes of action, contracts, covenants, obligations, debts, costs, expenses, attorneys’ fees, liabilities of whatever kind or nature in law or equity, by statute or otherwise whether now known or unknown, vested or contingent, suspected or unsuspected, and whether or not concealed or hidden, which have existed or may have existed, or which do exist, through the date this letter agreement becomes effective and enforceable, (“Claims”) of any kind, which relate in any way to your employment with the Company or the termination of that employment, except those arising out of the performance of this letter agreement and your rights under the Employment Agreement. Such released claims include, without in any way limiting the generality of the foregoing language, any and all claims arising under (i) any exception to the employment-at-will doctrine, including any common law theory sounding in tort, contract or public policy, (ii) the provisions of the Fair Labor Standards Act, as amended, or any state or local wage and hour law or ordinance, (iii) the National Labor Relations Act, as amended, or the Employee Retirement Income Security Act of 1974, as amended, and (iv) Title VII of the Civil Rights

A-1

Act of 1964, as amended, the Civil Rights Act of 1991, the Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, as amended, or the Illinois Human Rights Act.

(b) In signing this Release you acknowledge that you intend that it shall be effective as a bar to each and every one of the Claims hereinabove mentioned or implied. You expressly consent that this letter agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected Claims (notwithstanding any state statute that expressly limits the effectiveness of a general release of unknown, unsuspected and unanticipated Claims), if any, as well as those relating to any other Claims hereinabove mentioned or implied. You acknowledge and agree that this waiver is an essential and material term of this letter agreement and without such waiver the Company would not have made the Severance Payments described in paragraph 2. You further agree that in the event you bring your own Claim in which you seek damages against the Company, or in the event you seek to recover against the Company in any Claim brought by a governmental agency on your behalf, this release shall serve as a complete defense to such Claims.

(c) By signing this letter agreement, you acknowledge that you:

(1) have been given twenty-one days after receipt of this letter agreement within which to consider it;

(2) have carefully read and fully understand all of the provisions of this letter agreement;

(3) knowingly and voluntarily agree to all of the terms set forth in this letter agreement;

(4) knowingly and voluntarily agree to be legally bound by this letter agreement;

(5) have been advised and encouraged in writing (via this agreement) to consult with an attorney prior to signing this letter agreement;

(6) understand that this letter agreement, including the Release, shall not become effective and enforceable until the eighth day following execution of this letter agreement, and that at any time prior to the effective day you can revoke this letter agreement.

4. Additional Agreement.

You also agree not to disparage the Company, or its past and present investors, officers, directors or employees and to keep all confidential and proprietary information about the past or present business affairs of the Company confidential unless a prior written release from the Company is obtained.

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5. No Admissions.

This letter agreement shall not be construed as an admission of any wrongdoing either by the Company, its affiliates, or its and their directors, officers, agents and employees.

6. Governing Law.

This letter agreement shall be interpreted in accordance with the laws of the State of Illinois. Whenever possible, each provision of this letter agreement shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision shall be held to be prohibited or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or affecting the remainder of such provision or any of the remaining provisions of this letter agreement.

Please indicate your agreement by signing this letter and returning it to us on or before                     .

Very truly yours,

MATERIAL SCIENCES CORPORATION

By:

Its:

AGREED TO AND ACCEPTED BY:

Dated:                                                                                          

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EX-10.(GG)

Exhibit 10(gg)

CONSULTING AGREEMENT

THIS CONSULTING AGREEMENT is made as of the 5th day of May 2004, between MATERIAL SCIENCES CORPORATION, a Delaware corporation (the “Company”), and JAMES J. WACLAWIK, SR. (“Waclawik”).

Preliminary Recitals

A. The Company is a Delaware corporation engaged in the business of applying protective and decorative coatings to sheet steel coils, laminating films and metals onto such coils to produce advance composite materials and other businesses. The Company presently has domestic facilities located in Elk Grove Village, Illinois (“Elk Grove Village”), Walbridge, Ohio, Middletown, Ohio, Morrisville, Pennsylvania, Holland, Michigan and Wheaton, Illinois and also has international facilities.

B. The Company desires to engage Waclawik as a consultant following the end of his employment relationship with the Company pursuant to that certain Employment Agreement, dated as of May 5, 2004, between Waclawik and the Company (the “Employment Agreement”) and Waclawik desires to be so engaged on the terms and conditions set forth below.

C. As a consultant, Waclawik will perform the consulting services described in more detail below.

D. Due to the specialized nature of Waclawik’s services for the Company and the confidential information to which he has had and will have access, Waclawik recognizes not only a working relationship with the Company as a consultant but also a fiduciary obligation to the Company.

NOW, THEREFORE, the parties hereto agree as follows:

1. Preamble; Preliminary Recitals. The Preamble and Preliminary Recitals set forth above are hereby incorporated in and made a part of this Agreement.

2. Engagement as Consultant. The Company hereby engages Waclawik to render consulting services and Waclawik hereby accepts such engagement as a consultant to the Company, in each case on the terms and conditions hereinafter set forth.

(a) Term. Subject to the provisions for earlier termination set forth in Paragraph 5 below, the term of this Agreement shall commence on January 1, 2005 and end on December 31, 2005 (the “Consulting Term”).

(b) Consulting Services. Waclawik shall perform consulting services for the Company on projects relating to financial reporting, SEC reporting and compliance, internal audit and controls, systems, corporate finance, mergers and acquisitions, joint ventures, litigation management and other areas identified by the Chief Executive Officer (so long as those other areas are generally consistent with Waclawik’s historical roles and experience at the Company).

(c) Work Schedule. Waclawik shall be available to perform consulting services for the Company at the times and in the manner determined by the Company for up to (i) forty (40) hours per week through May 31, 2005 and (ii) five (5) working days per month during the remainder of the Consulting Term. If requested by the Company, Waclawik shall provide consulting services in excess of the weekly or monthly amounts referred to in the preceding sentence (“Additional Services”); provided that (1) the Company shall pay Waclawik $5,600 for each working day of Additional Services provided and (2) Waclawik’s consulting obligation and consulting compensation in the period from June 1, 2005 through December 31, 2005 shall be reduced by one working day for each working day of Additional Services provided. Any such reduction in Waclawik’s consulting schedule shall be made in reverse

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chronological order, starting with December 2005 (for example, if Waclawik provides a total of eight days of Additional Services, then his consulting commitment for December 2005 would be deemed satisfied and his consulting commitment for November 2005 would be reduced from 5 days to 2 days).

3. Consulting Fee; Bonus. During the Consulting Term and provided Waclawik is available and able to perform the consulting services, the Company shall pay Waclawik Forty Thousand Dollars and No Cents ($40,000.00) per month from January 1, 2005 through May 31, 2005 and Twenty-Eight Thousand Dollars and No Cents ($28,000.00) per month during the remainder of the Consulting Term (collectively, the “Consulting Fee”). The Consulting Fee shall be payable monthly on or before the third working day of the month following the month in which the consulting services were performed. As a condition of payment, Waclawik shall submit invoices to the Company, on a monthly basis, setting forth a description of any services rendered hereunder and the dates on which such services were rendered. In addition to the Consulting Fee, the Company shall pay Waclawik a lump sum payment (the “Bonus”) of One Hundred Thousand Dollars and No Cents ($100,000.00) on January 2, 2006 (or, at Waclawik’s option, within 5 business days following the date on which Waclawik completes all of his working days of Consulting Services, as described in the last sentence of Section 2). The foregoing notwithstanding, Waclawik shall not be entitled to receive the Bonus if the Company has terminated his consulting services for Cause (as defined below) or Waclawik has voluntarily resigned from his position as a consultant with the Company without Good Reason (as defined below).

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4. Reimbursement of Expenses. The Company shall reimburse Waclawik in accordance with normal Company procedures for the reasonable and necessary expenses which he incurs while performing consulting services as described in Paragraph 2(b) of this Agreement.

5. Early Termination.

(a) Death or Disability. If Waclawik’s consulting services are terminated as a result of the occurrence of Waclawik’s death or Disability (as defined in his Employment Agreement), then the Company shall continue to pay Waclawik or his estate the Consulting Fee and Bonus on their scheduled payment dates (in each case to the extent unpaid).

(b) Termination by the Company for Cause. The Company may terminate Waclawik’s consulting services at any time for Cause. For purposes hereof, “Cause” shall mean any of the following: (i) Waclawik’s commission of any act of fraud, theft or embezzlement against, or willful breach of a fiduciary duty to, the Company (including the unauthorized disclosure of Confidential Information); (ii) Waclawik’s conviction of a felony in either a state or federal court proceeding; (iii) Waclawik’s material breach of this Agreement, including the material failure of Waclawik to diligently and faithfully perform the consulting services in accordance with in this Agreement; or (iv) any willful or intentional act having the effect of injuring the reputation or business relationships of the Company. The termination shall be deemed effective on the date the Company provides written notice to Waclawik that it is terminating the Agreement pursuant to this Paragraph 5(b). In the event Waclawik’s consulting services are terminated pursuant to this Paragraph 5(b), the Company shall pay Waclawik any accrued but unpaid Consulting Fee through the effective date of termination.

(c) Termination by the Company without Cause. The Company may terminate Waclawik’s consulting services at any time without Cause. The termination shall be

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deemed effective on the date the Company provides written notice to Waclawik that it is terminating his consulting services pursuant to this Paragraph 5(c). In the event Waclawik’s consulting services are terminated pursuant to this Paragraph 5(c), the Company shall continue to pay Waclawik the Consulting Fee and Bonus on their scheduled payment dates (in each case to the extent unpaid).

(d) Termination by Waclawik for Good Reason. Waclawik may terminate his consulting services at any time for Good Reason. For purposes hereof, “Good Reason” shall mean any of the following: (i) the Company’s assignment to Waclawik of duties materially inconsistent with this Agreement without Waclawik’s consent or (ii) the Company’s failure to pay any amount owing to Waclawik hereunder, in each case after written notice from Waclawik of the alleged breach and a reasonable opportunity to cure. In the event Waclawik terminates his consulting services pursuant to this Paragraph 5(d), the Company shall continue to pay Waclawik the Consulting Fee and Bonus on their scheduled payment dates (in each case to the extent unpaid).

(e) Change in Control. In the event of a Change in Control (as defined in the Employment Agreement), the Company shall pay Waclawik a lump sum of cash in an amount equal to the Consulting Fee and Bonus (in each case to the extent unpaid).

6. Covenants.

(a) Upon termination of his consulting services with the Company (whether under the terms of this Agreement or otherwise), Waclawik, except as otherwise provided for in his Employment Agreement, shall surrender to the Company all property of the Company in his possession which includes, but is not limited to, all books, records, correspondence, notes, memoranda, files, documents, plans, sketches, lists, computerized forms of information and other forms of information whether or not reduced to writing, and any copies thereof relating to or concerning the Company.

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(b) Waclawik acknowledges and agrees that during the Consulting Term and following the termination of his consulting services with the Company, he will be bound by, and subject to restrictions set forth in, Sections 5, 6, 7 and 8 of his Employment Agreement.

7. Indemnification. Waclawik shall not be liable to the Company for any loss, damages or expenses resulting from Waclawik’s services under this Agreement with the Company other than: (1) those covered under Waclawik’s general liability insurance policy, and/or (2) those resulting from Waclawik’s acts which were either unlawful or which were not made in good faith and in a manner which Waclawik reasonably believed to be in the best interest of the Company. The Company will indemnify and hold harmless Waclawik against all liabilities, damages and expenses, including reasonable attorney fees, resulting from any civil third-party claim or lawsuit arising from Waclawik’s performance under this Agreement of acts within his authority, if Waclawik acted in good faith and in a lawful manner he reasonably believed to be in the best interest of the Company. Waclawik shall notify the Company in writing of any matter with respect to which Waclawik intends to seek indemnification as soon as reasonably practicable. Expenses incurred in defending a civil or criminal claim or lawsuit may be paid by the Company in advance of the final disposition of such matter only upon receipt of a written undertaking by Waclawik to repay such amount if it shall ultimately be determined that he was not entitled to be indemnified by the Company as authorized under Illinois law.

8. Non-Exclusive Remedy. All rights and remedies of the Company shall be cumulative and none shall exclude any other right or remedy allowed by law.

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9. Independent Contractor. Waclawik and the Company agree that Waclawik shall perform services hereunder as an independent contractor, retaining control over and responsibility for his own operations and personnel. Neither Waclawik nor Waclawik’s affiliates, partners, agents or related parties shall be considered employees or agents of the Company as a result of this Agreement, nor shall any of them have authority to contract in the name of or bind the Company, except as expressly agreed to in writing by the Company. It is agreed that Waclawik shall be solely responsible for any taxes that become due, if any, in connection with any payments Waclawik receives in connection with this Agreement.

10. No Waiver. No failure on the part of the Company to insist upon strict compliance by Waclawik with any term, covenant or provision of this Agreement shall constitute a waiver of the Company’s right thereafter to demand exact compliance with all the terms, covenants and provisions herein contained.

11. Assignment. This Agreement is personal to Waclawik and Waclawik may not assign or delegate any of his rights or obligations hereunder. The terms and provisions of this Agreement shall inure to the benefit of and bind the Company, its successors and assigns.

12. Amendments. No amendments to this Agreement shall be binding unless in writing and signed by the Company and Waclawik.

13. Applicable Law. This Agreement is made in the State of Illinois and all rights and obligations of the parties shall be governed by the laws of such state.

14. Captions. The paragraph headings used in this Agreement are included solely for convenience and shall not affect nor be used in connection with the interpretation of this Agreement.

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15. Invalidity of Provisions. If any provision in this Agreement is invalid as applied to any fact or circumstance, such invalidity shall not affect the validity of any other provision or of the same provision as applied to any other fact or circumstance.

16. Entire Agreement. This Agreement, together with the Employment Agreement and the Phantom Unit Agreement, contains the entire agreement between the parties regarding its subject matter and supersedes all negotiations, commitments and previous writings. Notwithstanding the foregoing, nothing in this Agreement is intended to or has the effect of releasing Waclawik from the Employment Agreement, which shall remain in full force and effect and continue to bind Waclawik and the Company.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written.

COMPANY:

MATERIAL SCIENCES CORPORATION, a

Delaware corporation

By:

/s/ Ronald Stewart

President and Chief Executive Officer

/s/ James J. Waclawik

James J. Waclawik, Jr.

Consultant

May 5, 2004

Date

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EX-10.(HH)

Exhibit 10(hh)

MATERIAL SCIENCES CORPORATION

PHANTOM STOCK UNIT AGREEMENT

THIS PHANTOM STOCK UNIT AGREEMENT (the “Agreement”), dated as of this 5th day of May, 2004, by and between Material Sciences Corporation, a Delaware corporation (the “Company”), and James J. Waclawik, Sr. (the “Unit Holder”), is entered into with reference to the following:

A. The Company is desirous of providing additional incentives to Unit Holder in rendering services as an executive officer, employee and/or consultant of the Company and in order to accomplish this result has determined to grant him phantom stock units.

B. Unit Holder is desirous of accepting the grant on the terms and conditions set forth herein.

NOW, THEREFORE, it is agreed as follows:

1. Grant.

(a) Subject to the terms and conditions set forth in this Agreement, the Company grants the Unit Holder (i) 19,070 Units (as defined below) (the “First Grant”), which will vest and be paid-out in accordance with the provisions of this Agreement if the First Vesting Date (defined below) occurs during the period commencing on the date hereof and expiring at the close of business on July 31, 2006 (the “First Expiration Date”) and (ii) 18,066 Units (the “Second Grant”), which will vest and be paid out in accordance with the provisions of this Agreement if the Second Vesting Date (defined below) occurs during the period commencing on the date hereof and expiring on the close of business on July 31, 2007 (the “Second Expiration Date” and, together with the First Expiration Date, the “Expiration Dates”). Each Unit represents the right to receive cash in an amount (the “Payout Amount”) equal to (i) the average of the Fair Market Value of one share of the Company’s Common Stock for the 30 consecutive trading days ending on the applicable Vesting Date plus (ii) the aggregate amount of dividends declared on one share of Common Stock prior to the applicable Vesting Date (but only for dividends as to which the “ex-dividend” trading dates are prior to the applicable Vesting Date). For purposes of this Agreement, “Fair Market Value of one share of Common Stock” on a particular day shall mean the closing sales price of the Common Stock on the New York Stock Exchange on that day.

2. Pay-out of Units. Within 15 business days after each Vesting Date, the Company shall pay the Unit Holder an amount equal to (i) the number of Units which vested on that Vesting Date multiplied by (ii) the Payout Amount. On the Expiration Dates, any unvested Units shall automatically and without notice terminate and become null and void.

3. Vesting. The First Grant shall vest when the Fair Market Value of one share of Common Stock is at or higher than $14.00 (“First Strike Price”) for 30 consecutive trading days (the “First Vesting Date”) and the Second Grant shall vest when the Fair Market Value

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of one share of Common Stock is at or higher than $15.00 (“Second Strike Price” and, together with the First Strike Price, the “Strike Prices”) for 30 consecutive trading days (the “Second Vesting Date,” and together with the First Vesting Date, the “Vesting Dates”), but in each case only if the Unit Holder is actively serving as an executive officer, employee or consultant on (or has served as an executive officer, employee or consultant through at least May 31, 2005 in accordance with the terms of his Employment Agreement and his Consulting Agreement prior to), the First Vesting Date or Second Vesting Date, as the case may be, with no interruption of continuous service from the date of this Agreement through the applicable Vesting Date (or, if earlier, May 31, 2005). For greater certainty, any leave of absence for periods and purposes conforming to the personnel policies of the Company and approved by the Compensation and Organization Committee (the “Committee”) of the Board of Directors shall not be deemed to be an interruption of continuous service. If any dividend is declared on the Common Stock prior to the First Vesting Date (and the “ex-dividend” trading date is prior to the First Vesting Date), then the Strike Prices shall automatically be reduced by the per share amount of such dividend with effect from and after the “ex-dividend” date. If any dividend is declared on the Common Stock after the First Vesting Date but prior to the Second Vesting Date (and the “ex-dividend” trading date falls within that period), then the Second Strike Price shall automatically be reduced by the per share amount of such dividend with effect from and after the “ex-dividend” date. The “per share amount” of any dividend paid other than in cash shall be the fair market value of such dividend as determined by the Committee.

4. Effect on Vesting in Case of Termination of Services. Notwithstanding Paragraph 3 above, the following special vesting rules shall apply if the Unit Holder’s service as an executive officer, employee or consultant terminates at any time prior to the First or Second Vesting Date (or, if earlier, May 31, 2005):

(a) In the event that the Unit Holder’s service is terminated due to the Unit Holder’s death or Disability, the Unit Holder or his estate shall retain the Units (and the Units shall vest in accordance with the terms of this Agreement if and when the Vesting Dates occur, but subject to the applicable Expiration Dates).

(b) In the event that the Unit Holder’s service is terminated by the Company for Cause, or in the event of the Unit Holder’s resignation without Good Reason, then the Unit Holder’s unvested Units shall remain unvested, and concurrent with the effective date of such termination, the Unit Holder shall forfeit all of the unvested Units.

(c) In the event that the Unit Holder’s service is terminated by the Company without Cause, or in the event of the Unit Holder’s resignation for Good Reason, the Unit Holder shall retain the Units (and the Units shall vest in accordance with the terms of this Agreement if and when the Vesting Dates occur, but subject to the applicable Expiration Dates).

(d) The terms “Cause”, “Disability” and “Good Reason” shall have the meanings set forth in the Employment Agreement (in the case of the termination of Unit Holder’s services as an executive officer or employee) or the Consulting Agreement (in the case of the termination of Unit Holder’s services as a consultant).

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5. Transferability. Except as otherwise provided herein, the Unit Holder may not sell, transfer, assign, pledge or otherwise encumber any of the Units or the rights granted hereunder (any such disposition or encumbrance being referred to herein as a “Transfer”). Any Transfer or purported Transfer by the Unit Holder of any of the Units except in accordance herewith shall be null and void. Units are exercisable during the Unit Holder’s lifetime. Notwithstanding the foregoing, Units may be Transferred (i) by law or pursuant to the laws of descent and distribution and (ii) by the Unit Holder to a “family member” of such Unit Holder by gift or by domestic relations order, but subject to the continued application of the vesting requirements under this Agreement (including without limitation the continued service by the Unit Holder as an executive officer, employee or consultant of the Company). For purposes of this paragraph 5, “family member” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Unit Holder’s household (other than as a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the Unit Holder) control the management of assets, and any other entity in which these persons (or the Unit Holder) own more than fifty percent of the voting interests (each, a “Permitted Transferee”). In the case of any Transfer pursuant to this Paragraph 5, this Agreement shall be interpreted such that the term “Unit Holder” shall mean the transferring Unit Holder and his Permitted Transferees (it being agreed that all of the obligations of the Unit Holder hereunder shall be allocated as appropriate between the transferring Unit Holder and his Permitted Transferee).

6. Changes in Capitalization; Special Dividends; Sale of the Company. Upon the occurrence of any of the following events prior to the First Vesting Date or Second Vesting Date, the grants hereunder shall be adjusted as follows:

(a) In the event of any change in the capitalization of the Company which affects the Units (such as a stock dividend, a stock distribution, a stock split, a subdivision or combination of shares, or a merger or consolidation to which the Company is a party, but excluding the sale, purchase or retirement by the Company of shares of Common Stock or securities convertible into Common Stock or the issuance of shares of Common Stock or securities convertible into Common Stock), the Committee shall make or cause to be made any proportionate adjustments herein or otherwise necessary to reflect such change with respect to the Units.

(b) Upon a Sale of the Company for cash or other consideration which has a fair market value (as determined by the Compensation Committee) in excess of the First Strike Price, then the First Vesting Date shall occur upon the closing of such transaction (even if the closing stock price has not exceeded the First Strike Price for 30 consecutive trading days) and the Payout Amount shall equal the per share value that the Company’s stockholders receive in such transaction.

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(c) Upon a Sale of the Company for cash or other consideration which has a fair market value (as determined by the Compensation Committee) in excess of the Second Strike Price, then the First Vesting Date shall occur upon the closing of such transaction (if it has not occurred previously) and the Second Vesting Date shall occur upon the closing of the transaction (even if the closing stock price has not exceeded the Second Strike Price for 30 consecutive trading days), and the Payout Amount shall equal the per share value that the Company’s stockholders receive in such transaction.

(d) Upon a Sale of the Company which does not trigger the First Vesting Date, the Unit Holder shall forfeit his right to the First Grant and Second Grant. Upon a Sale of the Company which triggers the First Vesting Date but not the Second Vesting Date, the Unit Holder shall forfeit his right to the Second Grant.

For purposes of this Section 6, “Sale of the Company” means (i) the sale of a majority of the outstanding Common Stock to a person or group in a single transaction or a series of related transactions, (ii) a merger or consolidation to which the Company is a party, other than a transaction in which the holders of the Common Stock receive securities which represent a majority of the voting power of the surviving corporation, and (iii) any other transaction determined to be a sale of the Company by the Committee.

7. Rights Unfunded. The Unit Holder understands that the rights provided for hereunder are unfunded and the Company has not made, and has no obligation to make, any provision with respect to segregating assets of the Company for payment of any benefits hereunder. The Unit Holder further understands that he has no interest in any particular asset of the Company by reason of this Agreement but only the rights of a general unsecured creditor with respect to his rights under this Agreement.

8. No Rights as a Stockholder. Neither the Unit Holder nor any other person legally entitled to the Units hereunder shall have any rights of a stockholder by virtue of the grant and vesting of the Units.

9. Taxes. As a condition precedent to this Agreement, the Unit Holder agrees to pay to the Company at such times as the Company shall determine such amounts as the Company shall deem necessary to satisfy any withholding taxes due on income that the Unit Holder recognizes as a result of vesting or pay-out of the Units. The Committee shall have the power to withhold, or require the Unit Holder to remit to the Company, an amount sufficient to satisfy any withholding or other tax due with respect to any Units and/or any amount payable hereunder, and the Committee may defer any such payments unless indemnified by the Unit Holder to such Committee’s satisfaction.

10. Descriptive Headings; Interpretation of Agreement. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. Any questions which arise in connection with the interpretation or performance of this grant shall be resolved by the Committee in its sole and absolute discretion.

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11. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Unit Holder acquire any rights hereunder.

12. Further Assurances. The parties agree to execute such further instruments and to take such further actions as may reasonably be required to carry out the intent of this Agreement.

13. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given when personally delivered or after five (5) business days following deposit in the United States Post Office, by certified mail with postage and fees prepaid, return receipt requested. Notices shall be addressed, in the case of the Unit Holder, to the address set forth below his signature on the signature page hereto and in the case of the Company, to it at its principal executive office, or at such other address as such party may designate by ten (10) days’ advance written notice to the other party.

14. Entire Agreement. This Agreement, together with the Employment Agreement and the Consulting Agreement, constitute the entire agreement of the parties with respect to the subject matter hereof.

15. Governing Law. The corporate law of the State of Delaware shall govern all questions concerning the relative rights of the Company and its shareowners. All other questions concerning the construction, validity and interpretation of this Agreement shall be governed by the internal laws (and not the laws of conflicts) of the State of Illinois.

16. Termination. This Agreement, and all rights and obligations hereunder, shall be null and void unless the Unit Holder shall accept the same below and return this executed Agreement to the Chief Executive Officer of the Company at his office in Elk Grove Village, Illinois by May 7, 2004.

* * *

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Dated as of the 5th day of May, 2004.

MATERIAL SCIENCES CORPORATION
By:	/s/ Ronald Stewart
	Ronald Stewart
Its: President and Chief Executive Officer

Accepted this 5th day of

May, 2004

/s/ James J. Waclawik, Sr.

James J. Waclawik, Sr.

Notice Address:

EX-10.(II)

Exhibit 10(ii)

FORM OF

MATERIAL SCIENCES CORPORATION

FISCAL 2005 PHANTOM STOCK UNIT AGREEMENT*

THIS PHANTOM STOCK UNIT AGREEMENT (the “Agreement’), dated as of this 9th day of March, 2004, by and between Material Sciences Corporation, a Delaware corporation (the “Company”), and «UnitHolder» (the “Unit Holder”), is entered into with reference to the following:

A. The Company is desirous of providing additional incentives to Unit Holder in rendering services as «Title» of the Company and in order to accomplish this result has determined to grant phantom stock units.

B. Unit Holder is desirous of accepting the grant on the terms and conditions set forth herein.

NOW, THEREFORE, it is agreed as follows:

1. Grant.

(a) Subject to the terms and conditions set forth in this Agreement, the Company grants the Unit Holder «Units» («NumberUnits») Units (as defined below), which will vest and be paid-out in accordance with the provisions of this Agreement if one or both of the Vesting Dates (defined below) occur during the period commencing on the date hereof and expiring at the close of business on March 8, 2007 (the “Expiration Date”). Each Unit represents the right to receive cash in an amount (the “Payout Amount”) equal to (i) the average of the Fair Market Value of one share of the Company’s Common Stock for the 30 consecutive trading days ending on the applicable Vesting Date plus (ii) the aggregate amount of dividends declared on one share of Common Stock prior to the applicable Vesting Date (but only for dividends as to which the “ex-dividend” trading dates are prior to the applicable Vesting Date). For purposes of this Agreement, “Fair Market Value of one share of Common Stock” on a particular day shall mean the closing sales price of the Common Stock on the New York Stock Exchange on that day.

2. Pay-out of Units. Within 15 business days after each Vesting Date, the Company shall pay the Unit Holder an amount equal to (i) the number of Units which vested on that Vesting Date multiplied by (ii) the Payout Amount. On the Expiration Date, any unvested Units shall automatically and without notice terminate and become null and void.

3. Vesting. Fifty percent (50%) of the total number of Units shall vest when the Fair Market Value of one share of Common Stock is at or higher than «FirstStrikePrice» (“First Strike Price”) for 30 consecutive trading days (the “First Vesting Date”). The remaining fifty percent (50%) of the total number of Units shall vest when the Fair Market Value of one share of Common Stock is at or higher than

* See Attached Schedule

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«SecondStrikePrice» (“Second Strike Price” and, together with the First Strike Price, the “Strike Prices”) for 30 consecutive trading days (the “Second Vesting Date,” and together with the First Vesting Date, the “Vesting Dates”), but in each case only if the Unit Holder is actively serving as «Title» of the Company on the First Vesting Date or Second Vesting Date, as the case may be, with no interruption of continuous service from the date of this Agreement through the applicable Vesting Date. For greater certainty, any leave of absence for periods and purposes conforming to the personnel policies of the Company and approved by the Compensation and Organization Committee (the “Committee”) of the Board of Directors shall not be deemed to be an interruption of continuous service. If any dividend is declared on the Common Stock prior to the First Vesting Date (and the “ex-dividend” trading date is prior to the First Vesting Date), then the Strike Prices shall automatically be reduced by the per share amount of such dividend with effect from and after the “ex-dividend” date. If any dividend is declared on the Common Stock after the First Vesting Date but prior to the Second Vesting Date (and the “ex-dividend” trading date falls within that period), then the Second Strike Price shall automatically be reduced by the per share amount of such dividend with effect from and after the “ex-dividend” date. The “per share amount” of any dividend paid other than in cash shall be the fair market value of such dividend as determined by the Committee.

4. Effect on Vesting in Case of Termination of Services. Notwithstanding Paragraph 3 above, the following special vesting rules shall apply if the Unit Holder’s services with the Company terminate at any time prior to the First or Second Vesting Date:

(a) In the event that the Unit Holder’s service is terminated due to the Unit Holder’s death, retirement or total and permanent disability, or due to the termination of the Unit Holder by the Company without Cause, the Committee shall have the sole and absolute discretion to determine if the Unit Holder’s unvested Units shall vest. Any determination by the Committee pursuant to this paragraph shall be final and binding on the Company and the Unit Holder and shall not be subject to contest or challenge.

(b) In the event that the Unit Holder is terminated by the Company under circumstances which constitute Cause, or in the event of the Unit Holder’s resignation from the Company, then the Unit Holder’s unvested Units shall remain unvested, and concurrent with the effective date of such termination, the Unit Holder shall forfeit all of the unvested Units.

(c) The following definitions shall apply for purposes of this paragraph 4:

“Cause” with respect to the termination of the Unit Holder’s services, means (i) the willful and continued failure by the Unit Holder to perform substantially the Unit Holder’s duties as «Title» of the Company within a reasonable period of time after a written demand for a substantial performance is delivered to the Unit Holder by the

2

Chief Executive Officer which demand specifically identifies the manner in which the Chief Executive Officer believes that the Unit Holder has not substantially performed the Unit Holder’s duties; or (ii) the willful misconduct by the Unit Holder in the performance of the Unit Holder’s duties as «Title» of the Company or the willful engaging by the Unit Holder in conduct which, in either case, is illegal or materially injurious to the Company monetarily or otherwise.

“Termination of services as a result of retirement or permanent disability” shall mean termination of services for either or both of these reasons as solely determined by the Committee.

5. Transferability. Except as otherwise provided herein, the Unit Holder may not sell, transfer, assign, pledge or otherwise encumber any of the Units or the rights granted hereunder (any such disposition or encumbrance being referred to herein as a “Transfer”). Any Transfer or purported Transfer by the Unit Holder of any of the Units except in accordance herewith shall be null and void. Units are exercisable during the Unit Holder’s lifetime. Notwithstanding the foregoing, Units may be Transferred (i) by law or pursuant to the laws of descent and distribution and (ii) by the Unit Holder to a “family member” of such Unit Holder by gift or by domestic relations order, but subject to the continued application of the vesting requirements under this Agreement (including without limitation the continued service by the Unit Holder as «Title» of the Company. For purposes of this paragraph 5, “family member” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Unit Holder’s household (other than as a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the Unit Holder) control the management of assets, and any other entity in which these persons (or the Unit Holder) own more than fifty percent of the voting interests (each, a “Permitted Transferee”). In the case of any Transfer pursuant to this Paragraph 5, this Agreement shall be interpreted such that the term “Unit Holder” shall mean the transferring Unit Holder and his Permitted Transferees (it being agreed that all of the obligations of the Unit Holder hereunder shall be allocated as appropriate between the transferring Unit Holder and his Permitted Transferee).

6. Changes in Capitalization; Special Dividends; Sale of the Company. Upon the occurrence of any of the following events prior to the First Vesting Date or Second Vesting Date, the grants hereunder shall be adjusted as follows:

(a) In the event of any change in the capitalization of the Company which affects the Units (such as a stock dividend, a stock distribution, a stock split, a subdivision or combination of shares, or a merger or consolidation to which the Company is a party, but excluding the sale, purchase or retirement by the Company of shares of Common Stock or securities convertible into Common Stock or the issuance of shares of Common Stock or securities convertible into Common Stock), the Committee shall make or cause to be made any proportionate adjustments herein or otherwise necessary to reflect such change with respect to the Units.

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(b) Upon a Sale of the Company for cash or other consideration which has a fair market value (as determined by the Compensation Committee) in excess of the First Strike Price, then the First Vesting Date shall occur upon the closing of such transaction (even if the closing stock price has not exceeded the First Strike Price for 30 consecutive trading days) and the Payout Amount shall equal the per share value that the Company’s stockholders receive in such transaction.

(c) Upon a Sale of the Company for cash or other consideration which has a fair market value (as determined by the Compensation Committee) in excess of the Second Strike Price, then the First Vesting Date shall occur upon the closing of such transaction (if it has not occurred previously) and the Second Vesting Date shall occur upon the closing of the transaction (even if the closing stock price has not exceeded the Second Strike Price for 30 consecutive trading days), and the Payout Amount shall equal the per share value that the Company’s stockholders receive in such transaction.

(d) Upon a Sale of the Company which does not trigger the First Vesting Date, the Unit Holder shall forfeit his right to the Units. Upon a Sale of the Company which triggers the First Vesting Date but not the Second Vesting Date, the Unit Holder shall forfeit his right to 50% of the Units.

For purposes of this Section 6, “Sale of the Company” means (i) the sale of a majority of the outstanding Common Stock to a person or group in a single transaction or a series of related transactions, (ii) a merger or consolidation to which the Company is a party, other than a transaction in which the holders of the Common Stock receive securities which represent a majority of the voting power of the surviving corporation, and (iii) any other transaction determined to be a sale of the Company by the Committee.

7. Rights Unfunded. The Unit Holder understands that the rights provided for hereunder are unfunded and the Company has not made, and has no obligation to make, any provision with respect to segregating assets of the Company for payment of any benefits hereunder. The Unit Holder further understands that he has no interest in any particular asset of the Company by reason of this Agreement but only the rights of a general unsecured creditor with respect to his rights under this Agreement.

8. No Rights as a Stockholder. Neither the Unit Holder nor any other person legally entitled to the Units hereunder shall have any rights of a stockholder by virtue of the grant and vesting of the Units.

9. Taxes. As a condition precedent to this Agreement, the Unit Holder agrees to pay to the Company at such times as the Company shall determine such amounts as the Company shall deem necessary to satisfy any withholding taxes due

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on income that the Unit Holder recognizes as a result of vesting or pay-out of the Units. The Committee shall have the power to withhold, or require the Unit Holder to remit to the Company, an amount sufficient to satisfy any withholding or other tax due with respect to any Units and/or any amount payable hereunder, and the Committee may defer any such payments unless indemnified by the Unit Holder to such Committee’s satisfaction.

10. Descriptive Headings; Interpretation of Agreement. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. Any questions which arise in connection with the interpretation or performance of this grant shall be resolved by the Committee in its sole and absolute discretion.

11. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Unit Holder acquire any rights hereunder.

12. Further Assurances. The parties agree to execute such further instruments and to take such further actions as may reasonably be required to carry out the intent of this Agreement.

13. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given when personally delivered or after five (5) business days following deposit in the United States Post Office, by certified mail with postage and fees prepaid, return receipt requested. Notices shall be addressed, in the case of the Unit Holder, to the address set forth below his signature on the signature page hereto and in the case of the Company, to it at its principal executive office, or at such other address as such party may designate by ten (10) days’ advance written notice to the other party.

14. Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof.

15. Governing Law. The corporate law of the State of Delaware shall govern all questions concerning the relative rights of the Company and its shareowners. All other questions concerning the construction, validity and interpretation of this Agreement shall be governed by the internal laws (and not the laws of conflicts) of the State of Illinois.

16. Termination. This Agreement, and all rights and obligations hereunder, shall be null and void unless the Unit Holder shall accept the same below and return this executed Agreement to the Secretary of the Company at his office in Elk Grove Village, Illinois by April 16, 2004.

* * *

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Dated as of the 9th day of March, 2004.

MATERIAL SCIENCES CORPORATION
By:
	Ronald L. Stewart
Its:	President and Chief Executive Officer

Accepted this              day of

                    , 2004

«UnitHolder»

Notice Address:

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SCHEDULE TO FORM OF PHANTOM STOCK UNIT AGREEMENT

(AS OF MARCH 9, 2004)

Unit Holder: Title: Units: First Strike Price: Second Strike Price:	Ronald L. Stewart President and Chief Executive Officer 100,000 $14.00 $15.00
Unit Holder: Title: Units: First Strike Price: Second Strike Price:	John M. Klepper Executive Officer 5,600 $14.00 $15.00
Unit Holder: Title: Units: First Strike Price: Second Strike Price:	Clifford D. Nastas Executive Officer 6,400 $14.00 $15.00
Unit Holder: Title: Units: First Strike Price: Second Strike Price:	Ronald L. Millar Executive Officer 5,600 $14.00 $15.00

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EX-10.(JJ)

Exhibit 10(jj)

FORM OF

MATERIAL SCIENCES CORPORATION,

ELECTRONIC MATERIALS AND DEVICES GROUP, INC.

INCENTIVE COMPENSATION AGREEMENT*

This INCENTIVE COMPENSATION AGREEMENT (the “Agreement”) is made as of May 6, 2004, by and among Material Sciences Corporation, Electronic Materials and Devices Group, Inc., a Delaware corporation (the “Company”), Material Sciences Corporation (“MSC”), a Delaware corporation and the parent of the Company, and «Participant» (the “Participant”).

WHEREAS, MSC wishes to provide the Participant with the opportunity to earn a bonus based on the gains recognized by MSC upon a partial or complete sale of the Company;

WHEREAS, MSC must recover all of its invested capital in the Company before the bonus opportunity will apply; and

WHEREAS, this Agreement has been adopted and approved by the Board of Directors of the Company and the Board of Directors of MSC (the “MSC Board”).

NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Participant hereby agree as follow:

ARTICLE I

DEFINITIONS

“Base Percentage” means the percentage set forth on Schedule A attached hereto.

“Cause”, with respect to the termination of Participant’s employment by the Company, means (i) the willful and continued refusal by Participant to perform a lawful and reasonable order, direction or instruction of his supervisor or the Board of Directors of the Company (the “Board”) within a reasonable period of time after a written demand for substantial performance is delivered to Participant by the Board which demand specifically identifies the manner in which the Board believes that Participant has not substantially performed such an order, direction or instruction; or (ii) the willful misconduct by Participant in the performance of Participant’s duties to the Company or MSC or the willful engaging by Participant in conduct which, in either case, is illegal or materially injurious to the Company or MSC. For purposes of this definition, no act, or failure to act, on Participant’s part shall be deemed “willful” unless done, or omitted to be done, by Participant not in good faith and without reasonable belief that Participant’s action or omission was in the best interest of the Company. In addition, notwithstanding the foregoing, Participant’s employment shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Participant and an opportunity for Participant, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Participant was guilty of conduct set forth above in clauses (i) or (ii) of the first sentence of this definition and specifying the particulars thereof in detail.

“Disability” means the inability of Participant to perform substantially all Participant’s duties and responsibilities to the Company by reason of a physical or mental illness or infirmity for either (i) a continuous period of six months or (ii) 180 days during any consecutive twelve-month period.

“Gain” means the excess of the Proceeds over the Invested Capital.

“Independent Third Party” means any corporation, limited liability company or other entity which, immediately prior to the contemplated transaction, is not a subsidiary or affiliate of MSC.

* See Attached Schedule

1

“Invested Capital” means $8,619,000 (plus all amounts invested by MSC in the Company, whether in the form of equity or debt, or charged by MSC to the Company, from and after March 1, 2004), reduced by all amounts distributed or re-paid to MSC by the Company. Without limiting the generality of the foregoing, any amounts paid by MSC or the Company under any employment, retention and/or change in control agreements with Participants, or with any other employee who has spent a majority of his time since June 2002 (or, if later, his hire date) on Company business matters, shall be added to Invested Capital.

“Participation Right” means the right of a Participant from the Company to receive a payment in an amount equal to: Base Percentage * Gain. The form of the payment shall be as set forth in Section 3.6 below.

“Proceeds” means the aggregate proceeds received by MSC in the form of (1) purchase price paid to MSC by one or more Independent Third Party for equity or debt securities of the Company, (2) repayment of debt owed by the Company to MSC from proceeds of asset sales by the Company with Independent Third Parties or (3) dividends or distributions from the Company to MSC of proceeds from asset sales with Independent Third Parties; provided that the amount of proceeds received by MSC shall be reduced by (a) reasonable reserves established as of the closing date of the transaction for possible indemnification claims against MSC under the terms of any agreement relating to the transaction (“Reserves”), (b) any liabilities of the Company retained by or transferred to MSC (to the extent MSC is responsible for payment of those liabilities after the closing) and (c) customary costs and expenses incurred by MSC in connection with the transaction. Proceeds shall not include any amounts received by the Company from the issuance of its equity or debt securities, whether in a joint venture transaction or otherwise, unless and to the extent such proceeds are paid or distributed to MSC as a return on its investment in the Company.

“Sale of the Company” means the closing of a sale of the Company to an Independent Third Party or affiliated group of Independent Third Parties pursuant to which such party or parties acquire all or substantially all of the outstanding capital stock of the Company or all or substantially all of the assets of each of the Company’s business lines (i.e., automotive, non-automotive transportation and consumer electronics).

“Sale of MSC” means the closing of a sale of MSC to an Independent Third Party or affiliated group of Independent Third Parties pursuant to which such party or parties acquire all or substantially all of the outstanding capital stock of MSC or all or substantially all of MSC’s assets determined on a consolidated basis.

ARTICLE II

ADMINISTRATION OF THE PLAN

This Agreement shall be administered by the MSC Board. Subject to the limitations contained in this Agreement, the MSC Board shall have the sole and complete authority to: (i) interpret this Agreement and adopt, amend and rescind administrative guidelines and other rules and regulations relating to this Agreement, (ii) correct any defect or omission or reconcile any inconsistency in this Agreement, (iii) make all calculations contemplated hereby (including without limitation the calculation of Gain) and (iv) make all other determinations and take all other actions necessary or advisable for the implementation and administration of this Agreement. The MSC Board’s determinations hereunder shall be conclusive and binding upon the Participant, the Company and MSC. The MSC Board may, to the extent permitted by law, delegate any of its authority hereunder to its Compensation Committee or such other persons as it deems appropriate; provided that all calculations and proposed payment amounts shall be submitted to the MSC Board for consideration and approval. All expenses associated with the administration of this Agreement shall be borne by MSC.

ARTICLE III

PARTICIPATION RIGHTS

Section III.1 Sale of the Company. Upon the occurrence of a Sale of the Company, MSC shall calculate the Gain on such Sale and MSC shall pay the Participant (if Participant is actively employed by the Company immediately prior to the closing of the Sale of the Company) an amount equal to the value of his Participation Right (if any). Upon receipt by Participant of a distribution under this Section 3.1, all of the rights and obligations of the Company, MSC and Participant under this Agreement shall automatically terminate and become null and void.

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Section III.2 Partial Sales; Public Offerings. In the event of (1) a sale by MSC of less than all of the outstanding capital stock of the Company (whether in a public offering or private transaction) or (2) the sale by the Company of less than all or substantially all of its assets (each, a “Partial Sale”), MSC shall calculate the Gain on such Partial Sale and MSC shall make any payment owing in respect of the Participation Right at that time. In the event of a subsequent transaction, MSC shall re-calculate the total Gain taking into account the subsequent transaction and all previous Partial Sales, and MSC shall pay to Participant, if Participant is entitled to receive payments under this Agreement at that time, an amount equal to the excess of (1) the value of his Participation Right based on the total Gain over (2) the total payments made to Participant in respect of previous transactions. Upon receipt by Participant of his final distribution under this Section 3.2, all of the rights and obligations of the Company, MSC and Participant under this Agreement shall automatically terminate and become null and void.

Section III.3 Termination of Employment. If Participant’s employment is terminated at any time prior to the termination of this Agreement by reason of (a) death or Disability or (b) termination by the Company without Cause, MSC shall cash-out the Participation Right, with the value of the Participation Right being determined using the estimated fair market value of the Company at the time of termination (as determined by MSC) as the amount of Proceeds for purposes of calculating Gain. Upon receipt by Participant of a distribution under this Section 3.3, all of the rights and obligations of the Company, MSC and Participant under this Agreement shall automatically and without notice terminate and become null and void.

Section III.4 Distributions.

(a) Commencing March 1, 2009, MSC shall determine the fair market value of the Company on an annual basis.

(b) At any time after the earlier to occur of (i) the Sale of MSC or (ii) March 1, 2009, MSC shall have the option, in its sole and absolute discretion, to cash-out all (but not less than all) of the Participation Right, with the value of the Participation Right being determined using the estimated fair market value of the Company at the time (as determined by MSC) as the amount of Proceeds for purposes of calculating Gain. Upon receipt by the Participant of a distribution under this Section 3.4(b), all of the rights and obligations of the Company, MSC and Participant under this Agreement shall automatically and without notice terminate and become null and void.

(c) At any time after March 1, 2009, if but only if the fair market value of the Company (as determined by MSC) exceeds $50 million and MSC has not exercised its option under Section 3.4(b), then the majority of the Participants (using Base Percentage as a percent of the total Base Percentage for all Participants) under this and all similar agreements shall have the right to require MSC to cash-out all (but not less than all) Participation Rights then outstanding, with the value of the Participation Rights being determined using the estimated fair market value of the Company at the time (as determined in good faith by MSC) as the amount of Proceeds for purposes of calculating Gain. Upon receipt by Participant of a distribution under this Section 3.4(c), all of the rights and obligations of the Company, MSC and Participant under this Agreement shall automatically and without notice terminate and become null and void.

Section III.5 Calculations and Related Matters.

(a) In the case of any payment to be made in connection with a transaction under Sections 3.1, 3.2 or 3.4 (with respect to a Sale of MSC), MSC shall provide Participant with a calculation of the Gain as soon as is reasonably practicable following the closing of the transaction and the completion of any necessary post-closing audits or purchase price adjustments. MSC shall make any determination of the estimated fair market value of the Company and related Gain under Sections 3.3 or 3.4 (other than with respect to a Sale of MSC) within 60 days after the triggering event or as soon thereafter as is reasonably practicable under the circumstances. In making any determination of the estimated fair market value of the Company and related Gain, MSC shall be entitled to reduce the Gain by reserves, liabilities, costs or expenses of the type described in the definition of the term “Proceeds” in such amounts as MSC determines in good faith.

(b) All calculations of Gain made by MSC in good faith under Sections 3.1 and 3.2 shall be final and conclusive, and binding on the Participant without any right of review or appeal. Calculations of fair market value and Gain under Sections 3.3 or 3.4 shall be subject to dispute resolution under the following procedure: if the Participant notifies MSC that he disagrees with a calculation of fair market value or Gain under Section 3.3 or 3.4, then an independent appraiser, experienced in making valuations of the type required by such Sections, as selected by MSC and consented to by the Participant (which consent shall not be unreasonably withheld), shall determine the fair market value and Gain as promptly as possible in accordance with the terms of this Agreement. The determination of such independent appraiser shall be final and conclusive, and binding on MSC and the Participant without any further right of review or appeal. The fees and expenses of the independent appraiser shall be borne by

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MSC, unless the final appraised value, as determined by the independent appraiser, is less than 110% of the valuation determined by the MSC Board, in which case the fees and expenses of the independent appraiser shall be borne by the Participant.

(c) Upon the release or reversal of any Reserves established in connection with any transaction, MSC shall re-calculate the total Gain to date taking into account the release or reversal, and MSC shall pay to Participant, if Participant is entitled to receive payments under this Agreement at that time, an amount equal to the excess of (1) the value of his Participation Right based on the total Gain over (2) the total payments made to Participant to date.

Section III.6 Payment. The Participation Right shall be paid in the same form of consideration as MSC receives in the transaction (e.g., the Participation Right shall be paid in cash if MSC receives cash in the transaction or in securities if MSC receives securities in the transaction); provided that if the buyer is unwilling to issue securities to Participant for business, regulatory or other reasons, then MSC shall have the right to pay the Participant in cash even though it will receive securities in the transaction. MSC shall pay any amounts due to Participant within 20 days after the final calculation of Gain, without interest. Notwithstanding the foregoing, MSC shall have the right to make any cash payment owing under this Agreement in a series of 24 monthly installments if such payment arises under Section 3.4 (or if MSC receives securities in a transaction but is paying the Participants in cash) and the Board of Directors concludes that making the payment in a lump sum would materially interfere with MSC’s ability to implement its business plans, meet its financial obligations or remain in compliance with the terms of any credit agreement or other indebtedness. Any payment which is paid in monthly installments shall accrue interest at the London Interbank Offered Rate from the date on which payment would otherwise have been due.

Section III.7 Future Participants. As of the date of this Agreement, the sum of the Base Percentages of Participant and all other Participants (together, the “Current Participants”) having similar agreements is 4.8%. MSC is holding in reserve for potential issuance to other current or future employees Base Percentages totaling an additional 1.2% (the “Additional Percentage”). Any portion of the Additional Percentage which has not been issued prior to a Sale of the Company shall automatically be allocated to the Current Participants on a pro rata basis (using Base Percentage as a percent of the total Base Percentage for all Participants) upon the Sale of the Company. In the event of a Partial Sale, MSC may decide, in its discretion, to (1) continue to hold all or a portion of the Additional Percentages (and/or any proceeds thereon) in reserve for potential issuance to other employees, (2) allocate all or a portion of the Additional Percentages (and/or the proceeds thereon) to the Current Participants or (3) take such other action as it deems appropriate under the circumstances. For the avoidance of doubt, the Base Percentages of a Current Participant whose employment terminates shall not be re-allocated to other Current Participants, unless MSC determines otherwise.

ARTICLE IV

MISCELLANEOUS

Section IV.1 Amendment and Termination. This Agreement may only be amended with the written consent of MSC and the Participant.

Section IV.2 No Assignment. The Participation Right may not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale, execution, attachment or similar process. Upon any attempted sale (including in the case of any attempted execution, attachment or similar process), the Participation Right shall immediately become null and void.

Section IV.3 No Rights as a Stockholder. The Participant shall not have any rights of a stockholder by virtue of the grant of the Participation Rights.

Section IV.4 No Liability of Purchasers. The right to receive payment under this Agreement may only be asserted against MSC, and Participant shall not have the right to seek payment from the Company or any Independent Third Party which acquires equity, debt or assets of the Company in any transaction.

Section IV.5 Waivers. The failure of a party hereto at any time or times to require performance of any provision hereof shall in no manner affect its right at a later time to enforce the same. No waiver by a party of any condition or of any breach of any term, covenant, representation or warranty contained in this Agreement shall be effective unless in writing, and no waiver in any one or more instances shall be deemed to be a further or continuing waiver of any such condition or breach in other instances or a waiver of any other condition or breach of any other term, covenant, representation or warranty.

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Section IV.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

Section IV.7 Interpretation. The headings preceding the text of Articles and Sections included in this Agreement are for convenience only and shall not be deemed part of this Agreement or be given any effect in interpreting this Agreement. The use of the masculine, feminine or neuter gender herein shall not limit any provision of this Agreement. The use of the terms “including” or “include” shall in all cases herein mean “including, without limitation” or “include, without limitation,” respectively.

Section IV.8 No Third Party Beneficiaries. This Agreement is solely for the benefit of MSC, the Company and the Participant, and no provision of this Agreement shall be deemed to confer upon other third parties any remedy, claim, liability, reimbursement, cause of action or other right.

Section IV.9 Severability. If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions hereof shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.

Section IV.10 Notices. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to (i) MSC at 2200 East Pratt Boulevard, Elk Grove Village, Illinois 60007-5995 and (ii) Employee at «Address»«CityStateZip», provided that all notices to MSC shall be directed to the attention of the Vice President of Human Resources, with a copy to the Chief Financial Officer of MSC, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.

Section IV.11 Entire Understanding. This Agreement, together with attached exhibits, sets forth the entire agreement and understanding of the parties hereto with respect to the matters set forth herein and supersedes any and all prior agreements, arrangements and understandings among the parties.

Section IV.12 Tax Withholding. Any payments provided for hereunder shall be paid net of any applicable tax withholding required under federal, state or local law.

Section IV.13 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without regard to the principles of conflicts of laws.

* * * * *

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first written above.

THE COMPANY:
MATERIAL SCIENCES CORPORATION, ELECTRONIC MATERIALS AND DEVICES GROUP, INC., a Delaware corporation
By:
Name:	James J. Waclawik, Sr.
Title:	Chief Financial Officer
MSC:
MATERIAL SCIENCES CORPORATION, a Delaware corporation
By:
Name:	Ronald L. Stewart
Title:	President and Chief Executive Officer
PARTICIPANT:
«Participant» «Address» «CityStateZip»

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SCHEDULE TO FORM OF INCENTIVE COMPENSATION AGREEMENT

(AS OF May 6, 2004)

Participant: Andrew G. Blake

Base Percentage:

	Gain		Base Percentage
Less than	$	5,000,000	2.736%
Next Incremental $5,000,000	$	10,000,000	3.192%
Next Incremental $5,000,000	$	15,000,000	3.648%
Next Incremental $5,000,000	$	20,000,000	4.104%
Next Incremental $5,000,000	$	25,000,000	4.560%
Greater than	$	25,000,000	4.560%

Participant: John J. Glazier, Jr.

Base Percentage:

	Gain		Base Percentage
Less than	$	5,000,000	1.376%
Next Incremental $5,000,000	$	10,000,000	1.605%
Next Incremental $5,000,000	$	15,000,000	1.835%
Next Incremental $5,000,000	$	20,000,000	2.064%
Next Incremental $5,000,000	$	25,000,000	2.293%
Greater than	$	25,000,000	2.293%

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EX-10.(KK)

Exhibit 10(kk)

RETENTION AGREEMENT

RETENTION AGREEMENT (this “Agreement”) dated as of February 29, 2004 by and between MATERIAL SCIENCES CORPORATION, a Delaware corporation, and its subsidiaries (collectively, the “Company”), and John M. Klepper (“Employee”) (capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in Section 9 hereof).

W I T N E S S E T H:

WHEREAS, Employee is employed by the Company or one of its subsidiaries;

WHEREAS, the Board of Directors of the Company has determined that appropriate steps should be taken to reinforce and encourage the continued employment and dedication of key personnel; and

WHEREAS, as an inducement for and in consideration of Employee remaining in its employ and in partial consideration of Employee’s agreement to terminate his supplemental employee retirement benefits and certain long term incentive awards and stock options, the Company agrees that Employee shall receive the retention, severance and other benefits set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing, of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties, intending legally to be bound, hereby agree as follows:

1. Effective Date; Term. This Agreement, and all rights and obligations of the parties hereunder, shall commence and become effective on the date hereof. The rights and obligations of the parties under Section 3 of this Agreement shall expire on June 30, 2005 unless Employee’s employment with the Company has terminated before June 30, 2005 or the Sale Process Completion Date occurs before June 30, 2005; provided that the Board of Directors may elect to extend the expiration date in its sole and absolute discretion.

2. Retention of Employee.

(a) Retention Period Compensation. The Company hereby agrees to continue to employ Employee, and Employee hereby agrees to remain employed by the Company, as Vice President, Human Resources until the Sale Process Completion Date; provided that the Company shall have the right to terminate Employee at any time with or without Cause and Employee shall have the right to terminate his employment at any time with or without Good Reason. During this period, Employee shall be entitled to the following compensation and benefits:

(i) Employee shall receive a base salary of $155,900 per annum or as such amount is increased by the Compensation Committee of the Board of Directors of the Company in its sole and absolute discretion on or about March 1, 2004 (the “Base Salary”), payable by the Company in regular installments in accordance with the

Company’s general payroll practices (in effect from time to time), until either (A) February 28, 2005, or (B) if the Sale Process Completion Date occurs prior to February 28, 2005, the one year anniversary of the Sale Process Completion Date, at which time Employee’s Base Salary may be adjusted, in the sole discretion of the Compensation Committee of the Board of Directors of the Company or Successor, to be competitive with comparable positions at companies of similar size in the Company’s or Successor’s industry.

(ii) If Employee is employed by the Company or a Successor on November 30^th of any given year during this period, then Employee shall be eligible to receive a cash bonus under the Company’s EVA Plan. If Employee’s employment terminates after November 30^th of a given year but prior to February 28^th of the immediately following year, then the bonus shall be pro-rated based on the portion of the fiscal year in which Employee was employed by the Company or a Successor.

(iii) Employee shall participate in all Company-sponsored employee benefit programs and receive all fringe benefits for which employees of his level are eligible, including, without limitation, incentive, savings, welfare benefit, reimbursement and retirement plans; provided that (A) Employee shall not be entitled to a car allowance and (B) Employee will forfeit the benefits described in Sections 2(b) (other than his right to receive the payment described therein) and 4(e)(ii) below.

(b) Termination of Supplemental Employee Retirement Plan. The Company shall pay to Employee, in full and complete satisfaction of the Company’s obligations under that certain Supplemental Pension Plan Agreement dated November 15, 2001 between the Company and Employee, an amount equal to $50,000 (less any withholding taxes) on May 31, 2004 or, if earlier, the date of termination of employment for any reason.

(c) Retention Bonus. The Company shall pay to Employee an amount equal to $135,099 on the earlier of (i) May 31, 2005, if Employee is employed by the Company or a Successor on such date, (ii) the second business day following the Company’s (or a Successor’s) termination of Employee without Cause or the death or Disability of Employee or (iii) the second business day following the Employee’s termination of his employment with a Successor for Good Reason (but Employee shall not be entitled to such amount in the event he terminates his employment with the Company for Good Reason).

3. Compensation Upon Termination of Employment.

(a) Death. If Employee’s employment by the Company is terminated as a result of the occurrence of Employee’s death, the Company shall pay to Employee’s estate vacation pay (for earned but unused vacation) and the compensation and other benefits expressly provided under Section 2 through the Termination Date, as well as any death benefits available under any Company plan or policy.

(b) Disability and Termination with or without Good Reason. If Employee’s employment by the Company is terminated by the Company as a result of the occurrence of Employee’s Disability or Employee terminates his employment with the Company with or

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without Good Reason, the Company shall pay to Employee vacation pay (for earned but unused vacation) and the compensation and other benefits expressly provided under Section 2 (other than under Section 2(c) if Employee terminates his employment with the Company with or without Good Reason) through the Termination Date, as well as any disability benefits available under any Company plan or policy in the case of Disability.

(c) Termination without Cause or for Good Reason.

(i) If Employee’s employment with the Company is terminated by the Company without Cause, the Company shall pay to Employee, in lieu of the Company’s then current severance policy, (x) on the Termination Date, any vacation pay (for earned but unused vacation) and the compensation and other benefits expressly provided under Section 2 through the Termination Date and (y) a severance payment (the “Severance Payment”) consisting of the following:

(A) a lump sum cash payment equal to the (x) sum of .750 multiplied by the Employee’s Base Salary and (y) a bonus equal to $55,000; and

(B) a payment equal to six months of Employee’s Base Salary, payable semi-monthly, commencing on the Termination Date; provided however that if Employee’s termination occurs within 18 months after the Sale Process Completion Date, Employee shall receive the amounts described in this Section 3(c)(i)(B) as a lump sum cash payment on the Termination Date.

Notwithstanding the foregoing, if a Successor (with the approval of the Company) offers Employee a Comparable Position and Employee declines such offer, then Employee shall not be entitled to a Severance Payment pursuant to this Section 3(c).

(ii) If Employee’s employment with a Successor is terminated by the Successor without Cause or Employee terminates his employment with the Successor for Good Reason, in each case at anytime during the eighteen month period following the Sale Process Completion Date, the Successor shall pay to Employee (x) on the Termination Date, any vacation pay (for earned but unused vacation) and the compensation and other benefits expressly provided under Section 2 through the Termination Date and (y) the Severance Payment.

(iii) In addition to the compensation paid pursuant to Sections 3(c)(i) or (ii) above, (x) the Company (or Successor), at its expense, shall continue to provide Employee with all employee benefits (including welfare benefit programs) and fringe benefits specified in Section 2(a)(iii) for 15 months following the Termination Date (or substantially comparable benefits); provided that the Company (or Successor) shall not be required to make DC pension contributions on behalf of Employee, and (y) except as set forth in Section 4(e), all vested stock options, shares of restricted stock and other stock or stock based awards granted by the Company to Employee shall remain exercisable by Employee subject to the terms and conditions of any plans which such grants or awards were made under.

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(d) Notice of Termination. Any purported termination of Employee’s employment by the Company or by Employee shall be communicated to the other party hereto by a written notice which shall indicate the specific termination provision of this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee’s employment under the provision so indicated.

(e) No Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation earned by Employee as the result of employment by another employer or Successor, by retirement benefits, by offset against any amount claimed to be owed by Employee to the Company or otherwise.

4. Additional Understandings.

(a) Employee’s Insurance Policy. If applicable and immediately after the Termination Date, Employee agrees to be solely responsible for the payment of the premiums under his long-term care/life insurance policy.

(b) Company Property. Employee shall return and relinquish all rights to all Company owned or leased property (including without limitation his Company-issued cellular telephone) on the Termination Date.

(c) Transition Services. In the event Employee is terminated by the Company (other than for Cause, Disability or death), or Employee terminates his employment for Good Reason, the Company shall provide (i) outplacement services at an executive level through one or more outside firms up to an aggregate cost of $20,000 and in accordance with the Company’s past practice, with such services to extend until the earlier of (x) 15 months following the termination of Employee’s employment or (y) the date Employee secures full time employment and (ii) Employee access to the Company’s voicemail and electronic mail systems, with such access continuing for sixty (60) days following the Termination Date.

(d) Directors’ and Officers’ Insurance. Prior to the Sale Process Completion Date, the Company shall maintain a directors’ and officers’ liability insurance policy (with coverage for the Employee) consistent with past practice. Employee shall be entitled to tail coverage under such policy (to apply following the Sale Process Completion Date) on the same terms applicable to members of the Board of Directors of the Company.

(e) Long-Term Incentives.

(i) Upon the earlier of November 30, 2004 or the Sale Process Completion Date, the unvested portion of the long-term incentive award and the related cash award granted to Employee on December 18, 2001 shall automatically vest.

(ii) Employee expressly agrees and acknowledges, effective as of the date hereof, that Employee forfeits all right, title and interest to (i) the long-term incentive award granted to Employee on March 1, 2003 pursuant to the 2003 Long-Term Incentive Stock Award Program, and (ii) options to purchase 4,465 shares of Common Stock at $10 per share which were originally scheduled to vest on February 28, 2005.

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(f) Indemnification Agreement. Employee expressly acknowledges and agrees that, notwithstanding any provision or statement to the contrary contained in this Agreement, the Indemnification Agreement between the Company and Employee dated March 1, 2002 shall remain in full force and effect and continue to be binding upon Employee and the Company in accordance with its terms.

(g) Change in Control and Technology Agreements. Employee and the Company expressly acknowledge and agree that, effective as of the date hereof, the Change of Control Agreement entered into between the Company and Employee dated November 15, 2001 and the Technology Agreement between the Company and the Employee dated February 14, 2000 shall become null and void and have no further force or effect.

(h) Retirement Accounts. The Company shall take all necessary actions to cause the Employee’s defined contribution plan account balance and 401(k) plan account balance to be distributed or transferred in accordance with the Employee’s instructions as expeditiously as possible following termination pursuant to the Company’s then current practice and applicable law.

(i) Excise Tax Gross-Up.

(i) In the event that Employee becomes entitled to the payments and benefits provided under Section 3 above and/or any other payments or benefits in connection with a change in control or termination of Employee’s employment with the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change in control or any person affiliated with the Company or such person) (collectively, the “Payments”), and if any of the Payments will be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Code, then (A) if the aggregate amount of the Payments is equal to or greater than 330% of the “base amount” as defined in Section 280G(b)(3) of the Code, then the Company shall pay to Employee, at least 30 days prior to the time payment of any such Excise Tax is due, an additional amount (the “Gross-Up Payment”) such that the net amount retained by Employee, after deduction of any Excise Tax and any federal and state and local income tax imposed on the Gross-Up Payment, shall be equal to the Excise Tax imposed on the Payments; and (B) if the aggregate amount of the Payments is less than 330% of the “base amount,” then the aggregate present value of the payments made pursuant to the terms of this Agreement alone without taking into account payments made pursuant to any other agreements between the Company and Employee shall be reduced so that the Payment equals 299.99% of the “base amount” (it being understood that in no event shall the amount of the payment made pursuant to the terms of this Agreement be less than $0).

(ii) For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) the Payments shall be treated as “parachute payments” within the meaning of Section 280G(b)(2) of the Code,

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and all “excess parachute payments” within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax, unless, in the opinion of tax counsel selected by the Company’s independent auditors and reasonably acceptable to Employee, the Payments (in whole or in part) do not constitute parachute payments or excess parachute payments or are otherwise not subject to the Excise Tax, (B) the amount of the Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (y) the total amount of the Payments or (z) the amount of excess parachute payments within the meaning of Section 280G(b)(l) (after applying clause (A) above), and (C) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company’s independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code.

(iii) For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee’s residence on the Termination Date, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

(iv) In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Employee’s employment, Employee shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by Employee if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee’s employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined.

(j) Company Successors. The Company will require either (1) any acquiror of the Company as a whole or (2) any acquiror of the coated metal business unit and/or the laminates and composites business unit which directly or indirectly becomes the employer of Employee (in each case through merger, consolidation, asset purchase, stock purchase or otherwise) (a “Successor”) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as Employee would be entitled to hereunder if Employee terminated Employee’s employment by the Company for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes

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effective shall be deemed the Termination Date. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor which assumes and agrees to perform this Agreement by operation of law, or otherwise.

5. Confidential Information and Ownership of Property.

(a) Confidential Information. Employee agrees to use all Confidential Information solely in connection with the performance of services for or on behalf of the Company. Employee shall not, during the term of this Agreement, or at any time after the termination of this Agreement, in any manner, either directly or indirectly, (i) disseminate, disclose, use or communicate any Confidential Information to any person or entity, regardless of whether such Confidential Information is considered to be confidential by third parties, or (ii) otherwise directly or indirectly misuse any Confidential Information; provided, however, that (y) none of the provisions of this Section shall apply to disclosures made for valid business purposes of the Company or (z) that Employee shall not be obligated to treat as confidential any Confidential Information that (I) was publicly known at the time of disclosure to Employee; (II) becomes publicly known or available thereafter other than by means in violation of this Agreement or any other duty owed to the Company or any of its Affiliates by any person or entity; or (III) is lawfully disclosed to Employee by a third party. Notwithstanding the foregoing, Employee shall be permitted to disclose Confidential Information to the extent required to enforce Employee’s rights hereunder in any litigation arising under, or pertaining to, this Agreement provided that Employee shall give prior written notice to the Company of any such disclosure so that the Company may have an opportunity to protect the confidentiality of such Confidential Information in such litigation.

(b) Ownership of Property. Employee agrees that all works of authorship developed, authored, written, created or contributed to during the term of his employment for the benefit of the Company, whether solely or jointly with others, shall be considered works-made-for-hire. Employee agrees that such works shall be the sole and exclusive property of the Company (or its appropriate Affiliate) and that all right, title and interest therein or thereto, including all intellectual property rights existing or obtained in connection therewith, shall likewise be the sole and exclusive property of the Company (or its appropriate Affiliate). Employee agrees further that, in the event that any work is not considered to be work-made-for-hire by operation of law, Employee will immediately, and without further compensation, assign all of Employee’s right, title and interest therein to the Company (or its designated Affiliate), its successors and assigns. At the request and expense of the Company, Employee agrees to perform in a timely manner such further acts as may be necessary or desirable to transfer, defend or perfect the Company’s ownership of such work and all rights incident thereto.

6. Covenant Not to Compete. Employee covenants and agrees that Employee shall not anywhere in North America (including, without limitation, the United States, Canada and Mexico), during the term of Employee’s employment by the Company or any Affiliate thereof and for the Non-Compete Period, directly or indirectly own an interest in, operate, join, control, advise, work for, consult to, have a financial interest which provides any control of, or participate in any corporation, partnership, proprietorship, firm, association, person, or other entity producing, designing, providing, soliciting orders for, selling, distributing, consulting to, or marketing or re-marketing products, goods, equipment, or services competitive with or in

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substantially the same line of business as the Company or any Affiliate thereof, or any part thereof, as of the commencement of the Non-Compete Period. This covenant does not prohibit the mere ownership of less than three percent (3%) of the outstanding stock of any publicly-traded corporation as long as Employee is not otherwise in violation of this Agreement.

7. Covenant Against Solicitation of Employees. During the term of Employee’s employment by the Company and for the Non-Compete Period, Employee shall not employ employees or agents or former employees or agents of the Company or its Affiliates or, directly or indirectly, solicit or otherwise encourage the employment of employees or agents or former employees or agents of the Company or its Affiliates; provided, however, that this restriction shall not apply to former employees or agents (y) who, as of the date of termination of Employee’s employment by the Company, have not worked for any of the Company or its Affiliates during the twelve preceding months or (z) whose employment by the Company or any Affiliate thereof was terminated by the Company.

8. Remedies.

(a) Employee Acknowledgements. Employee acknowledges (i) that the covenants contained in Sections 5, 6 and 7, including, without limitation, the time and geographic limits (collectively, the “Restrictive Covenants”), are reasonable and appropriate and that Employee will not any claim to the contrary in any action brought by the Company or its Affiliates to enforce any of such provisions and (ii) that should Employee violate any of the Restrictive Covenants, it will be difficult to determine the resulting damages to the Company and its Affiliates and, in addition to any other remedies the Company and its Affiliates may have, (A) the Company and its Affiliates shall be entitled to temporary injunctive relief without being required to post a bond and permanent injunctive relief without the necessity of proving actual damage; and (B) the Company shall have the right to offset against its obligation to make any payments to Employee under this Agreement or otherwise to the extent of any money damages incurred or suffered by the Company and its Affiliates. The Company may elect to seek one or more of these remedies at its sole discretion on a case by case basis. Failure to seek any or all remedies in one case shall not restrict the Company from seeking any remedies in another situation. Such action by the Company shall not constitute a waiver of any of its rights.

(b) Intent. It is the parties’ intent that each of the Restrictive Covenants be read and interpreted with every reasonable inference given to its enforceability. However, it is also the parties’ intent that if any term, provision or condition of the Restrictive Covenants is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions thereof shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Finally, it is also the parties’ intent that if a court should determine any of the Restrictive Covenants are unenforceable because of over-breadth, then the court shall modify said covenant so as to make it reasonable and enforceable under the prevailing circumstances.

(c) Tolling. In the event of any breach by Employee of any Restrictive Covenant, the running of the period of restriction shall be automatically tolled and suspended for the duration of such breach, and shall automatically recommence when such breach is remedied in order that the Company shall receive the full benefit of Employee’s compliance with each of the Restrictive Covenants.

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(d) Independent Enforcement. Employee agrees that the Restrictive Covenants shall be enforced independently of any other obligations between the Company, on the one hand, and Employee, on the other, and that the existence of any other claim or defense shall not affect the enforceability of the Restrictive Covenants or the remedies provided herein. The Restrictive Covenants shall be in addition to and shall not replace any other restrictive covenant agreement that Employee may currently have (or hereafter enter into) with the Company or any of its Affiliates.

(e) Survival. The provisions of this Section 8 shall survive the termination of this Agreement.

9. Certain Defined Terms. For purposes of this Agreement the following terms and phrases shall have the following meanings:

“Affiliate” means any person or entity who or which, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, a specified person or entity (the term “control” for these purposes meaning the ability, whether by ownership of shares or other equity interests, by contract or otherwise, to elect a majority of the directors of a corporation, to act as or select the managing or general partner of a partnership, or otherwise to select, or have the power to remove and then select, a majority of those persons exercising governing authority over an entity).

“Cause”, with respect to the termination of Employee’s employment by the Company, means (i) the willful and continued refusal by Employee to perform a lawful and reasonable order, direction or instruction of the Board of Directors within a reasonable period of time after a written demand for substantial performance is delivered to Employee by the Board of Directors which demand specifically identifies the manner in which the Board believes that Employee has not substantially performed such an order, direction or instruction; or (ii) the willful misconduct by Employee in the performance of Employee’s duties to the Company or the willful engaging by Employee in conduct which, in either case, is illegal or materially injurious to the Company. For purposes of this definition, no act, or failure to act, on Employee’s part shall be deemed “willful” unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee’s action or omission was in the best interest of the Company. In addition, notwithstanding the foregoing, Employee’s employment by the Company shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for such purpose (after reasonable notice to Employee and an opportunity for Employee, together with counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors, Employee was guilty of conduct set forth above in clauses (i) or (ii) of the first sentence of this definition and specifying the particulars thereof in detail.

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

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“Comparable Position” means a position with a Successor that is not more than seventy-five miles from Employee’s present office location and has (i) responsibilities substantially similar to those in existence for Employee with the Company immediately prior to such Successor’s offer of employment and (ii) for the first 12 months of employment with the Successor, salary at least equal and bonus opportunity and benefits comparable to those in existence for Employee with the Company immediately prior to such Successor’s offer of employment and thereafter on terms competitive with comparable positions at companies of similar size in the Successor’s industry.

“Confidential Information” means all software, trade secrets, work products created by Employee for the Company or any of its Affiliates, know-how, ideas, techniques, theories, discoveries, formulas, plans, charts, designs, drawings, lists of current or prospective clients, business plans and proposals, current or prospective business opportunities, financial records, research and development, marketing strategies and programs and reports and other proprietary information created or obtained by Employee for the benefit of the Company or any of its Affiliates during the course of employment by the Company.

“Disability” means the inability of Employee to perform substantially all Employee’s duties and responsibilities to the Company by reason of a physical or mental illness or infirmity for either (i) a continuous period of six months or (ii) 180 days during any consecutive twelve-month period.

“Employment Period” means the date commencing on the Effective Date and terminating on the Termination Date.

“EVA Plan” means the annual variable compensation plan adopted by the Company’s Compensation Committee of the Board of Directors, as the same may be amended, modified, supplemented or restated from time to time (including any successor thereto or replacement therefor).

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Good Reason” means the occurrence, without the express written consent of Employee, of any one of the following events, unless such circumstances are fully corrected prior to the Termination Date specified in the applicable notice of termination delivered pursuant to Section 2(b):

(i) the assignment to Employee of any duties significantly inconsistent with Employee’s position and status with the Company or a substantial adverse alteration in the nature or status of Employee’s employment responsibilities from those in existence on the date hereof;

(ii) the relocation of Employee’s office or job location to a location not within seventy-five miles of Employee’s present office or job location, except for required travel on the Company’s business to an extent substantially consistent with Employee’s present business travel obligations;

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(iii) the failure by the Company to pay to Employee any portion of the compensation required hereunder, within ten business days of the date such compensation is due;

(iv) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 4(m) hereof; or

(v) any purported termination of Employee’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(d).

“Non-Compete Period” means the period commencing on the date upon which Employee ceases to be employed by the Company or any Affiliate thereof and terminating 18 months later.

“Sale Process Completion Date” means the closing of the sale of the following business units, either individually or through a sale of the Company as a whole: the coated metal business unit (including the Elk Grove Village, Middletown and Morrisville facilities) and the laminates and composites business unit.

“Successor” has the meaning set forth in Section 4(j).

“Termination Date” means

(i) if Employee’s employment is terminated for Death, the date of Employee’s death;

(ii) if Employee’s employment is terminated for Disability, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee’s duties during such 30 day period); and

(iii) if Employee’s employment is terminated for any other reason (other than death or Disability), the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than 30 days, and in the case of a termination for Good Reason shall not be less than 15 nor more than 60 days, respectively, from the date such Notice of Termination is given);

provided; however, that if prior to the Termination Date (as determined without regard to this provision), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Termination Date shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided; further, however, that the Termination Date shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. During the pendency of any such dispute, the Company will continue to pay Employee’s full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which

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Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this definition. Amounts paid under this paragraph are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement.

10. Miscellaneous.

(a) Amendment. This Agreement may be amended, modified or supplemented but only in writing signed by each of the parties hereto.

(b) Waivers. The failure of a party hereto at any time or times to require performance of any provision hereof shall in no manner affect its right at a later time to enforce the same. No waiver by a party of any condition or of any breach of any term, covenant, representation or warranty contained in this Agreement shall be effective unless in writing, and no waiver in any one or more instances shall be deemed to be a further or continuing waiver of any such condition or breach in other instances or a waiver of any other condition or breach of any other term, covenant, representation or warranty.

(c) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.

(d) Forum Selection and Consent to Jurisdiction. EACH OF THE COMPANY AND EMPLOYEE AGREE THAT ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT BETWEEN OR AMONG SUCH PARTIES, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS LOCATED IN COOK COUNTY, ILLINOIS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS. EACH OF THE COMPANY AND EMPLOYEE HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS LOCATED IN COOK COUNTY, ILLINOIS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS. EACH OF THE COMPANY AND EMPLOYEE HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

(e) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

(f) Interpretation. The headings preceding the text of Articles and Sections included in this Agreement are for convenience only and shall not be deemed part of this Agreement or be given any effect in interpreting this Agreement. The use of the masculine,

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feminine or neuter gender herein shall not limit any provision of this Agreement. The use of the terms “including” or “include” shall in all cases herein mean “including, without limitation” or “include, without limitation,” respectively. References to employment by the Company in this Agreement shall also refer to employment by one of the Company’s subsidiaries if applicable.

(g) Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No assignment of any rights or obligations shall be made by any party without the written consent of each other party.

(h) No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and, to the extent provided herein, their respective affiliates, directors, officers, employees, agents, heirs, executors, administrators and legal representatives, and no provision of this Agreement shall be deemed to confer upon other third parties any remedy, claim, liability, reimbursement, cause of action or other right.

(i) Severability. If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions hereof shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.

(j) Remedies Cumulative. The remedies provided in this Agreement shall be cumulative and shall not preclude the assertion or exercise of any other rights or remedies available by law, in equity or otherwise.

(k) Entire Understanding. Except as provided in Section 4(e), this Agreement, together with attached exhibits, sets forth the entire agreement and understanding of the parties hereto with respect to the matters set forth herein and supersedes any and all prior agreements, arrangements and understandings among the parties.

(l) Conflicts With Existing Agreements. In the event that any term or provision of this Agreement conflicts with or differs from any term or provision of other existing agreement, understanding or plan between the Company and Employee or to which Employee is a participant, such term or provision of this Agreement shall govern for all purposes and respects.

(m) Tax Withholding. Any payments provided for hereunder shall be paid net of any applicable tax withholding required under federal, state or local law.

(n) General Release. As a condition of receipt of any payments under Section 3, Employee shall be required to sign a general release proposed by and provided by the Company in the form attached as Exhibit A hereto and to abide by the provisions of such general release.

(o) Attorneys’ Fees and Other Costs. In the event a dispute arises between the parties hereto and suit is instituted, the prevailing party or parties in such litigation shall be entitled to recover reasonable attorneys’ fees and other costs and expenses from the non-prevailing party or parties, whether incurred at the trial level or in any appellate proceeding. Unless prohibited by Section 13(k) of the Exchange Act (or the rules or regulations promulgated

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thereunder) or Employee otherwise elects, expenses incurred by Employee in connection with any dispute described in this Section will be paid by the Company in advance of the final disposition of such dispute within 20 days after presentation by Employee of written documentation therefor reasonably satisfactory to the Company if Employee furnishes the Company a written undertaking to repay any amounts advanced if it is ultimately determined that Employee is not entitled to attorneys’ fees and other costs pursuant to this Section (which written undertaking will provide that the Company shall be entitled to collect its attorneys’ fees and other out-of-pocket costs incurred in connection with the enforcement of such undertaking).

(p) Notices. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to (i) the Company at 2200 East Pratt Boulevard, Elk Grove Village, Illinois 60007-5995 and (ii) Employee at                     , provided that all notices to the Company shall be directed to the attention of the Board of Directors, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change in address shall be effective only upon receipt.

(q) Employee Representations. EMPLOYEE REPRESENTS AND AGREES THAT: (A) HE HAS READ THIS AGREEMENT CAREFULLY; (B) HE UNDERSTANDS ALL OF ITS TERMS AND KNOWS THAT HE IS GIVING UP IMPORTANT RIGHTS; (C) HE VOLUNTARILY CONSENTS TO EVERYTHING IN IT; (D) HE HAS BEEN ADVISED TO CONSULT WITH AN ATTORNEY BEFORE EXECUTING IT AND HE HAS DONE SO OR, AFTER CAREFUL READING AND CONSIDERATION HE HAS CHOSEN NOT TO DO SO ON HIS OWN VOLITION; AND (E) HE HAS SIGNED THIS AGREEMENT KNOWINGLY AND VOLUNTARILY AND WITH THE ADVICE OF ANY COUNSEL RETAINED TO ADVISE HIM WITH RESPECT TO IT.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.

THE COMPANY:
MATERIAL SCIENCES CORPORATION, a Delaware corporation
By:	/s/ Michael J. Callahan
Name:	Michael J. Callahan
Title:	President and Chief Executive Officer
EMPLOYEE:
/s/ John M. Klepper
Name:	John M. Klepper

Acknowledged and Agreed:
Material Sciences Corporation, a Delaware corporation
By:	/s/ Ronald L. Stewart
Name:	Ronald L. Stewart
Title:	President and Chief Executive Officer

EXHIBIT A

FORM OF GENERAL RELEASE

Dear [employee]:

This letter will confirm the agreement between you and Material Sciences Corporation (including its subsidiaries, the “Company”) as follows:

1. Separation from the Company.

By signing this letter agreement you acknowledge that the termination of your employment with the Company will be effective on              (the “Termination Date”). As of the Termination Date, you will cease to be an employee of the Company, and you will no longer be required to fulfill any of the duties and responsibilities associated with your position.

2. Severance Payment.

You acknowledge and agree that the severance payments paid or granted to you pursuant to that certain Retention and Change in Control Agreement, dated February 17, 2004, by and between you and the Company (“Retention Agreement”), represents consideration for signing this Release and is not salary, wages or benefits to which you were already entitled. Such payments shall not be considered compensation for purposes of any employee benefit plan, program, policy or arrangement maintained or hereafter established by the Company or any of its affiliates.

3. Release by You.

(a) You (for yourself, your heirs, assigns or executors) release and forever discharge the Company, any of its affiliates, and its and their directors, officers, agents and employees from any and all claims, suits, demands, causes of action, contracts, covenants, obligations, debts, costs, expenses, attorneys’ fees, liabilities of whatever kind or nature in law or equity, by statute or otherwise whether now known or unknown, vested or contingent, suspected or unsuspected, and whether or not concealed or hidden, which have existed or may have existed, or which do exist, through the date this letter agreement becomes effective and enforceable, (“Claims”) of any kind, which relate in any way to your employment with the Company or the termination of that employment, except those arising out of the performance of this letter agreement and your rights under the Retention Agreement. Such released claims include, without in any way limiting the generality of the foregoing language, any and all claims arising under (i) any exception to the employment-at-will doctrine, including any common law theory sounding in tort, contract or public policy, (ii) the provisions of the Fair Labor Standards Act, as amended, or any state or local wage and hour law or ordinance, (iii) the National Labor Relations Act, as amended, or the Employee Retirement Income Security Act of 1974, as amended, and (iv) Title VII of the Civil Rights

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Act of 1964, as amended, the Civil Rights Act of 1991, the Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, as amended, or the Illinois Human Rights Act.

(b) In signing this Release you acknowledge that you intend that it shall be effective as a bar to each and every one of the Claims hereinabove mentioned or implied. You expressly consent that this letter agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected Claims (notwithstanding any state statute that expressly limits the effectiveness of a general release of unknown, unsuspected and unanticipated Claims), if any, as well as those relating to any other Claims hereinabove mentioned or implied. You acknowledge and agree that this waiver is an essential and material term of this letter agreement and without such waiver the Company would not have made the Severance Payments described in paragraph 2. You further agree that in the event you bring your own Claim in which you seek damages against the Company, or in the event you seek to recover against the Company in any Claim brought by a governmental agency on your behalf, this release shall serve as a complete defense to such Claims.

(c) By signing this letter agreement, you acknowledge that you:

(1) have been given twenty-one days after receipt of this letter agreement within which to consider it;

(2) have carefully read and fully understand all of the provisions of this letter agreement;

(3) knowingly and voluntarily agree to all of the terms set forth in this letter agreement;

(4) knowingly and voluntarily agree to be legally bound by this letter agreement;

(5) have been advised and encouraged in writing (via this agreement) to consult with an attorney prior to signing this letter agreement;

(6) understand that this letter agreement, including the Release, shall not become effective and enforceable until the eighth day following execution of this letter agreement, and that at any time prior to the effective day you can revoke this letter agreement.

4. Additional Agreement.

You also agree not to disparage the Company, or its past and present investors, officers, directors or employees and to keep all confidential and proprietary information about the past or present business affairs of the Company confidential unless a prior written release from the Company is obtained or disclosure is permitted under the terms of the Retention Agreement.

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5. No Admissions.

This letter agreement shall not be construed as an admission of any wrongdoing either by the Company, its affiliates, or its and their directors, officers, agents and employees.

6. Governing Law.

This letter agreement shall be interpreted in accordance with the laws of the State of Illinois. Whenever possible, each provision of this letter agreement shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision shall be held to be prohibited or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or affecting the remainder of such provision or any of the remaining provisions of this letter agreement.

Please indicate your agreement by signing this letter and returning it to us on or before             .

Very truly yours,

MATERIAL SCIENCES CORPORATION

By:

Its:

AGREED TO AND ACCEPTED BY:

Dated:                     

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EX-10.(LL)

Exhibit 10(ll)

RETENTION AGREEMENT

RETENTION AGREEMENT (this “Agreement”) dated as of February 29, 2004 by and between MATERIAL SCIENCES CORPORATION, a Delaware corporation, and its subsidiaries (collectively, the “Company”), and Ronald L. Millar, Jr. (“Employee”) (capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in Section 9 hereof).

W I T N E S S E T H:

WHEREAS, Employee is employed by the Company or one of its subsidiaries;

WHEREAS, the Board of Directors of the Company has determined that appropriate steps should be taken to reinforce and encourage the continued employment and dedication of key personnel; and

WHEREAS, as an inducement for and in consideration of Employee remaining in its employ and in partial consideration of Employee’s agreement to terminate his supplemental employee retirement benefits and certain long term incentive awards and stock options, the Company agrees that Employee shall receive the retention, severance and other benefits set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing, of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties, intending legally to be bound, hereby agree as follows:

1. Effective Date; Term. This Agreement, and all rights and obligations of the parties hereunder, shall commence and become effective on the date hereof. The rights and obligations of the parties under Section 3 of this Agreement shall expire on June 30, 2005 unless Employee’s employment with the Company has terminated before June 30, 2005 or the Sale Process Completion Date occurs before June 30, 2005; provided that the Board of Directors may elect to extend the expiration date in its sole and absolute discretion.

2. Retention of Employee.

(a) Retention Period Compensation. The Company hereby agrees to continue to employ Employee, and Employee hereby agrees to remain employed by the Company, as Senior Vice President, Operations until the Sale Process Completion Date; provided that the Company shall have the right to terminate Employee at any time with or without Cause and Employee shall have the right to terminate his employment at any time with or without Good Reason. During this period, Employee shall be entitled to the following compensation and benefits:

(i) Employee shall receive a base salary of $202,000 per annum or as such amount is increased by the Compensation Committee of the Board of Directors of the Company in its sole and absolute discretion on or about March 1, 2004 (the “Base

Salary”), payable by the Company in regular installments in accordance with the Company’s general payroll practices (in effect from time to time) until either (A) February 28, 2005, or (B) if the Sale Process Completion Date occurs prior to February 28, 2005, the one year anniversary of the Sale Process Completion Date, at which time Employee’s Base Salary may be adjusted, in the sole discretion of the Compensation Committee of the Board of Directors of the Company or Successor, to be competitive with comparable positions at companies of similar size in the Company’s or Successor’s industry.

(ii) If Employee is employed by the Company or a Successor on November 30th of any given year during this period, then Employee shall be eligible to receive a cash bonus under the Company’s EVA Plan. If Employee’s employment terminates after November 30th of a given year but prior to February 28th of the immediately following year, then the bonus shall be pro-rated based on the portion of the fiscal year in which Employee was employed by the Company or a Successor.

(iii) Employee shall participate in all Company-sponsored employee benefit programs and receive all fringe benefits for which employees of his level are eligible, including, without limitation, incentive, savings, welfare benefit, reimbursement and retirement plans; provided that (A) Employee shall not be entitled to a car allowance and (B) Employee will forfeit the benefits described in Sections 2(b) (other than his right to receive the payment described therein) and 4(e)(ii) below.

(b) Termination of Supplemental Employee Retirement Plan. The Company shall pay to Employee, in full and complete satisfaction of the Company’s obligations under that certain Supplemental Pension Plan Agreement dated March 2, 1992, as amended on May 7, 1999, between the Company and Employee, an amount equal to $645,000 (less any withholding taxes) on May 31, 2004 or, if earlier, the date of termination of employment for any reason.

(c) Retention Bonus. The Company shall pay to Employee an amount equal to $661,194 on the earlier of (i) May 31, 2005, if Employee is employed by the Company or a Successor on such date, (ii) the second business day following the Company’s (or a Successor’s) termination of Employee without Cause or the death or Disability of Employee or (iii) the second business day following the Employee’s termination of his employment with a Successor for Good Reason (but Employee shall not be entitled to such amount in the event he terminates his employment with the Company for Good Reason).

3. Compensation Upon Termination of Employment.

(a) Death. If Employee’s employment by the Company is terminated as a result of the occurrence of Employee’s death, the Company shall pay to Employee’s estate vacation pay (for earned but unused vacation) and the compensation and other benefits expressly provided under Section 2 through the Termination Date, as well as any death benefits available under any Company plan or policy.

(b) Disability and Termination with or without Good Reason. If Employee’s employment by the Company is terminated by the Company as a result of the occurrence of

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Employee’s Disability or Employee terminates his employment with the Company with or without Good Reason, the Company shall pay to Employee vacation pay (for earned but unused vacation) and the compensation and other benefits expressly provided under Section 2 (other than under Section 2(c) if Employee terminates his employment with the Company with or without Good Reason) through the Termination Date, as well as any disability benefits available under any Company plan or policy in the case of Disability.

(c) Termination without Cause or for Good Reason.

(i) If Employee’s employment with the Company is terminated by the Company without Cause, the Company shall pay to Employee, in lieu of the Company’s then current severance policy, (x) on the Termination Date, any vacation pay (for earned but unused vacation) and the compensation and other benefits expressly provided under Section 2 through the Termination Date and (y) a severance payment (the “Severance Payment”) consisting of the following:

(A) a lump sum cash payment equal to the (x) Employee’s Base Salary and (y) a bonus equal to $100,000; and

(B) a payment equal to nine months of Employee’s Base Salary, payable semi-monthly, commencing on the Termination Date; provided however that if Employee’s termination occurs within 18 months after the Sale Process Completion Date, Employee shall receive the amounts described in this Section 3(c)(i)(B) as a lump sum cash payment on the Termination Date.

Notwithstanding the foregoing, if a Successor (with the approval of the Company) offers Employee a Comparable Position and Employee declines such offer, then Employee shall not be entitled to a Severance Payment pursuant to this Section 3(c).

(ii) If Employee’s employment with a Successor is terminated by the Successor without Cause or Employee terminates his employment with the Successor for Good Reason, in each case at anytime during the eighteen month period following the Sale Process Completion Date, the Successor shall pay to Employee (x) on the Termination Date, any vacation pay (for earned but unused vacation) and the compensation and other benefits expressly provided under Section 2 through the Termination Date and (y) the Severance Payment.

(iii) In addition to the compensation paid pursuant to Sections 3(c)(i) or (ii) above, (x) the Company (or Successor), at its expense, shall continue to provide Employee with all employee benefits (including welfare benefit programs) and fringe benefits specified in Section 2(a)(iii) for 21 months following the Termination Date (or substantially comparable benefits); provided that the Company (or Successor) shall not be required to make DC pension contributions on behalf of Employee, and (y) except as set forth in Section 4(e), all vested stock options, shares of restricted stock and other stock or stock based awards granted by the Company to Employee shall remain exercisable by Employee subject to the terms and conditions of any plans which such grants or awards were made under.

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(d) Notice of Termination. Any purported termination of Employee’s employment by the Company or by Employee shall be communicated to the other party hereto by a written notice which shall indicate the specific termination provision of this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee’s employment under the provision so indicated.

(e) No Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation earned by Employee as the result of employment by another employer or Successor, by retirement benefits, by offset against any amount claimed to be owed by Employee to the Company or otherwise.

4. Additional Understandings.

(a) Employee’s Insurance Policy. If applicable and immediately after the Termination Date, Employee agrees to be solely responsible for the payment of the premiums under his long-term care/life insurance policy.

(b) Company Property. Employee shall return and relinquish all rights to all Company owned or leased property (including without limitation his Company-issued cellular telephone) on the Termination Date.

(c) Transition Services. In the event Employee is terminated by the Company (other than for Cause, Disability or death), or Employee terminates his employment for Good Reason, the Company shall provide (i) outplacement services at an executive level through one or more outside firms up to an aggregate cost of $20,000 and in accordance with the Company’s past practice, with such services to extend until the earlier of (x) 21 months following the termination of Employee’s employment or (y) the date Employee secures full time employment and (ii) Employee access to the Company’s voicemail and electronic mail systems, with such access continuing for sixty (60) days following the Termination Date.

(d) Directors’ and Officers’ Insurance. Prior to the Sale Process Completion Date, the Company shall maintain a directors’ and officers’ liability insurance policy (with coverage for the Employee) consistent with past practice. Employee shall be entitled to tail coverage under such policy (to apply following the Sale Process Completion Date) on the same terms applicable to members of the Board of Directors of the Company.

(e) Long-Term Incentives.

(i) Upon the earlier of November 30, 2004 or the Sale Process Completion Date, the unvested portion of the long-term incentive award and the related cash award granted to Employee on December 18, 2001 shall automatically vest.

(ii) Employee expressly agrees and acknowledges, effective as of the date hereof, that Employee forfeits all right, title and interest to (i) the long-term incentive award granted to Employee on March 1, 2003 pursuant to the 2003 Long-Term Incentive Stock Award Program, and (ii) options to purchase 23,707 shares of Common Stock at $10 per share which were originally scheduled to vest on February 28, 2005.

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(f) Indemnification Agreement. Employee expressly acknowledges and agrees that, notwithstanding any provision or statement to the contrary contained in this Agreement, the Indemnification Agreement between the Company and Employee dated March 1, 2002 shall remain in full force and effect and continue to be binding upon Employee and the Company in accordance with its terms.

(g) Change in Control and Technology Agreements. Employee and the Company expressly acknowledge and agree that, effective as of the date hereof, the Change of Control Agreement entered into between the Company and Employee dated June 30, 2001, as amended on November 25, 2002, and the Technology Agreement between the Company and the Employee dated May 13, 1969 shall become null and void and have no further force or effect.

(h) Retirement Accounts. The Company shall take all necessary actions to cause the Employee’s defined contribution plan account balance and 401(k) plan account balance to be distributed or transferred in accordance with the Employee’s instructions as expeditiously as possible following termination pursuant to the Company’s then current practice and applicable law.

(i) Excise Tax Gross-Up.

(i) In the event that Employee becomes entitled to the payments and benefits provided under Section 3 above and/or any other payments or benefits in connection with a change in control or termination of Employee’s employment with the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change in control or any person affiliated with the Company or such person) (collectively, the “Payments”), and if any of the Payments will be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Code, then (A) if the aggregate amount of the Payments is equal to or greater than 330% of the “base amount” as defined in Section 280G(b)(3) of the Code, then the Company shall pay to Employee, at least 30 days prior to the time payment of any such Excise Tax is due, an additional amount (the “Gross-Up Payment”) such that the net amount retained by Employee, after deduction of any Excise Tax and any federal and state and local income tax imposed on the Gross-Up Payment, shall be equal to the Excise Tax imposed on the Payments; and (B) if the aggregate amount of the Payments is less than 330% of the “base amount,” then the aggregate present value of the payments made pursuant to the terms of this Agreement alone without taking into account payments made pursuant to any other agreements between the Company and Employee shall be reduced so that the Payment equals 299.99% of the “base amount” (it being understood that in no event shall the amount of the payment made pursuant to the terms of this Agreement be less than $0).

(ii) For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) the Payments shall be treated as “parachute payments” within the meaning of Section 280G(b)(2) of the Code,

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and all “excess parachute payments” within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax, unless, in the opinion of tax counsel selected by the Company’s independent auditors and reasonably acceptable to Employee, the Payments (in whole or in part) do not constitute parachute payments or excess parachute payments or are otherwise not subject to the Excise Tax, (B) the amount of the Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (y) the total amount of the Payments or (z) the amount of excess parachute payments within the meaning of Section 280G(b)(l) (after applying clause (A) above), and (C) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company’s independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code.

(iii) For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee’s residence on the Termination Date, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

(iv) In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Employee’s employment, Employee shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by Employee if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee’s employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined.

(j) Company Successors. The Company will require either (1) any acquiror of the Company as a whole or (2) any acquiror of the coated metal business unit and/or the laminates and composites business unit which directly or indirectly becomes the employer of Employee (in each case through merger, consolidation, asset purchase, stock purchase or otherwise) (a “Successor”) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as Employee would be entitled to hereunder if Employee terminated Employee’s employment by the Company for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes

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effective shall be deemed the Termination Date. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor which assumes and agrees to perform this Agreement by operation of law, or otherwise.

5. Confidential Information and Ownership of Property.

(a) Confidential Information. Employee agrees to use all Confidential Information solely in connection with the performance of services for or on behalf of the Company. Employee shall not, during the term of this Agreement, or at any time after the termination of this Agreement, in any manner, either directly or indirectly, (i) disseminate, disclose, use or communicate any Confidential Information to any person or entity, regardless of whether such Confidential Information is considered to be confidential by third parties, or (ii) otherwise directly or indirectly misuse any Confidential Information; provided, however, that (y) none of the provisions of this Section shall apply to disclosures made for valid business purposes of the Company or (z) that Employee shall not be obligated to treat as confidential any Confidential Information that (I) was publicly known at the time of disclosure to Employee; (II) becomes publicly known or available thereafter other than by means in violation of this Agreement or any other duty owed to the Company or any of its Affiliates by any person or entity; or (III) is lawfully disclosed to Employee by a third party. Notwithstanding the foregoing, Employee shall be permitted to disclose Confidential Information to the extent required to enforce Employee’s rights hereunder in any litigation arising under, or pertaining to, this Agreement provided that Employee shall give prior written notice to the Company of any such disclosure so that the Company may have an opportunity to protect the confidentiality of such Confidential Information in such litigation.

(b) Ownership of Property. Employee agrees that all works of authorship developed, authored, written, created or contributed to during the term of his employment for the benefit of the Company, whether solely or jointly with others, shall be considered works-made-for-hire. Employee agrees that such works shall be the sole and exclusive property of the Company (or its appropriate Affiliate) and that all right, title and interest therein or thereto, including all intellectual property rights existing or obtained in connection therewith, shall likewise be the sole and exclusive property of the Company (or its appropriate Affiliate). Employee agrees further that, in the event that any work is not considered to be work-made-for-hire by operation of law, Employee will immediately, and without further compensation, assign all of Employee’s right, title and interest therein to the Company (or its designated Affiliate), its successors and assigns. At the request and expense of the Company, Employee agrees to perform in a timely manner such further acts as may be necessary or desirable to transfer, defend or perfect the Company’s ownership of such work and all rights incident thereto.

6. Covenant Not to Compete. Employee covenants and agrees that Employee shall not anywhere in North America (including, without limitation, the United States, Canada and Mexico), during the term of Employee’s employment by the Company or any Affiliate thereof and for the Non-Compete Period, directly or indirectly own an interest in, operate, join, control, advise, work for, consult to, have a financial interest which provides any control of, or participate in any corporation, partnership, proprietorship, firm, association, person, or other entity producing, designing, providing, soliciting orders for, selling, distributing, consulting to, or marketing or re-marketing products, goods, equipment, or services competitive with or in

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substantially the same line of business as the Company or any Affiliate thereof, or any part thereof, as of the commencement of the Non-Compete Period. This covenant does not prohibit the mere ownership of less than three percent (3%) of the outstanding stock of any publicly-traded corporation as long as Employee is not otherwise in violation of this Agreement.

7. Covenant Against Solicitation of Employees. During the term of Employee’s employment by the Company and for the Non-Compete Period, Employee shall not employ employees or agents or former employees or agents of the Company or its Affiliates or, directly or indirectly, solicit or otherwise encourage the employment of employees or agents or former employees or agents of the Company or its Affiliates; provided, however, that this restriction shall not apply to former employees or agents (y) who, as of the date of termination of Employee’s employment by the Company, have not worked for any of the Company or its Affiliates during the twelve preceding months or (z) whose employment by the Company or any Affiliate thereof was terminated by the Company.

8. Remedies.

(a) Employee Acknowledgements. Employee acknowledges (i) that the covenants contained in Sections 5, 6 and 7, including, without limitation, the time and geographic limits (collectively, the “Restrictive Covenants”), are reasonable and appropriate and that Employee will not any claim to the contrary in any action brought by the Company or its Affiliates to enforce any of such provisions and (ii) that should Employee violate any of the Restrictive Covenants, it will be difficult to determine the resulting damages to the Company and its Affiliates and, in addition to any other remedies the Company and its Affiliates may have, (A) the Company and its Affiliates shall be entitled to temporary injunctive relief without being required to post a bond and permanent injunctive relief without the necessity of proving actual damage; and (B) the Company shall have the right to offset against its obligation to make any payments to Employee under this Agreement or otherwise to the extent of any money damages incurred or suffered by the Company and its Affiliates. The Company may elect to seek one or more of these remedies at its sole discretion on a case by case basis. Failure to seek any or all remedies in one case shall not restrict the Company from seeking any remedies in another situation. Such action by the Company shall not constitute a waiver of any of its rights.

(b) Intent. It is the parties’ intent that each of the Restrictive Covenants be read and interpreted with every reasonable inference given to its enforceability. However, it is also the parties’ intent that if any term, provision or condition of the Restrictive Covenants is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions thereof shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Finally, it is also the parties’ intent that if a court should determine any of the Restrictive Covenants are unenforceable because of over-breadth, then the court shall modify said covenant so as to make it reasonable and enforceable under the prevailing circumstances.

(c) Tolling. In the event of any breach by Employee of any Restrictive Covenant, the running of the period of restriction shall be automatically tolled and suspended for the duration of such breach, and shall automatically recommence when such breach is remedied in order that the Company shall receive the full benefit of Employee’s compliance with each of the Restrictive Covenants.

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(d) Independent Enforcement. Employee agrees that the Restrictive Covenants shall be enforced independently of any other obligations between the Company, on the one hand, and Employee, on the other, and that the existence of any other claim or defense shall not affect the enforceability of the Restrictive Covenants or the remedies provided herein. The Restrictive Covenants shall be in addition to and shall not replace any other restrictive covenant agreement that Employee may currently have (or hereafter enter into) with the Company or any of its Affiliates.

(e) Survival. The provisions of this Section 8 shall survive the termination of this Agreement.

9. Certain Defined Terms. For purposes of this Agreement the following terms and phrases shall have the following meanings:

“Affiliate” means any person or entity who or which, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, a specified person or entity (the term “control” for these purposes meaning the ability, whether by ownership of shares or other equity interests, by contract or otherwise, to elect a majority of the directors of a corporation, to act as or select the managing or general partner of a partnership, or otherwise to select, or have the power to remove and then select, a majority of those persons exercising governing authority over an entity).

“Cause”, with respect to the termination of Employee’s employment by the Company, means (i) the willful and continued refusal by Employee to perform a lawful and reasonable order, direction or instruction of the Board of Directors within a reasonable period of time after a written demand for substantial performance is delivered to Employee by the Board of Directors which demand specifically identifies the manner in which the Board believes that Employee has not substantially performed such an order, direction or instruction; or (ii) the willful misconduct by Employee in the performance of Employee’s duties to the Company or the willful engaging by Employee in conduct which, in either case, is illegal or materially injurious to the Company. For purposes of this definition, no act, or failure to act, on Employee’s part shall be deemed “willful” unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee’s action or omission was in the best interest of the Company. In addition, notwithstanding the foregoing, Employee’s employment by the Company shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for such purpose (after reasonable notice to Employee and an opportunity for Employee, together with counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors, Employee was guilty of conduct set forth above in clauses (i) or (ii) of the first sentence of this definition and specifying the particulars thereof in detail.

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

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“Comparable Position” means a position with a Successor that is not more than seventy-five miles from Employee’s present office location and has (i) responsibilities substantially similar to those in existence for Employee with the Company immediately prior to such Successor’s offer of employment and (ii) for the first 12 months of employment with the Successor, salary at least equal and bonus opportunity and benefits comparable to those in existence for Employee with the Company immediately prior to such Successor’s offer of employment and thereafter on terms competitive with comparable positions at companies of similar size in the Successor’s industry.

“Confidential Information” means all software, trade secrets, work products created by Employee for the Company or any of its Affiliates, know-how, ideas, techniques, theories, discoveries, formulas, plans, charts, designs, drawings, lists of current or prospective clients, business plans and proposals, current or prospective business opportunities, financial records, research and development, marketing strategies and programs and reports and other proprietary information created or obtained by Employee for the benefit of the Company or any of its Affiliates during the course of employment by the Company.

“Disability” means the inability of Employee to perform substantially all Employee’s duties and responsibilities to the Company by reason of a physical or mental illness or infirmity for either (i) a continuous period of six months or (ii) 180 days during any consecutive twelve-month period.

“Employment Period” means the date commencing on the Effective Date and terminating on the Termination Date.

“EVA Plan” means the annual variable compensation plan adopted by the Company’s Compensation Committee of the Board of Directors, as the same may be amended, modified, supplemented or restated from time to time (including any successor thereto or replacement therefor).

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Good Reason” means the occurrence, without the express written consent of Employee, of any one of the following events, unless such circumstances are fully corrected prior to the Termination Date specified in the applicable notice of termination delivered pursuant to Section 2(b):

(i) the assignment to Employee of any duties significantly inconsistent with Employee’s position and status with the Company or a substantial adverse alteration in the nature or status of Employee’s employment responsibilities from those in existence on the date hereof;

(ii) the relocation of Employee’s office or job location to a location not within seventy-five miles of Employee’s present office or job location, except for required travel on the Company’s business to an extent substantially consistent with Employee’s present business travel obligations;

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(iii) the failure by the Company to pay to Employee any portion of the compensation required hereunder, within ten business days of the date such compensation is due;

(iv) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 4(m) hereof; or

(v) any purported termination of Employee’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(d).

“Non-Compete Period” means the period commencing on the date upon which Employee ceases to be employed by the Company or any Affiliate thereof and terminating 18 months later.

“Sale Process Completion Date” means the closing of the sale of the following business units, either individually or through a sale of the Company as a whole: the coated metal business unit (including the Elk Grove Village, Middletown and Morrisville facilities) and the laminates and composites business unit.

“Successor” has the meaning set forth in Section 4(j).

“Termination Date” means

(i) if Employee’s employment is terminated for Death, the date of Employee’s death;

(ii) if Employee’s employment is terminated for Disability, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee’s duties during such 30 day period); and

(iii) if Employee’s employment is terminated for any other reason (other than death or Disability), the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than 30 days, and in the case of a termination for Good Reason shall not be less than 15 nor more than 60 days, respectively, from the date such Notice of Termination is given);

provided; however, that if prior to the Termination Date (as determined without regard to this provision), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Termination Date shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided; further, however, that the Termination Date shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. During the pendency of any such dispute, the Company will continue to pay Employee’s full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which

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Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this definition. Amounts paid under this paragraph are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement.

10. Miscellaneous.

(a) Amendment. This Agreement may be amended, modified or supplemented but only in writing signed by each of the parties hereto.

(b) Waivers. The failure of a party hereto at any time or times to require performance of any provision hereof shall in no manner affect its right at a later time to enforce the same. No waiver by a party of any condition or of any breach of any term, covenant, representation or warranty contained in this Agreement shall be effective unless in writing, and no waiver in any one or more instances shall be deemed to be a further or continuing waiver of any such condition or breach in other instances or a waiver of any other condition or breach of any other term, covenant, representation or warranty.

(c) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.

(d) Forum Selection and Consent to Jurisdiction. EACH OF THE COMPANY AND EMPLOYEE AGREE THAT ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT BETWEEN OR AMONG SUCH PARTIES, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS LOCATED IN COOK COUNTY, ILLINOIS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS. EACH OF THE COMPANY AND EMPLOYEE HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS LOCATED IN COOK COUNTY, ILLINOIS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS. EACH OF THE COMPANY AND EMPLOYEE HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

(e) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

(f) Interpretation. The headings preceding the text of Articles and Sections included in this Agreement are for convenience only and shall not be deemed part of this Agreement or be given any effect in interpreting this Agreement. The use of the masculine,

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feminine or neuter gender herein shall not limit any provision of this Agreement. The use of the terms “including” or “include” shall in all cases herein mean “including, without limitation” or “include, without limitation,” respectively. References to employment by the Company in this Agreement shall also refer to employment by one of the Company’s subsidiaries if applicable.

(g) Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No assignment of any rights or obligations shall be made by any party without the written consent of each other party.

(h) No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and, to the extent provided herein, their respective affiliates, directors, officers, employees, agents, heirs, executors, administrators and legal representatives, and no provision of this Agreement shall be deemed to confer upon other third parties any remedy, claim, liability, reimbursement, cause of action or other right.

(i) Severability. If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions hereof shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.

(j) Remedies Cumulative. The remedies provided in this Agreement shall be cumulative and shall not preclude the assertion or exercise of any other rights or remedies available by law, in equity or otherwise.

(k) Entire Understanding. Except as provided in Section 4(e), this Agreement, together with attached exhibits, sets forth the entire agreement and understanding of the parties hereto with respect to the matters set forth herein and supersedes any and all prior agreements, arrangements and understandings among the parties.

(l) Conflicts With Existing Agreements. In the event that any term or provision of this Agreement conflicts with or differs from any term or provision of other existing agreement, understanding or plan between the Company and Employee or to which Employee is a participant, such term or provision of this Agreement shall govern for all purposes and respects.

(m) Tax Withholding. Any payments provided for hereunder shall be paid net of any applicable tax withholding required under federal, state or local law.

(n) General Release. As a condition of receipt of any payments under Section 3, Employee shall be required to sign a general release proposed by and provided by the Company in the form attached as Exhibit A hereto and to abide by the provisions of such general release.

(o) Attorneys’ Fees and Other Costs. In the event a dispute arises between the parties hereto and suit is instituted, the prevailing party or parties in such litigation shall be entitled to recover reasonable attorneys’ fees and other costs and expenses from the non-prevailing party or parties, whether incurred at the trial level or in any appellate proceeding. Unless prohibited by Section 13(k) of the Exchange Act (or the rules or regulations promulgated

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thereunder) or Employee otherwise elects, expenses incurred by Employee in connection with any dispute described in this Section will be paid by the Company in advance of the final disposition of such dispute within 20 days after presentation by Employee of written documentation therefor reasonably satisfactory to the Company if Employee furnishes the Company a written undertaking to repay any amounts advanced if it is ultimately determined that Employee is not entitled to attorneys’ fees and other costs pursuant to this Section (which written undertaking will provide that the Company shall be entitled to collect its attorneys’ fees and other out-of-pocket costs incurred in connection with the enforcement of such undertaking).

(p) Notices. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to (i) the Company at 2200 East Pratt Boulevard, Elk Grove Village, Illinois 60007-5995 and (ii) Employee at                     , provided that all notices to the Company shall be directed to the attention of the Board of Directors, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change in address shall be effective only upon receipt.

(q) Employee Representations. EMPLOYEE REPRESENTS AND AGREES THAT: (A) HE HAS READ THIS AGREEMENT CAREFULLY; (B) HE UNDERSTANDS ALL OF ITS TERMS AND KNOWS THAT HE IS GIVING UP IMPORTANT RIGHTS; (C) HE VOLUNTARILY CONSENTS TO EVERYTHING IN IT; (D) HE HAS BEEN ADVISED TO CONSULT WITH AN ATTORNEY BEFORE EXECUTING IT AND HE HAS DONE SO OR, AFTER CAREFUL READING AND CONSIDERATION HE HAS CHOSEN NOT TO DO SO ON HIS OWN VOLITION; AND (E) HE HAS SIGNED THIS AGREEMENT KNOWINGLY AND VOLUNTARILY AND WITH THE ADVICE OF ANY COUNSEL RETAINED TO ADVISE HIM WITH RESPECT TO IT.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.

THE COMPANY:
MATERIAL SCIENCES CORPORATION, a Delaware corporation
By:     /s/ Michael J. Callahan
Name:	Michael J. Callahan
Title:	President and Chief Executive Officer
EMPLOYEE:
/s/ Ronald L. Millar, Jr.
Name:	Ronald L. Millar, Jr.

Acknowledged and Agreed:
Material Sciences Corporation, a Delaware corporation
By:	/s/ Ronald L. Stewart
Name	: Ronald L. Stewart
Title:	President and Chief Executive Officer

EXHIBIT A

FORM OF GENERAL RELEASE

Dear [employee]:

This letter will confirm the agreement between you and Material Sciences Corporation (including its subsidiaries, the “Company”) as follows:

1. Separation from the Company.

By signing this letter agreement you acknowledge that the termination of your employment with the Company will be effective on                      (the “Termination Date”). As of the Termination Date, you will cease to be an employee of the Company, and you will no longer be required to fulfill any of the duties and responsibilities associated with your position.

2. Severance Payment.

You acknowledge and agree that the severance payments paid or granted to you pursuant to that certain Retention and Change in Control Agreement, dated February 17, 2004, by and between you and the Company (“Retention Agreement”), represents consideration for signing this Release and is not salary, wages or benefits to which you were already entitled. Such payments shall not be considered compensation for purposes of any employee benefit plan, program, policy or arrangement maintained or hereafter established by the Company or any of its affiliates.

3. Release by You.

(a) You (for yourself, your heirs, assigns or executors) release and forever discharge the Company, any of its affiliates, and its and their directors, officers, agents and employees from any and all claims, suits, demands, causes of action, contracts, covenants, obligations, debts, costs, expenses, attorneys’ fees, liabilities of whatever kind or nature in law or equity, by statute or otherwise whether now known or unknown, vested or contingent, suspected or unsuspected, and whether or not concealed or hidden, which have existed or may have existed, or which do exist, through the date this letter agreement becomes effective and enforceable, (“Claims”) of any kind, which relate in any way to your employment with the Company or the termination of that employment, except those arising out of the performance of this letter agreement and your rights under the Retention Agreement. Such released claims include, without in any way limiting the generality of the foregoing language, any and all claims arising under (i) any exception to the employment-at-will doctrine, including any common law theory sounding in tort, contract or public policy, (ii) the provisions of the Fair Labor Standards Act, as amended, or any state or local wage and hour law or ordinance, (iii) the National Labor Relations Act, as amended, or the Employee Retirement Income Security Act of 1974, as amended, and (iv) Title VII of the Civil Rights

Act of 1964, as amended, the Civil Rights Act of 1991, the Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, as amended, or the Illinois Human Rights Act.

(b) In signing this Release you acknowledge that you intend that it shall be effective as a bar to each and every one of the Claims hereinabove mentioned or implied. You expressly consent that this letter agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected Claims (notwithstanding any state statute that expressly limits the effectiveness of a general release of unknown, unsuspected and unanticipated Claims), if any, as well as those relating to any other Claims hereinabove mentioned or implied. You acknowledge and agree that this waiver is an essential and material term of this letter agreement and without such waiver the Company would not have made the Severance Payments described in paragraph 2. You further agree that in the event you bring your own Claim in which you seek damages against the Company, or in the event you seek to recover against the Company in any Claim brought by a governmental agency on your behalf, this release shall serve as a complete defense to such Claims.

(c) By signing this letter agreement, you acknowledge that you:

(1) have been given twenty-one days after receipt of this letter agreement within which to consider it;

(2) have carefully read and fully understand all of the provisions of this letter agreement;

(3) knowingly and voluntarily agree to all of the terms set forth in this letter agreement;

(4) knowingly and voluntarily agree to be legally bound by this letter agreement;

(5) have been advised and encouraged in writing (via this agreement) to consult with an attorney prior to signing this letter agreement;

(6) understand that this letter agreement, including the Release, shall not become effective and enforceable until the eighth day following execution of this letter agreement, and that at any time prior to the effective day you can revoke this letter agreement.

4. Additional Agreement.

You also agree not to disparage the Company, or its past and present investors, officers, directors or employees and to keep all confidential and proprietary information about the past or present business affairs of the Company confidential unless a prior written release from the Company is obtained or disclosure is permitted under the terms of the Retention Agreement.

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5. No Admissions.

This letter agreement shall not be construed as an admission of any wrongdoing either by the Company, its affiliates, or its and their directors, officers, agents and employees.

6. Governing Law.

This letter agreement shall be interpreted in accordance with the laws of the State of Illinois. Whenever possible, each provision of this letter agreement shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision shall be held to be prohibited or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or affecting the remainder of such provision or any of the remaining provisions of this letter agreement.

Please indicate your agreement by signing this letter and returning it to us on or before                     .

Very truly yours,

MATERIAL SCIENCES CORPORATION

By:

Its:

AGREED TO AND ACCEPTED BY:

Dated:                    

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EX-10.(MM)

Exhibit 10(mm)

RETENTION AGREEMENT

RETENTION AGREEMENT (this “Agreement”) dated as of April 6, 2004 by and between MATERIAL SCIENCES CORPORATION, a Delaware corporation, and its subsidiaries (collectively, the “Company”), and Clifford D. Nastas (“Employee”) (capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in Section 9 hereof).

W I T N E S S E T H:

WHEREAS, Employee is employed by the Company or one of its subsidiaries;

WHEREAS, the Board of Directors of the Company has determined that appropriate steps should be taken to reinforce and encourage the continued employment and dedication of key personnel; and

WHEREAS, as an inducement for and in consideration of Employee remaining in its employ and in partial consideration of Employee’s agreement to terminate his supplemental employee retirement benefits and certain long term incentive awards and stock options, the Company agrees that Employee shall receive the retention, severance and other benefits set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing, of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties, intending legally to be bound, hereby agree as follows:

1. Effective Date; Term. This Agreement, and all rights and obligations of the parties hereunder, shall commence and become effective on the date hereof. The rights and obligations of the parties under Section 3 of this Agreement shall expire on June 30, 2005 unless Employee’s employment with the Company has terminated before June 30, 2005 or the Sale Process Completion Date occurs before June 30, 2005; provided that the Board of Directors may elect to extend the expiration date in its sole and absolute discretion.

2. Retention of Employee.

(a) Retention Period Compensation. The Company hereby agrees to continue to employ Employee, and Employee hereby agrees to remain employed by the Company, as Vice President, Sales and Marketing until the Sale Process Completion Date; provided that the Company shall have the right to terminate Employee at any time with or without Cause and Employee shall have the right to terminate his employment at any time with or without Good Reason. During this period, Employee shall be entitled to the following compensation and benefits:

(i) Employee shall receive a base salary of $252,200 per annum or as such amount is increased by the Compensation Committee of the Board of Directors of the Company in its sole and absolute discretion on or about March 1, 2004 (the “Base

Salary”), payable by the Company in regular installments in accordance with the Company’s general payroll practices (in effect from time to time), until either (A) February 28, 2005, or (B) if the Sale Process Completion Date occurs prior to February 28, 2005, the one year anniversary of the Sale Process Completion Date, at which time Employee’s Base Salary may be adjusted, in the sole discretion of the Compensation Committee of the Board of Directors of the Company or Successor, to be competitive with comparable positions at companies of similar size in the Company’s or Successor’s industry.

(ii) If Employee is employed by the Company or a Successor on November 30th of any given year during this period, then Employee shall be eligible to receive a cash bonus under the Company’s EVA Plan. If Employee’s employment terminates after November 30th of a given year but prior to February 28th of the immediately following year, then the bonus shall be pro-rated based on the portion of the fiscal year in which Employee was employed by the Company or a Successor.

(iii) Employee shall participate in all Company-sponsored employee benefit programs and receive all fringe benefits for which employees of his level are eligible, including, without limitation, incentive, savings, welfare benefit, reimbursement and retirement plans; provided that (A) Employee shall not be entitled to a car allowance and (B) Employee will forfeit the benefits described in Sections 2(b) (other than his right to receive the payment described therein) and 4(e)(ii) below.

(b) Termination of Supplemental Employee Retirement Plan. The Company shall pay to Employee, in full and complete satisfaction of the Company’s obligations under that certain Supplemental Pension Plan Agreement dated November 15, 2001 between the Company and Employee, an amount equal to $50,000 (less any withholding taxes) on May 31, 2004 or, if earlier, the date of termination of employment for any reason.

(c) Retention Bonus. The Company shall pay to Employee an amount equal to: (i) $250,000 on the earlier of (A) September 30, 2004, if Employee is employed by the Company or a Successor on such date, (B) the second business day following the Company’s (or a Successor’s) termination of Employee without Cause or the death or Disability of Employee or (C) the second business day following the Employee’s termination of his employment with a Successor for Good Reason (but Employee shall not be entitled to such amount in the event he terminates his employment with the Company for Good Reason); and (ii) $195,395 on the earlier of (A) May 31, 2005, if Employee is employed by the Company or a Successor on such date, (B) the second business day following the Company’s (or a Successor’s) termination of Employee without Cause or the death or Disability of Employee or (C) the second business day following the Employee’s termination of his employment with a Successor for Good Reason (but Employee shall not be entitled to such amount in the event he terminates his employment with the Company for Good Reason).

3. Compensation Upon Termination of Employment.

(a) Death. If Employee’s employment by the Company is terminated as a result of the occurrence of Employee’s death, the Company shall pay to Employee’s estate

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vacation pay (for earned but unused vacation) and the compensation and other benefits expressly provided under Section 2 through the Termination Date, as well as any death benefits available under any Company plan or policy.

(b) Disability and Termination with or without Good Reason. If Employee’s employment by the Company is terminated by the Company as a result of the occurrence of Employee’s Disability or Employee terminates his employment with the Company with or without Good Reason, the Company shall pay to Employee vacation pay (for earned but unused vacation) and the compensation and other benefits expressly provided under Section 2 (other than under Section 2(c) if Employee terminates his employment with the Company with or without Good Reason) through the Termination Date, as well as any disability benefits available under any Company plan or policy in the case of Disability.

(c) Termination without Cause or for Good Reason.

(i) If Employee’s employment with the Company is terminated by the Company without Cause, the Company shall pay to Employee, in lieu of the Company’s then current severance policy, (x) on the Termination Date, any vacation pay (for earned but unused vacation) and the compensation and other benefits expressly provided under Section 2 through the Termination Date and (y) a severance payment (the “Severance Payment”) consisting of the following:

(A) a lump sum cash payment equal to the (x) sum of .750 multiplied by the Employee’s Base Salary and (y) a bonus equal to 40% of the Employee’s Base Salary; and

(B) a payment equal to six months of Employee’s Base Salary, payable semi-monthly, commencing on the Termination Date; provided however that if Employee’s termination occurs within 18 months after the Sale Process Completion Date, Employee shall receive the amounts described in this Section 3(c)(i)(B) as a lump sum cash payment on the Termination Date.

Notwithstanding the foregoing, if a Successor (with the approval of the Company) offers Employee a Comparable Position and Employee declines such offer, then Employee shall not be entitled to a Severance Payment pursuant to this Section 3(c).

(ii) If Employee’s employment with a Successor is terminated by the Successor without Cause or Employee terminates his employment with the Successor for Good Reason, in each case at anytime during the eighteen month period following the Sale Process Completion Date, the Successor shall pay to Employee (x) on the Termination Date, any vacation pay (for earned but unused vacation) and the compensation and other benefits expressly provided under Section 2 through the Termination Date and (y) the Severance Payment.

(iii) In addition to the compensation paid pursuant to Sections 3(c)(i) or (ii) above, (x) the Company (or Successor), at its expense, shall continue to provide Employee with all employee benefits (including welfare benefit programs) and fringe benefits specified in Section 2(a)(iii) for 15 months following the Termination Date (or

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substantially comparable benefits); provided that the Company (or Successor) shall not be required to make DC pension contributions on behalf of Employee, and (y) except as set forth in Section 4(e), all vested stock options, shares of restricted stock and other stock or stock based awards granted by the Company to Employee shall remain exercisable by Employee subject to the terms and conditions of any plans which such grants or awards were made under.

(d) Notice of Termination. Any purported termination of Employee’s employment by the Company or by Employee shall be communicated to the other party hereto by a written notice which shall indicate the specific termination provision of this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee’s employment under the provision so indicated.

(e) No Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation earned by Employee as the result of employment by another employer or Successor, by retirement benefits, by offset against any amount claimed to be owed by Employee to the Company or otherwise.

4. Additional Understandings.

(a) Employee’s Insurance Policy. If applicable and immediately after the Termination Date, Employee agrees to be solely responsible for the payment of the premiums under his long-term care/life insurance policy.

(b) Company Property. Employee shall return and relinquish all rights to all Company owned or leased property (including without limitation his Company-issued cellular telephone) on the Termination Date.

(c) Transition Services. In the event Employee is terminated by the Company (other than for Cause, Disability or death), or Employee terminates his employment for Good Reason, the Company shall provide (i) outplacement services at an executive level through one or more outside firms up to an aggregate cost of $20,000 and in accordance with the Company’s past practice, with such services to extend until the earlier of (x) 15 months following the termination of Employee’s employment or (y) the date Employee secures full time employment and (ii) Employee access to the Company’s voicemail and electronic mail systems, with such access continuing for sixty (60) days following the Termination Date.

(d) Directors’ and Officers’ Insurance. Prior to the Sale Process Completion Date, the Company shall maintain a directors’ and officers’ liability insurance policy (with coverage for the Employee) consistent with past practice. Employee shall be entitled to tail coverage under such policy (to apply following the Sale Process Completion Date) on the same terms applicable to members of the Board of Directors of the Company.

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(e) Long-Term Incentives.

(i) Upon the earlier of November 30, 2004 or the Sale Process Completion Date, the unvested portion of the long-term incentive award and the related cash award granted to Employee on December 18, 2001 shall automatically vest.

(ii) Employee expressly agrees and acknowledges, effective as of the date hereof, that Employee forfeits all right, title and interest to (i) the long-term incentive award granted to Employee on March 1, 2003 pursuant to the 2003 Long-Term Incentive Stock Award Program, and (ii) options to purchase 12,584 shares of Common Stock at $10 per share which were originally scheduled to vest on February 28, 2005.

(f) Indemnification Agreement. Employee expressly acknowledges and agrees that, notwithstanding any provision or statement to the contrary contained in this Agreement, the Indemnification Agreement between the Company and Employee dated March 1, 2002 shall remain in full force and effect and continue to be binding upon Employee and the Company in accordance with its terms.

(g) Change in Control; Technology and Other Agreements. Employee and the Company expressly acknowledge and agree that, effective as of the date hereof, the Change of Control Agreement entered into between the Company and Employee dated June 30, 2001, as amended on April 1, 2002, the Technology Agreement between the Company and the Employee dated April 2, 2002, and the Supplemental Compensation Agreement dated January 9, 2004 between the Company and Employee, shall become null and void and have no further force or effect.

(h) Retirement Accounts. The Company shall take all necessary actions to cause the Employee’s defined contribution plan account balance and 401(k) plan account balance to be distributed or transferred in accordance with the Employee’s instructions as expeditiously as possible following termination pursuant to the Company’s then current practice and applicable law.

(i) Excise Tax Gross-Up.

(i) In the event that Employee becomes entitled to the payments and benefits provided under Section 3 above and/or any other payments or benefits in connection with a change in control or termination of Employee’s employment with the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change in control or any person affiliated with the Company or such person) (collectively, the “Payments”), and if any of the Payments will be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Code, then (A) if the aggregate amount of the Payments is equal to or greater than 330% of the “base amount” as defined in Section 280G(b)(3) of the Code, then the Company shall pay to Employee, at least 30 days prior to the time payment of any such Excise Tax is due, an additional amount (the “Gross-Up Payment”) such that the net amount retained by Employee, after deduction of any Excise Tax and any federal and state and local income tax imposed on the Gross-Up Payment, shall be equal to the Excise Tax imposed on the Payments; and (B) if the aggregate amount of the Payments is less than 330% of the “base amount,” then the aggregate

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present value of the payments made pursuant to the terms of this Agreement alone without taking into account payments made pursuant to any other agreements between the Company and Employee shall be reduced so that the Payment equals 299.99% of the “base amount” (it being understood that in no event shall the amount of the payment made pursuant to the terms of this Agreement be less than $0).

(ii) For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) the Payments shall be treated as “parachute payments” within the meaning of Section 280G(b)(2) of the Code, and all “excess parachute payments” within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax, unless, in the opinion of tax counsel selected by the Company’s tax advisors and reasonably acceptable to Employee, the Payments (in whole or in part) do not constitute parachute payments or excess parachute payments or are otherwise not subject to the Excise Tax, (B) the amount of the Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (y) the total amount of the Payments or (z) the amount of excess parachute payments within the meaning of Section 280G(b)(l) (after applying clause (A) above), and (C) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company’s tax advisors in accordance with the principles of Section 280G(d)(3) and (4) of the Code.

(iii) For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee’s residence on the Termination Date, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

(iv) In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Employee’s employment, Employee shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by Employee if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee’s employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined.

(j) Company Successors. The Company will require either (1) any acquiror of the Company as a whole or (2) any acquiror of the coated metal business unit and/or the

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laminates and composites business unit which directly or indirectly becomes the employer of Employee (in each case through merger, consolidation, asset purchase, stock purchase or otherwise) (a “Successor”) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as Employee would be entitled to hereunder if Employee terminated Employee’s employment by the Company for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Termination Date. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor which assumes and agrees to perform this Agreement by operation of law, or otherwise.

5. Confidential Information and Ownership of Property.

(a) Confidential Information. Employee agrees to use all Confidential Information solely in connection with the performance of services for or on behalf of the Company. Employee shall not, during the term of this Agreement, or at any time after the termination of this Agreement, in any manner, either directly or indirectly, (i) disseminate, disclose, use or communicate any Confidential Information to any person or entity, regardless of whether such Confidential Information is considered to be confidential by third parties, or (ii) otherwise directly or indirectly misuse any Confidential Information; provided, however, that (y) none of the provisions of this Section shall apply to disclosures made for valid business purposes of the Company or (z) that Employee shall not be obligated to treat as confidential any Confidential Information that (I) was publicly known at the time of disclosure to Employee; (II) becomes publicly known or available thereafter other than by means in violation of this Agreement or any other duty owed to the Company or any of its Affiliates by any person or entity; or (III) is lawfully disclosed to Employee by a third party. Notwithstanding the foregoing, Employee shall be permitted to disclose Confidential Information to the extent required to enforce Employee’s rights hereunder in any litigation arising under, or pertaining to, this Agreement provided that Employee shall give prior written notice to the Company of any such disclosure so that the Company may have an opportunity to protect the confidentiality of such Confidential Information in such litigation.

(b) Ownership of Property. Employee agrees that all works of authorship developed, authored, written, created or contributed to during the term of his employment for the benefit of the Company, whether solely or jointly with others, shall be considered works-made-for-hire. Employee agrees that such works shall be the sole and exclusive property of the Company (or its appropriate Affiliate) and that all right, title and interest therein or thereto, including all intellectual property rights existing or obtained in connection therewith, shall likewise be the sole and exclusive property of the Company (or its appropriate Affiliate). Employee agrees further that, in the event that any work is not considered to be work-made-for-hire by operation of law, Employee will immediately, and without further compensation, assign all of Employee’s right, title and interest therein to the Company (or its designated Affiliate), its successors and assigns. At the request and expense of the Company, Employee agrees to perform in a timely manner such further acts as may be necessary or desirable to transfer, defend or perfect the Company’s ownership of such work and all rights incident thereto.

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6. Covenant Not to Compete. Employee covenants and agrees that Employee shall not anywhere in North America (including, without limitation, the United States, Canada and Mexico), during the term of Employee’s employment by the Company or any Affiliate thereof and for the Non-Compete Period, directly or indirectly own an interest in, operate, join, control, advise, work for, consult to, have a financial interest which provides any control of, or participate in any corporation, partnership, proprietorship, firm, association, person, or other entity producing, designing, providing, soliciting orders for, selling, distributing, consulting to, or marketing or re-marketing products, goods, equipment, or services competitive with or in the metal to metal laminating or coil coating business of the Company or any Affiliate thereof, or any part thereof, as of the commencement of the Non-Compete Period. This covenant does not prohibit the mere ownership of less than three percent (3%) of the outstanding stock of any publicly-traded corporation as long as Employee is not otherwise in violation of this Agreement.

7. Covenant Against Solicitation of Employees. Employee shall not, during the term of his employment by the Company and for the Non-Compete Period, directly or indirectly, on his own account, or as an employee, consultant, agent, partner, joint venturer, beneficial owner of 1% or more of the outstanding stock, officer, principal, agent, trustee, advisor or in any other relation or capacity whatsoever of any other person, firm, partnership, corporation or other entity solicit any employees of the Company, except Mark Gresser, Andrew Winkley, Mike Werner and Matt Murphy.

8. Remedies.

(a) Employee Acknowledgements. Employee acknowledges (i) that the covenants contained in Sections 5, 6 and 7, including, without limitation, the time and geographic limits (collectively, the “Restrictive Covenants”), are reasonable and appropriate and that Employee will not any claim to the contrary in any action brought by the Company or its Affiliates to enforce any of such provisions and (ii) that should Employee violate any of the Restrictive Covenants, it will be difficult to determine the resulting damages to the Company and its Affiliates and, in addition to any other remedies the Company and its Affiliates may have, (A) the Company and its Affiliates shall be entitled to temporary injunctive relief without being required to post a bond and permanent injunctive relief without the necessity of proving actual damage; and (B) the Company shall have the right to offset against its obligation to make any payments to Employee under this Agreement or otherwise to the extent of any money damages incurred or suffered by the Company and its Affiliates. The Company may elect to seek one or more of these remedies at its sole discretion on a case by case basis. Failure to seek any or all remedies in one case shall not restrict the Company from seeking any remedies in another situation. Such action by the Company shall not constitute a waiver of any of its rights.

(b) Intent. It is the parties’ intent that each of the Restrictive Covenants be read and interpreted with every reasonable inference given to its enforceability. However, it is also the parties’ intent that if any term, provision or condition of the Restrictive Covenants is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions thereof shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Finally, it is also the parties’ intent that if a court should determine any of the Restrictive Covenants are unenforceable because of over-breadth, then the court shall modify said covenant so as to make it reasonable and enforceable under the prevailing circumstances.

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(c) Tolling. In the event of any breach by Employee of any Restrictive Covenant, the running of the period of restriction shall be automatically tolled and suspended for the duration of such breach, and shall automatically recommence when such breach is remedied in order that the Company shall receive the full benefit of Employee’s compliance with each of the Restrictive Covenants.

(d) Independent Enforcement. Employee agrees that the Restrictive Covenants shall be enforced independently of any other obligations between the Company, on the one hand, and Employee, on the other, and that the existence of any other claim or defense shall not affect the enforceability of the Restrictive Covenants or the remedies provided herein. The Restrictive Covenants shall be in addition to and shall not replace any other restrictive covenant agreement that Employee may currently have (or hereafter enter into) with the Company or any of its Affiliates.

(e) Survival. The provisions of this Section 8 shall survive the termination of this Agreement.

9. Certain Defined Terms. For purposes of this Agreement the following terms and phrases shall have the following meanings:

“Affiliate” means any person or entity who or which, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, a specified person or entity (the term “control” for these purposes meaning the ability, whether by ownership of shares or other equity interests, by contract or otherwise, to elect a majority of the directors of a corporation, to act as or select the managing or general partner of a partnership, or otherwise to select, or have the power to remove and then select, a majority of those persons exercising governing authority over an entity).

“Cause”, with respect to the termination of Employee’s employment by the Company, means (i) the willful and continued refusal by Employee to perform a lawful and reasonable order, direction or instruction of the Board of Directors within a reasonable period of time after a written demand for substantial performance is delivered to Employee by the Board of Directors which demand specifically identifies the manner in which the Board believes that Employee has not substantially performed such an order, direction or instruction; or (ii) the willful misconduct by Employee in the performance of Employee’s duties to the Company or the willful engaging by Employee in conduct which, in either case, is illegal or materially injurious to the Company. For purposes of this definition, no act, or failure to act, on Employee’s part shall be deemed “willful” unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee’s action or omission was in the best interest of the Company. In addition, notwithstanding the foregoing, Employee’s employment by the Company shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for such purpose (after reasonable notice to Employee and an

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opportunity for Employee, together with counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors, Employee was guilty of conduct set forth above in clauses (i) or (ii) of the first sentence of this definition and specifying the particulars thereof in detail.

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

“Comparable Position” means a position with a Successor that is not more than seventy-five miles from Employee’s present office location and has (i) responsibilities substantially similar to those in existence for Employee with the Company immediately prior to such Successor’s offer of employment and (ii) for the first 12 months of employment with the Successor, salary at least equal and bonus opportunity and benefits comparable to those in existence for Employee with the Company immediately prior to such Successor’s offer of employment and thereafter on terms competitive with comparable positions at companies of similar size in the Successor’s industry.

“Confidential Information” means all software, trade secrets, work products created by Employee for the Company or any of its Affiliates, know-how, ideas, techniques, theories, discoveries, formulas, plans, charts, designs, drawings, lists of current or prospective clients, business plans and proposals, current or prospective business opportunities, financial records, research and development, marketing strategies and programs and reports and other proprietary information created or obtained by Employee for the benefit of the Company or any of its Affiliates during the course of employment by the Company.

“Disability” means the inability of Employee to perform substantially all Employee’s duties and responsibilities to the Company by reason of a physical or mental illness or infirmity for either (i) a continuous period of six months or (ii) 180 days during any consecutive twelve-month period.

“Employment Period” means the date commencing on the Effective Date and terminating on the Termination Date.

“EVA Plan” means the annual variable compensation plan adopted by the Company’s Compensation Committee of the Board of Directors, as the same may be amended, modified, supplemented or restated from time to time (including any successor thereto or replacement therefor).

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Good Reason” means the occurrence, without the express written consent of Employee, of any one of the following events, unless such circumstances are fully corrected prior to the Termination Date specified in the applicable notice of termination delivered pursuant to Section 2(b):

(i) the assignment to Employee of any duties significantly inconsistent with Employee’s position and status with the Company or a substantial adverse alteration in the nature or status of Employee’s employment responsibilities from those in existence on the date hereof;

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(ii) the relocation of Employee’s office or job location to a location not within seventy-five miles of Employee’s present office or job location, except for required travel on the Company’s business to an extent substantially consistent with Employee’s present business travel obligations;

(iii) the failure by the Company to pay to Employee any portion of the compensation required hereunder, within ten business days of the date such compensation is due;

(iv) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 4(m) hereof; or

(v) any purported termination of Employee’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(d).

“Non-Compete Period” means the period commencing on the date upon which Employee ceases to be employed by the Company or any Affiliate thereof and terminating 15 months later.

“Sale Process Completion Date” means the closing of the sale of the following business units, either individually or through a sale of the Company as a whole: the coated metal business unit (including the Elk Grove Village, Middletown and Morrisville facilities) and the laminates and composites business unit.

“Successor” has the meaning set forth in Section 4(j).

“Termination Date” means

(i) if Employee’s employment is terminated for Death, the date of Employee’s death;

(ii) if Employee’s employment is terminated for Disability, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee’s duties during such 30 day period); and

(iii) if Employee’s employment is terminated for any other reason (other than death or Disability), the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than 30 days, and in the case of a termination for Good Reason shall not be less than 15 nor more than 60 days, respectively, from the date such Notice of Termination is given);

provided; however, that if prior to the Termination Date (as determined without regard to this provision), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Termination Date shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided; further, however, that the Termination Date shall be extended by a

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notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. During the pendency of any such dispute, the Company will continue to pay Employee’s full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this definition. Amounts paid under this paragraph are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement.

10. Miscellaneous.

(a) Amendment. This Agreement may be amended, modified or supplemented but only in writing signed by each of the parties hereto.

(b) Waivers. The failure of a party hereto at any time or times to require performance of any provision hereof shall in no manner affect its right at a later time to enforce the same. No waiver by a party of any condition or of any breach of any term, covenant, representation or warranty contained in this Agreement shall be effective unless in writing, and no waiver in any one or more instances shall be deemed to be a further or continuing waiver of any such condition or breach in other instances or a waiver of any other condition or breach of any other term, covenant, representation or warranty.

(c) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.

(d) Forum Selection and Consent to Jurisdiction. EACH OF THE COMPANY AND EMPLOYEE AGREE THAT ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT BETWEEN OR AMONG SUCH PARTIES, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS LOCATED IN COOK COUNTY, ILLINOIS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS. EACH OF THE COMPANY AND EMPLOYEE HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS LOCATED IN COOK COUNTY, ILLINOIS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS. EACH OF THE COMPANY AND EMPLOYEE HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

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(e) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

(f) Interpretation. The headings preceding the text of Articles and Sections included in this Agreement are for convenience only and shall not be deemed part of this Agreement or be given any effect in interpreting this Agreement. The use of the masculine, feminine or neuter gender herein shall not limit any provision of this Agreement. The use of the terms “including” or “include” shall in all cases herein mean “including, without limitation” or “include, without limitation,” respectively. References to employment by the Company in this Agreement shall also refer to employment by one of the Company’s subsidiaries if applicable.

(g) Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No assignment of any rights or obligations shall be made by any party without the written consent of each other party.

(h) No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and, to the extent provided herein, their respective affiliates, directors, officers, employees, agents, heirs, executors, administrators and legal representatives, and no provision of this Agreement shall be deemed to confer upon other third parties any remedy, claim, liability, reimbursement, cause of action or other right.

(i) Severability. If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions hereof shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.

(j) Remedies Cumulative. The remedies provided in this Agreement shall be cumulative and shall not preclude the assertion or exercise of any other rights or remedies available by law, in equity or otherwise.

(k) Entire Understanding. Except as provided in Section 4(e), this Agreement, together with attached exhibits, sets forth the entire agreement and understanding of the parties hereto with respect to the matters set forth herein and supersedes any and all prior agreements, arrangements and understandings among the parties.

(l) Conflicts With Existing Agreements. In the event that any term or provision of this Agreement conflicts with or differs from any term or provision of other existing agreement, understanding or plan between the Company and Employee or to which Employee is a participant, such term or provision of this Agreement shall govern for all purposes and respects.

(m) Tax Withholding. Any payments provided for hereunder shall be paid net of any applicable tax withholding required under federal, state or local law.

(n) General Release. As a condition of receipt of any payments under Section 3, Employee shall be required to sign a general release proposed by and provided by the Company in the form attached as Exhibit A hereto and to abide by the provisions of such general release.

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(o) Attorneys’ Fees and Other Costs. In the event a dispute arises between the parties hereto and suit is instituted, the prevailing party or parties in such litigation shall be entitled to recover reasonable attorneys’ fees and other costs and expenses from the non-prevailing party or parties, whether incurred at the trial level or in any appellate proceeding. Unless prohibited by Section 13(k) of the Exchange Act (or the rules or regulations promulgated thereunder) or Employee otherwise elects, expenses incurred by Employee in connection with any dispute described in this Section will be paid by the Company in advance of the final disposition of such dispute within 20 days after presentation by Employee of written documentation therefor reasonably satisfactory to the Company if Employee furnishes the Company a written undertaking to repay any amounts advanced if it is ultimately determined that Employee is not entitled to attorneys’ fees and other costs pursuant to this Section (which written undertaking will provide that the Company shall be entitled to collect its attorneys’ fees and other out-of-pocket costs incurred in connection with the enforcement of such undertaking).

(p) Notices. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to (i) the Company at 2200 East Pratt Boulevard, Elk Grove Village, Illinois 60007-5995 and (ii) Employee at                     , provided that all notices to the Company shall be directed to the attention of the Board of Directors, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change in address shall be effective only upon receipt.

(q) Employee Representations. EMPLOYEE REPRESENTS AND AGREES THAT: (A) HE HAS READ THIS AGREEMENT CAREFULLY; (B) HE UNDERSTANDS ALL OF ITS TERMS AND KNOWS THAT HE IS GIVING UP IMPORTANT RIGHTS; (C) HE VOLUNTARILY CONSENTS TO EVERYTHING IN IT; (D) HE HAS BEEN ADVISED TO CONSULT WITH AN ATTORNEY BEFORE EXECUTING IT AND HE HAS DONE SO OR, AFTER CAREFUL READING AND CONSIDERATION HE HAS CHOSEN NOT TO DO SO ON HIS OWN VOLITION; AND (E) HE HAS SIGNED THIS AGREEMENT KNOWINGLY AND VOLUNTARILY AND WITH THE ADVICE OF ANY COUNSEL RETAINED TO ADVISE HIM WITH RESPECT TO IT.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.

THE COMPANY:
MATERIAL SCIENCES CORPORATION, a Delaware corporation
By:	/s/ Ronald L. Stewart
Name:	Ronald L. Stewart
Title:	President and Chief Executive Officer
EMPLOYEE:
	/s/ Clifford D. Nastas
Name:	Clifford D. Nastas

EXHIBIT A

FORM OF GENERAL RELEASE

Dear [employee]:

This letter will confirm the agreement between you and Material Sciences Corporation (including its subsidiaries, the “Company”) as follows:

1. Separation from the Company.

By signing this letter agreement you acknowledge that the termination of your employment with the Company will be effective on                      (the “Termination Date”). As of the Termination Date, you will cease to be an employee of the Company, and you will no longer be required to fulfill any of the duties and responsibilities associated with your position.

2. Severance Payment.

You acknowledge and agree that the severance payments paid or granted to you pursuant to that certain Retention and Change in Control Agreement, dated February 17, 2004, by and between you and the Company (“Retention Agreement”), represents consideration for signing this Release and is not salary, wages or benefits to which you were already entitled. Such payments shall not be considered compensation for purposes of any employee benefit plan, program, policy or arrangement maintained or hereafter established by the Company or any of its affiliates.

3. Release by You.

(a) You (for yourself, your heirs, assigns or executors) release and forever discharge the Company, any of its affiliates, and its and their directors, officers, agents and employees from any and all claims, suits, demands, causes of action, contracts, covenants, obligations, debts, costs, expenses, attorneys’ fees, liabilities of whatever kind or nature in law or equity, by statute or otherwise whether now known or unknown, vested or contingent, suspected or unsuspected, and whether or not concealed or hidden, which have existed or may have existed, or which do exist, through the date this letter agreement becomes effective and enforceable, (“Claims”) of any kind, which relate in any way to your employment with the Company or the termination of that employment, except those arising out of the performance of this letter agreement and your rights under the Retention Agreement. Such released claims include, without in any way limiting the generality of the foregoing language, any and all claims arising under (i) any exception to the employment-at-will doctrine, including any common law theory sounding in tort, contract or public policy, (ii) the provisions of the Fair Labor Standards Act, as amended, or any state or local wage and hour law or ordinance, (iii) the National Labor Relations Act, as amended, or the Employee Retirement Income Security Act of 1974, as amended, and (iv) Title VII of the Civil Rights

Act of 1964, as amended, the Civil Rights Act of 1991, the Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, as amended, or the Illinois Human Rights Act.

(b) In signing this Release you acknowledge that you intend that it shall be effective as a bar to each and every one of the Claims hereinabove mentioned or implied. You expressly consent that this letter agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected Claims (notwithstanding any state statute that expressly limits the effectiveness of a general release of unknown, unsuspected and unanticipated Claims), if any, as well as those relating to any other Claims hereinabove mentioned or implied. You acknowledge and agree that this waiver is an essential and material term of this letter agreement and without such waiver the Company would not have made the Severance Payments described in paragraph 2. You further agree that in the event you bring your own Claim in which you seek damages against the Company, or in the event you seek to recover against the Company in any Claim brought by a governmental agency on your behalf, this release shall serve as a complete defense to such Claims.

(c) By signing this letter agreement, you acknowledge that you:

(1) have been given twenty-one days after receipt of this letter agreement within which to consider it;

(2) have carefully read and fully understand all of the provisions of this letter agreement;

(3) knowingly and voluntarily agree to all of the terms set forth in this letter agreement;

(4) knowingly and voluntarily agree to be legally bound by this letter agreement;

(5) have been advised and encouraged in writing (via this agreement) to consult with an attorney prior to signing this letter agreement;

(6) understand that this letter agreement, including the Release, shall not become effective and enforceable until the eighth day following execution of this letter agreement, and that at any time prior to the effective day you can revoke this letter agreement.

4. Additional Agreement.

You also agree not to disparage the Company, or its past and present investors, officers, directors or employees and to keep all confidential and proprietary information about the past or present business affairs of the Company confidential unless a prior written release from the Company is obtained or disclosure is permitted under the terms of the Retention Agreement.

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5. No Admissions.

This letter agreement shall not be construed as an admission of any wrongdoing either by the Company, its affiliates, or its and their directors, officers, agents and employees.

6. Governing Law.

This letter agreement shall be interpreted in accordance with the laws of the State of Illinois. Whenever possible, each provision of this letter agreement shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision shall be held to be prohibited or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or affecting the remainder of such provision or any of the remaining provisions of this letter agreement.

Please indicate your agreement by signing this letter and returning it to us on or before                     .

Very truly yours,

MATERIAL SCIENCES CORPORATION

By:

Its:

AGREED TO AND ACCEPTED BY:

Dated:

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EX-21

Exhibit 21

Subsidiaries of the Registrant

Name of Subsidiary	State or Jurisdiction of Incorporation
Material Sciences Corporation, Engineered Materials and Solutions Group, Inc. (formerly known as MSC Pre Finish Metals Inc.)	Illinois
Material Sciences Corporation, Electronic Materials and Devices Group, Inc.	Delaware
MSC Pre Finish Metals (EGV) Inc.	Delaware
MSC Pre Finish Metals (MV) Inc.	Delaware
MSC Pre Finish Metals (MT) Inc.	Delaware
MSC Walbridge Coatings Inc.	Delaware
MSC San Diego Holding Company Inc. (formerly known as MSC Specialty Films, Inc.)	California
MSC Laminates and Composites Inc.	Delaware
MSC Laminates and Composites (EGV) Inc.	Delaware
Material Sciences Foreign Sales Corporation	U.S. Virgin Islands
MSC Richmond Holding Company (formerly known as MSC Pinole Point Steel Inc.)	Delaware
MSC Pre Finish Metals (PP) Inc.	Delaware
MSC/GAC Laminates and Composites Holding GmbH	Germany
MSC/GAC Laminates and Composites GmbH & Co.	Germany
MSC/GAC Beteiligungs GmbH	Germany
MSC/TEKNO Laminates and Composites LTDA	Brazil

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EX-23.A

Exhibit 23(a)

Consent of Deloitte & Touche LLP

We consent to the incorporation by reference in Registration Statements on Form S-8 of Material Sciences Corporation (No.’s 33-00067, 33-40610, 33-41310, 33-57648, 33-81064, 333-15679, 333-15677, 333-33885, 333-33897 and 333-88387) of our report dated May 10, 2004 (which report expresses an unqualified opinion and includes explanatory paragraphs relating to (i) the Company’s change in its method of accounting for goodwill and intangible assets, (ii) disclosures, related to the aforementioned accounting change, of financial statement amounts related to the 2002 financial statements and (iii) the change in the composition of reportable segments in 2004 and 2003 and reclassifications of financial statement amounts related to the 2002 financial statements; the 2002 financial statements were audited by other auditors who have ceased operations and for which we have expressed no opinion or other form of assurance other than with respect to such disclosures and reclassifications) appearing in this Annual Report on Form 10-K of Material Sciences Corporation for the year ended February 29, 2004.

/s/    Deloitte & Touche LLP        

Deloitte & Touche LLP

Chicago, Illinois

May 14, 2004

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EX-23.B

Exhibit 23(b)

Notice Regarding Consent of Arthur Andersen LLP

Arthur Andersen LLP audited the balance sheets of Material Sciences Corporation and its subsidiaries (collectively, “MSC”) as of February 28, 2002 and 2001, and the related statements of income (loss), cash flows, shareowners’ equity and comprehensive income (loss) for each of the three years in the period ended February 28, 2002. These financial statements are included in MSC’s Annual Report of Form 10-K for the year ended February 29, 2004 and the incorporated by reference into MSC’s previously filed Registration Statements on Form S-8 (File Nos. 33-00067, 33-40610, 33-31310, 33-57648, 33-81064, 333-15679, 333-15677, 333-33885, 333-33897 and 333-88387). After reasonable efforts, MSC has not been able to obtain the consent of Arthur Andersen LLP to the incorporation by reference of it audit report dated April 29, 2002 into the above-referenced Registration Statements. The absence of an updated consent may limit recovery by investors from Arthur Andersen LLP, particularly under Section 11(a) of the Securities Act of 1933, as amended.

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EX-31.1

Exhibit 31.1

Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer

I, Ronald L. Stewart, President and Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Material Sciences Corporation;

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)) 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;

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.

Dated: May 14, 2004

By:	/S/    RONALD L. STEWART
	Ronald L. Stewart
	President and Chief Executive Officer and Director

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EX-31.2

Exhibit 31.2

Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer

I, James J. Waclawik, Sr., Vice President and Chief Financial Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Material Sciences Corporation;

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)) 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;

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.

Dated: May 14, 2004

By:	/S/    JAMES J. WACLAWIK, SR.
	James J. Waclawik,
	Sr. Vice President, Chief Financial Officer and Secretary

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EX-32

Exhibit 32

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer

In connection with the Report of Material Sciences Corporation (the “Company”) on Form 10-K for the fiscal year ended February 29, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ronald L. Stewart, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(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 result of operations of the Company.

	May 14, 2004
By:	/S/    RONALD L. STEWART
	Ronald L. Stewart
	President, Chief Executive Officer and Director

In connection with the Report, I, James J. Waclawik, Sr., Vice President, Chief Financial Officer and Secretary of the Company, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(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 result of operations of the Company.

	May 14, 2004
By:	/S/    JAMES J. WACLAWIK, SR.
	James J. Waclawik, Sr.
	Vice President, Chief Financial Officer and Secretary

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