Special Situations Fund III, L.P. SC-TO-I

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GQQyIdSCEyrR8wge0lAjW6j4q+YkCe4epPLufQp3a6CqS84oMNZQxir3XjnlQCeX DE0Cz4Tfx+k9vvzIH050oA== 0001188112-05-002019.txt : 20051117 0001188112-05-002019.hdr.sgml : 20051117 20051117164948 ACCESSION NUMBER: 0001188112-05-002019 CONFORMED SUBMISSION TYPE: SC TO-I PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20051117 DATE AS OF CHANGE: 20051117 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SPECIAL SITUATIONS FUND III L P CENTRAL INDEX KEY: 0000914248 IRS NUMBER: 133737427 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-I SEC ACT: 1934 Act SEC FILE NUMBER: 005-45211 FILM NUMBER: 051213165 BUSINESS ADDRESS: STREET 1: 153 E 53 ST 51ST FL CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2128325300 MAIL ADDRESS: STREET 1: 153 EAST 53RD STREET 51ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: SPECIAL SITUATIONS FUND III L P CENTRAL INDEX KEY: 0000914248 IRS NUMBER: 133737427 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-I BUSINESS ADDRESS: STREET 1: 153 E 53 ST 51ST FL CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2128325300 MAIL ADDRESS: STREET 1: 153 EAST 53RD STREET 51ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 SC TO-I 1 tsctoi-8263.htm SPECIAL SITUATIONS FUND III, L.P. Special Situations Fund III, L.P. SC-TO-I

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 2005

SECURITIES ACT FILE NO. ___________

INVESTMENT COMPANY ACT FILE NO. 811-08110

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE TO

ISSUER TENDER OFFER STATEMENT

(Pursuant To Section 13(E)(1) Of The

Securities Exchange Act Of 1934)

SPECIAL SITUATIONS FUND III, L.P.

(Name Of Issuer)

SPECIAL SITUATIONS FUND III, L.P.

(Names Of Person(S) Filing Statement)

LIMITED PARTNERSHIP UNITS

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

(Title Of Class Of Securities)

NOT APPLICABLE

(CUSIP Number Of Class Of Securities)

AUSTIN W. MARXE

c/o SPECIAL SITUATIONS FUNDS

153 EAST 53^RD STREET, 55^TH FLOOR

NEW YORK, NEW YORK 10022

TELEPHONE: (212) 207-6500

AFTER DECEMBER 5, 2005 AT

527 MADISON AVENUE, SUITE 2600

NEW YORK, NEW YORK 10022

TELEPHONE: (212) 207-6500

(Name, Address And Telephone Number Of Person Authorized To

Receive Notices And Communications On Behalf Of Person(S) Filing Statement)

COPIES TO:

ALLEN B. LEVITHAN, ESQ.

LOWENSTEIN SANDLER PC

65 LIVINGSTON AVENUE

ROSELAND, NEW JERSEY 07068-1791

TELEPHONE: (973) 597-2406

FAX: (973) 597-2407

CALCULATION OF FILING FEE

Transaction Valuation: $501,719,494.00*

Amount Of Filing Fee: $59,052.44**

* Calculated at the aggregate maximum purchase price to be paid for Units in the cash repurchase offer and the current net asset value in the exchange tender offer.

** Calculated at $117.70 per $1,000,000 of the Transaction Valuation.

[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

Amount Previously Paid: ________________ Filing Party:_________________

Form or Registration No.:_______________ Date Filed:___________________

[ ] Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer.

Check the appropriate boxes below to designate any transactions to which the statement relates:

[ ] third-party tender offer subject to Rule 14d-1.

[X] issuer tender offer subject to Rule 13e-4.

[ ] going-private transaction subject to Rule 13e-3.

[ ] amendment to Schedule 13D under Rule 13d-2.

Check the following box if the filing is a final amendment reporting the results of the tender offer: [ ]

ITEM 1. SUMMARY TERM SHEET.

Reference is made to the Summary Term Sheet of the offer document dated November 17, 2005 (the "Offer Document") that is attached as Exhibit (a)(1)(ii) and is incorporated herein by reference.

ITEM 2. SUBJECT COMPANY INFORMATION.

(a) The name of the issuer is Special Situations Fund III, L.P. (the "Fund"), a closed-end investment company organized as a Delaware limited partnership and registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The principal executive offices of the Fund are currently located at 153 East 53^rd Street, 55^th Floor, New York, New York 10022, (212) 207-6500 and after December 5, 2005 will be located at 527 Madison Avenue, Suite 2600, New York, New York 10022, (212) 207-6500.

(b) The title of the securities being sought is units of limited partnership interests ("Units"). As of June 30, 2005 there were approximately 19,998.9112 Units issued and outstanding.

(d)-(f) Not applicable.

ITEM 3. IDENTITY AND BACKGROUND OF FILING PERSON.

(a) The Fund is tendering for its own Units. The principal executive offices of the Fund are currently located at 153 East 53^rd Street, 55^th Floor, New York, New York 10022, (212) 207-6500 and after December 5, 2005 will be located at 527 Madison Avenue, Suite 2600, New York, New York 10022, (212) 207-6500.

(b)-(d) Not applicable.

ITEM 4. TERMS OF THE TRANSACTION.

(a)(1)

(i) The Fund is seeking tenders for up to 10% of the total outstanding Units held by limited partners of the Fund (“Limited Partners”) for a cash payment equal to the net asset value (the "NAV") per Unit of the Units tendered as calculated on December 30, 2005 (the “Cash Repurchase Offer”). The Fund is seeking tender for all Units held by limited partners of the Fund that are qualified purchasers as defined in the Investment Company Act of 1940, as amended (together "Qualified Purchasers"), in an exchange as discussed herein, having an aggregate net asset value on December 30, 2005 equal to all Units held by limited partners that are Qualified Purchasers (the "Exchange Tender Offer").

(ii) For each Unit tendered, the security holder will receive (a) in the Cash Repurchase Offer a cash amount, and (b) in the Exchange Tender Offer, an amount of Units of Special Situations Fund III QP, L.P. ("SSF QP") which is a Delaware limited partnership that has been newly created to effect the Exchange Tender Offer, equal to the NAV per Unit of the Fund calculated on December 30, 2005, upon the terms and subject to the conditions set forth in the Offer Document. Reference is hereby made to the Cover Page, Section 2 "The Cash Repurchase Offer" and Section 3 "The Exchange Tender Offer" of the Offer Document, which are incorporated herein by reference.

(iii) The Cash Repurchase Offer and the Exchange Tender Offer (collectively, the “Offers”) are scheduled to expire on December 16, 2005. Reference is hereby made to the Cover Page and Section 6 "Certain Conditions of the Offers" of the Offer Document, which are incorporated herein by reference.

(iv) Not applicable.

(v) Reference is hereby made to the Cover Page, Summary Term Sheet and Section 6 "Certain Conditions of the Offers" of the Offer Document, which are incorporated herein by reference.

(vi) Reference is hereby made to Section 5 "Withdrawal Rights" of the Offer Document, which is incorporated herein by reference.

(vii) Reference is hereby made to the Cover Page, Section 4 "Procedure for Tenders" and Section 5 "Withdrawal Rights" of the Offer Document, which are incorporated herein by reference.

(viii) Reference is hereby made to Section 4 "Procedure for Tenders" of the Offer Document, which is incorporated herein by reference.

(ix) The maximum percentage of Units to be purchased in the Cash Repurchase Offer is 10% of the total Units outstanding. If the Limited Partners tender for repurchase in the Cash Repurchase Offer more than 10% of the Units outstanding, the Fund’s Individual General Partners, as permitted by the Fund’s limited partnership agreement, will exercise their discretion to increase such maximum by another 2% of the total Units outstanding (for a total of 12%). If the Cash Repurchase Offer remains oversubscribed, the Fund will repurchase Units tendered on a pro rata basis (based upon the number of Units submitted for purchase by each such holder). The Exchange Tender Offer is open only to Limited Partners that are Qualified Purchasers. Reference is hereby made to Section 2 “The Cash Repurchase Offer” of the Offer Document, which is incorporated herein by reference.

(x) Reference is hereby made to Section 8 “Certain Information About SSF QP” of the Offer Document, which is incorporated herein by reference.

(xi) Reference is hereby made to Section 9 "Certain Federal Income Tax Consequences" of the Offer Document, which is incorporated herein by reference.

(xii) Reference is hereby made to Section 9 "Certain Federal Income Tax Consequences" of the Offer Document, which is incorporated herein by reference.

(a)(2) Not applicable.

(b) MGP Advisers Limited Partnership (“MGP”), the corporate general partner of the Fund, holds 1,244.7802 Units (or 6.2% of the Units outstanding), representing the entire corporate general partner interest of the Fund. AWM Investment Company, Inc. (“AWM”), is the general partner of MGP and Austin W. Marxe, David M. Greenhouse and Adam Stettner are the limited partners of MGP (the “Principals”). Mr. Marxe and Mr. Greenhouse are the sole shareholders and executive officers of AWM and along with Dianne Marxe are the sole directors of AWM. Mr. Marxe holds 160.8813 Units (or 0.8% of the Units outstanding), Mr. Greenhouse holds 33.3417 Units (or 0.2% of the Units outstanding) and Mr. Stettner holds 1.9543 Units (or 0.01% of the Units outstanding). MGP and two of its Principals, Austin W. Marxe and David M. Greenhouse (in their individual capacities), will participate in the Exchange Tender Offer in the same proportion as the Limited Partners after giving effect to the Cash Repurchase Offer, that is, they will exchange Units in the same proportion as the Units held by all Limited Partners (other than Mr. Greenhouse) are exchanged, subject to the Adviser and the Individual General Partners holding collectively at least 1% of the Fund’s outstanding Units. The Fund also has five Individual General Partners: Austin W. Marxe is the Managing Individual General Partner of the Fund and holds 160.8813 Units (or 0.8% of the Units outstanding), Peter W. Williams is an Individual General Partner of the Fund and holds 16.1060 Units (or 0.08% of the Units outstanding), William Austin is an Individual General Partner of the Fund and holds 0.2065 Units (or less than 1% of the Units outstanding), Stanley S. Binder is an Individual General Partner of the Fund and holds 0.8010 Units (or less than 1% of the Units outstanding), and Delcour S. Potter is an Individual General Partner of the Fund and holds 0.2065 Units (or less than 1% of the Units outstanding). All ownership information provided in this paragraph is as of June 30, 2005. Other than Mr. Marxe, who, as described above, intends to tender Units pursuant to the Exchange Tender Offer on a pro rata basis, based upon the amount of Units exchanged by limited partners of the Fund and the amount of Units that remain in the Fund, none of the Individual General Partners intend to tender Units pursuant to the Exchange Tender Offer. None of MGP, the Principals or the Individual General Partners will participate in the Cash Repurchase Offer.

(c)-(f) Not applicable.

ITEM 5. PAST CONTRACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.

(a)-(d) Not applicable.

(e) The Fund does not know of any contract, agreement, arrangement, understanding or relationship, whether contingent or otherwise or whether or not legally enforceable, between the Fund, SSF QP or MGP, any of the Fund's, SSF QP’s or MGP 's executive officers or directors, any of the Fund’s Individual General Partners or any person controlling the Fund, SSF QP or MGP or any executive officer or director of any corporation or other entity ultimately in control of the Fund, SSF QP

or MGP and any person with respect to any securities of the Fund, SSF QP or MGP (including, but not limited to, any contract, agreement, arrangement, understanding or relationship concerning the transfer or the voting of any such securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss, or the giving or withholding of proxies, consents or authorizations).

ITEM 6. PURPOSES OF THE TRANSACTION AND PLANS AND PROPOSALS.

(a) Reference is hereby made in Section 1 "Background and Purpose of the Offers" of the Offer Document, which is incorporated herein by reference.

(b) Reference is hereby made to Section 1 "Background and Purpose of the Offers" of the Offer Document, which is incorporated herein by reference.

(c) The Fund does not have any plans, proposals or negotiations that relate to or would result in (1) an extraordinary transaction, such as a merger, reorganization or liquidation, involving the Fund, SSF QP or MGP; (2) a purchase, sale or transfer of a material amount of assets of the Fund, SSF QP or MGP, although the Fund will transfer a portion of its assets to SSF QP if tenders are received and accepted pursuant to the Exchange Tender Offer; (3) any material change in the present dividend rate or policy, or indebtedness or capitalization of the Fund, although following the exchange, the Fund intends to solicit the vote of its limited partners to change its repurchase policies as described in Section 1 "Background and Purpose of the Offer" of the Offer Document, which is incorporated herein by reference; (4) any change in the present board of managers or management of the Fund, SSF QP or MGP, including but not limited to, any plans or proposal to change the number or the term of managers or to change any material term of the employment contract of any executive officer; (5) any other material change in the Fund’s, SSF QP’s or MGP’s structure or business, including any plans or proposals to make any changes in its investment policy for which a vote would be required by Section 13 of the Investment Company Act of 1940, as amended; (6) any class of equity securities of the Fund, SSF QP or MGP to be delisted from a national securities exchange or cease to be authorized to be quoted in an automated quotation system operated by a national securities association; (7) any class of equity securities of the Fund, SSF QP or MGP becoming eligible for termination of registration under Section 12(g)(4) of the Securities Exchange Act of 1934 (the "1934 Act"); (8) the suspension of the Fund’s, SSF QP’s or MGP’s obligation to file reports under Section 15(d) of the 1934 Act; (9) the acquisition by any person of additional securities of the Fund, SSF QP or MGP or the disposition of securities of the Fund, SSF QP or MGP other than as described above and in the Fund’s of SSF QP's Confidential Private Placement Memorandum; or (10) any changes in the Fund’s, SSF QP’s or MGP’s charter, bylaws or other governing instruments or other actions that could impede the acquisition of control of the Fund, SSF QP or MGP.

(d) Not applicable.

ITEM 7. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATIONS.

(a) The funds to be used to satisfy tenders in the Cash Repurchase Offer will be obtained by utilizing cash on hand and/or liquidating a portion of the portfolio securities of the Fund. Reference is hereby made to Section 2 "Cash Repurchase Offer" of the Offer Document, which is incorporated herein by reference.

(b) Not applicable.

(d) None of the funds or other consideration to be paid to Limited Partners tendering pursuant to the Cash Repurchase Offer is, or is expected to be, borrowed, directly or indirectly.

ITEM 8. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.

(a) MGP holds 1,244.7802 Units (or 6.2% of the Units outstanding), representing the entire corporate general partner interest of the Fund. Mr. Marxe holds 160.8813 Units (or 0.8% of the Units outstanding), Mr. Greenhouse holds 33.3417 Units (or 0.2% of the Units outstanding) and Mr. Stettner holds 1.9543 Units (or 0.01% of the Units outstanding). Peter W. Williams is an Individual General Partner of the Fund and holds 16.1060 Units (or 0.08% of the Units outstanding), William Austin is an Individual General Partner of the Fund and holds 0.2065 Units (or less than 1% of the Units outstanding), Stanley S. Binder is an Individual General Partner of the Fund and holds 0.8010 Units (or less than 1% of the Units outstanding), and Delcour S. Potter is an Individual General Partner of the Fund and holds 0.2065 Units (or less than 1% of the Units outstanding). All ownership information provided in this paragraph is as of June 30, 2005. The address of MGP and each of the Principals and Individual General Partners is currently 153 East 53^rd Street, 55^th Floor, New York, New York 10022, (212) 207-6500 and after December 5, 2005 will be 527 Madison Avenue, Suite 2600, New York, New York 10022, (212) 207-6500.

(b) There have not been any transactions involving the Units that were effected during the past 60 days by the Fund, SSF QP or MGP, any executive officer or director of the Fund, SSF QP or MGP, any person controlling the Fund, SSF QP or MGP, any executive officer or director of any corporation ultimately in control of the Fund, SSF QP or MGP or by any associate or subsidiary of any of the foregoing, including any executive officer or director of any such subsidiary. The Fund and SSF QP issue interests in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the Securities Act of 1933 in amounts equal to the NAV on the date of each such sale. Within the past 60 business days, the Fund has not issued any Units. SSF QP has been newly created to effect the Exchange Tender Offer and has not yet issued any limited partnership interests.

ITEM 9. PERSONS/ASSETS RETAINED, EMPLOYED, COMPENSATED OR USED.

(a) No persons have been directly or indirectly employed, retained, or are to be compensated by or on behalf of the Fund to make solicitations or recommendations in connection with the Offers.

(b) Not applicable.

ITEM 10. FINANCIAL STATEMENTS.

(a) The Fund's financial information for the period ended December 31, 2004 has been audited by Anchin, Block & Anchin LLP, and is incorporated herein by reference to the reports filed with the SEC on August 19, 2005 (File number 811-08110). SSF QP has been newly created to effect the Exchange Tender Offer and has not conducted any activities since its formation. Copies of the Fund's financial information may be found on the SEC's website at WWW.SEC.GOV or may be obtained free of charge by calling the Fund at (212) 207-6500.

(b)-(c) Not applicable.

ITEM 11. ADDITIONAL INFORMATION.

(a) (1) None.

(2) Applicable regulatory requirements that must be complied with and approvals required to be obtained in connection with the Exchange Tender Offer are: (a) an order of the Securities and Exchange Commission (the “Commission”), pursuant to Section 17(b) of the 1940 Act, granting an exemption from Section 17(a) of the 1940 Act to conduct the Exchange Tender Offer, and (b) an exemption or no-action letter from the Commission pursuant to Rule 13e-4 promulgated under the Securities Exchange Act of 1934, as amended (“1934 Act”) granting an exemption from Rules 13e-4(f)(8)(i) and 13e-4(f)(8)(ii) of the 1934 Act to conduct the Exchange Tender Offer. The Fund will consummate the Exchange Tender Offer only in conformity with any relief granted by the Commission or its staff.

(3) Not Applicable.

(4) Not Applicable.

(5) None.

(b) The Offer Document, attached hereto as Exhibit (a)(1)(ii), is incorporated herein by reference in its entirety.

ITEM 12. EXHIBITS.

(a) (1) (i) Form of Cover Letter to Limited Partners.

(ii) Offer Document.

(iii) Form of Letter of Transmittal.

(iv) Performance Supplement of the Fund through September 30, 2005.

(v) Unaudited Quarterly Financial Statements of the Fund through September 30, 2005.

(vi) Private Placement Memorandum of SSF QP.

(vii) Agreement of Limited Partnership of SSF QP.

(2)-(3) Not applicable.

(4) Not applicable.

(5) (i) Audited Financial Statements of Special Situations Fund III, L.P. for the fiscal year ended December 31, 2004.*

(b) Not applicable.

(d) Not applicable.

(g) Not applicable.

(h) Not applicable.

* Incorporated by reference to the Fund's Certified Shareholder Report for the fiscal year ended December 31, 2004 on Form N-CSR/A, as filed with the Securities and Exchange Commission on August 19, 2005.

ITEM 13. INFORMATION REQUIRED BY SCHEDULE 13E-3.

Not applicable.

SIGNATURE

After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

SPECIAL SITUATIONS FUND III, L.P.


	BY: MGP ADVISERS LIMITED PARTNERSHIP

	By:	/s/ Austin W. Marxe
		Austin W. Marxe Managing Individual General Partner November 17, 2005

EXHIBIT INDEX

EXHIBITS

99.(a) (1) (i) Form of Cover Letter to Limited Partners.

99.(a) (1) (ii) Offer Document.

99.(a) (1) (iii) Form of Letter of Transmittal.

99.(a) (1) (iv) Performance Supplement of the Fund through September 30, 2005.

99.(a) (1) (v) Unaudited Quarterly Financial Statements of the Fund through September 30, 2005.

99.(a) (1) (vi) Private Placement Memorandum of SSF QP.

99.(a) (1) (vii) Agreement of Limited Partnership of SSF QP.

EX-99.1 2 tex99a1i.htm EXHIBIT 99.(A)(1)(I) Exhibit 99.(a)(1)(i)

Exhibit 99.(a)(1)(i)

November 17, 2005

Name and Address of Limited Partner

Dear [LIMITED PARTNER]:

Enclosed please find important documentation that relates to the semi-annual repurchase offer to all limited partners and a special one-time exchange offer available only to limited partners of the Fund who are also qualified purchasers as defined in the Investment Company Act of 1940, as amended .

To aide you in your decision, we have included the following:

1.	the Offer Document, explaining the two offers in detail;

2.	the Letter of Transmittal, which must be completed and in our possession by December 16, 2005 if you wish to participate in either or both offers;

3.	the Performance Supplement, updating you with the Fund’s performance through September 30, 2005;

4.	the September 30, 2005 quarterly financial statements;

5.	the Special Situations Fund III QP, L.P. Private Placement Memorandum with the Notice of Limited Offer attached;

6.	the Special Situations Fund III QP, L.P. Agreement of Limited Partnership; and

7.	a stamped self-addressed return envelope for your convenience.

Should you wish to tender your Units or a portion of your Units for cash repurchase by the Fund, or if you are a qualified purchaser and wish to tender all of your Units not tendered in the cash repurchase offer for exchange in the exchange tender offer, please complete and return the enclosed Letter of Transmittal by mail or by fax so that it arrives in our offices no later than December 16, 2005.

NO ACTION IS REQUIRED IF YOU DO NOT WISH TO REDEEM ANY PORTION OF YOUR UNITS, AND IF YOU ARE A QUALIFIED PURCHASER AND DO NOT WISH TO PARTICIPATE IN THE EXCHANGE OFFER.

If you have any questions, please call (212) 207-6500.

Sincerely,

Austin W. Marxe

Managing Individual General Partner

EX-99.2 3 tex99a1ii.htm EXHIBIT 99.(A)(1)(II) Exhibit 99.(a)(1)(ii)

Exhibit 99.(a)(1)(ii)

OFFER DOCUMENT

SPECIAL SITUATIONS FUND III, L.P.

527 MADISON AVENUE, SUITE 2600

NEW YORK, NEW YORK 10022

OFFER TO ALL LIMITED PARTNERS TO REPURCHASE UP TO 10% OF ALL OUTSTANDING UNITS AT NET ASSET VALUE

OFFER LIMITED TO LIMITED PARTNERS THAT ARE QUALIFIED PURCHASERS FOR EXCHANGE OF ALL OUTSTANDING UNITS AT NET ASSET VALUE

DATED NOVEMBER 17, 2005

THE OFFERS AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., EASTERN TIME, ON DECEMBER 16, 2005, UNLESS THE OFFER IS EXTENDED

To the limited partners of

Special Situations Fund III, L.P.:

TO ALL LIMITED PARTNERS. Special Situations Fund III, L.P. (the "Fund"), is offering to purchase for cash on the terms and conditions set forth in this Offer Document and the related Letter of Transmittal (which together constitute the "Cash Repurchase Offer") up to 10%¹ of all outstanding units of the Fund pursuant to tenders by limited partners of the Fund ("Limited Partners"). (As used in this Offer Document, the term "Unit" or "Units" as the context requires, shall refer to the units of limited partnership interest in the Fund and portions thereof representing beneficial interests in the Fund.). Limited Partners who choose to participate in the Cash Repurchase Offer may tender all or a portion of their Units in exchange for a cash amount equal to the net asset value of the respective Units of the Fund as of the close of business on December 30, 2005 (the last business day of the year). This Cash Repurchase Offer is being made to all Limited Partners and is not conditioned on any minimum amount of Units being tendered, but is subject to certain conditions described below. Units are not traded on any established trading market and are subject to strict restrictions on transferability pursuant to the Fund's Limited Partnership Agreement, as amended (the "Limited Partnership Agreement").

TO LIMITED PARTNERS THAT ARE QUALIFIED PURCHASERS. The Fund is offering a one-time exchange option to Limited Partners that are Qualified Purchasers (“Qualified Purchasers”), as defined in the Investment Company Act of 1940, as amended, (the “1940 Act”). Limited Partners that are Qualified Purchasers

¹ If the Limited Partners tender for repurchase in the Cash Repurchase Offer more than 10% of the Units outstanding, the Board, as permitted by the Fund’s Limited Partnership Agreement, will exercise its discretion to increase such maximum by another 2% of the total Units outstanding (for a total of 12%).

(collectively, the "QP Limited Partners") may tender, on the terms and conditions set forth in this Offer Document and the related Letter of Transmittal (which together constitute the "Exchange Tender Offer" and together with the Cash Repurchase Offer, the “Offers”) all of their Units that are not tendered and accepted pursuant to the Cash Repurchase Offer, in exchange for amount of units of Special Situations Fund III QP, L.P. ("SSF QP") equal in value to the Units of the Fund tendered for exchange, at a price equal to the net asset value (“NAV”) of the respective Units of the Fund as of the close of business on December 30, 2005 (the last business day of the year). SSF QP has the same general partner and investment objectives as the Fund as described in the SSF QP Confidential Private Placement Memorandum that accompanies this Offer Document. However, SSF QP is not registered as an investment company pursuant to the 1940 Act in reliance upon the exemption provided pursuant to Section 3(c)(7) of the 1940 Act for a limited partnership whose outstanding units are owned only by Qualified Purchasers. This Exchange Tender Offer is being made to all QP Limited Partners and is not conditioned on any minimum amount of Units being tendered, but is subject to certain conditions described below. Units are not traded on any established trading market and are subject to strict restrictions on transferability pursuant to the Fund's Limited Partnership Agreement.

***

Limited Partners should realize that the value of the Units tendered will likely change between the date hereof and December 30, 2005, when the value of the Units tendered to the Fund will be determined for purposes of calculating the purchase or exchange value of such Units. Limited Partners tendering their Units should also note that they will remain limited partners in the Fund, with respect to the Units tendered and accepted by the Fund, through December 31, 2005 (the “Exchange Date”). Limited Partners may obtain daily net asset value information during the period from December 9, 2005 through December 15, 2005, by contacting the Fund at the telephone number or address set forth on page 2, Monday through Friday, except holidays, during normal business hours of 9:00 A.M. to 5:00 P.M. (Eastern Time).

Limited Partners desiring to tender their Units in either or both of the Offers should complete and sign the attached Letter of Transmittal and mail, fax it or send it by a national overnight courier service to the Fund in the manner set forth in Section 4 herein.

IMPORTANT

THE FUND MAKES NO RECOMMENDATION TO ANY LIMITED PARTNER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING UNITS. LIMITED PARTNERS MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER UNITS.

BECAUSE EACH LIMITED PARTNER'S INVESTMENT DECISION IS AN INDIVIDUAL ONE, BASED ON ITS FINANCIAL CIRCUMSTANCES, NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE FUND AS TO WHETHER ANY LIMITED PARTNER SHOULD TENDER UNITS PURSUANT TO THE OFFERS. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERS OTHER THAN THOSE CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH RECOMMENDATION AND SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE FUND.

THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE FAIRNESS OR MERITS OF SUCH TRANSACTION OR ON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

Questions, requests for assistance and requests for additional copies of this Offer Document may be directed to:

SPECIAL SITUATIONS FUND III, L.P.

527 MADISON AVENUE, SUITE 2600

NEW YORK, NEW YORK 10022

TELEPHONE: (212) 207-6500

FAX: (212) 207-6515

iii

TABLE OF CONTENTS

SUMMARY TERM SHEET	1

1. BACKGROUND AND PURPOSE OF THE OFFERS	5
2. THE CASH REPURCHASE OFFER	7
3. THE EXCHANGE TENDER OFFER	8
4. PROCEDURE FOR TENDERS	10
5. WITHDRAWAL RIGHTS	11
6. CERTAIN CONDITIONS OF THE OFFERS	11
7. CERTAIN INFORMATION ABOUT THE FUND	12
8. CERTAIN INFORMATION ABOUT SSF QP	13
9. CERTAIN FEDERAL INCOME TAX CONSEQUENCES	15
9. MISCELLANEOUS	16

SUMMARY TERM SHEET

THE CASH REPURCHASE OFFER

The Fund operates as an “interval fund” under Rule 23c-3 promulgated under the 1940 Act and conducts routine cash repurchase offers pursuant to its fundamental policies and Rule 23c-3 under the 1940 Act, as well as its Limited Partnership Agreement. Partners of SSF III are entitled to redeem Units at their NAV semi-annually, on June 30 and December 31 of each year. The Cash Repurchase Offer is such a “routine” cash repurchase offer to all Limited Partners. See Section 1 - Background and Purposes of the Offers.

The Board has determined that the maximum percentage of Units of the Fund to be repurchased pursuant to the Cash Repurchase Offer initially will be 10% of the total Units outstanding. If the amount of Units that are properly tendered pursuant to the Cash Repurchase Offer and not withdrawn pursuant to Section 5 below is less than or equal to 10% of the total Units outstanding, the Fund will, on the terms and subject to the conditions of the Cash Repurchase Offer, purchase all of the Units so tendered. If the Limited Partners tender for repurchase in the Cash Repurchase Offer more than 10% of the Units outstanding, the Board, as permitted by the Fund’s Limited Partnership Agreement, will exercise its discretion to increase such maximum by another 2% of the total Units outstanding (for a total of 12%). If the Cash Repurchase Offer remains oversubscribed, the Fund will repurchase Units tendered on a pro rata basis (based upon the number of Units submitted for purchase by each such holder). If a Limited Partner’s tender is accepted, the Fund will pay the entire value of the Units that are repurchased in cash on or before January 6, 2006. The funds to be used to satisfy tenders in the Cash Repurchase Offer will be obtained by utilizing cash on hand and/or liquidating a portion of the portfolio securities of the Fund. See Section 2 - The Cash Repurchase Offer.

The Cash Repurchase Offer will remain open until 5:00 p.m., Eastern Time, on December 16, 2005 unless extended. Limited Partners may obtain daily NAV information during the period from December 9, 2005 through December 15, 2005, by contacting the Fund at the telephone number or address set forth on page 2, Monday through Friday, except holidays, during normal business hours of 9:00 A.M. TO 5:00 P.M. (EASTERN TIME). See Section 2 - The Cash Repurchase Offer.

THE EXCHANGE TENDER OFFER

A “grandfather” provision under Treasury Regulation Section 1.7704-1(l)(2), which has had the effect of allowing SSF III to satisfy a “private placement safe harbor” in applicable Treasury Regulations ensuring that it would not be treated as a publicly-traded partnership for federal income tax purposes, will expire on December 31, 2005. SSF III must satisfy one of the applicable “safe harbors” to ensure that it will not be treated as a publicly-traded partnership taxed as a corporation. To continue to satisfy the “private placement safe harbor” SSF III would be required to decrease the maximum number of partners from 500 to 100, so long as it remains a registered investment company. A publicly-traded partnership generally is taxed as a corporation subject to a double level of tax that could be extremely adverse to the Fund’s Partners. Unless the Fund satisfies a different “safe harbor,” the determination of whether it should be treated as a publicly-traded partnership would be made by applying a “facts and circumstances” test. To satisfy a safe harbor and avoid the uncertainty of the “facts and circumstances” test, the Fund would have to amend its repurchase offer policies to change the minimum repurchase offer amount from 10% of the Units outstanding per semi-annual period (or 20% per year) to 5% of Units outstanding per semi-annual period (or 10% per year) and to increase the repurchase request deadline from 14 days to 60 days prior to the repurchase pricing date. Thereafter, with certain exceptions (including the annual repurchase of up to an additional 2% of the Units outstanding), commencing in 2006 the Fund’s repurchase of Units during each year would have to be limited to 10% of the outstanding Units in order to satisfy this safe harbor and avoid the “facts and circumstances” test. See Section 1 - Background and Purposes of the Offers.

The purpose of the Exchange Tender Offer is to permit QP Limited Partners who do not approve of amending the Fund’s repurchase offer policies to exchange their Units in the Fund for equivalent Units in Special Situations Fund III QP, L.P. (“SSF QP”). SSF QP is a Delaware limited partnership that has been newly created to effect the Exchange Tender Offer. It will not be registered under the Investment Company Act of 1940 in reliance upon the exemption afforded by Section 3(c)(7) of that Act as all of its investors will be Qualified Purchasers. The Fund and SSF QP have the same general partner and the same investment objectives. QP Limited Partners should carefully read the SSF QP Confidential Private Placement Memorandum which accompanies this Offer Document prior to deciding to participate in the Exchange Tender Offer. See Section 1 - Background and Purposes of the Offers.

The Exchange Tender Offer will allow all of the QP Limited Partners (which are the only investors eligible to invest in SSF QP) a one-time exchange option where such Limited Partners can choose to tender their Units in exchange for an equal amount of full and fractional Units of SSF QP having the same NAV as the tendered Units of the Fund on the Valuation Date. The Cash Repurchase Offer is not limited by the Exchange Tender Offer. Thus, a QP Limited Partner may

tender all of its Units in the Cash Repurchase Offer and not participate in the Exchange Tender Offer or a QP Limited Partner may tender less than all of its Units in the Cash Repurchase Offer and tender all (but not less than all) of its remaining Units in the Exchange Tender Offer. To clarify, a QP Limited Partner may participate in the Exchange Tender Offer only if such Limited Partner tenders, pursuant to the Exchange Tender Offer and/or the Cash Repurchase Offer, an aggregate of all of the Units held by such Limited Partner. See Section 3 - The Exchange Tender Offer.

The Exchange Tender Offer will remain open until 5:00 p.m., Eastern Time, on December 16, 2005 unless extended. Limited Partners may obtain daily NAV information during the period from December 9, 2005 through December 15, 2005, by contacting the Fund at the telephone number or address set forth on page 2, Monday through Friday, except holidays, during normal business hours of 9:00 A.M. TO 5:00 P.M. (EASTERN TIME). See Section 3 - The Exchange Tender Offer.

We have the right to cancel, amend or postpone the Exchange Tender Offer at any time before 5:00 p.m., Eastern Time, on December 16, 2005. Limited Partners tendering their Units should also note that they will remain limited partners in the Fund, with respect to the Units tendered and accepted by the Fund, through December 31, 2005. See Section 6 - Certain Conditions of the Offers.

GENERAL

Following this summary is a formal notice of our Cash Repurchase Offer for all Limited Partners and our Exchange Tender Offer for QP Limited Partners. The Offers remain open to you until 5:00 p.m., Eastern Time, on December 16, 2005, the expected expiration date of the Offers. Until that time, you have the right to change your mind and withdraw any tender of your Units. See Section 4 - Procedures for Tenders and Section 5- Withdrawal Rights.

If you would like us to tender all or a portion of your Units pursuant to the Cash Repurchase Offer or exchange your Units for units of SSF QP pursuant to the Exchange Tender Offer you should (i) mail or send by national overnight courier service the Letter of Transmittal (enclosed with this Offer Document), to the Fund, 527 Madison Avenue, Suite 2600, New York, New York 10022; or (ii) fax it to the Fund at (212) 207-6515, so that it is received before 5:00 p.m., Eastern Time, on December 16, 2005. IF YOU FAX THE LETTER OF TRANSMITTAL, YOU SHOULD MAIL THE ORIGINAL LETTER OF TRANSMITTAL TO THE FUND PROMPTLY AFTER YOU FAX IT (ALTHOUGH THE ORIGINAL DOES NOT HAVE TO BE RECEIVED BEFORE 5:00 P.M., EASTERN TIME, ON DECEMBER 16, 2005). See Section 4 - Procedures for Tenders.

As of the close of business on November 11, 2005, the net asset value of a Unit held by a Limited Partner was $26,705. Limited Partners should realize that the value of the Units tendered will likely change between such date and December 30, 2005, when the value of the Units tendered to the Fund will be determined for purposes of calculating the purchase or exchange value of such Units. Limited Partners may obtain daily net asset value information during the period from December 9, 2005 through December 15, 2005, by contacting the Fund at the telephone number or address set forth on page iii, Monday through Friday, except holidays, during normal business hours of 9:00 A.M. To 5:00 P.M. (Eastern Time). See Section 2 - Cash Repurchase Offer and Section 3- Exchange Tender Offer.

1. BACKGROUND AND PURPOSE OF THE OFFER.

THE CASH REPURCHASE OFFER. The Fund, which was organized as a Delaware limited partnership on October 18, 1993, is a closed-end management investment company registered with the Securities and Exchange Commission (the “Commission”) under the 1940 Act.² The Fund operates as an “interval fund” under Rule 23c-3 promulgated under the 1940 Act and conducts routine cash repurchase offers pursuant to its fundamental policies and Rule 23c-3 under the 1940 Act, as well as its Limited Partnership Agreement. Partners of SSF III are entitled to redeem Units at their NAV semi-annually, on June 30 and December 31 of each year. For each semi-annual repurchase date, the Individual General Partners (collectively, the “Board”) determine the maximum percentage of Units to be repurchased, which currently must be at least 10% of the total Units outstanding and not more than 25% of the total Units outstanding on the redemption date (determined after redetermination of Units). The Cash Repurchase Offer is such a “routine” cash repurchase offer to all Limited Partners.

Units that are tendered to the Fund in connection with the Cash Repurchase Offer will be retired, although the Fund will issue new Units from time to time pursuant to non-public offerings limited to “accredited investors” (within the meaning of Regulation D promulgated under the Securities Act of 1934) who are also “qualified clients” (within the meaning of the Investment Advisers Act of 1940) as set forth in its Confidential Private Placement Memorandum.

THE EXCHANGE TENDER OFFER. A “grandfather” provision under Treasury Regulation Section 1.7704-1(l)(2), which has had the effect of allowing SSF III to satisfy a “private placement safe harbor” in applicable Treasury Regulations ensuring that it would not be treated as a publicly-traded partnership for federal income tax purposes, will expire on December 31, 2005. SSF III must satisfy one of the applicable “safe harbors” to ensure that it will not be treated as a publicly-traded partnership taxed as a corporation. To continue to satisfy the “private placement safe harbor” SSF III would be required to decrease the maximum number of partners from 500 to 100, so long as it remains a registered investment company. A publicly-traded partnership generally is taxed as a corporation subject to a double level of tax that could be extremely adverse to the Fund’s Partners. Unless the Fund satisfies a different “safe harbor,” the determination of whether it should be treated as a publicly-traded partnership would be made by applying a “facts and circumstances” test. To satisfy a safe harbor and avoid the uncertainty of the “facts and circumstances” test, the Fund would have to amend its repurchase offer policies to change the minimum repurchase offer amount from 10% of

² The Fund has a corporate general partner, MGP Advisers Limited Partnership (the “Adviser”), which acts as its investment adviser, and individual general partners (“Individual General Partners,” and together with the Adviser, the “General Partners”) who serve in the same capacity as directors of a registered investment company organized as a corporation. The Individual General Partners are responsible for the overall management and supervision of the Fund. Following consummation of the Offers, the Individual General Partners shall remain in such capacity with the Fund. All other partners of the Fund are limited partners (“Limited Partners,” and together with the General Partners, the “Partners”).

the Units outstanding per semi-annual period (or 20% per year) to 5% of Units outstanding per semi-annual period (or 10% per year) and to increase the repurchase request deadline from 14 days to 60 days prior to the repurchase pricing date. Thereafter, with certain exceptions (including the annual repurchase of up to an additional 2% of the Units outstanding), commencing in 2006 the Fund’s repurchase of Units during each year would have to be limited to 10% of the outstanding Units in order to satisfy this safe harbor and avoid the “facts and circumstances” test.³ The Board believes the modification limiting the size of withdrawals may not be satisfactory to the largest Limited Partners of the Fund (who are all Qualified Purchasers) because of the decrease in the liquidity of their Units.

The Fund seeks an equitable and efficient means to: (i) permit QP Limited Partners who do not approve of amending the Fund’s repurchase offer policies to exchange their Units in the Fund for equivalent Units in SSF QP in the Exchange Tender Offer, (ii) permit Unit holders who do not approve of amending the Fund’s repurchase offer policies to liquidate their investment in the Fund for cash in the Cash Repurchase Offer, and (iii) avoid disadvantaging the Fund Unit holders who would like to continue their investment in the Fund by amending its repurchase offer policies so as to fall within the Treasury Regulation safe harbor described above.

The Board also considered other alternatives to the Offers, after coming to the conclusion in May, 2005 that there was no likelihood that the expiration date of the “private placement safe harbor”, which had been in existence for approximately 10 years, would be extended. The Board considered having the Fund qualify as a “regulated investment company” under the Internal Revenue Code of 1986, as amended. This alternative was determined not to be preferable to the Offers because of the restrictions on SSF III’s operations and investments which would be expected to result therefrom, including limitations on the concentration of its portfolio, the requirement generally to distribute to investors 90% or more of its taxable and tax-exempt income, and the less favorable treatment of any operating losses or net capital losses, plus the additional anticipated administrative costs associated with such compliance with the applicable requirements and restrictions. The Board also considered the possibility of liquidating the Fund. This was not considered preferable to the Offers as it likely would result in the recognition of taxable gain for a number of Limited Partners and deny many of them the opportunity to obtain the investment management services of the Adviser.

³ Subject to the approval of at least a majority of the outstanding Units held by Limited Partners after the Offers, commencing in 2006 SSF III’s repurchases will be so limited.

partnership shall be taxed as a corporation. It is expected that SSF QP’s gross income will consist of sufficient “passive income”, e.g., dividends, interest, and gain from the sale of securities, to satisfy this safe harbor. Therefore, the expiration of the “grandfathered” safe harbor under Treasury Regulation Section 1.7704-1(1)(2) does not affect SSF QP. In comparison, the Fund is not eligible to satisfy the “passive income” exception because it is a registered investment company. The Fund and SSF QP have the same general partner and the same investment objectives. QP Limited Partners should carefully read the SSF QP Confidential Private Placement Memorandum attached hereto prior to deciding to participate in the Exchange Tender Offer.

Units that are tendered to the Fund in connection with the Exchange Tender Offer will be retired, although the Fund may issue new Units from time to time pursuant to non-public offerings limited to “accredited investors” (within the meaning of Regulation D promulgated under the Securities Act of 1934) who are also “qualified clients” (within the meaning of the Investment Advisers Act of 1940) as set forth in its Confidential Private Placement Memorandum.

2. THE CASH REPURCHASE OFFER.

The Cash Repurchase Offer will enable all Limited Partners of the Fund to choose to tender all or a portion of their Units to the Fund for a cash payment equal to the NAV of the Units tendered, as calculated on the Valuation Date, the last business day in 2005. Subject to the limitations set forth below, Limited Partners may tender all of their Units or the portion of their Units, as described below. The Cash Repurchase Offer is being made to all Limited Partners and is not conditioned on any minimum amount of Units being tendered. If a Limited Partners tender is accepted, the Fund will pay the entire values of the Units that are repurchased in cash on or before January 6, 2006. The funds to be used to satisfy tenders in the Cash Repurchase Offer will be obtained by utilizing cash on hand and/or liquidating a portion of the portfolio securities of the Fund.

The Board has determined that the maximum percentage of Units of the Fund to be repurchased pursuant to the Cash Repurchase Offer initially will be 10% of the total Units outstanding. If the amount of Units that are properly tendered pursuant to the Cash Repurchase Offer and not withdrawn pursuant to Section 5 below is less than or equal to 10% of the total Units outstanding, the Fund will, on the terms and subject to the conditions of the Cash Repurchase Offer, purchase all of the Units so tendered. If the Limited Partners tender for repurchase in the Cash Repurchase Offer more than 10% of the Units outstanding, the Board, as permitted by the Fund’s Limited Partnership Agreement, will exercise its discretion to increase such maximum by another 2% of the total Units outstanding (for a total of 12%). If the Cash Repurchase Offer remains oversubscribed, the Fund will repurchase Units tendered on a pro rata basis (based upon the number of Units submitted for purchase by each such holder). The Individual General Partners, the Adviser and the limited partners of the Adviser (Austin W. Marxe, David Greenhouse and Adam Stettner, collectively, the “Principals”) will not participate in the Cash Repurchase Offer.

In order to maintain a fixed price per Unit of $25,000 for the repurchase of a Unit, the Fund will redetermine the number of Units held by each Partner on the Valuation Date (immediately before any repurchases of Units) to reflect allocations of profit or loss of the Fund. As a result, the number of Units owned by each Partner will equal the balance in such Partner's Book Capital Account on the Valuation Date divided by $25,000. By way of example only, if the net asset value of a Unit is $37,500 immediately prior to such redetermination, a Partner will be credited with 1.5 Units for each Unit owned on the Valuation Date. As a convenience to Partners, the enclosed Letter of Transmittal allows a Partner to tender a specified number of Units or a specified percentage of such Units, in each case at $25,000 per Unit.

The Cash Repurchase Offer will remain open until 5:00 p.m., Eastern Time, on December 16, 2005. The Cash Repurchase Offer may be suspended or postponed as described in Section 5 below. Limited Partners should realize that the value of the Units tendered likely will change between the date hereof and December 30, 2005, when the value of the Units tendered to the Fund will be determined for purposes of calculating the redemption value of such Units. The following table sets forth the key deadlines and dates for the tender and payment of Units with respect to this Cash Repurchase Offer:

Description	Date
Repurchase Request Deadline--the last day to submit tenders of Units for repurchase and the last day to modify or withdraw any tender submitted to the Fund	December 16, 2005
Repurchase Pricing Date-- the day for determination of the net asset value per Unit	December 30, 2005
Repurchase Payment Deadline--the last day for payment of repurchased Units	January 6, 2006

As of the close of business on November 11, 2005, the net asset value of a Unit held by a Limited Partner was $26,705. LIMITED PARTNERS MAY OBTAIN DAILY NET ASSET VALUE INFORMATION DURING THE PERIOD FROM DECEMBER 9, 2005 THROUGH DECEMBER 15, 2005, BY CONTACTING THE FUND AT THE TELEPHONE NUMBER OR ADDRESS SET FORTH ON PAGE iii, MONDAY THROUGH FRIDAY, EXCEPT HOLIDAYS, DURING NORMAL BUSINESS HOURS OF 9:00 A.M. TO 5:00 P.M. (EASTERN TIME).

3. THE EXCHANGE TENDER OFFER.

full and fractional Units of SSF QP having the same NAV as the tendered Units of the Fund on the Valuation Date.⁴ Any Partner that is eligible to invest in SSF QP will be eligible to participate in the Exchange Tender Offer. The Exchange Tender Offer is being made only to QP Limited Partners and is not conditioned on any minimum amount of Units being tendered for exchange. The Cash Repurchase Offer is not limited by the Exchange Tender Offer. Thus, a QP Limited Partner may tender all of its Units in the Cash Repurchase Offer and not participate in the Exchange Tender Offer or a QP Limited Partner may tender less than all of its Units in the Cash Repurchase Offer and tender all (but not less than all) of its remaining Units in the Exchange Tender Offer. To clarify, a QP Limited Partner may participate in the Exchange Tender Offer only if such Limited Partner tenders, pursuant to the Exchange Tender Offer and/or the Cash Repurchase Offer, an aggregate of all of the Units held by such Limited Partner.

QP Limited Partners who choose to participate in the Exchange Tender Offer by tendering their Units will receive in exchange an amount of units of SSF QP equal in value to the Units tendered for exchange, at a price equal to the NAV of the tendered Units as of the close of business on the Valuation Date. Each Unit of SSF QP issued to a tendering QP Limited Partner will have an NAV equal to the NAV of the Fund Units exchanged. The NAV of the Fund’s Units and SSF QP’s Units will be determined in an identical manner. On the Exchange Date the Fund will contribute marketable securities, on a pro rata basis to SSF QP having a total net asset value equal to the total net asset value of the Units being exchanged. In exchange for such contribution of portfolio securities to SSF QP, the Fund, which is a Qualified Purchaser, shall be issued Units in SSF QP, consisting of limited partnership interests and general partnership interests, which will be exchanged to QP Limited Partners who participate in the Exchange Tender Offer and the Adviser, respectively. SSF QP will have the same investment objectives as the Fund but will not accept investors and will not begin investment activities until the day following the Exchange Date. Because Units will be exchanged and issued at NAV, Limited Partners will not be diluted. Moreover, such exchange of Units will not be a taxable transaction for the Funds nor for the tendering QP Limited Partners. SSF QP will have no assets until after the Valuation Date. Other than Mr. Marxe, who intends to tender Units pursuant to the Exchange Tender Offer on a pro rata basis, based upon the amount of Units exchanged by Limited Partners and the amount of Units that remain in the Fund, none of the Individual General Partners intend to tender Units pursuant to the Exchange Tender Offer.

This Exchange Tender Offer will remain open until 5:00 p.m., Eastern Time, on December 16, 2005. The Exchange Tender Offer may be extended, amended or canceled as described in Section 5 below. Limited Partners should realize that the value of the

⁴ The Fund has requested exemptive relief from the Securities and Exchange Commission (the “Commission”), from certain provisions of the 1940 Act and the Securities Exchange Act of 1934, as amended (the “1934 Act”), to permit the Fund to conduct the Exchange Tender Offer. SSF III will consummate the Offers only if such exemptions are received and if received, only in conformity with the relief granted. THERE CAN BE NO ASSURANCE THAT THE FUND WILL OBTAIN THE REQUESTED RELIEF FROM THE COMMISSION OR THAT ANY RELIEF GRANTED WILL BE ON CONDITIONS AMENABLE TO THE FUND AND THE LIMITED PARTNERS.

Units tendered will likely change between the date hereof and December 30, 2005, when the value of the Units tendered to the Fund will be determined for purposes of calculating the exchange value of such Units. QP Limited Partners tendering their Units should also note that they will remain limited partners in the Fund, with respect to the Units tendered and accepted by the Fund, through December 31, 2005. QP LIMITED PARTNERS SHOULD READ CAREFULLY THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM OF SSF QP PRIOR TO DECIDING TO PARTICIPATE.

4. PROCEDURE FOR TENDERS.

The Fund recommends that all documents be submitted via certified mail, return receipt requested, via national overnight courier or by facsimile transmission with confirmation of successful transmission. A Limited Partner choosing to fax a Letter of Transmittal must also send or deliver the original completed and executed Letter of Transmittal promptly thereafter. Limited Partners wishing to confirm receipt of a Letter of Transmittal may contact the Fund at the address or telephone number set forth above. The method of delivery of any documents is at the election and complete risk of the Limited Partner tendering Units including, but not limited to, the failure to receive any Letter of Transmittal or other document submitted by facsimile transmission. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of tenders will be determined by the Fund, in its sole discretion, and such determination shall be final and binding. The Fund reserves the absolute right to reject any or all tenders determined by it not to be in appropriate form or the acceptance of or payment for which would, in the opinion of counsel for the Fund, be unlawful. The Fund also reserves the absolute right to waive any of the conditions of the Offers or any defect in any tender with respect to any particular Unit or any particular Limited Partner, and the Fund's interpretation of the terms and conditions of the Offers will be final and binding.

Unless waived, any defects or irregularities in connection with tenders must be cured within such time as the Fund shall determine. Tenders will not be deemed to have been made until the defects or irregularities have been cured or waived. Neither the Fund nor its agents shall be obligated to give notice of any defects or irregularities in tenders, nor shall any of them incur any liability for failure to give such notice.

5. WITHDRAWAL RIGHTS.

Any Limited Partner tendering Units pursuant to the Cash Repurchase Offer or Exchange Tender Offer may withdraw his, her or its tender at any time prior to or on December 16, 2005. To be effective, any notice of withdrawal of a tender must be timely received at the address or fax number set forth on page iii. A form to give notice of withdrawal of a tender is available by calling the Fund at the telephone number indicated on page 2. All questions as to the form and validity (including time of receipt) of notices of withdrawal of a tender will be determined by the Fund, in its sole discretion, and such determination shall be final and binding. A tender of Units properly withdrawn shall not thereafter be deemed to be tendered for purposes of the Offers. However, withdrawn Units may be tendered again prior to December 16, 2005 by following the procedures described in Section 3.

6. CERTAIN CONDITIONS OF THE OFFER.

THE CASH REPURCHASE OFFER. The Cash Repurchase Offer will expire on December 16, 2005. The Fund reserves the right, at any time and from time to time, to suspend or postpone the Cash Repurchase Offer, by approval of a majority of the Board, for: (a) any period during which there is a suspension of trading on any organized exchange or over-the-counter market where the Fund has a material investment, (b) any period during which an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable, or during which it is not reasonably practicable for the Fund to fairly determine the value of its net assets, or (c) any period as the Commission may by order permit. The Fund will promptly notify all Partners of any such suspension or postponement.

THE EXCHANGE TENDER OFFER. The Exchange Tender Offer will expire on December 16, 2005. The Fund reserves the right, at any time and from time to time, up to and including acceptance of tenders pursuant to the Exchange Tender Offer to: (a) cancel the Exchange Tender Offer and in the event of such cancellation not to exchange any Units tendered pursuant to the Exchange Tender Offer; (b) amend the Exchange Tender Offer; and (c) postpone the acceptance of Units in the Exchange Tender Offer. If the Fund determines to amend the Exchange Tender Offer or to postpone the acceptance of Units tendered, it will, to the extent necessary, extend the period of time during which the Exchange Tender Offer is open and will promptly notify Limited Partners. During any such extension, all Units previously tendered and not withdrawn will remain subject to the Exchange Tender Offer.

The Fund may cancel or amend the Exchange Tender Offer or postpone the acceptance of tenders for any reason, including, without limitation, if the Fund does not receive the exemptive relief requested from the Commission, as described herein. The Fund has requested exemptive relief from the Commission, from certain provisions of the 1940 Act and the Securities Exchange Act of 1934, as amended, to permit the Fund to conduct the Exchange Tender Offer. SSF III will consummate the Exchange Tender Offer only if such exemptions are received and if received, only in conformity with the relief granted. THERE CAN BE NO ASSURANCE THAT THE FUND WILL OBTAIN THE REQUESTED RELIEF FROM THE COMMISSION OR THAT ANY RELIEF GRANTED WILL BE ON CONDITIONS AMENABLE TO THE FUND AND THE LIMITED PARTNERS.

7. CERTAIN INFORMATION ABOUT THE FUND.

The Fund, which was organized as a Delaware limited partnership on October 18, 1993, is a closed-end management investment company registered with the Commission under the 1940 Act. The Fund’s Units are not registered under the Securities Act of 1933 (the “1933 Act”) because Units are sold in non-public offerings in compliance with Regulation D promulgated under the 1933 Act. Each unaffiliated investor in the Fund is an "accredited investor" within the meaning of Regulation D under the 1933 Act and a “qualified client” within the meaning of Rule 205-3 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Fund may offer and sell additional Units to existing Limited Partners and qualified new investors in the future. The Fund operates as an “interval fund” under Rule 23c-3 promulgated under the 1940 Act and conducts routine cash repurchase offers pursuant to its fundamental policies and Rule 23c-3 under the 1940 Act, as well as its Limited Partnership Agreement. The Fund’s investment objectives are to maximize long-term capital appreciation by investing primarily in equity securities and securities with equity features of companies traded publicly on Nasdaq or “over-the-counter” or listed on national securities exchanges, which possess a technological, market or product niche, which may be, for various reasons, undervalued, or with prospects of going private or being acquired.

As of June 30, 2005, SSF III had approximately 289 Unit holders who were Qualified Purchasers, owning approximately 92% of the Fund's Units, and approximately 162 Limited Partners who were not Qualified Purchasers owning the balance. As of June 30, 2005, (i) SSF III’s total assets were approximately $500.0 million; (ii) the Adviser held 1,244.7802 Units of the fund (representing approximately $31.1 million and 6.2% of the outstanding Units) as a General Partner (and no Units as a Limited Partner); (iii) the Individual General Partners as a group held an aggregate of 178.2013 Units of SSF III (representing approximately $4.5 million and 0.9% of the outstanding Units)⁵ as General

⁵ This figure excludes the Units held by the Adviser although Austin Marxe, an Individual General Partner, is deemed to beneficially own the Units held by the Adviser by virtue of his control over the Adviser.

Partners, other than 15.3178 Units held as a Limited Partner by one Individual General Partner.

The Adviser receives a performance allocation equal to 20% of the net profit allocated to Limited Partners for each fiscal period (which is calculated with regard to a “high water mark” - that is, if there is a loss for an accounting period, the incentive allocation will not apply to future periods until the loss has been recovered.). SSF III pays each quarter, in arrears, an administrative fee to AWM Investment Company, Inc. (“AWM”) equal to 0.75% per annum of the Fund’s NAV.

Depending on participation in the Exchange Tender Offer and the Cash Repurchase Offer, the Fund is likely to be significantly smaller after the effect of the Offers. Although the decrease in the size of the Fund will not result in an increase in the rate of the fee paid to the Fund’s administrator, other expenses of the Fund, such as legal, accounting and compliance fees, will not decrease in proportion to the decrease in the size of the Fund. Although the relative increase in the Fund’s expense ratio is expected to be material, the Board believes that the benefits of the Offers to all Partners (including the continued service of the Adviser) outweigh the burden of any such increase in the Fund’s expense ratio.

8. CERTAIN INFORMATION ABOUT SSF QP.

SSF QP is a Delaware limited partnership that was formed on May 17, 2005 to effect the Exchange Tender Offer. It will not be registered under the 1940 Act in reliance upon the exemption afforded by Section 3(c)(7) of the 1940 Act as all of its investors will be Qualified Purchasers. SSF QP’s Units will not be registered under the 1933 Act in reliance upon Regulation D promulgated under the 1933 Act. Each investor in SSF QP will also be an "accredited investor" within the meaning of Regulation D under the 1933 Act and a “qualified client” within the meaning of Rule 205-3 under the Advisers Act. SSF QP will have no assets until the Exchange Date.

SSF QP has been designed to act as a companion fund to the Fund and its terms are substantially the same as those of the Fund. SSF QP will have the same investment objectives as the Fund but will not begin investment activities until the Offers are completed. SSF QP will initially have the same administration fee and performance allocation structure as the Fund. The Adviser will receive a performance allocation equal to 20% of the net profit allocated to limited partners of SSF QP for each fiscal period (which is calculated with regard to a “high water mark” as described above). SSF QP will pay each quarter, in arrears, an administrative fee to AWM equal to 0.75% per annum of SSF QP’s NAV. Beginning June 30, 2006, limited partners of SSF QP may redeem their Units of SSF QP semi-annually on June 30 and December 31 of each calendar year, by providing written notice to the Adviser on or before June 15 or December 15, respectively, of such calendar year. The Adviser has the right to limit the aggregate redemptions of Units of SSF QP by limited partners in any semi-annual fiscal period to 10% of the outstanding Units at the last day of the period (after the

redetermination of Units to reflect SSF QP’s profit or loss as of the end of such period). SSF QP expects to offer and sell additional Units to QP Limited Partners and other Qualified Purchasers semi-annually (i.e., as of January 1 and July 1 of each calendar year) at the discretion of the Adviser (beginning January 1, 2006).

Although SSF QP was formed as a sister fund to the Fund, there are likely to be some significant differences between the two funds. Below is a brief description of some of the more significant differences:

1. The Fund is a closed-end management investment company registered pursuant to the 1940 Act. SSF QP is not registered under the 1940 Act in reliance upon the exemption afforded by Section 3(c)(7) of the 1940 Act as all of its investors will be Qualified Purchasers. As a registered investment company, the Fund is subject to the rules and regulations of the 1940 Act, which require, among other things, (i) that the Fund maintain a board of directors consisting of at least 75% “independent directors” who are responsible for the Fund’s oversight of the Fund’s policies and procedures, (ii) that the Fund file a prospectus and annual and semi-annual reports with the Commission, (iii) that the Fund redeem its units only pursuant to semi-annual repurchase requests conducted in accordance with Rule 23c-3 of the 1940 Act, and (iv) that the Fund obtain prior approval of the Commission prior to engaging in certain affiliate transactions. SSF QP is not a registered investment company and is not be subject to the rules and regulations of the 1940 Act applicable to registered investment companies.

2. The Fund is a registered investment company that has greater than 100 partners and thus does not qualify for the“private placement safe harbor” in applicable Treasury Regulations ensuring that it would not be treated as a publicly-traded partnership for federal income tax purposes. In order to qualify for a different safe harbor, the Fund is required to limit the number of Units repurchased to 5% of Units outstanding per semi-annual period (or 10% per year) and increase the repurchase request deadline from 14 days to 60 days prior to the repurchase pricing date. It is expected that, subject to the approval of at least a majority of the outstanding Units held by Limited Partners after the Offers, commencing in 2006 SSF III’s repurchases will be so limited. SSF QP is not a registered investment company and qualifies for the“passive income” exception from the general rule that a publicly traded partnership shall be taxed as a corporation. As a result, the redemption policies of SSF QP differ from those which are proposed for the Fund; SSF QP is not required to limit repurchases/redemptions and will redeem up to 10% of Units outstanding per semi-annual period (or 20% per year). In addition, the request deadline for redemption of Units of SSF QP will be June 15 or December 15, for the applicable semi-annual offering.

3. Initially the Fund and SSF QP will have substantially similar investment portfolios (except with respect to amount invested). The Fund and SSF QP have the same investment objectives and their respective limited partnership agreements contain substantially identical investment restrictions. However, differences in the investment portfolios may occur as a result of, among other things, the following:

(i) It is expected that the Fund and SSF QP will generally participate in the same investments, pro rata based upon asset size. There may be circumstances, however, when such pro rata investment will not be feasible due to differences in the amount of cash available for investment by the Fund and SSF QP at any time, differences in capital contributions, redemptions and other factors.

(ii) As an investment company registered under the 1940 Act, the Fund’s ability to engage in short sales and purchase securities on margin is limited. SSF QP is not subject to the rules and regulations of the 1940 Act and thus is not subject to any limitation with respect to short sales and purchasing securities on margin.

(iii) As a registered investment company the Fund is exempt from the requirements of NASD Rule 2790 with respect to “new issues,” which are any equity securities offered in an initial public offering. Generally, NASD Rule 2790 prohibits a “new issue from being sold to an account in which a “restricted person” (persons associated with NASD members and certain other persons) has a beneficial interest. SSF QP is not a registered investment company and thus its participation in new issues will be subject to the requirements of NASD Rule 2790. The large number of investors in SSF QP may make it impracticable to accurately determine and update the status of investors as restricted persons or non-restricted persons and thus may limit SSF QP’s participation in “new issues.”

QP LIMITED PARTNERS SHOULD CAREFULLY READ THE SSF QP CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM ATTACHED HERETO PRIOR TO DECIDING TO PARTICIPATE IN THE EXCHANGE TENDER OFFER.

9. CERTAIN FEDERAL INCOME TAX CONSEQUENCES.

Below is a general summary of the United States federal income tax consequences to the Limited Partners who participate in the Offers. Limited Partners should consult their own tax advisors for a complete description of the tax consequences to them as a result of participation in the Offers.

THE CASH REPURCHASE OFFER. In general, a Limited Partner from which Units are repurchased by the Fund will be treated as receiving a distribution of money from the Fund. Such Limited Partner generally will not recognize income or gain as a result of the repurchase, except to the extent (if any) that the amount of consideration (both in money and a reduction in the Limited Partners share of SSF III liabilities) received by the Limited Partner exceeds such Limited Partner's adjusted tax basis in such Limited Partner's Units. A Limited Partner's basis in such Limited Partner's Units will be reduced (but not below zero) by the amount of consideration received by the Limited Partner from the Fund in connection with the repurchase of such Units. Cash distributed to a Limited Partner in excess of the adjusted tax basis of such Limited Partner's Units is taxable as capital gain or ordinary income, depending on the circumstances. A Limited Partner that has all of its Units repurchased by the Fund may recognize a loss, but only to the extent

that the amount of consideration received from the Fund is less than the Limited Partner 's then adjusted tax basis in such Limited Partner's Units.

THE EXCHANGE TENDER OFFER. It is anticipated that the exchange of Units for units of SSF QP on the Exchange Date will be treated as a distribution from SSF III to the QP Limited Partner of property other than money. Such QP Limited Partner will generally not recognize income or gain, except to the extent (if any) that the amount of such QP Limited Partner’s share of SSF III liabilities is reduced by an amount in excess of such QP Limited Partner’s adjusted tax basis in such QP Limited Partner’s Units. Generally, a QP Limited Partner’s adjusted tax basis in the units of SSF QP received will be equal to such QP Limited Partner’s adjusted tax basis in the Units exchanged therefor, reduced by any reduction in such QP Limited Partner’s share of SSF III liabilities.

10. MISCELLANEOUS.

No repurchase fees, brokerage commissions, fees or other remuneration will be paid by the Fund, SSF QP or any Limited Partner in connection with the Offers. SSF QP will bear, as organizational costs, the costs of effecting the Exchange Tender Offer, including the legal fees associated with the relief requested from the Commission under the 1940 Act and the 1934 Act, and the filing with the Commission of the Fund’s tender offer materials for the Exchange Tender Offer. Any and all costs and expenses in connection with the Cash Repurchase Offer will be incurred before the Fund calculates its NAV, and therefore will be reflected in the NAV, on the Valuation Date.

The Offers are not being made to, nor will tenders be accepted from, Limited Partners in any jurisdiction in which the Offers or its acceptance would not comply with the securities or Blue Sky laws of such jurisdiction. The Fund is not aware of any jurisdiction in which the Offers or tenders pursuant thereto would not be in compliance with the laws of such jurisdiction. However, the Fund reserves the right to exclude Limited Partners from the Offers in any jurisdiction in which it is asserted that the Offers cannot lawfully be made. The Fund believes such exclusion is permissible under applicable laws and regulations, provided the Fund makes a good faith effort to comply with any state law deemed applicable to the Offers.

EX-99.3 4 tex99a1iii.htm EXHIBIT 99.(A)(1)(III) Exhibit 99.(a)(1)(iii)

Exhibit 99.(a)(1)(iii)

LETTER OF TRANSMITTAL

REGARDING UNITS OF LIMITED PARTNERSHIP INTEREST

SPECIAL SITUATIONS FUND III, L.P.

Tendered Pursuant to the Cash Repurchase Offer and Exchange Tender Offer described in the

Offer Document

Dated November 17, 2005

THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT,

AND THIS LETTER OF TRANSMITTAL MUST BE RECEIVED BY THE FUND BY,

5:00 P.M, EASTERN TIME, ON DECEMBER 16, 2005.

IF YOU WISH TO TENDER YOUR UNITS PURSUANT TO THE CASH REPURCHASE

OFFER OR THE EXCHANGE TENDER OFFER PLEASE COMPLETE THIS LETTER

OF TRANSMITTAL AND RETURN IT BY MAIL TO:

Special Situations Fund III, L.P.

527 Madison Avenue, Suite 2600

New York, New York 10022

Telephone: (212) 207-6500

Ladies and Gentlemen:

The undersigned hereby tenders to Special Situations Fund III, L.P., a limited partnership organized under the laws of the State of Delaware (the "Fund"), in the manner and to the extent specified below, the units of limited partnership interest (hereinafter the "Unit" or "Units" as the context requires) in the Fund or portion thereof held by the undersigned, on the terms and conditions set forth in the Offer Document dated November 17, 2005, receipt of which is hereby acknowledged, and in this Letter of Transmittal (which together constitute the "Offers").

THE TENDER AND THIS LETTER OF TRANSMITTAL ARE SUBJECT TO ALL THE TERMS AND CONDITIONS SET FORTH IN THE OFFERS, INCLUDING, BUT NOT LIMITED TO, THE ABSOLUTE RIGHT OF THE FUND TO REJECT ANY AND ALL TENDERS DETERMINED BY THE FUND, IN ITS SOLE DISCRETION, NOT TO BE IN THE APPROPRIATE FORM.

* * *

INSTRUCTIONS

* * *

If you are tendering Units pursuant to the Cash Repurchase Offer only, please complete Part 1.

If you are a Qualified Purchaser and are tendering Units pursuant to the Exchange Tender Offer only, please complete Part 2 and then complete Exhibit A.

If you are a Qualified Purchaser and are tendering Units pursuant to the Cash Repurchase Offer and the Exchange Tender Offer, please complete Parts 1 and 2 below and then complete Exhibit A.

AFTER COMPLETION PLEASE RETURN THIS FORM BY MAIL TO:

Special Situations Fund III, L.P.

527 Madison Avenue, Suite 2600

New York, New York 10022

OR FAX TO:

Fax # (212) 207-6515

(IF FAXED, PLEASE RETURN ORIGINAL TO THE ADDRESS ABOVE)

FOR ADDITIONAL INFORMATION PLEASE CALL US AT (212) 207-6500.

-2-

SPECIAL SITUATIONS FUND III, L.P.

PART 1 - CASH REPURCHASE OF UNITS TENDER FORM

By completing the applicable provisions of Part 1 hereof, the undersigned hereby tenders to the Fund the Units or portion thereof tendered hereby, as described and specified below, pursuant to the Cash Repurchase Offer. The undersigned hereby warrants that the undersigned has full authority to tender the Units or portion thereof tendered hereby and that the Fund will acquire good title thereto, free and clear of all liens, charges, encumbrances, conditional sales agreements or other obligations relating to the sale thereof, and not subject to any adverse claim, when and to the extent the same are purchased by it. Upon request, the undersigned will execute and deliver any additional documents necessary to complete the sale in accordance with the terms of the Cash Repurchase Offer. The undersigned recognizes that under certain circumstances set forth in the Cash Repurchase Offer, the Fund may not be required to purchase any of the Units in the Fund or portions thereof tendered hereby. Payment of the purchase price for the Units or portion thereof tendered by the undersigned will be made by check or wire transfer of the funds to the account identified by the undersigned below. The undersigned recognizes that the amount of the purchase price for Units will be based on the net asset value of the Fund as of December 30, 2005, the last business day of the year. Except as stated in Section 5 of the Offer Document, this tender is irrevocable. The undersigned hereby tenders Units for repurchase, at a price of $25,000 per Unit, as follows (complete one of the following):

_________ Number of Units

_________ % of Units

The number or percentage of Units tendered hereby will represent Units owned by the undersigned on the Repurchase Pricing Date (December 30, 2005).

PAYMENT OF THE CASH REPURCHASE OFFER

Please indicate the manner in which you wish to receive payment:

[ ] Check (all payments will be mailed to your address as reflected in the Fund's records, unless otherwise noted).

Address: ____________________________

____________________________

[ ] Wire transfer (if so, check the box and complete the information below).

Bank Name: _________________________________________

ABA Routing Number: ________________________________

Credit to: ___________________________________________

Account Number: ____________________________________

For further credit to: __________________________________

Name(s) on the Account: ______________________________

__________________________________________________

Account Number: ____________________________________

-3-

SIGNATURE PAGE FOR CASH REPURCHASE OFFER

For an Individual or Joint Account:

_________________________________________

Print Name(s)

_________________________________________

Address

(______)__________________________________

Telephone Number

_________________________________________

Social Security No. or Taxpayer Identification No.:

_________________________________________

Signature(s)

Date: _____________________________________

For an Entity:

_________________________________________

Name of Entity

_________________________________________

Address

(_____)___________________________________

Telephone Number

_________________________________________

Social Security No. or Taxpayer Identification No.:

By: ______________________________________

Print Name: _______________________________

Print Title: ________________________________

Date: ______________________

-4-

SPECIAL SITUATIONS FUND III, L.P.

PART 2 - EXCHANGE TENDER OFFER

(FOR LIMITED PARTNERS WHO ARE QUALIFIED PURCHASERS ONLY)

By completing the applicable provisions of Part 2 hereof, the undersigned hereby tenders to the Fund the Units tendered hereby as described and specified below, pursuant to the Exchange Tender Offer in exchange for an amount of whole or fractional units of Special Situations Fund III QP, L.P., a limited partnership organized under the laws of the State of Delaware ("SSF QP"), equal in value to the net asset value of the tendered Units of the Fund as of December 30, 2005 (the "Valuation Date"). The undersigned hereby warrants that the undersigned has full authority to tender the Units tendered hereby for such exchange and that the Fund will acquire good title thereto, free and clear of all liens, charges, encumbrances, conditional sales agreements or other obligations relating to the sale thereof, and not subject to any adverse claim, when and to the extent the same are purchased by it. Upon request, the undersigned agrees to execute and deliver any additional documents necessary to complete the exchange in accordance with the terms of the Exchange Tender Offer.

In completing the applicable provisions of Part 2 hereof, the undersigned recognizes that under certain circumstances set forth in the Exchange Tender Offer, the Fund may not be required to accept any of the Units in the Fund tendered hereby in the Exchange Tender Offer. The undersigned recognizes that (i) the exchange of its Units for those of SSF QP will be completed as of December 31, 2005, (ii) the undersigned will remain a limited partner of the Fund through December 31, 2005, and (iii) as of January 1, 2006 the undersigned will be a partner of SSF QP. The undersigned recognizes that the amount of Units received by the undersigned pursuant to the Exchange Tender Offer will initially be based on the unaudited net asset value of the Fund as of December 30, 2005, and may change subject to the year end audit of the Fund. Except as stated in Section 5 of the Offer Document, this tender is irrevocable.

A. Please check the box below if you are a limited partner that is a Qualified Purchaser and you would like to tender your Units pursuant to the Exchange Tender Offer.

[__] The undersigned desires to tender all units of limited partnership interest in the Fund not tendered and accepted in the Cash Repurchase Offer in exchange for units of limited partnership interest of Special Situations Fund III QP, L.P. ("SSF QP") as set forth in the Exchange Tender Offer.*

* The undersigned also authorizes the Fund to take steps reasonably necessary to conduct the exchange transaction.

B. By executing below the undersigned hereby acknowledges and agrees as follows:

(i) Effective at 5:00 p.m. New York time on December 31, 2005, all of the Units of the undersigned in SSF III tendered pursuant to the Exchange Tender Offer (the “Redeemed Units”**) shall be redeemed in accordance with the Agreement of Limited Partnership of SSF III (the “SSF Limited Partnership Agreement”), and the undersigned shall have withdrawn from SSF III.

^** ^{Any
Units tendered by a QP Limited Partner pursuant to the Cash Repurchase Offer
that are not accepted}^{for
redemption by SSF III because the Cash Repurchase Offer is oversubscribed shall
be deemed to have been tendered pursuant to the Exchange Tender Offer and will
be included as Redeemed Units.}

-5-

(ii) In full and complete satisfaction of its obligations to pay redemption proceeds set forth in the SSF III Limited Partnership Agreement, SSF III assigns and transfers to the undersigned, effective at the opening of business on January 1, 2006 (the “Admittance Time”), SSF QP units having a net asset value equal to the net asset value of the Redeemed Units on the Valuation Date. Such transfer shall constitute a distribution in kind by SSF III of its interest in SSF QP and is being made in exchange for the undersigned’s interest in SSF III.

(iii) The undersigned accepts this assignment and hereby assumes and undertakes to perform all obligations to be performed by a limited partner of SSF QP under the terms of the Agreement of Limited Partnership of SSF QP, as in effect from time to time (the “SSF QP Limited Partnership Agreement”). The undersigned hereby agrees to become a limited partner of SSF QP. The undersigned acknowledges receipt of the Confidential Private Placement Memorandum of SSF QP and the SSF QP Limited Partnership Agreement and agrees to be bound by the SSF QP Limited Partnership Agreement.

(iv) The undersigned represents and warrants that:

(a) the undersigned is an “accredited investor,” as that term is defined in Rule 501(a) of Regulation D of the Securities Act of 1933, as amended (the “Act”);

(b) the undersigned is a Qualified Purchaser on the date hereof, and that the information contained in the undersigned’s Qualified Purchaser Confirmation attached hereto as Exhibit A and made a part hereof, is true and complete;

(c) he, she or it is acquiring the limited partnership interest in SSF QP for his, her or its own account, for investment purposes only and not with any expectation or intent of making any further distribution or resale of the interest acquired; and

(d) the undersigned understands that (i) the SSF QP limited partnership interest has not been registered under the Act or corresponding provisions of applicable state securities laws; and (ii) the SSF QP limited partnership interest may not be further transferred in the absence of such registration or the availability of an exemption from such registration requirements; and

(Signature Page Follows)

-6-

SPECIAL SITUATIONS FUND III, L.P.

SIGNATURE PAGE FOR EXCHANGE TENDER OFFER

For an Individual or Joint Account:

_________________________________________

Print Name(s)

________________________________________

Address

(_____)__________________________________

Telephone Number

_________________________________________

Social Security No. or Taxpayer Identification No.:

_________________________________________

Signature(s)

Date: _____________________________________

For an Entity:

_________________________________________

Name of Entity

_________________________________________

Address

(_____)___________________________________

Telephone Number

_________________________________________

Social Security No. or Taxpayer Identification No.:

By: ______________________________________

Print Name: _______________________________

Print Title: ________________________________

Date: ______________________

-7-

SPECIAL SITUATIONS FUND III, L.P.

EXHIBIT A

QUALIFIED PURCHASER CONFIRMATION

CONFIRMATION OF STATUS AS A QUALIFIED PURCHASER

(Must be completed by all Qualified Purchasers)

Please indicate below the category under which you meet the requirements to be considered a “Qualified Purchaser.”

For Individual Investors Only

___

(1)

I certify that I am a qualified purchaser because I own¹ not less than $5,000,000 in investments.²

For “Family” Corporations, Foundations, Endowments, or Partnerships

___

(2)

The undersigned hereby certifies that it is a qualified purchaser because it owns not less than $5,000,000 in investments and the undersigned is owned directly or indirectly (1) by or for the benefit of two or more natural persons who are (A) related as siblings or spouse (including former spouses), (B) direct lineal descendants by birth or adoption, (C) spouses of such persons, (D) the estates of such persons, or (2) by foundations, charitable organizations or trusts established by or for the benefit of such persons.

For Trusts

___

(3)

The undersigned hereby certifies that it is a qualified purchaser because it was not formed for the specific purpose of acquiring Limited Partnership Interests in Special Situations Fund III QP, L.P., and the trustee or other authorized person making decisions with respect to the trust, and each settlor or other person who has contributed assets to the trust, is a person described in items (1), (2) or (4) of this questionnaire.

For Others

___

(4)

The undersigned hereby certifies that it is a qualified purchaser because it is a natural person or entity, either acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than $25,000,000 in investments.

Note: In determining whether the $5 million or $25 million thresholds are met, investments can be valued at cost or market value as of a recent date. There shall be deducted from the value of any investment the amount of any outstanding indebtedness incurred to acquire or for the purpose of acquiring the investment.

¹A natural person may include any investments held jointly with his or her spouse or in which such person shares a community property interest with his or her spouse. If the Limited Partnership Interest in the Fund is held jointly, there may be included in the amount of each spouse’s investments any investment owned by the other spouse (whether or not such investment is held jointly or subject to a community property interest).

²The term “investments” shall mean any or all of the following types of assets: (1) securities (as defined in the Securities Act), except for securities of issuers controlled by the Limited Partner (“Control Securities”), unless the issuer of the Control Securities is itself a registered or private investment company or the Control Securities represent securities of an issuer that are listed on a national securities exchange or on NASDAQ; (2) securities contracts or options thereon; (3) physical commodities; (4) real estate held for investment purposes; and (5) cash and cash equivalents held for investment purposes.

-8-

EX-99.4 5 tex99a1iv.htm EXHIBIT 99.(A)(1)(IV) Exhibit 99.(a)(1)(iv)

Exhibit 99.(a)(1)(iv)

PERFORMANCE OF

SPECIAL SITUATIONS FUND III, L.P.

September 30, 2005

This Performance Supplement has been prepared in connection with the offering of Units to current Limited Partners of the Fund and prospective investors who wish to invest as Limited Partners in the Fund. The information set forth herein supplements the Fund’s Confidential Offering Memorandum, dated November 24, 2004 (the “Memorandum”) and must be read together with the memorandum. Certain capitalized terms used herein without definition have the meanings set forth in the Memorandum. An investor, whether a current Limited Partner or prospective investor, should review this Supplement in conjunction with the Memorandum prior to making a decision to invest in the Units. AN INVESTMENT IN THE UNITS INVOLVES A NUMBER OF SIGNIFICANT RISKS AND OTHER IMPORTANT FACTORS. IN ADDITION TO THE INFORMATION SET FORTH HEREIN, INVESTORS SHOULD CAREFULLY REVIEW THE FACTORS SET FORTH IN THE MEMORANDUM UNDER “RISK AND OTHER IMPORTANT FACTORS.”

Performance of the Fund

The following tables set forth certain summary information relating to the performance results of the Fund from the commencement of its investment operations on January 1, 1994, through September 30, 2005. Table I below sets forth the net asset values of the Fund as of the end of the 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003 and 2004 fiscal years and as of September 30, 2005, and the percentage change in such net asset values during such periods. In addition, Table I sets forth the cumulative increase in net asset value (in dollars and percentage) as of September 30, 2005. The net asset value as of any given date reflects the fair market value of the Fund’s assets, including all portfolio securities, less its liabilities, as of such date. In valuing the Fund’s assets, securities traded on a securities exchange or through Nasdaq were valued at the last sales price, if available. Other securities traded in the “over-the-counter” market, including Nasdaq securities with no available sales price, were valued at the average of the bid and asked prices on the last trading day. See the discussion in the Memorandum under “VALUATION OF ASSETS.”

THE PAST RESULTS OF THE FUND ARE NOT NECESSARILY INDICATIVE OF THE FUND’S FUTURE PERFORMANCE. INVESTMENT RESULTS WILL FLUCTUATE.

TABLE I

Net Asset Values of the Fund

Date	Net Asset Value¹		Percentage Change

January 1, 1994	$	71,083,300		---
December 31, 1994²	$	76,826,466		11.9	%
December 31, 1995²	$	106,645,926		45.1	%
December 31, 1996²	$	146,220,793		50.5	%
December 31, 1997²	$	171,924,211		24.0	%
December 31, 1998²	$	136,594,297		(11.5	%)
December 31, 1999²	$	214,348,297		79.2	%
December 31, 2000²	$	240,051,093		18.2	%
December 31, 2001²	$	291,262,245		17.4	%
December 31, 2002²	$	231,745,663		(19.0	%)
December 31, 2003²	$	429,235,957		103.1	%
December 31, 2004³	$	550,499,858		25.4	%

September 30, 2005	$	549,611,494		1.4	%
Cumulative Increase	$	478,528,194		1,294.9	%

Net asset values set forth above have been determined from audited financial statements of the Fund, except for information as of September 30, 2005, which has been determined from unaudited financial statements of the Fund. No assurance can be given that the Fund would have been able to obtain the prices for its portfolio securities reflected in the above values had it disposed of such securities through the public markets on the dates indicated above. The above values do not reflect any reductions for the advisory compensation allocable to MGP for the above periods or for brokerage commissions or other similar costs which ordinarily would be incurred upon the disposition of portfolio securities if the Fund were actually to have obtained the prices for its portfolio securities reflected in the above values.

The Net Asset Value at each of December 31, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, and 2003 takes into account purchases of Units and redemptions of Units on June 30 and December 31 of each of such year. The amount of such purchases have been subtracted from, and the amount of such redemptions have been added to, net asset value, in calculating the Percentage Change on December 31 of each such year.

The Net Asset Value for December 31, 2004 takes into account purchases of Units of $ 22,913,885 and redemptions of Units of $11,587,049 on June 30, 2004, and purchases of Units of $29,131,500 and redemptions of Units of $29,654,129 on December 31, 2004. The amount of such purchases have been subtracted from, and the amount of such redemptions have been added to, net asset value in calculating the Percentage Change on December 31, 2004.

-1-

Table II below sets forth the dollar value, as of the dates indicated, of an initial investment of $25,000 in Units of the Fund by a Limited Partner on January 1, 1994, assuming no redemptions or additional purchases of Units. In addition, Table II sets forth the periodic and cumulative percentage changes in the value of such an investment for the dates set forth in the Table.

TABLE II

Value of an Initial Investment of $25,000

By a Limited Partner

Date	Value¹		Current Percentage Change²			Cumulative Percentage Change³

January 1, 1994	$	25,000		---			---
December 31, 1994	$	27,346		9.4	%		9.4	%
December 31, 1995	$	37,033		35.4	%		48.1	%
December 31, 1996	$	51,833		40.0	%		107.3	%
December 31, 1997	$	61,680		19.0	%		146.7	%
December 31, 1998	$	54,263		(12.0	%)		117.1	%
December 31, 1999	$	90,225		66.3	%		261.1	%
December 31, 2000	$	102,994		14.2	%		312.4	%
December 31, 2001	$	117,850		14.4	%		371.7	%
December 31, 2002	$	95,451		(19.0	%)		282.1	%
December 31, 2003	$	178,032		86.5	%		612.6	%
December 31, 2004	$	213,744		20.1	%		756.0	%
September 30, 2005⁴	$	216,145		1.1	%		765.4	%

The values set forth above are net of any advisory compensation allocable to MGP with respect to such investment. MGP is entitled to receive advisory compensation (the “Advisory Fee”) equal to 20% of the Book Profit derived in any fiscal period, after all prior allocations of Book Loss have been offset. The Advisory Fee allocable to MGP is in the form of a profit allocation. The values set forth above have been determined from audited financial statements of the Fund, except for the information as of September 30, 2005 which has been determined from the unaudited financial statements of the Fund.

²	Current Percentage Change on any date represents the percentage increase or decrease in the value of a Limited Partner’s investment in the Fund, net of advisory compensation allocable to MGP, during the period from the preceding date through the date indicated above.

³	Cumulative Percentage Change represents the percentage increase or decrease in the value of a Limited Partner’s investment in the Fund, net of advisory compensation allocable to MGP, since January 1, 1994.

The Advisory Fee allocable to MGP in determining the value of a Limited Partner’s investment in the Fund on September 30, 2005, is computed as if such date was the last day of a fiscal period of the Fund. Under the Partnership Agreement, allocations of Book Profit and Book Loss among the Partners are made on the last day of each fiscal period of the Fund. See the discussion in the Memorandum under “ALLOCATION OF PROFIT AND LOSS.” The Fund’s fiscal periods end on each June 30 and December 31.

-2-

Performance of the 1990 Fund

Prior to formation of the Fund, MGP served as investment advisor of Special Situations Fund, L.P., formerly known as Prudential-Bache Special Situations Fund, L.P. (the “1990 Fund”), the predecessor to the Fund. The 1990 Fund’s investment objective was identical to that of the Fund, and the 1990 Fund invested in the same types of securities as those of the Fund. The 1990 Fund, which had commenced investment operations on February 23, 1990, was liquidated on December 31, 1993, and, in connection therewith, its securities were rolled over into the Fund. The following tables set forth certain summary information relating to the performance results of the 1990 Fund from the commencement of its investment operations through its liquidation.

FOR A MORE COMPLETE DESCRIPTION OF THE PERFORMANCE OF THE 1990 FUND, SEE THE DISCUSSION IN THE MEMORANDUM UNDER “PERFORMANCE OF MGP AND AWM.”

Table III below sets forth the net asset values of the 1990 Fund as of the end of each fiscal year and the percentage increase in such net asset values during each such fiscal year. In addition, Table III sets forth the cumulative increase in net asset value (in dollars and percentage) as of the liquidation of the 1990 Fund on December 31, 1993. The net asset value as of any given date reflects the fair market value of the 1990 Fund’s assets, including all portfolio securities, less its liabilities, as of such date. In valuing the assets of the 1990 Fund, securities traded on a securities exchange or through Nasdaq were valued at the last sales price, if available. Other securities traded in the “over-the-counter” market, including Nasdaq securities with no available last sales price, were valued at the average of the bid and asked prices on the last trading day.

TABLE III

1990 FUND

Net Asset Values

Date	Net Asset Value^1,2		Percentage Increase

February 23, 1990	$	31,454,355		--
December 31, 1990	$	29,431,678		(6.4	%)
December 31, 1991³	$	48,032,937		73.9	%
December 31, 1992⁴	$	57,955,329		29.6	%
December 31, 1993^5,6	$	77,383,863		39.6	%

Cumulative Increase	$	45,929,508		194.5	%

¹	Except for values set forth for February 23, 1990, the net asset values above have been determined from audited financial statements of the 1990 Fund. Information as of February 23, 1990, reflects the aggregate capital contributions by partners to the 1990 Fund.

No assurance can be given that the 1990 Fund would have been able to obtain the prices for its portfolio securities reflected in the above values had it disposed of such securities through the public markets on the dates indicated above. The above values do not reflect any reductions for the advisory compensation allocable to MGP for the above periods or for brokerage commissions or other similar costs which ordinarily would be incurred upon the disposition of portfolio securities if the 1990 Fund were actually to have obtained the prices for its portfolio securities reflected in the above values.

-3-

³	The Net Asset Value and Percentage Increase as of December 31, 1991, reflect cash redemptions of $3,140,262 as of such date.

⁴	The Net Asset Value and Percentage Increase as of December 31, 1992, reflect cash distributions of $9,236,822 made to partners of the 1990 Fund on April 1, 1992, $5,163,557 of which was reinvested in units.

⁵	The Net Asset Value and Percentage Increase as of December 31, 1993, reflect cash distributions of $11,286,252 made to partners of the 1990 Fund on April 1, 1993, $8,541,119 of which was reinvested in units.

⁶	The Net Asset Value and Percentage Increase as of December 31, 1993, reflect the value ascribed to the 1990 Fund’s assets in its liquidation. A significant portion of the 1990 Fund’s assets were contributed to the Fund in exchange for Units therein.

Table IV below sets forth the dollar value, as of the dates indicated, of an initial investment of $5,000 in units of the 1990 Fund by a limited partner on February 23, 1990, assuming reinvestment of all distributions in additional units. In addition, Table IV sets forth the periodic and cumulative percentage increases in the value of such an investment for the dates set forth in the Table.

TABLE IV

1990 FUND

Value of an Initial Investment of $5,000

by a Limited Partner

Date	Value¹		Current Percentage Increase²			Cumulative Percentage Increase³

February 23, 1990	$	5,000		---			---
December 31, 1990	$	4,678		(6.4	%)		(6.4	%)
December 31, 1991	$	7,501		60.3	%		50.0	%
December 31, 1992	$	9,411		25.5	%		88.2	%
December 31, 1993	$	12,716		35.1	%		154.3	%

The values set forth above on dates subsequent to February 23, 1990, have been determined from audited financial statements of the 1990 Fund. Such values include unrealized gains shown on such statements for the dates indicated above and reflect a deduction for advisory compensation that would have been allocated to MGP with respect to such gains. No assurance can be given that the 1990 Fund could have actually disposed of its portfolio securities at the values shown in such statements.

-4-

²	Current Percentage Increase on any date represents the percentage increase in the value of a limited partner’s investment in the 1990 Fund, net of advisory compensation allocable to MGP, during the period from the preceding date through the date indicated.

³	Cumulative Percentage Increase on any date represents the percentage increase in the value of a limited partner’s investment in the 1990 Fund, net of advisory compensation allocable to MGP, since the closing of its offering on February 23, 1990.

THE PERFORMANCE RESULTS AND THE MIX OF INVESTMENTS OF THE FUND MAY DIFFER SIGNIFICANTLY FROM THOSE OF THE 1990 FUND. ACCORDINGLY, A PROSPECTIVE INVESTOR SHOULD NOT CONSIDER THE RESULTS OF THE 1990 FUND TO BE INDICATIVE OF THE RESULTS WHICH MAY BE ACHIEVED BY THE FUND.

Performance of the 1985 Fund

MGP also served as the investment adviser of the predecessor fund to the 1990 Fund, Special Situations Fund, L.P. (the “1985 Fund”), which had commenced investment operations on June 13, 1985, and was liquidated in connection with the closing of the offering of units of the 1990 Fund on February 23, 1990. The 1985 Fund’s investment objective was virtually identical to that of the Fund, and the 1985 Fund invested in the same types of securities as those of the Fund. No cash distributions were made by the 1985 Fund. The following tables set forth certain summary information relating to the performance results of the 1985 Fund from the commencement of its investment operations through February 23, 1990.

Table V below sets forth the net asset values of the 1985 Fund as of the end of each fiscal year and as of February 23, 1990, and the percentage increase in such net asset values during each such fiscal period. In addition, Table V sets forth the cumulative increase in net asset value (in dollars and percentage) as of February 23, 1990. The net asset value as of any given date reflects the fair market value of the 1985 Fund’s assets, including all portfolio securities, less its liabilities, as of such date. In valuing the assets of the 1985 Fund, securities traded on a securities exchange or through Nasdaq were valued at the last sales price, if available. Other securities traded in the “over-the-counter” market, including Nasdaq securities with no available last sales price, were valued at the average of the bid and asked prices on the last trading day.

-5-

TABLE V

1985 FUND

Net Asset Values

Date	Net Asset Value^1,2		Percentage Increase

June 13, 1985	$	7,250,000		--
December 31, 1985	$	8,587,553		18.4	%
December 31, 1986	$	9,174,841		6.8	%
December 31, 1987	$	10,407,633		13.4	%
December 31, 1988	$	17,019,120		63.5	%
December 31, 1989	$	19,909,811		17.0	%
February 23, 1990	$	18,916,875		(5.0	%)

Cumulative Increase	$	11,666,875		160.9	%

Except for the values set forth for June 13, 1985, and February 23, 1990, the net asset values above have been determined from audited financial statements of the 1985 Fund. Information as of June 13, 1985, reflects the aggregate capital contributions by partners to the 1985 Fund. Information as of February 23, 1990, reflects the value ascribed to the 1985 Fund’s assets in its liquidation. A significant portion of the 1985 Fund’s assets were contributed to the 1990 Fund in exchange for units therein.

No assurance can be given that the 1985 Fund would have been able to obtain the prices for its portfolio securities reflected in the above values had it disposed of such securities through the public markets on the dates indicated above. The above values do not reflect any reductions for the advisory compensation allocable to MGP for any of the above periods or for brokerage commissions or other similar costs which ordinarily would have been incurred upon the disposition of portfolio securities if the 1985 Fund were actually to have obtained the prices for its portfolio securities reflected in the above values.

Table VI below sets forth the dollar value of a unit in the 1985 Fund held by such Fund’s limited partners as of the commencement of investment operations on June 13, 1985, through the liquidation of the 1985 Fund on February 23, 1990, and the cumulative percentage increase in the value of a unit for such person.

-6-

TABLE VI

1985 FUND

Value of Units of Limited Partnership Interest

June 13, 1985		February 23, 1990

Dollar Value of One Unit¹	$25,000	$54,542

Cumulative Percentage Gain	--	118.2%

The dollar value of a unit as of February 23, 1990, is determined by reference to the amount paid with respect to such a unit in the liquidation of the 1985 Fund. A significant portion of the 1985 Fund’s assets were contributed to the 1990 Fund in exchange for units therein. No assurance can be given that the 1985 Fund could have disposed of its portfolio securities through the public markets at the values reflected above as of February 23, 1990.

THE PERFORMANCE RESULTS AND THE MIX OF INVESTMENTS OF THE FUND MAY DIFFER SIGNIFICANTLY FROM THOSE OF THE 1985 FUND. ACCORDINGLY, A PROSPECTIVE INVESTOR SHOULD NOT CONSIDER THE RESULTS OF THE 1985 FUND TO BE INDICATIVE OF THE RESULTS WHICH MAY BE ACHIEVED BY THE FUND.

Cumulative Performance of MGP

Table VII below sets forth the increases in value accruing to a limited partner who invested with MGP based upon (i) an initial investment of $25,000 in the 1985 Fund on June 13, 1985, and (ii) assuming no withdrawals and full reinvestment of all distributions, the rollover of the entire investment from the 1985 Fund into the 1990 Fund and the further rollover of the entire investment from the 1990 Fund into the Fund.

-7-

TABLE VII

CUMULATIVE PERFORMANCE OF MGP

Value of an Initial Investment of $25,000

by a Limited Partner

Date	Net Asset Value¹		Cumulative Percentage Increase

June 13, 1985	$	25,000		---
February 23, 1990²	$	54,542		118.2	%
December 31, 1993³	$	138,711		454.8	%
September 30, 2005⁴	$	1,200,458		4,801.8	%

No assurance can be given that the 1985 Fund, the 1990 Fund or the Fund would have been able to obtain the prices for its portfolio securities reflected in the above values had they disposed of such securities through the public markets on the dates indicated above. The above values do not reflect any reductions for brokerage commissions or other similar costs which ordinarily would have been incurred upon the disposition of such portfolio securities. All values reflect reductions for advisory compensation allocable to MGP.

²	The value as of February 23, 1990, is determined by reference to the amount paid in the liquidation of the 1985 Fund. A significant portion of the 1985 Fund’s assets were contributed to the 1990 Fund in exchange for units therein.

³	The value as of December 31, 1993, is determined by reference to the amount paid in the liquidation of the 1990 Fund. A significant portion of the 1990 Fund’s assets were contributed to the Fund in exchange for Units therein.

⁴	The value as of September 30, 2005, is determined from the Fund’s unaudited financial statements as of such date. The advisory fee allocable to MGP in determining such value is computed as if such date was the last day of a fiscal period of the Fund.

-8-

Composition of Fund’s Investments

As of September 30, 2005, the Fund had 86.9%of its total assets invested in special situation investments (equity securities and securities with equity features of companies that the Fund believes possess a technological, market or product niche, that may be, for various reasons, undervalued, or have prospects of going private or being acquired), 13.0% of its total assets in cash, cash equivalents or receivables and 0.1% in other assets. The assets invested in special situation investments were invested as follows:

(a) 71.8% in Nasdaq equity securities;

(b) 5.5% in other over-the-counter equity securities;

(d) 2.5% in securities listed on exchanges; and

(e) 11.9% in securities of non-United States issuer.

No significant amount of the Fund’s assets were concentrated in any particular industry as of September 30, 2005. The “restricted” equity securities or equity securities underlying debt securities were acquired in private placement transactions pursuant to which the issuers thereof have committed to take all necessary prompt action to allow free tradability of such securities.

Current Net Asset Values-Limited Partner Unit

The Fund, in its Notice of Offer to Repurchase Units dated the date hereof, reported that the net asset value of a Unit held by a Limited Partner was $ 26,705 as of the close of business on November 11, 2005. See “Repurchase Offer” below. The Fund will compute its net asset value and the net asset value of such a Unit on each business day from December 9, 2005 through December 15, 2005. A Limited Partner or prospective investor may obtain information on such net asset values as of any date by calling the Fund, at telephone number (212) 207-6500, attention: Rose M. Carling or Marianne Hicks.

Security Ownership of Certain Beneficial Holders

The following table sets forth, as of September 30, 2005, the beneficial ownership of Units of each Partner known by the Fund to own beneficially more than 5% of the Units and of Austin W. Marxe, a Managing Director of the Fund. Units are owned both of record and beneficially unless otherwise indicated.

-9-

Name and Address Of Beneficial Owner⁽¹⁾	Amount Beneficially Owned⁽²⁾	Percent Beneficially Owned

Austin W. Marxe⁽³⁾⁽⁴⁾	1,405.6615	7.0%
Robert W. Wilson 2002 Revocable Trust⁽³⁾	4,641.3095	23.2%
St. Lawrence University⁽³⁾	1,039.7135	5.2%
Wildlife Conservation Society⁽³⁾	1,338.0879	6.7%

⁽¹⁾	Information with respect to beneficial owners of more than 5% of the outstanding Units was derived, to the extent available, from Schedule 13Ds or Schedule 13Gs and the amendments thereto on file with the Securities and Exchange Commission.

⁽²⁾	Beneficial ownership, as reported in the above table, has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934.

⁽³⁾	The business address of such beneficial owner, for purposes hereof, is c/o Special Situations Fund III, L.P., 527 Madison Avenue, Suite 2600, New York 10022.

⁽⁴⁾

Includes 100% of the Units held by MGP. Pursuant to MGP’s Eight Amendment to Second Amended and Restated Agreement of Limited Partnership, Austin W. Marxe beneficially owns 45.099% of the partnership interests of MGP, David M. Greenhouse beneficially owns 44.901% of the partnership interests of MGP, and Adam Stettner owns 10% of the partnership interests of MGP. Mr. Marxe disclaims beneficial ownership of 54.901% of the Units held by MGP.

As of September 30, 2005, the following table sets forth the net asset values of the Fund and each of the other Special Situations Funds described above.

Name of Fund	Net Asset Value

Special Situations Fund III, L.P.	$	549,611,494

Special Situations Cayman Fund, L.P.	$	138,974,600

Special Situations Private Equity Fund, L.P.	$	141,885,455

Special Situations Technology Fund, L.P.	$	27,158,150

Special Situations Technology Fund II, L.P.	$	166,960,461

Special Situations Life Sciences Fund, L.P.	$	18,714,252

*The net asset value provided for the Special Situations Life Sciences Fund, L.P. is estimated.

-10-

EX-99.5 6 tex99a1v.htm EXHIBIT 99.(A)(1)(V) Exhibit 99.(a)(1)(v)

Exhibit 99.(a)(1)(v)

September 30, 2005
Special Situations Fund III, L.P.	Third Quarter Report

SPECIAL SITUATIONS FUND III, L.P.

INDEX TO THIRD QUARTER REPORT

SEPTEMBER 30, 2005

_________________________________________________________________________________

	PAGE

Statement of Financial Condition	1

Portfolio of Investments	2

Statement of Operations	13

Statements of Changes in Partners’ Capital	14

Notes to the Financial Statements	15

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

STATEMENT OF FINANCIAL CONDITION

SEPTEMBER 30, 2005




ASSETS

Investments, at fair value (cost $364,097,237)	$	484,315,434
Cash and cash equivalents		54,912,344
Receivable for investments sold		17,634,881
Other assets		255,677

Total Assets	$	557,118,336

LIABILITIES AND PARTNERS' CAPITAL

Liabilities

Securities sold short, at fair value (proceeds $560,932)	$	519,633
Payable for investments purchased		5,475,287
Administrator's fee payable		1,003,954
Consulting fee payable		181,423
Accrued expenses		326,545

Total Liabilities		7,506,842

Partners' Capital

Limited Partners		509,661,592
Corporate General Partner		35,484,605
Individual General Partners		4,465,297

Total Partners' Capital		549,611,494

Total Liabilities and Partners' Capital	$	557,118,336

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

PORTFOLIO OF INVESTMENTS

SEPTEMBER 30, 2005

Shares	Common Stocks	Fair Value

	Aerospace 0.20%
971,600	SPACEHAB, Incorporated (a)	$	1,117,340

	Automotive Components 2.44%
1,448,909	Amerigon Incorporated (a)		8,476,118
322,300	Rush Enterprises, Inc. - Class A		4,924,744
			13,400,862

	Biotechnology 1.54%
1,915,275	Ciphergen Biosystems, Inc.		3,543,259
967,742	Medivation, Inc. (Restricted)		1,500,000
415,600	Metabasis Therapeutics, Inc.		2,422,948
2,036,195	Xcyte Therapies, Inc. (a)		977,373
			8,443,580

	Biotechnology - Drug Delivery 0.63%
1,439,592	Aradigm Corporation		1,540,363
296,817	DepoMed, Inc.		1,923,374
			3,463,737

	Building Materials 0.30%
123,222	L.B. Foster Company		1,632,691

	Business Services 0.18%
268,550	Intraware, Inc.		993,637

	Communication Equipment - Software 3.80%
2,238,077	Artisoft, Inc. (a)		3,088,546
4,098,966	Artisoft, Inc. (Restricted) (a)		4,667,083
37,378	Avid Technology, Inc.		1,547,449
3,511,499	ION Networks, Inc. (a)		491,609
758,524	MetaSolv, Inc.		2,480,373
635,223	PC-Tel, Inc.		5,971,096
1,926,881	Visual Networks, Inc. (a)		2,639,827
			20,885,983

	Communication Products - Equipment 3.30%
461,128	Centillium Communications, Inc.		1,738,453
2,047,483	NMS Communications Corporation		7,575,687
253,400	RADVision, Ltd. (Israel)		3,463,978
162,750	Telular Corporation		637,980
1,472,518	Tut Systems, Inc.		4,741,508
			18,157,606

	Computer Equipment 1.36%
362,500	Optimal Group, Inc. (Canada)		7,496,500

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

PORTFOLIO OF INVESTMENTS

SEPTEMBER 30, 2005

Shares	Common Stocks (Continued)	Fair Value

	Computer Peripherals 0.66%
248,305	Immersion Corporation	$	1,740,618
120,000	Printronix, Inc.		1,878,000
			3,618,618

	Computer Services - Software 9.78%
221,331	Aptimus, Inc.		3,087,567
1,977,456	ClickSoftware Technologies, Ltd. (Israel) (a)		3,223,253
416,747	CryptoLogic, Inc. (Canada)		7,318,077
1,573,957	Net Perceptions, Inc. (a)		1,196,207
178,255	Nuance Communications, Inc.		950,099
1,114,903	ONYX Software Corporation (a)		4,013,651
434,227	Palm Source, Inc.		7,837,797
652,900	Phoenix Technologies, Ltd.		4,916,337
1,251,365	Primal Solutions, Inc.		312,841
1,711,802	Quovadx, Inc.		5,186,760
249,384	Stellent, Inc.		2,137,221
979,642	SumTotal Systems, Inc.		4,770,856
767,850	SupportSoft, Inc.		3,869,964
2,738,150	Unify Corporation (a)		1,013,115
187,580	Witness Systems, Inc.		3,918,546
			53,752,291

	Computer Systems 2.63%
934,674	Adept Technology, Inc. (a)		7,524,126
388,100	Performance Technologies, Incorporated		2,774,915
650,553	SeaChange International, Inc.		4,137,517
			14,436,558

	Consumer Services 1.75%
500,000	Kenexa Corporation		6,260,000
581,818	OneTravel Holdings, Inc. (a)		3,374,544
			9,634,544

	Data Security 0.71%
700,401	Entrust, Inc.		3,922,246

	Electronic Components 2.28%
726,458	American Technology Corporation		3,704,936
298,700	Frequency Electronics, Inc.		3,255,830
2,564,502	Tvia, Inc. (a)		5,564,969
			12,525,735

	Electronic Equipment 0.87%
1,782,205	Iteris Holdings, Inc. (a)		4,794,131

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

PORTFOLIO OF INVESTMENTS

SEPTEMBER 30, 2005

Shares	Common Stocks (Continued)	Fair Value

	Electronic Instruments 1.14%
120,000	Axsys Technologies, Inc.	$	2,353,200
296,735	Image Sensing Systems, Inc. (a)		3,275,954
133,998	Metretek Technologies, Inc.		629,790
			6,258,944

	Electronic Semiconductor 1.57%
538,200	Kopin Corporation		3,740,490
1,263,200	PSi Technologies Holdings, Inc. (Philippines) (a)		1,250,568
581,062	Parkervision, Inc.		3,654,880
			8,645,938

	Energy - Oil & Gas 0.83%
19,300	Core Laboratories, N.V. (Netherlands)		622,618
250,000	Willbros Group, Inc. (Panama)		3,962,500
			4,585,118

	Energy - Technology 2.35%
839,836	Catalytica Energy Systems, Inc.		1,175,770
632,227	Hoku Scientific, Inc.		6,764,829
1,203,715	Quantum Fuel Systems Technologies Worldwide, Inc.		4,935,232
			12,875,831

	Entertainment 1.16%
379,500	DTS, Inc.		6,390,780

	Gold Mining 0.57%
2,550,300	MK Resources Company (a)		3,136,869

	Healthcare Services 1.34%
66,218	IntegraMed America, Inc.		793,954
359,766	U.S. Physical Therapy, Inc.		6,533,350
			7,327,304

	Healthcare - Specialized Products & Services 1.30%
210,000	American Dental Partners, Inc.		7,123,200


	Housing - Construction 0.71%
160,527	Modtech Holdings, Inc.		1,560,322
412,086	U.S. Home Systems, Inc.		2,348,890
			3,909,212

	Household Furniture - Appliances 0.27%
2,612,500	Chitaly Holdings Limited (Hong Kong)		1,489,125

	Insurance 0.00%
200	Renaissance Acceptance Group, Inc.		-

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

PORTFOLIO OF INVESTMENTS

SEPTEMBER 30, 2005

Shares	Common Stocks (Continued)	Fair Value

	Information Services 0.69%
774,748	EDGAR Online, Inc. (a)	$	1,851,648
1,658,882	FIND/SVP, Inc. (a)		1,924,303
			3,775,951

	Internet Commerce 0.72%
914,800	Corillian Corporation		2,927,360
173,425	Youbet.com, Inc.		993,725
			3,921,085

	Medical Devices & Equipment 10.89%
1,081,814	ATS Medical, Inc.		4,002,712
332,738	Applied Imaging Corporation (a)		445,037
121,247	Given Imaging, Ltd. (Israel)		2,928,115
297,231	Laserscope, Inc.		8,375,969
2,278,848	Micro Therapeutics, Inc. (a)		12,738,766
495,070	Natus Medical Incorporated		6,025,002
864,489	Orthovita, Inc.		3,700,013
1,296,978	Precision Optics Corporation, Inc. (a)		635,519
508,924	Quidel Corporation		4,814,421
377,784	Regeneration Technologies, Inc.		3,086,495
480,000	Regeneration Technologies, Inc. (Restricted)		3,921,600
594,310	Sonic Innovations, Inc.		2,629,227
6,278,932	World Heart Corporation (Canada) (a)		6,467,300
			59,770,176

	Medical - Drugs 0.83%
800,000	Advanced Life Sciences Holdings, Inc.		3,976,000
243,054	Corgentech, Inc.		573,607
			4,549,607

	Medical Instruments 0.40%
344,827	Caprius, Inc. (a)		827,585
74,124	NuVasive, Inc.		1,389,084
			2,216,669

	Online Services 3.47%
1,717,050	The Knot, Inc. (a)		19,042,084

	Paper - Packaging 0.00%
593,749	Chase Packaging Corporation		-

	Pharmaceutical Products 1.18%
253,267	Axcan Pharma, Inc. (Canada)		3,272,209
383,864	Indevus Pharmaceuticals, Inc.		1,105,528
500,000	Isis Pharmaceutical, Inc. (Restricted)		2,125,000
			6,502,737

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

PORTFOLIO OF INVESTMENTS

SEPTEMBER 30, 2005

Shares	Common Stocks (Continued)	Fair Value

	Restaurant 1.26%
712,998	Buca, Inc.	$	4,327,898
651,499	Monterey Gourmet Foods, Inc.		2,612,511
			6,940,409

	Retail 5.50%
173,303	1-800 CONTACTS, INC.		3,249,431
453,000	Bakers Footwear Group, Inc. (a)		6,795,000
639,041	EZCORP, Inc. (a)		10,262,998
453,045	Gaiam, Inc.		4,675,424
227,250	Gander Mountain Company		2,042,977
542,152	Odimo Incorporated		802,331
418,309	PC Mall, Inc.		2,392,727
			30,220,888

	Semiconductor 0.06%
65,899	CEVA, Inc.		341,357

	Semiconductor Equipment 3.39%
504,400	HI/FN, Inc.		2,799,420
282,012	Nanometrics Incorporated		3,299,540
1,303,516	Nova Measuring Instruments, Ltd. (Israel) (a)		2,867,735
1,495,200	Tegal Corporation (a)		986,832
6,720,185	Tegal Corporation (Restricted) (a)		4,368,120
1,400,209	Trikon Technologies, Inc. (Great Britain) (a)		2,380,355
325,263	Ultra Clean Holdings, Inc.		1,945,073
			18,647,075

	Services 1.41%
539,385	Collectors Universe, Inc. (a)		6,850,189
108,676	OPNET Technologies, Inc.		915,052
			7,765,241

	Technology - Miscellaneous 2.36%
813,100	IPASS, Inc.		4,374,478
1,083,044	Intermap Technologies Corp. (Canada)		5,312,656
918,855	Kintera, Inc.		2,802,508
577,829	Supercom, Ltd.		502,711
			12,992,353

	Telecom Equipment 1.26%
671,838	COMARCO, Inc. (a)		5,509,072
999,954	Peco II, Inc.		1,439,934
			6,949,006

	Telecom Services 1.73%
468,600	Spectralink Corporation		5,974,650
534,617	WPCS International Incorporated (a)		3,533,818
			9,508,468

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

PORTFOLIO OF INVESTMENTS

SEPTEMBER 30, 2005

Shares	Common Stocks (Continued)	Fair Value

	Telecommunications 0.83%
634,312	Arbinet-thexchange, Inc.	$	4,567,046

	Therapeutics 2.32%
457,205	Critical Therapeutics, Inc.		4,306,871
245,408	Dyax Corp.		1,371,830
1,684,211	Memory Pharmaceuticals Corp. (Restricted) (a)		3,200,001
431,507	Pharmacyclics, Inc.		3,892,193
			12,770,895

	Transportation 0.99%
339,200	Excel Maritime Carriers, Ltd. (Bermuda)		5,447,552
2,500	Velocity Express Corporation		8,125
			5,455,677

	Total Common Stocks 82.95%		455,955,104


Shares	Preferred Stocks	Fair Value

	Data Security 0.58%
1,250,000	Verdasys, Inc. Series B convertible (Restricted)	$	3,160,000

	Transportation 0.18%
304,682	Velocity Express Corporation 6% convertible		990,216

	Total Preferred Stocks 0.76%		4,150,216

Principal Amount	Corporate Bonds	Fair Value

	Communications Equipment - Software 0.76%
$4,195,151	Visual Networks, Inc. 5% convertible, due 12/31/07 (Restricted) (a)	$	4,195,151

	Computer Peripherals 0.69%
3,800,000	Immersion Corporation 5% convertible, due 12/23/09		3,800,000

	Computer Services - Software 0.46%
2,500,000	LocatePlus Holding Corporation 3% convertible, due 11/5/05 (Restricted)		2,500,000
€ 2,100,000	Titus Interactive 2%, due 7/1/05 (France)		-
			2,500,000

	Computer Systems 0.75%
$1,875,000	3D Systems Corporation 6% convertible, due 11/30/13		4,094,437

	Consumer Products 0.27%
1,500,000	Rockford Corporation 4.5% convertible, due 6/11/09		1,500,000

	Total Corporate Bonds 2.93%		16,089,588

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

PORTFOLIO OF INVESTMENTS

SEPTEMBER 30, 2005

Warrants	Warrants	Fair Value

	Biotechnology 0.02%
413,400	Alliance Pharmaceutical Corp. 10/30/06	$	4,134
43,000	Discovery Laboratories, Inc. 9/19/10		58,480
4,819	Dov Pharmaceutical, Inc. 6/2/09		39,949
			102,563

	Biotechnology - Drug Delivery 0.18%
398,733	Aradigm Corporation 3/10/07		47,848
208,333	Aradigm Corporation 11/10/07		6,249
210,648	DepoMed, Inc. 4/21/08		950,022
			1,004,119

	Communication Equipment - Software 0.03%
1,140,000	Artisoft, Inc. 9/30/06 (a)		68,400
118,161	Artisoft, Inc. 9/28/15 (Restricted) (a)		-
44,842	Artisoft, Inc. 12/16/08 (Restricted) (a)		-
586,600	ION Networks, Inc. 2/14/07 (a)		11,732
1,147,058	ION Networks, Inc. 3/31/10 (a)		68,823
			148,955

	Communication Products - Equipment 0.07%
57,861	Superconductor Technologies, Inc. 3/10/07		578
427,500	Superconductor Technologies, Inc. 9/26/07		8,550
736,259	Tut Systems, Inc. 7/22/10		390,217
			399,345

	Computer Peripherals 0.02%
81,121	Immersion Corporation 12/23/09		95,723

	Computer Services - Software 0.02%
862,500	Interplay Entertainment Corp. 3/29/06		-
10,000,000	LocatePlus Holding Corporation 7/8/10 (Restricted)		-
929,560	Unify Corporation 4/26/09 (a)		74,365
			74,365

	Computer Systems 0.17%
1,666,700	Adept Technology, Inc. 11/18/08 (a)		916,685

	Consumer Products 0.02%
70,889	Rockford Corporation 6/11/09		122,638

	Consumer Services 0.08%
2,327,272	OneTravel Holdings, Inc. 4/14/10 (a)		442,182

	Electronic Components 0.04%
216,176	American Technology Corporation 1/18/06		17,294
179,303	American Technology Corporation 7/18/09		195,440
			212,734

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

PORTFOLIO OF INVESTMENTS

SEPTEMBER 30, 2005

Warrants	Warrants (Continued)	Fair Value

	Electronic Equipment 0.15%
708,350	Iteris Holdings, Inc. B 8/16/07 (a)	$	835,853

	Electronic Semiconductor 0.02%
80,000	Parkervision, Inc. 3/10/10		129,600

	Energy - Technology 0.00%
132,667	Arotech Corporation 6/30/08		9,287
58,075	Arotech Corporation 12/31/08		2,904
			12,191

	Information Services 0.02%
150,000	EDGAR Online, Inc. 1/8/06 (a)		9,000
600,000	FIND/SVP, Inc. 5/10/09 (a)		114,000
			123,000

	Medical Devices & Equipment 0.03%
268,600	Applied Imaging Corporation 7/29/06 (a)		-
114,286	Orthovita, Inc. 6/26/08		93,714
47,476	SpectRx, Inc. 6/13/06		-
6,653,226	World Heart Corporation 9/22/08 (Canada) (a)		66,532
			160,246

	Medical Information Systems 0.00%
2,200,000	LifeRate Systems, Inc. 11/14/07 (a)		-

	Medical Instruments 0.01%
2,758,620	Caprius, Inc. 2/15/10 (a)		62,069

	Pharmaceutical Products 0.00%
125,000	Isis Pharmaceuticals, Inc. 8/23/10 (Restricted)		-

	Semiconductor Equipment 0.02%
747,600	Tegal Corporation 7/14/10 (a)		74,760
3,360,092	Tegal Corporation 9/19/10 (Restricted) (a)		-
206,250	Trikon Technologies, Inc. 10/22/07 (Great Britain) (a)		14,437
			89,197

	Technology - Miscellaneous 0.19%
934,544	Intermap Technologies Corp. 3/17/08 (Canada)		1,028,002

	Telecom Services 0.24%
150,780	GoAmerica, Inc. 12/19/08		1,507
8,750,000	WPCS International Incorporated 11/17/09 (a)		1,312,500
			1,314,007

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

PORTFOLIO OF INVESTMENTS

SEPTEMBER 30, 2005

Warrants		Warrants (Continued)	Fair Value


		Telecommunications 0.00%
79,800		Q Comm International, Inc. 6/24/08	$	18,354

		Therapeutics 0.15%
159,672		Critical Therapeutics, Inc. 6/6/10		828,698
589,473		Memory Pharmaceuticals Corp. 9/22/10 (Restricted) (a)		-
				828,698

		Total Warrants 1.48%		8,120,526


		TOTAL INVESTMENTS 88.12%	$	484,315,434


Shares		Securities Sold Short	Fair Value

		Specialized Services 0.09%
67,310		Flow International Corporation	$	519,633


		TOTAL SECURITIES SOLD SHORT 0.09%	$	519,633

	(a)	Affiliated issuer under the Investment Company Act of 1940, inasmuch
		as the Fund owns more than 5% of the voting securities of the issuer.

	All percentages are relative to Partners' Capital.

	All securities are non-income producing except for 3D Systems Corporation,
	Chitaly Holdings Limited, CryptoLogic, Inc., Frequency Electronics, Inc.,
	Immersion Corporation, Printronix, Inc., Rockford Corporation, Spectralink
	Corporation and Velocity Express Corporation.

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

PORTFOLIO OF INVESTMENTS

SEPTEMBER 30, 2005

Industry Concentration	Total		% of Partners' Capital

Aerospace	$	1,117,340	0.20
Automotive Components		13,400,862	2.44
Biotechnology		8,546,143	1.55
Biotechnology - Drug Delivery		4,467,856	0.81
Building Materials		1,632,691	0.30
Business Services		993,637	0.18
Communication Equipment - Software		25,230,089	4.59
Communication Products - Equipment		18,556,951	3.38
Computer Equipment		7,496,500	1.36
Computer Peripherals		7,514,341	1.37
Computer Services - Software		56,326,656	10.25
Computer Systems		19,447,680	3.54
Consumer Products		1,622,638	0.30
Consumer Services		10,076,726	1.83
Data Security		7,082,246	1.29
Electronic Components		12,738,469	2.32
Electronic Equipment		5,629,984	1.02
Electronic Instruments		6,258,944	1.14
Electronic Semiconductor		8,775,538	1.60
Energy - Oil and Gas		4,585,118	0.83
Energy - Technology		12,888,022	2.35
Entertainment		6,390,780	1.16
Gold Mining		3,136,869	0.57
Healthcare Services		7,327,304	1.34
Healthcare - Specialized Products & Services		7,123,200	1.30
Housing - Construction		3,909,212	0.71
Household Furniture - Appliances		1,489,125	0.27
Insurance		-	0.00
Information Services		3,898,951	0.71
Internet Commerce		3,921,085	0.72
Medical Devices & Equipment		59,930,422	10.91
Medical - Drugs		4,549,607	0.83
Medical Information Systems		-	0.00
Medical Instruments		2,278,738	0.41
Online Services		19,042,084	3.47
Paper - Packaging		-	0.00
Pharmaceutical Products		6,502,737	1.18
Restaurant		6,940,409	1.26

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

PORTFOLIO OF INVESTMENTS

SEPTEMBER 30, 2005

Industry Concentration (Continued)		Total	% of Partners' Capital

Retail	$	30,220,888	5.50
Semiconductor		341,357	0.06
Semiconductor Equipment		18,736,272	3.41
Services		7,765,241	1.41
Specialized Services		(519,633)	(0.09)
Technology - Miscellaneous		14,020,355	2.55
Telecom Equipment		6,949,006	1.26
Telecom Services		10,822,475	1.97
Telecommunications		4,585,400	0.83
Therapeutics		13,599,593	2.47
Transportation		6,445,893	1.17


TOTAL PORTFOLIO	$	483,795,801	88.03%

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005




REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
	Net realized gain on investments		$	54,368,326
	Net change in unrealized appreciation			(47,164,677	)
		Total Realized and Unrealized Gain on Investments				$	7,203,649

INVESTMENT INCOME (LOSS)
	Investment Income
		Interest		1,779,532
		Dividends (net of withholding taxes of $9,415)		423,329
		Securities lending fees		362,208
		Other		548,757
		Total Investment Income		3,113,826

	Operating Expenses
		Administrator's fee		2,925,648
		Professional fees		346,364
		Independent General Partners' fees		60,000
		Custody fee and other		184,847
		Total Operating Expenses		3,516,859

		Net Investment Loss					(403,033	)

NET INCOME						$	6,800,616

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

(Information Subsequent to December 31, 2004 is Unaudited)



	Per Limited Partners' Unit			Limited Partners			Corporate General Partner			Individual General Partners				Total

YEAR ENDED
DECEMBER 31, 2004:

BALANCE,
DECEMBER 31, 2003				$	380,390,677		$	23,987,396		$	6,949,884		$	411,327,957

Capital contributions					40,821,885			-			-			40,821,885
Transfers					15,556			(737,610	)		722,054			-
Allocation of net income:
Corporate General
Partner - Performance					-			22,091,939			-			22,091,939
Partners					81,219,840			5,618,404			1,529,511			88,367,755
Repurchases					(19,241,178	)		(17,000,000	)		(5,000,000	)		(41,241,178	)

BALANCE,
DECEMBER 31, 2004	$	25,000			483,206,780			33,960,129			4,201,449			521,368,358

SIX MONTHS ENDED
JUNE 30, 2005:

Capital contributions					29,131,500			-			-			29,131,500
Transfers					407			(214,660	)		214,253			-
Allocation of net loss	$	(1,945	)		(39,868,520	)		(2,625,962	)		(343,616	)		(42,838,098	)
Repurchases					(7,688,980	)		-			-			(7,688,980	)

BALANCE,
JUNE 30, 2005	$	25,000			464,781,187			31,119,507			4,072,086			499,972,780

THREE MONTHS ENDED
SEPTEMBER 30, 2005:

Allocation of net income:
Corporate General
Partner - Performance					-			1,360,123			-			1,360,123
Partners	$	2,414			44,880,405			3,004,975			393,211			48,278,591

BALANCE,
SEPTEMBER 30, 2005	$	27,414		$	509,661,592		$	35,484,605		$	4,465,297		$	549,611,494




See Note 4 for changes in Units outstanding.

See the accompanying Notes to the Financial Statements.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

NOTES TO THE FINANCIAL STATEMENTS

(Information Subsequent to December 31, 2004 is Unaudited)

NOTE 1 - GENERAL:

Special Situations Fund III, L.P. (the “Fund”) was organized under the Delaware Revised Uniform Limited Partnership Act on October 18, 1993, and commenced investment operations on January 1, 1994. The Fund is a closed-end interval fund registered under the Investment Company Act of 1940. The Fund shall have perpetual existence unless sooner dissolved as provided for in the Agreement of Limited Partnership (the “Agreement’’).

The Agreement provides for not less than three “Individual General Partners” and a “Corporate General Partner”. The General Partners, as a group, must own not less than one percent (1%) of the Fund’s outstanding Units.

The Corporate General Partner and Investment Adviser is MGP Advisers Limited Partnership (“MGP”), of which the General Partner is AWM Investment Company, Inc. (“AWM”). Austin W. Marxe, an Individual General Partner of the Fund and a limited partner of MGP owns directly and indirectly a majority of MGP and AWM. Mr. Marxe is primarily responsible for managing the Fund’s investments and performing certain administrative services on its behalf.

The Fund seeks long-term capital appreciation by investing primarily in equity securities and securities with equity features of publicly traded companies which possess a technological, market or product niche, which may be, for various reasons, undervalued, or with prospects of going private or being acquired.

On December 31, 2005 a “grandfather” provision which had the effect of allowing the Fund to satisfy a “private placement safe harbor” will expire. This provision has allowed the Fund to be treated as a partnership for federal income tax purposes rather than as a publicly traded partnership, which is generally taxed as a corporation. The Fund is seeking to satisfy a different safe harbor, which in general, would limit semi-annual repurchase offers to a maximum of 5% of Units outstanding per semi-annual period (or 10% per year) and increase the repurchase request deadline from 14 days to 60 days prior to the repurchase pricing date (the “Safe Harbor Amendments”).

The Fund has requested exemptive relief from the Securities and Exchange Commission to permit a one-time exchange tender offer at December 31, 2005 to allow Qualified Purchasers (as defined under the Investment Company Act of 1940) to exchange their units in the Fund for equivalent units in Special Situations Fund III QP, L.P. (a Delaware limited partnership recently formed to be a companion fund to the Fund).

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

NOTES TO THE FINANCIAL STATEMENTS

(Information Subsequent to December 31, 2004 is Unaudited)

NOTE 1 - GENERAL (CONTINUED):

A limited partner who is a Qualified Purchaser will have the option to: (i) accept the one-time exchange tender offer, (ii) accept the cash repurchase offer or (iii) remain invested in the Fund (with the expectation that the Fund will adopt the Safe Harbor Amendments). A limited partner who is not a Qualified Purchaser will have the option to: (i) accept the cash repurchase offer or (ii) remain invested in the Fund (with the expectation that the Fund will adopt the Safe Harbor Amendments). A Special Meeting of Partners will be held on November 16, 2005 to vote on these issues.

NOTE 2 - ACCOUNTING POLICIES:

Securities traded on a securities exchange or on the NASDAQ System are valued at the last reported sales price on the last business day of the reporting period. Securities for which no sale occurred on such day are valued at the average of the highest bid and lowest asked prices on the last trading day. Securities for which market quotations are not available are valued at fair value as determined in good faith by the Individual General Partners. Securities transactions are recorded on trade date. Realized gains and losses on sales of securities are determined using the specific identification cost method. Dividend income is recorded on the ex-dividend date, and interest income is recorded on the accrual basis.

Cash and cash equivalents consist principally of cash balances in a brokerage account.

The Fund entered into an agreement to lend portfolio securities to a qualified borrower in order to earn additional income. The terms of the lending agreement require that loans are secured by cash or securities with an aggregate market value at least equal to a percentage of the market value of the loaned securities agreed upon by the borrower and the Fund (which shall be not less than 100% of the market value of the loaned securities), computed on a daily basis. If the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons, the Fund could experience delays and costs in recovering the securities loaned or in gaining access to collateral. At September 30, 2005, the value of the loaned securities and corresponding collateral (U.S. Treasury obligations) received was $3,100,760 and $3,163,276, respectively.

The Fund entered into a consulting agreement whereby the consultant will perform management and financial advisory services to companies (“covered investments”) in which the Fund invests. As compensation, the consultant earns ten percent of the appreciation on each covered investment for the agreed upon period. Of this amount, one half is currently payable and the remainder is deferred until a final payment date, as further defined in the consulting agreement.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

NOTES TO THE FINANCIAL STATEMENTS

(Information Subsequent to December 31, 2004 is Unaudited)

NOTE 2 - ACCOUNTING POLICIES (CONTINUED):

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 3 - ALLOCATION OF ACCOUNTING PROFITS AND LOSSES:

Net income is allocated: first, to MGP to the extent of any previous net losses allocated to MGP in excess of the other partners’ capital balances; next, to the partners in proportion to the number of Units held by each to the extent of net losses previously allocated to them; and, thereafter, 80% to the partners in proportion to the number of Units held by each and 20% performance allocation to MGP. If there is a loss for an accounting period, the performance allocation to MGP will not apply to future periods until the loss has been recovered. For purposes of the performance allocation, net income for the three months ended September 30, 2005 was reduced by a loss carryover from June 30, 2005 of $42,838,098.

Net losses are allocated to the partners in proportion to the number of Units held by each, provided, however, that losses in excess of an Individual General Partner’s or a Limited Partner’s capital balance will be allocated to MGP.

NOTE 4 - PARTNER CAPITAL ACCOUNT TRANSACTIONS:

All net income allocated to partners will be reinvested. In order to maintain a $25,000 price per Unit, the number of Units held by each partner at the close of each fiscal period (generally June 30 and December 31, commencing December 31, 1994), is adjusted to equal the partner’s capital account divided by $25,000.

As of the close of each fiscal period, the Fund will offer to repurchase at least 10% and no more than 25% of the outstanding Units. The repurchase request deadline will generally be June 16 and December 17, of each year.

The Fund has the right to sell additional Units at the beginning of each fiscal period.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

NOTES TO THE FINANCIAL STATEMENTS

(Information Subsequent to December 31, 2004 is Unaudited)

NOTE 4 - PARTNER CAPITAL ACCOUNT TRANSACTIONS (CONTINUED):

Changes in Units outstanding are as follows:

	Limited Partners		Corporate General Partner		Individual General Partners		Total

Balance, December 31, 2003	15,215.6271		959.4958		277.9954		16,453.1183
Additional Units sold	1,632.8754		-		-		1,632.8754
Transfers	0.6223		(29.5044	)	28.8821		-
Semi-annual adjustments of Units	3,248.7935		1,108.4137		61.1805		4,418.3877
Repurchases	(769.6471	)	(680.0000	)	(200.0000	)	(1,649.6471	)

Balance, December 31, 2004	19,328.2712		1,358.4051		168.0580		20,854.7343
Additional Units sold	1,165.2600		-		-		1,165.2600
Transfers	0.0163		(8.5864	)	8.5701		-
Semi-annual adjustments of Units	(1,594.7408	)	(105.0385	)	(13.7446	)	(1,713.5239	)
Repurchases	(307.5592	)	-		-		(307.5592	)

Balance, June 30, 2005 and September 30, 2005	18,591.2475		1,244.7802		162.8835		19,998.9112

NOTE 5 - PURCHASES AND SALES OF SECURITIES:

Purchases and sales of securities for the nine months ended September 30, 2005 aggregated $238,395,903 and $215,891,267, respectively.

NOTE 6 - INCOME TAXES:

No provision for income taxes has been made in the accompanying financial statements as each partner is individually responsible for reporting income or loss based upon the partner’s respective share of the Fund’s income and expenses reported for income tax purposes.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

NOTES TO THE FINANCIAL STATEMENTS

(Information Subsequent to December 31, 2004 is Unaudited)

NOTE 7 - RELATED PARTY TRANSACTIONS:

AWM is the administrator of the Fund. The administrator’s fee is computed monthly at an annual rate of 0.75% of the average net assets.

The Fund pays each Independent General Partner an annual fee of $20,000.

NOTE 8 - APPROVAL OF ADVISORY CONTRACT:

At a special meeting of the Independent General Partners (“IGPs”) of the Fund, they considered whether to approve the continuation of the existing Investment Advisory Agreement (the “Advisory Agreement”) between the Fund and MGP Advisers Limited Partnership (“MGP”). In addition to the materials the IGPs had reviewed throughout the course of the year, the IGPs received materials relating to the advisory agreement before the meeting and had the opportunity to ask questions and request further information in connection with its consideration.

The approval of the Advisory Agreement and the continuation of MGP as the investment adviser of the Fund is based upon the following findings as well as specific considerations discussed below: (1) that the Advisory Agreement with MGP is in the best interests of the Fund; (2) that the services to be performed by MGP pursuant to the Advisory Agreement are services required for the operation of the Fund; (3) that MGP can provide services the nature and quality of which are at least equal to those provided by others offering the same services; and (4) that the fees for such services are fair and reasonable in light of the usual and customary charges made by others for services of the same nature and quality.

In determining whether to approve the Advisory Agreement, the IGPs considered various relevant factors, including those discussed below.

Nature, Extent and Quality of Service

In considering the nature, extent and quality of service to the Fund, the IGPs reviewed the Fund’s investment objectives and strategy along with the advisory services provided to the Fund by MGP over both short- and long-term periods. The services provided include investment research, portfolio management and trading. The IGPs took into account the organizational depth and stability of the firm, noting that the Fund managers have considerable investment and trading experience and have managed the Fund since its inception (in 1985). Furthermore, they do not use brokerage commissions to purchase third-party research.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

NOTES TO THE FINANCIAL STATEMENTS

(Information Subsequent to December 31, 2004 is Unaudited)

NOTE 8 - APPROVAL OF ADVISORY CONTRACT (CONTINUED):

Investment Performance

The IGPs considered the short- and long-term performance of the Fund, including both lesser and more profitable periods and noted favorable performance over the Fund’s history as compared with relevant market indices.

Costs of Services Provided

The IGPs considered the compensation arrangement with MGP, such that the performance allocation of 20% is customary for the Fund’s peer group. The IGPs also noted the use of a “highwater” mark in determining the profit threshold. The IGPs reviewed the expense ratio of the Fund and determined it fair and reasonable as compared to the Fund’s peer group.

Profits

The IGPs considered the level of MGP’s profits in managing the Fund and concluded that the profit was fair and customary based on the Fund’s peer group.

Economies of Scale

The IGPs, in considering economies of scale, reviewed whether there have been or if there is a potential for the realization of future economies of scale, and whether the Fund’s investors would benefit from such scale. The IGPs noted that the consideration of economies of scale is not a determining factor as it relates to the approval of the Advisory Agreement with MGP.

In considering whether to approve the continuation of the advisory agreement, the IGPs did not weigh any one factor more than another. They concluded that the approval of the agreement was in the best interest of the Fund. The advisory agreement will continue for one year and is renewable by the IGPs after that for successive one year periods.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

NOTES TO THE FINANCIAL STATEMENTS

(Information Subsequent to December 31, 2004 is Unaudited)

NOTE 9 - SUPPLEMENTARY FINANCIAL INFORMATION:

	Nine Months Ended September 30,	Year Ended December 31,
	2005	2004	2003	2002	2001	2000

Ratio of investment expenses to average net assets ^1,2	0.00%	0.00%	0.57%	0.03%	0.00%	0.00%

Ratio of operating expenses to average net assets ²	0.90%	0.84%	1.03%	0.94%	0.89%	0.85%

Ratio of total expenses to average net assets ²	0.90%	0.84%	1.60%	0.97%	0.89%	0.85%

Ratio of net income (loss) to average net assets ²	1.73%	23.09%	74.23%	(22.16)%	16.62%	15.19%

Portfolio turnover rate	48.94%	63.46%	52.43%	60.28%	91.33%	102.49%
¹The investment expenses reflected in the above ratio include, but are not limited to, consulting fees having a direct correlation to the performance of “covered investments”, as further defined in Note 2 herein. ²Forperiods less than one year, ratios have been annualized.^.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

NOTES TO THE FINANCIAL STATEMENTS

(Information Subsequent to December 31, 2004 is Unaudited)

NOTE 10 - RETURN ON PARTNER INVESTMENT:

At September 30, 2005, the value of a $25,000 investment made at each respective subscription date is as follows:

Subscription Date		Value
January 1, 1994		$216,145
January 1, 1995		197,602
July 1, 1995		174,968
January 1, 1996		145,914
July 1, 1996		110,150
January 1, 1997		104,250
July 1, 1997		98,748
January 1, 1998		87,607
July 1, 1998		89,828
January 1, 1999		99,583
July 1, 1999		91,887
January 1, 2000		59,891
July 1, 2000		51,301
January 1, 2001		52,466
July 1, 2001		45,865
January 1, 2002		45,852
July 1, 2002		52,309
January 1, 2003		56,611
July 1, 2003		43,322
January 1, 2004		30,352
July 1, 2004		28,215
January 1, 2005		25,281
July 1, 2005		27,414

NOTE 11 - SECURITIES SOLD SHORT:

The Fund is subject to certain inherent risks arising from its activities of selling securities short. The ultimate cost to the Fund to acquire these securities may exceed the liability reflected in the financial statements. In addition, the Fund is required to maintain collateral with the broker to secure these short positions.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

NOTES TO THE FINANCIAL STATEMENTS

(Information Subsequent to December 31, 2004 is Unaudited)

NOTE 12 - INVESTMENTS IN RESTRICTED AND ILLIQUID SECURITIES:

The Fund has made investments in securities that are not freely tradable due to Securities and Exchange Commission’s regulations. These restricted securities may not be sold except in exempt transactions or when they have become registered under the Securities Act of 1933. Investing in restricted securities generally poses a greater risk than investing in more widely held, publicly traded companies. Restrictions imposed on the sale of these securities and the lack of a secondary market may affect the timing and price obtained for such sales. The following is a list of restricted and illiquid securities valued by the Fund as of September 30, 2005:

Issuer	Type of Security	Acquisition Date	Acquisition Cost	Value	Value as a % of Partners’ Capital
Artisoft, Inc.	Common	9/28/04	$2,667,132	$2,667,132	0.49%
Artisoft, Inc.	Common	9/28/05	1,999,951	1,999,951	0.36%
Isis Pharmaceutical, Inc.	Common	8/24/05	2,125,000	2,125,000	0.39%
Medivation, Inc.	Common	12/17/04	1,500,000	1,500,000	0.27%
Memory Pharmaceuticals Corp.	Common	9/23/05	3,200,000	3,200,000	0.58%
Regeneration Technologies, Inc.	Common	8/29/05	4,104,000	3,921,600	0.71%
Tegal Corporation	Common	9/19/05	4,368,120	4,368,120	0.79%
Verdasys, Inc. Series B 2%	Preferred	9/3/04	2,500,000	3,160,000	0.58%
LocatePlus Holding	Corporate Bond	7/8/05	2,500,000	2,500,000	0.46%
Visual Networks	Corporate Bond	8/9/05	4,191,151	4,191,151	0.76%
Total restricted and illiquid securities			$29,155,354	$29,632,954	5.39%

NOTE 13 - CREDIT RISK CONCENTRATION:

Cash and cash equivalents consist principally of balances held in a custodial account with Banc of America Securities LLC. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000. Net cash balances and securities in excess of these limits are protected by a guarantee provided by the broker’s parent company, Bank of America Corporation, in the amount of $300,000,000 per account or $1.2 billion in the aggregate.

SPECIAL SITUATIONS FUND III, L.P.

(A Limited Partnership)

NOTES TO THE FINANCIAL STATEMENTS

(Information Subsequent to December 31, 2004 is Unaudited)

NOTE 14 - PROXY VOTING (UNAUDITED):

A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities is available (1) without charge, upon request, by calling (212) 207-6500 or (2) on the Securities and Exchange Commission (“SEC”) website at www.sec.gov.

The Fund’s proxy voting record for the most recent 12-month period ended December 31 is available (1) without charge, upon request, by calling (212) 207-6500 or (2) on the SEC’s website at www.sec.gov. Information as of December 31 each year will generally be available by the following March 1.

NOTE 15 - FORM N-Q (UNAUDITED):

The Fund files a complete Portfolio of Investments for the first and third quarters of its fiscal year with the SEC on Form N-Q within 60 days of the end of such fiscal quarter. The Fund’s Form N-Q is available on the SEC’s website at www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330.

EX-99.6 7 tex99a1vi.htm EXHIBIT 99.(A)(1)(VI) Exhibit 99.(a)(1)(vi)

Exhibit 99.(a)(1)(vi)

NOTICE OF LIMITED OFFER

CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM

SPECIAL SITUATIONS FUND III QP, L.P.

November 2005

This document is being provided solely to existing limited partners of Special Situations Fund III, L.P. in connection with the Exchange Tender Offer described in the Offer Document that accompanies this document. This document may not be used by such persons for any other purpose or by any other person for any purpose. This document may not be copied, reproduced or given to any other person. This document is not otherwise an offer to sell (or solicitation of an offer to buy) an interest in Special Situations Fund III QP, L.P.

CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM

SPECIAL SITUATIONS FUND III QP, L.P.

Limited Partnership Interests

$25,000 Per Unit

_____________________

Minimum Investment for New Subscribers - 4 Units ($100,000)

Minimum Investment for Current Limited Partners -1 Unit ($25,000)

_____________________

November 2005

Neither the Fund nor the interests offered hereby will be registered under the securities laws of any jurisdiction. Accordingly, offer and sale will be made only to “accredited investors” within the meaning of Rule 501(a) of the Securities Act of 1933, as amended who are also “qualified purchasers” within the meaning of the Investment Company Act of 1940, as amended (the “1940 Act”) and, outside of the United States, only to persons to whom offers and sales are permitted under applicable securities laws. This offering is intended to comply with the provisions of Section 3(c)(7) of the 1940 Act, which exempts issuers that are not making and do not currently propose to make a public offering of their securities and the outstanding securities of which are owned only by “qualified purchasers” as defined in the 1940 Act.

Each prospective investor, by accepting delivery of this Confidential Private Placement Memorandum, agrees not to copy or divulge the contents hereof to any person other than its legal, business or tax advisors in connection with seeking the advice of such persons with respect to this offering. Periodically, the Fund may prepare reports and supplements to this Memorandum for distribution to partners and prospective investors. These reports and supplements may include descriptions of proposed or closed investments and financial information with respect to the Fund’s operations. Unless this Memorandum is restated in its entirety, all reports and supplements delivered to partners and prospective investors in the Fund will be incorporated by reference into this Memorandum. Prospective investors are encouraged to review these reports and supplements.

_______________________________

Memorandum No.

_______________________________

Name of Offeree

Table of Contents

		Page
I.	INTRODUCTION	1
II.	HISTORY OF THE FUND	2
III.	SUMMARY OF TERMS	5
IV.	INVESTMENT OBJECTIVE AND POLICIES	10
V.	THE MANAGEMENT TEAM	15
VI.	SUMMARY OF THE OFFERING	19
VII.	ALLOCATION OF PROFIT AND LOSS	23
VIII.	VALUATION OF ASSETS	24
IX.	REDEMPTIONS, TRANSFERS AND WITHDRAWALS OF UNITS	25
X.	LEGAL CONSIDERATIONS	27
XI.	CERTAIN FEDERAL INCOME TAX CONSIDERATIONS	29
XII.	RISKS FACTORS AND CONFLICTS OF INTEREST	37

SPECIAL SITUATIONS FUND III QP, L.P.

THIS PRIVATE PLACEMENT MEMORANDUM (THE “MEMORANDUM”) IS BEING FURNISHED TO YOU CONFIDENTIALLY IN CONNECTION WITH THE PRIVATE PLACEMENT OF LIMITED PARTNERSHIP UNITS (THE “UNITS”) OF SPECIAL SITUATIONS FUND III QP, L.P. (THE “FUND”). DELIVERY OF THIS MEMORANDUM TO ANYONE OTHER THAN THE OFFEREE NAMED ABOVE IS UNAUTHORIZED, AND ANY REPRODUCTION OF THIS MEMORANDUM, IN WHOLE OR IN PART, OR ANY DISCLOSURE OF ITS CONTENTS, IN WHOLE OR IN PART, WITHOUT THE PRIOR WRITTEN CONSENT OF THE FUND IS PROHIBITED.

THE UNITS OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “SECURITIES ACT”), IN RELIANCE UPON EXEMPTIONS FROM REGISTRATION FOR NON-PUBLIC OFFERINGS. THE GENERAL PARTNER ANTICIPATES THAT THE OFFERING AND SALE OF SUCH UNITS WILL BE EXEMPT FROM SUCH REGISTRATION PURSUANT TO REGULATION D OF THE SECURITIES ACT.

THE UNITS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE “SEC”) OR ANY SECURITIES COMMISSION OF ANY STATE OR BY ANY OTHER REGULATORY OR GOVERNMENTAL AUTHORITY NOR HAS THE SEC OR SUCH STATE SECURITIES COMMISSION OR REGULATORY OR GOVERNMENTAL AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE UNITS ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND THE APPLICABLE STATE SECURITIES LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.

NO PERSON HAS BEEN AUTHORIZED TO MAKE REPRESENTATIONS OR GIVE ANY INFORMATION WITH RESPECT TO THE UNITS, EXCEPT THE INFORMATION CONTAINED HEREIN AND OTHER INFORMATION PROVIDED BY THE FUND. ONLY THOSE REPRESENTATIONS EXPRESSLY SET FORTH IN THIS MEMORANDUM AND CONTAINED IN DOCUMENTS FURNISHED BY THE FUND TO PROSPECTIVE INVESTORS MAY BE RELIED UPON IN CONNECTION WITH THIS OFFER. ANY ADDITIONAL INFORMATION RELATING TO THE FUND REASONABLY REQUESTED BY AN INVESTOR THAT IS AVAILABLE OR THAT CAN BE OBTAINED WITHOUT UNREASONABLE EXPENSE WILL BE MADE AVAILABLE TO SUCH INVESTOR, AND REPRESENTATIVES OF THE FUND WILL BE AVAILABLE TO INVESTORS DURING THE OFFERING PERIOD TO ANSWER QUESTIONS CONCERNING THIS OFFERING OR THE FUND.

THIS MEMORANDUM HAS BEEN PREPARED IN CONNECTION WITH THE PRIVATE PLACEMENT OF UNITS TO UNITED STATES ACCREDITED INVESTORS WHO ARE ALSO QUALIFIED PURCHASERS WITHIN THE MEANING OF THE 1940 ACT AND WHO OTHERWISE MEET THE INVESTOR QUALIFICATION AND SUITABILITY REQUIREMENTS SET FORTH IN THE FUND’S SUBSCRIPTION DOCUMENTS (THE “SUBSCRIPTION DOCUMENTS”). INVESTMENT IN UNITS INVOLVES A HIGH DEGREE OF RISK AND IS SUITABLE ONLY FOR SOPHISTICATED INVESTORS. SEE “RISK FACTORS AND CONFLICTS OF INTEREST.” A PROSPECTIVE INVESTOR SHOULD NOT SUBSCRIBE FOR UNITS UNLESS

HE, SHE OR IT IS ABLE TO MAKE THE REPRESENTATIONS RELATING TO SUCH INVESTOR AS CONTAINED IN THE SUBSCRIPTION DOCUMENTS AND UNLESS SUCH INVESTOR IS SATISFIED THAT HE, SHE OR IT HAS RECEIVED ALL INFORMATION THAT WOULD ENABLE SUCH INVESTOR TO EVALUATE THE MERITS AND RISKS OF THE PROPOSED INVESTMENT.

THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANYONE IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT PERMITTED BY LAW. IN ADDITION, THIS MEMORANDUM CONSTITUTES AN OFFER ONLY IF A NAME APPEARS IN THE SPACE SET OUT FOR THE NAME OF THE OFFEREE ON THE COVER PAGE AND IS AN OFFER ONLY TO SUCH NAMED OFFEREE.

THIS PRIVATE PLACEMENT MEMORANDUM CONTAINS CERTAIN “FORWARD-LOOKING STATEMENTS,” WHICH MAY BE IDENTIFIED BY THE USE OF SUCH WORDS AS “BELIEVE,” “EXPECT,” “ANTICIPATE,” “SHOULD,” “PLANNED,” “ESTIMATED,” AND “POTENTIAL.” EXAMPLES OF FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, ESTIMATES WITH RESPECT TO FINANCIAL CONDITION, RESULTS OF OPERATIONS, AND SUCCESS OR LACK OF SUCCESS OF THE FUND’S INVESTMENT STRATEGY. ALL ARE SUBJECT TO VARIOUS FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM PROJECTED RESULTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, GENERAL AND LOCAL ECONOMIC CONDITIONS, CHANGING LEVELS OF COMPETITION WITHIN CERTAIN INDUSTRIES, CHANGES IN INTEREST RATES, CHANGES IN LEGISLATION OR REGULATION; AND OTHER ECONOMIC, COMPETITIVE, GOVERNMENTAL, REGULATORY AND TECHNOLOGICAL FACTORS AFFECTING THE FUND’S OPERATIONS. AS A RESULT OF THE INHERENT RISKINESS AND UNCERTAINTY OF AN INVESTMENT IN THE FUND, SUCH INVESTMENT INVOLVES THE RISK OF LOSS OF SOME OR ALL OF AN INVESTOR’S INVESTMENT. SEE “RISK FACTORS AND CONFLICTS OF INTEREST.”

THE STATEMENTS CONTAINED IN THIS MEMORANDUM AND ANY COMMUNICATION, WRITTEN OR ORAL, FROM THE FUND, OR ANY OF ITS EMPLOYEES OR AGENTS, SHALL NOT BE CONSTRUED AS LEGAL, TAX, ACCOUNTING OR OTHER EXPERT ADVICE. EACH OFFEREE SHOULD CONSULT HIS OWN ATTORNEY, ACCOUNTANT OR OTHER PROFESSIONAL ADVISER AS TO THE LEGAL, TAX, ACCOUNTING AND OTHER RELATED ISSUES CONCERNING AN INVESTMENT IN UNITS.

THE TERMS AND CONDITIONS OF AN INVESTMENT IN UNITS ARE SET FORTH IN THE AGREEMENT OF LIMITED PARTNERSHIP OF THE FUND (THE “PARTNERSHIP AGREEMENT”) AND THE SUBSCRIPTION DOCUMENTS. A CURRENT LIMITED PARTNER OR PROSPECTIVE INVESTOR SHOULD CAREFULLY REVIEW THE PARTNERSHIP AGREEMENT AND THE SUBSCRIPTION DOCUMENTS PRIOR TO MAKING A DECISION RELATING TO AN INVESTMENT IN THE UNITS.

FLORIDA RESIDENTS

IN THE EVENT THAT SALES ARE MADE TO FIVE (5) OR MORE PERSONS IN THE STATE OF FLORIDA PURSUANT TO THE EXEMPTION FOR LIMITED OFFERS OR SALES OF SECURITIES AS SET FORTH IN THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT, ANY SALE TO AN INVESTOR WHO IS A RESIDENT OF FLORIDA MAY, AT SUCH INVESTOR'S OPTION, BE VOID TO ANY SUCH INVESTOR WITHIN A PERIOD OF THREE (3)

iii

DAYS AFTER THE INVESTOR FIRST TENDERS OR PAYS THE CONSIDERATION TO THE FUND REQUIRED HEREUNDER. TO ACCOMPLISH THIS, IT IS SUFFICIENT FOR A FLORIDA INVESTOR TO SEND A LETTER OR TELEGRAM TO THE FUND WITHIN SUCH THREE (3) DAY PERIOD, STATING THAT IT IS VOIDING AND RESCINDING THE PURCHASE. IF AN INVESTOR SENDS A LETTER, IT IS PRUDENT TO DO SO BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO INSURE THAT IT IS RECEIVED AND TO EVIDENCE THE TIME OF MAILING.

GEORGIA RESIDENTS

THE SECURITIES DESCRIBED HEREIN HAVE BEEN (OR WILL BE) ISSUED OR SOLD IN RELIANCE ON PARAGRAPH (13) OF CODE SECTION 10-5-9 OF THE GEORGIA SECURITIES ACT OF 1973, AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT.

I. INTRODUCTION

This Confidential Private Placement Memorandum (this “Memorandum”) relates to a private offering of limited partnership interests (“Units” or “Interests”) in Special Situations Fund III QP, L.P. (the “Fund”) to prospective investors who wish to invest in the Fund as limited partners (each a “Limited Partner”). This offering is being made only to United States Persons who are accredited investors, within the meaning of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), qualified purchasers within the meaning of the Investment Company Act of 1940, as amended (the “1940 Act”) and “qualified clients” within the meaning of Rule 205-3 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). In addition, each new investor must meet, and continue to meet, the investor qualification and suitability requirements set forth herein and in the Fund’s Subscription Documents.

This Memorandum sets forth the investment program and method of operation of the Fund, the principal terms of the Agreement of Limited Partnership (the “Partnership Agreement”) and certain other pertinent information. However, this Memorandum does not set forth all of the provisions and distinctions of the Partnership Agreement that may be significant to a particular prospective Limited Partner. Each prospective Limited Partner should examine this Memorandum, the Partnership Agreement and the Subscription Documents accompanying this Memorandum in order to assure itself that the terms of the Partnership Agreement and the Fund's investment program and method of operation are satisfactory to it.

This Memorandum is submitted to the person whose name appears on the cover or, if transmitted by e-mail, the addressee of the e-mail (the “Recipient”), and is not intended for the use of any other Person. In accepting this Memorandum, the Recipient agrees:

(a) not to reproduce, forward or disseminate this Memorandum (electronically or otherwise) for distribution to any Person, nor to discuss its contents with any Person, other than the Recipient’s professional advisors;

(b) to return or, if transmitted electronically, delete this Memorandum upon receipt of a written request from the Fund or any of its authorized agents or representatives;

(c) not to consider receipt of this Memorandum as an offer to sell or a solicitation of an offer to buy in any jurisdiction where such offer or solicitation is unlawful; and

(d) not to rely on any information concerning the Fund or its business other than information contained in this Memorandum.

Representatives of the Fund will be available to answer questions regarding the terms and conditions of this offering and to provide additional information requested by prospective investors. Please contact the Fund at 527 Madison Avenue, Suite 2600, New York, New York 10022, telephone number (212) 207-6500, attention: Subscription Department, if you have any questions, require any additional information or would like to obtain information on recent net asset values.

Purchase of Units may be deemed to be a speculative investment and is not intended as a complete investment program. Investment in the Fund is designed only for sophisticated persons who are able to bear the entire loss of their capital contributions to the Fund. INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH HEREIN UNDER “RISK FACTORS AND CONFLICTS OF INTEREST.”

***

II. HISTORY OF THE FUND

The Fund has been formed to be the companion fund to Special Situations Fund III, L.P., a Delaware limited partnership (the “Registered Fund”) and the Fund’s Units are initially being offered only to the limited partners of the Registered Fund who are “qualified purchasers”, within the meaning of the 1940 Act, in exchange for their interests in the Registered Fund. The Registered Fund was organized as a Delaware limited partnership on October 18, 1993 and is a closed-end management investment company registered under the 1940 Act. Since commencement, the Registered Fund has offered and sold additional units at semi-annual intervals on January 1 and July 1. As of the start of business on July 1, 2005, the net assets of the Registered Fund aggregated approximately $499,972,780. Sales of the Registered Fund’s units are not registered under the Securities Act because units are sold in non-public offerings in compliance with Regulation D promulgated under the Securities Act. Each investor in the Registered Fund is an "accredited investor" within the meaning of Regulation D under the Securities Act and a “qualified client” within the meaning of Rule 205-3 under the Advisers Act.

A “grandfather” provision under Treasury Regulation Section 1.7704-1(l)(2), which has had the effect of allowing the Registered Fund to satisfy a “safe harbor” in applicable Treasury Regulations ensuring that it would not be treated as a publicly traded partnership for federal income tax purposes, will expire on December 31, 2005. A publicly traded partnership generally is taxed as a corporation subject to a double level of tax that could be extremely adverse to the Registered Fund unit holders. Unless the Registered Fund satisfies a “safe harbor,” the determination of whether it should be treated as a publicly traded partnership would be made by applying a “facts and circumstances” test. To satisfy a safe harbor and avoid the uncertainty of the “facts and circumstances” test, the Registered Fund would have to limit withdrawals to 5% of units outstanding (or 10% per year) per semi-annual period and increase the repurchase request deadline from 14 days to 60 days prior to the repurchase pricing date (collectively, the “Registered Fund Amendment”).

The Registered Fund Amendment may not be satisfactory to certain limited partners of the Registered Fund because of the decrease in the liquidity of their units. In order to accommodate any such limited partners who are qualified purchasers, the General Partner has created the Fund, which is intended to have substantially the same investment objectives and offering policies as the Registered Fund prior to the Registered Fund Amendment, but is not registered as an investment company under the 1940 Act in reliance upon Section 3(c)(7) of the 1940 Act. Section 3(c)(7) of the 1940 Act exempts issuers that are not making and do not currently propose to make a public offering of their securities and the outstanding securities of which are owned only by “qualified purchasers” as defined in the 1940 Act. As a result, any limited partners of the Registered Fund who are “qualified purchasers” and who do not approve of the Registered Fund Amendment may choose to move their investment to the Fund. The Registered Fund intends to permit such limited partners who are “qualified purchasers” to, on December 31, 2005, exchange their interests in the Registered Fund for interests in the Fund having an identical net asset value, which will have the effect of “spinning off” an allocable portion of the assets of the Registered Fund (“Exchange Transaction”).

While as of the date of this Memorandum, the General Partner has not determined definitively the number of limited partners of the Registered Fund who are qualified purchasers and who will exchange their units of the Registered Fund for Units of the Fund, the General Partner estimates that 289 limited partners in the Registered Fund, having a total of approximately 18,333.0847 units of the Registered Fund representing net assets of the Registered Fund of approximately $458,327,118 as of July 1, 2005, are qualified purchasers who are eligible to invest in the Fund. The remaining investors are

expected to remain in the Registered Fund, which is expected to continue to operate, make investments, and seek additional investors.

The Fund and the Registered Fund have the same General Partner. The Fund will have the same investment objectives as the Registered Fund but will not admit limited partners or begin investment activities until January 1, 2006. The Fund will initially have substantially the same administration fee, performance allocation structure and redemption policies (prior to the Registered Fund Amendment) as the Registered Fund. Although the Fund was formed as a companion fund to the Registered Fund, there are likely to be some significant differences between the two funds. Below is a brief description of some of the more significant differences:

1. The Registered Fund is a closed-end management investment company registered pursuant to the 1940 Act. The Fund is not registered under the 1940 Act in reliance upon the exemption afforded by Section 3(c)(7) of the 1940 Act as all of its investors will be Qualified Purchasers. As a registered investment company, the Registered Fund is subject to the rules and regulations of the 1940 Act, which require, among other things, (i) that the Registered Fund maintain a board of directors consisting of at least 75% “independent directors” who are responsible for the oversight of the Registered Fund’s policies and procedures, (ii) that the Registered Fund file a prospectus and annual and semi-annual reports with the SEC, (iii) that the Registered Fund redeem its units only pursuant to semi-annual repurchase requests conducted in accordance with Rule 23c-3 of the 1940 Act, and (iv) that the Registered Fund obtain prior approval of the SEC prior to engaging in certain affiliate transactions. The Fund is not a registered investment company and is not be subject to the rules and regulations of the 1940 Act applicable to registered investment companies.

2. The Registered Fund is a registered investment company that has greater than 100 partners and thus does not qualify for the“private placement safe harbor” in applicable Treasury Regulations ensuring that it would not be treated as a publicly traded partnership for federal income tax purposes. In order to qualify for a different safe harbor, the Registered Fund is required to enact the Registered Fund Amendment to limit withdrawals to 5% of units outstanding (or 10% per year) per semi-annual period and increase the repurchase request deadline from 14 days to 60 days prior to the repurchase pricing date. The Fund is not a registered investment company and qualifies for the “private placement safe harbor” in applicable Treasury Regulations ensuring that it would not be treated as a publicly traded partnership for federal income tax purposes. As a result, the redemption policies of the Fund differ from those which are proposed for the Registered Fund.

3. Initially the Registered Fund and the Fund will have substantially similar investment portfolios (except with respect to amount invested). The Registered Fund and the Fund have the same investment objectives and their respective limited partnership agreements contain substantially identical investment restrictions. However, differences in the investment portfolios may occur as a result of, among other things, the following:

(i) It is expected that the Registered Fund and the Fund will generally participate in the same investments, pro rata based upon asset size. There may be circumstances, however, when such pro rata investment will not be feasible due to differences in the amount of cash available for investment by the Registered Fund and the Fund at any time, differences in capital contributions, redemptions and other factors.

(ii) As an investment company registered under the 1940 Act, the Registered Fund’s ability to engage in short sales and purchase securities on margin is limited. The Fund is not subject to the rules and regulations of the 1940 Act and thus is not subject to any limitation with respect to short sales and purchasing securities on margin.

(iii) As a registered investment company the Registered Fund is exempt from the requirements of NASD Rule 2790 with respect to “new issues,” which are any equity securities offered in an initial public offering. Generally, NASD Rule 2790 prohibits a “new issue from being sold to an account in which a “restricted person” (persons associated with NASD members and certain other persons) has a beneficial interest. The Fund is not a registered investment company and thus its participation in new issues will be subject to the requirements of NASD Rule 2790. The large number of investors in the Fund may make it impracticable to accurately determine and update the status of investors as restricted persons or non-restricted persons and thus may limit the Fund’s participation in “new issues.”

4. If a significant number of limited partners of the Registered Fund elect to participate in the Exchange Transaction and exchange their interest in the Registered Fund for an interest in the Fund, the Registered Fund will become significantly smaller following the Exchange Transaction. Although the decrease in the size of the Registered Fund will not result in an increase in the rate of the fee paid to the Registered Fund’s administrator or investment adviser, other expenses of the Registered Fund, such as legal, accounting and compliance fees, will not decrease in proportion to the decrease in the size of the Registered Fund and this may result in a higher expense ratio for the Registered Fund as compared to the Fund.

***

III. SUMMARY OF TERMS

The following summary should be read in conjunction with the detailed information appearing in the Partnership Agreement, the Subscription Documents and elsewhere in this Memorandum.

*The Fund:*		Special Situations Fund III QP, L.P. (the “Fund”) is a limited partnership formed on May 17, 2005 under the laws of the State of Delaware. The Fund will continue in perpetuity, unless earlier terminated pursuant to its terms.
*Fund Management:*		The general partner of the Fund is MGP Advisers Limited Partnership (“MGP” or the “General Partner”), a limited partnership formed on September 8, 1992 under the laws of the State of Delaware. AWM Investment Company, Inc. (the “Administrator” or “AWM”) is the sole general partner of MGP and Austin W. Marxe, David M. Greenhouse and Adam Stettner are the sole limited partners of MGP. In addition, Messrs. Marxe and Greenhouse are the sole officers and stockholders of AWM and are, together with Dianne Marxe, the wife of Austin Marxe, the sole directors of AWM. Messrs. Marxe, Greenhouse and Stettner will be primarily responsible for identifying, analyzing and recommending investment opportunities for the Fund and for the execution of all of the Fund’s trades. MGP has the exclusive right to manage and control the business and affairs of the Fund. No Limited Partner will be permitted to participate in the control of the Fund’s business, transact any business in the Fund’s name, have the power to sign documents for the Fund or have any right or authority to act for, or on behalf of, or to bind, the Fund or the General Partner in any other way. See “THE MANAGEMENT TEAM - The General Partner.”
*Investment Objective:*		The Fund’s primary investment objective is to maximize long-term capital appreciation by investing primarily in equity securities and securities with equity features of companies traded publicly on Nasdaq and “over-the-counter” or listed on national securities exchanges, which possess a technological, market or product niche, which may be, for various reasons, undervalued, or with prospects of going private or being acquired. The Fund invests principally in common stocks, preferred stocks, convertible securities and, to a lesser extent, warrants and options. The Fund expects that a significant portion of its investment portfolio will consist of securities of companies publicly traded in the United States. The Fund is subject to certain investment restrictions as set forth in the Partnership Agreement. See “INVESTMENT OBJECTIVE AND POLICIES - Investment Restrictions.”
*Offering:*		Units are being offered at a price of $25,000 per Unit, solely to United States Persons who are “accredited investors” and “qualified purchasers” and who also meet the investor qualification standards set forth herein and in the Fund’s Subscription Documents. The offering is not conditioned on the Fund’s receipt of any minimum amount of subscriptions for or purchases of Units. See “SUMMARY OF THE OFFERING.”
*Minimum Investment:*		The minimum initial investment in the Fund is four (4) Units, or $100,000, subject to waiver in the sole discretion of the General Partner. Investments

		greater than the minimum may be subscribed for in multiples of $25,000 (1 Unit). An investor subscribing for Units may acquire additional Units semi-annually as of January 1 and July 1 of each calendar year at the discretion of the General Partner. See“REDEMPTIONS,TRANSFERS AND WITHDRAWALS OF UNITS.”
*No Registration:*		The offer and sale of the Units will not be registered with the SEC in reliance upon an exemption from the registration requirements of the Securities Act. As a result, the transferability of the Units will be restricted. In addition, the Fund does not intend to register as an investment company under the 1940 Act in reliance upon Section 3(c)(7) of the 1940 Act, which exempts issuers that are not making and do not currently propose to make a public offering of their securities and the outstanding securities of which are owned only by “qualified purchasers” as defined in the 1940 Act. See “OFFERING OF SECURITIES - No Registration.”

*Additional Limited* *Partners and Capital* *Contributions:*		New Limited Partners may be admitted and additional Capital Contributions may be made in the discretion of the General Partner semi-annually as of January 1 and July 1 of each year, and at such other times in the discretion of the General Partner. See “REDEMPTIONS, TRANSFERS AND WITHDRAWALS OF UNITS.”
*Allocation of Profit and* *Loss:*		The Fund’s Book Profit or Book Loss for each of its fiscal periods is determined by reference to the increase or decrease, as the case may be, in the Fund’s net asset value during each such period. Book Profit and Book Loss for each fiscal period is allocated among the Partners in accordance with Article V of the Partnership Agreement. At the end of each fiscal period, the capital accounts of the Limited Partners will be debited, and the capital account of MGP will be credited, with a performance allocation equal to twenty (20%) percent of the Book Profit allocated to the Limited Partners during such fiscal period (the “Incentive Allocation”). The Incentive Allocation will be allocated on a “high water mark” basis such that, with respect to any Limited Partner, no Incentive Allocation will be allocated to MGP until any Book Loss allocated to such Limited Partner shall have first been recovered. See “ALLOCATION OF PROFIT AND LOSS.”
*Expenses:*		The costs and expenses attributable to the organization of the Fund and effecting the Exchange Transaction, including any legal and regulatory fees associated with any SEC filings, will be borne by the Fund. Up to $5,000 of such organizational and offering expenses may be deducted in the first year of operation, with the remainder amortized over a one hundred eighty (180) month amortization period. See “SUMMARY OF THE OFFERING - Expenses of Offering.” The Fund will bear all of the administrative and other expenses of operating the Fund, including the Incentive Allocation to the General Partner, all fees of the Administrator, the custodian and other agents of the Fund, fees for legal and accounting and tax services, brokerage and other costs of portfolio transactions, and costs of regulatory compliance, printing costs, and costs associated with maintaining the Fund’s legal existence. However, the Fund will not be responsible for the payment of any general overhead expenses of

		MGP, or any of its affiliates, including rent, salaries of personnel and other expenses. The Fund has entered into an administration agreement with AWM pursuant to which AWM will perform administrative and management services necessary for the operation of the Fund, other than those services to be performed by MGP or by the Fund’s counsel or auditors. The Fund will pay an administrative fee (the “Administration Fee”) to AWM equal to 0.75% per annum of the Fund’s net asset value, payable quarterly as of the end of a fiscal quarter. See “THE MANAGEMENT TEAM - Administrator.”
*Distributions:*		Distributions will be made to Limited Partners only in the form of redemption of their Units and/or upon dissolution of the Fund. See “REDEMPTIONS, TRANSFERS AND WITHDRAWALS OF UNITS - Redemptions” and “SUMMARY OF TERMS - Dissolution.”
*Redemptions:*		Redemptions of Units by Partners will be permitted semi-annually as of June 30 and December 31 of each year by written notice to the General Partner received no later than June 15 or December 15, as the case may be. Upon a redetermination of the number of Units held by Partners to reflect changes in the Fund’s Profit or Loss for each fiscal period, the redemption of Units will be made at a price of $25,000 per Unit. The redemption price will be paid within 7 days after the end of the applicable fiscal period. The General Partner has the right to limit aggregate redemptions of Units on any June 30 or December 31 to 10% of the outstanding Units on such date (after a redetermination of such Units as described herein). In such event, Units will be redeemed, pro rata, among the Limited Partners electing redemptions of all or part of their Units. See “REDEMPTIONS, TRANSFERS AND WITHDRAWALS OF UNITS.”
*Reports*:		Limited Partners will receive (i) annual reports containing audited financial statements of the Fund and (ii) quarterly unaudited reports for the first three quarters of each calendar year setting forth information concerning valuations, profits, gains and losses of the Fund. In addition, the General Partner, to the extent reasonably determinable from the books and records of the Fund, will cause all necessary tax information to be furnished to Limited Partners for each calendar year as soon as practicable after the end of such year.
*Transferability of* *Interest:*		The Partnership Agreement significantly restricts the ability of a Limited Partner to sell or otherwise transfer his Units in the Fund. An Interest will not be transferable to anyone without the prior consent of the General Partner, which consent may be granted or withheld in the sole discretion of the General Partner. See “REDEMPTIONS, TRANSFERS AND WITHDRAWALS OF UNITS.”
*Liability of Limited* *Partners*:		Except as otherwise provided by law, a Limited Partner will not be liable for the repayment or discharge of any debt or obligation of the Fund. See “RISK FACTORS AND CONFLICTS OF INTEREST - Possible Loss of Limited Liability.”
*Liability of the General*		The Partnership Agreement provides that the General Partner will not be

*Partner*:		liable to any Partner of the Fund for mistakes of judgment or for action or inaction except for acts or omissions constituting willful malfeasance, bad faith, gross negligence or reckless disregard of its duties. The General Partner may consult with counsel and accountants in respect of the Fund’s affairs and is to be fully protected and justified in any action or inaction which is taken in accordance with the advice or opinion of such counsel or accountants. The foregoing provisions (as well as the indemnification provisions described below), however, shall not be construed to relieve the General Partner of any liability to the extent that such liability may not be waived, modified or limited under applicable law.
*Indemnification*:		The Fund will indemnify the General Partner and any agent, affiliate or employee of the General Partner to the fullest extent permitted by law and will hold each harmless from and with respect to all (i) fees, costs and expenses incurred in connection with, or resulting from, any claim, action or demand against the General Partner, or any agent, affiliate or employee of the General Partner that arises out of, or in any way relates to, the Fund and its business or affairs and (ii) any losses or damages resulting from any such claim, action or demand, including amounts paid in settlement or compromise of the claim, action or demand. This indemnification will not apply, however, if the action or failure to act by the General Partner or its agent, affiliate or employee causing such liability is determined by a final adjudication to have constituted willful malfeasance, bad faith, gross negligence or a reckless disregard of duties.
*Dissolution*:		On dissolution of the Fund, the General Partner or, if there is no General Partner, a liquidator, approved by Limited Partners holding a majority of the Units, will cause the Fund’s assets to be liquidated, will wind up the Fund’s affairs and will distribute the Fund’s assets, in cash or in kind, in the following manner and order: (i) in payment of debts and expenses and satisfaction of the claims of all creditors of the Fund, other than the General Partner, which satisfaction of claims will include the setting aside of a reasonable amount of reserves to satisfy any contingent liability of the Fund; (ii) in satisfaction of the claims of the General Partner as a creditor of the Fund; and (iii) any balance to the Partners in proportion to and to the extent of their respective capital accounts as adjusted in accordance with the Partnership Agreement for the fiscal period of the Fund ended on the date of the dissolution. Any distribution of assets in kind will be allocated to the Partners by the General Partner, to the extent practicable, on a proportionate basis. Upon a dissolution, the General Partner will be required to contribute capital to the Fund to cover any deficit balance in its capital account.
*Amendments*:		The Partnership Agreement generally may be amended, in whole or in part, by written consent of the General Partner and of Partners holding not less than a majority of the Units held by the Limited Partners. In addition, the General Partner may make certain administrative or technical amendments to the Partnership Agreement without the consent of any Limited Partner.
*Risk Factors:*		An investment in Units involves a number of significant risk factors. Prospective investors should carefully consider the information set forth under “RISK FACTORS AND CONFLICTS OF INTEREST.” In particular,

		an investment in Units will be subject to certain conflicts of interest in view of the investment advisory services rendered by Austin W. Marxe, David M. Greenhouse and Adam Stettner to the Fund and other investment partnerships.
*Tax Consequences:*		A prospective investor should consider carefully all of the potential tax consequences of an investment in Units and should consult with his tax adviser before subscribing for Units. For a discussion of certain United States income tax consequences of this investment, see “CERTAIN FEDERAL INCOME TAX CONSEQUENCES.”

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IV. INVESTMENT OBJECTIVE AND POLICIES

The Fund’s primary investment objective is to maximize long-term capital appreciation by investing primarily in equity securities and securities with equity features of companies traded publicly on Nasdaq and “over-the-counter” or listed on national securities exchanges, which possess a technological, market or product niche, which may be, for various reasons, undervalued, or with prospects of going private or being acquired. The Fund considers such types of investments to be “special situation investments.” The Fund invests and intends to invest principally in United States equity securities that are traded through The Nasdaq Stock Market or the “over-the-counter” market. Foreign securities in which the Fund may invest are expected to be listed on United States and foreign securities exchanges or traded publicly in the United States or foreign “over-the-counter” markets. Although it is not expected that significant investments will be made in foreign securities, the Fund is subject to no limitation on the amount of its assets that may be invested in foreign securities and investments. Risks associated with investing in foreign securities are described herein under “RISK FACTORS AND CONFLICTS OF INTEREST - Foreign Securities.”

Most of the special situation investments acquired by the Fund are and are expected to continue to be in publicly traded companies. The securities acquired by the Fund in such companies include and are expected to continue to include common stocks, preferred stocks, convertible debt or equity securities, and, to a lesser extent, warrants and options. From time to time, the Fund may acquire more than 5% of a class of equity securities registered under the Securities Exchange Act of 1934 (the “Exchange Act”). In such event, the Fund would be required to file a Schedule 13G or Schedule 13D under the Exchange Act with the issuer of such securities and with the Securities and Exchange Commission (the “SEC”). The Fund may, however, also acquire interests in venture capital situations, partnerships and private funds or other similar investment vehicles. Investments are made and are expected to be made in companies or other entities engaged in a variety of industries and which are in various stages of development. The Fund diversifies and will diversify the size and nature of its investments as it deems prudent, subject to the limitation of investing no more than 25% of the value of its total assets in securities of issuers whose primary business is in one particular industry. In addition, the Fund will invest no more than 15% of the value of its total assets in the equity securities of a particular issuer. See “Investment Restrictions” below. The following are examples of the types of investments that the Fund makes and expects to make:

·	Investments in small or obscure companies.

·	Investments in large companies that, in the opinion of the General Partner, are, for various reasons, undervalued.

·	Investments in companies with prospects of going private, being acquired, or possessing some special technological, market or product niche likely to result in market appreciation.

The Fund endeavors to invest and maintain at least 70% of its total assets in special situation investments. There can be no assurance as to when cash contributions of investors in the Fund will be fully invested in portfolio securities, although the Fund does not anticipate incurring any significant delays in investing such contributions. See “RISK FACTORS AND CONFLICTS OF INTEREST - Time Required to Invest and for Maturity of Investments.” In certain instances, such as periods of adverse market conditions, the Fund may invest a significant portion of its assets in money market and treasury securities.

Although it is not expected that any significant portion of the Fund’s assets will be invested in debt securities, the Fund is subject to no restrictions with respect to the investment of its assets in such securities, including securities which are unrated or rated in the lowest categories of the recognized rating services (i.e., securities rated Ca or lower by Moody’s Investors Service, Inc. (“Moody’s”) or CC or lower by Standard & Poor’s Corporation (“S&P”)). Low-rated and unrated debt securities have special risks that are described under “RISK FACTORS AND CONFLICTS OF INTEREST-Low-Rated and Unrated Debt Securities.”

The method and timing of the sale or liquidation of the Fund’s portfolio investments are essential elements in maximizing returns on the Fund’s investment capital. Depending upon the size and nature of the investment, certain investments of the Fund may be held for up to two or more years prior to their disposition. Any such sale or disposition of securities or other investments by the Fund may be limited by general economic and market factors or regulatory restrictions. See “RISK FACTORS AND CONFLICTS OF INTEREST - Possible Illiquidity of Portfolio Investments; Investments in Restricted Securities.” In addition, the Fund may be required to liquidate certain of its portfolio investments, prior to realization of expected returns, in order to pay for redemptions of Units.

THERE CAN BE NO ASSURANCE THAT THE INVESTMENT OBJECTIVES OF THE FUND WILL BE ACHIEVED. SEE “RISK FACTORS AND CONFLICTS OF INTEREST.”

Investment Process

In evaluating and monitoring investments of the Fund, the General Partner will review information published or furnished by various companies and other entities, including prospectuses and offering memoranda, periodic and annual reports, reports on Forms 10-K and 10-Q, proxy statements and other filings under the Exchange Act and other analytical or descriptive evaluations of performance. In many instances, the General Partner will communicate directly with management of the companies or other entities under evaluation or review to update or supplement published information. Many factors, such as the relationship of market value to book or current asset value, the testing results of new products, the history of introduction of successful products or services, and the strength of management and earnings performance, will be considered by the General Partner. In addition, general market performance, economic conditions, both domestic and foreign, and political factors will be reviewed as part of the evaluation and monitoring process. There is no single factor that will be predominantly considered in choosing investments for the Fund. Although the Fund may acquire a significant position in a particular company or entity, the Fund may be unable or unwilling to assert an influence on the management of such company or entity to assure the success of its investment.

The Fund may use a variety of investment strategies and techniques involving equity or debt securities, including purchasing securities with borrowed money, selling securities short, and purchasing and writing listed put and call options. The Fund may also enter into transactions designed to minimize the effect of currency fluctuations with respect to securities of foreign companies or securities that are not United States dollar denominated.

Use of Cash and Cash Equivalents

Pending investment of the Fund’s assets in investments or to facilitate redemptions of Units by Partners, the Fund will hold cash or cash equivalents. The Fund expects to invest in obligations of the United States government and its agencies, instrumentalities or authorities (“Government Securities”), bank obligations, including certificates of deposits, time deposits and bankers’ acceptances of United States banks having total assets in excess of $500 million, commercial paper and money market mutual funds.

Investment Restrictions

The following restrictions of the Fund shall not be changed without the approval of (i) the General Partner and (ii) Limited Partners holding at least a majority of the Units held by Limited Partners:

(a) The Fund will invest no more than 25% of the value of its total assets in the securities of issuers whose primary business is in one particular industry, except that this restriction does not apply to Government Securities, certificates of deposit, short-term commercial paper or bankers’ acceptances.

(b) The Fund will invest no more than 15% of the value of its total assets in the equity securities of a particular issuer, except that this restriction does not apply to investments in Government Securities, money market funds, certificates of deposit, short-term commercial paper or bankers' acceptances;

(c) The Fund will not lend money to other persons, except through purchasing debt obligations, lending portfolio investments or entering into repurchase agreements in a manner consistent with the Fund's investment objective and investment policies;

(d) The Fund will not underwrite the securities of other issuers, except insofar as the Fund may be deemed an underwriter under the Securities Act by virtue of disposing of its portfolio investments;

(e) The Fund will not purchase real estate or interests in real estate, except that the Fund may purchase and sell securities that are secured by real estate or interests therein and may purchase securities issued by companies that invest or deal in real estate;

(f) The Fund will not purchase or sell commodities or commodity contracts, except that the Fund may engage in transactions to hedge interest rates or foreign currency risks, including, without limitation, investing in exchange traded or “over-the-counter” options or foreign currency futures contracts;

(g) The Fund will not issue senior securities (as such term is defined in the 1940 Act), except to the extent such issuance relates to borrowing in order to purchase portfolio securities or to transactions involving short sales or options. Collateral arrangements with respect to options, margins and short sales are not considered by the Fund to be the issuance of senior securities;

(h) The Fund will not borrow money, except that it may borrow money to purchase portfolio securities if, after giving effect to any such borrowing, the ratio that (i) the value of the Fund’s total assets, less all liabilities and indebtedness not represented by senior securities (as such term is defined under the 1940 Act), bears to (ii) the aggregate amount of senior securities representing indebtedness of the Fund, shall be at least 300%; and

(i) The Fund will not mortgage, pledge, hypothecate or otherwise encumber any securities it owns or holds, except as may be necessary or appropriate in connection with borrowings to purchase portfolio securities. This restriction shall not restrict the deposit in escrow of securities or other assets of the Fund in connection with short sales, put and call options and loans of portfolio securities.

The percentage limitations contained in the restrictions listed above shall apply at the time of the purchases of securities by the Fund.

ERISA Investment Restriction

The Fund will not invest or hold any of its assets in the securities of any issuer which is affiliated with or related to any Employee Retirement Income Security Act of 1974, as amended (“ERISA”), benefit plan investor at any time when Units held by benefit plan investors represent 25% or more of the outstanding Units of the Fund. See “LEGAL CONSIDERATIONS - ERISA.”

Portfolio Transactions and Turnover

The General Partner will be responsible for the execution of the Fund’s portfolio transactions and the allocation of brokerage services among broker-dealers. Transactions in securities effected in national securities exchanges involve the payment of negotiated brokerage commissions. On exchanges in which the commissions are negotiated, the costs of transactions may vary among different brokers. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the prices of those securities include undisclosed commissions or mark-ups. Over-the-counter purchases and sales on behalf of the Fund are and will be transacted directly with principal market makers, except in those cases in which such purchases or sales are not reasonably practicable or in which better prices and executions may be obtained elsewhere. The costs of securities purchased from underwriters include an underwriting commission or concession, and the prices at which securities are purchased from and sold to dealers include dealers’ mark-ups or mark-downs. Government Securities are generally purchased directly from the United States Treasury or from the issuing agency, instrumentality or authority.

In selecting brokers or dealers to execute portfolio transactions on behalf of the Fund, the General Partner seeks and will seek the best overall terms available. In assessing the best overall terms available for any transaction, the General Partner considers and will consider such factors as it deems relevant, including the breadth of the market in the security, the price of the security, the reliability, financial condition and execution capability of the broker or dealer, the size of and the difficulty in executing the transaction, the research services the broker or dealer provides to the General Partner and the reasonableness of the commission for the specific transaction.

The General Partner is authorized to consider “brokerage and research services” (as those terms are defined in Section 28(e) of the Exchange Act) in selecting brokers or dealers to execute particular transactions, and in evaluating the best overall terms available. The General Partner is also authorized to cause the Fund to pay to a broker or dealer who provides such brokerage and research services a commission for executing a portfolio transaction which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction. The General Partner will determine in good faith that such commission was reasonable in relation to the value of the brokerage and research services provided to the General Partner. Certain of the services and information received by the General Partner attributable to a transaction executed on behalf of the Fund may benefit other accounts or funds over which investment discretion is or may, in the future, be exercised by Austin W. Marxe, David M. Greenhouse and Adam Stettner. Although the General Partner is authorized to consider “brokerage and research services” in selecting brokers or dealers, the current policy of the General Partner is not to accept such services or any “soft dollars” from brokers or dealers.

The Fund has no obligation to deal with any broker or group of brokers in executing transactions in portfolio securities. The Fund may engage affiliates of one or more of the General Partners from time to time to act as a broker or dealer in connection with the execution of the Fund’s transactions. The Fund will invest without regard to its portfolio turnover rate and will not be managed for tax efficiency.

Participation in New Issues

The Fund may, from time to time, under limited circumstances, purchase new issues of securities. The sale and purchase of new issues of securities is regulated by the National Association of Securities Dealers, Inc. (the “NASD”) under NASD Rule 2790 (the “Rule”). The Rule applies to “new issues,” which are any equity securities offered in an initial public offering. Under the Rule, with certain exceptions, an NASD member may not sell a new issue to an account in which a “restricted person” (persons associated with NASD members and certain other persons) has a beneficial interest. The Rule also contains an exception under which a collective investment account, like the Fund, which is owned in part by restricted persons, would be able to purchase new issues provided that only a de minimis percentage of the purchase was attributed to such persons. Because of the limitations imposed by the Rule, all prospective investors in the Fund must complete a Restricted Person Statement in order for the Fund to be able to determine if they are eligible to participate in new issues. The Fund will treat as a restricted person any Limited Partner who fails to provide the information necessary to make the determination required under the Rule.

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V. THE MANAGEMENT TEAM

The General Partner

The General Partner is MGP Advisers Limited Partners, a Delaware limited partnership located at 527 Madison Avenue, Suite 2600, New York, New York 10022. In addition to being the Fund’s General Partner, the General Partner also serves as the Fund’s investment adviser. The General Partner is responsible for the overall management and supervision of the operations of the Fund and for the investment decisions of the Fund in accordance with its investment objective and policies. The General Partner is registered as an investment adviser under the Advisers Act.

AWM is the sole general partner of the General Partner and Austin W. Marxe, David M. Greenhouse and Adam Stettner are the sole limited partners of the General Partner. In addition, Messrs. Marxe and Greenhouse are the sole officers and stockholders of AWM and are, together with Dianne Marxe, the wife of Austin W. Marxe, the sole directors of AWM. Messrs. Marxe, Greenhouse and Stettner will be primarily responsible for identifying, analyzing and recommending investment opportunities for the Fund and for the execution of all of the Fund’s trades.

Mr. Marxe, Mr. Greenhouse and Mr. Stettner are responsible for the investment decisions of other funds and clients and the General Partner may have such responsibility for other funds and clients in the future. As a result of such other activities, the General Partner, Mr. Marxe, Mr. Greenhouse and Mr. Stettner may have conflicts of interest in allocating management time, services and functions among the Fund and other clients or funds. See “RISK FACTORS AND CONFLICTS OF INTEREST - Allocation of Management Time and Services.”

The General Partner will at all times own at least a one percent (1%) interest in the Fund and maintain a capital account balance at least equal to one percent (1%) of the Fund’s aggregate capital account balances, and will make capital contributions to the Fund as necessary to maintain such interests. The General Partner may acquire an interest in excess of one percent (1%) of the Fund, either through capital contributions or reinvestment of its Incentive Allocation. The Fund does not anticipate that there will be additional general partners of the Fund.

The General Partner will receive an Incentive Allocation of 20% of the Fund’s profit for each fiscal period subject to a loss carryforward. See “ALLOCATION OF PROFIT AND LOSS.” Such Incentive Allocation to the General Partner will increase the number of Units held by the General Partner in the Fund.

Principals of the General Partner

Austin W. Marxe. Mr. Marxe, born in 1940, is a principal of MGP, the General Partner. In addition, Mr. Marxe serves as a managing member of MG Advisers L.L.C. (“MG”). MG is the general partner of, and investment adviser to, Special Situations Private Equity Fund, L.P. MG is registered as an investment adviser under the Advisers Act. Mr. Marxe is the President, a director and the majority stockholder of AWM. AWM serves as the Fund’s administrator. In addition, AWM serves as the administrator of, and the general partner of the investment adviser to, Special Situations Fund III, L.P. AWM is also the general partner of, the investment adviser to, and administrator of, Special Situations Cayman Fund, L.P., as well as the administrator to Special Situations Private Equity Fund, L.P., Special Situations Technology Fund, L.P., Special Situations Technology Fund II, L.P. and Special Situations Life Sciences Fund, L.P. AWM is registered as an investment adviser under the Advisers Act. In addition, Mr. Marxe serves as a managing member of SST Advisers L.L.C. (“SST”) and LS Advisers

LLC (“LS”). SST is the general partner of, and investment adviser to, Special Situations Technology Fund, L.P. and Special Situations Technology Fund II, L.P. LS is the general partner of, and investment adviser to, Special Situations Life Sciences Fund, L.P. Both SST and LS are registered as investment advisers under the Advisers Act. From 1968 to 1990, Mr. Marxe was employed in various capacities by Prudential Securities Incorporated (“PSI”), formerly known as Prudential-Bache Securities, Inc., including Senior Vice President-Investments. During such time, Mr. Marxe, together with PSI, organized the predecessor funds to Special Situations Fund III, L.P. Mr. Marxe's business address is c/o Special Situations Fund, 527 Madison Avenue, Suite 2600, New York, New York 10022.

David M. Greenhouse. Mr. Greenhouse, born in 1960, is a principal of MGP. In addition, Mr. Greenhouse serves as a managing member of MG. MG is the general partner of, and investment adviser to, Special Situations Private Equity Fund, L.P. Mr. Greenhouse serves as a director of AWM, the Fund’s Administrator. Mr. Greenhouse has been the Executive Vice President and minority shareholder of AWM since February 1992. In addition, AWM serves as the administrator of, and the general partner of the investment adviser to, Special Situations Fund III, L.P. In addition, Mr. Greenhouse serves as a managing member of SST and LS. SST is the general partner of, and investment adviser to, Special Situations Technology Fund, L.P. and Special Situations Technology Fund II, L.P. LS is the general partner of, and investment adviser to, Special Situations Life Sciences Fund, L.P. Mr. Greenhouse was an employee of RHO Management Company, Inc., an international advisory firm, from 1985 until February 1992, and was involved in all aspects of such firm's investment management activities, including portfolio management, foreign exchange and derivative securities trading and venture capital investments. Mr. Greenhouse's business address is c/o Special Situations Fund, 527 Madison Avenue, Suite 2600, New York, New York 10022.

Adam Stettner. Mr. Stettner, born in 1964, is a limited partner of MGP and has served as a portfolio manager of Special Situations Technology Fund, L.P. since its inception in 1997 and of Special Situations Technology Fund II, L.P. since its inception in 2003. Mr. Stettner is also a member of MG and LS and a managing member of SST. Prior to serving as a portfolio manager of Special Situations Technology Fund, L.P., Mr. Stettner was President of Stettner Consultants, Inc., a technology consulting company that he founded in 1989 to provide computer and communications expertise to major corporate enterprises. Mr. Stettner served as a director of CUseeMe Networks, Inc. (“CuseeMe”) (formerly White Pines Software, Inc.), a public company providing rich media communications, from March 1999 to June 2001 when CuseeMe was acquired by First Virtual Communications, Inc. (“FVC”). Since June 2001, Mr. Stettner has served as a director of FVC, a public company providing rich media communications. Mr. Stettner's business address is c/o Special Situations Fund, 527 Madison Avenue, Suite 2600, New York, New York 10022.

Administrator

The Fund has entered into an administration agreement with AWM pursuant to which AWM will perform administrative and management services necessary for the operation of the Fund, other than those services to be performed by the General Partner or by the Fund’s counsel or auditors. AWM, at its expense, provides the Fund with office space, facilities and personnel necessary for the administration of the Fund. For these services, the Fund will pay each quarter, in arrears, an administrative fee (the “Administration Fee”) to AWM equal to 0.75% per annum of the Fund’s net asset value, payable quarterly as of the end of a fiscal quarter See -“SUMMARY OF TERMS - Expenses” and “VALUATION OF ASSETS.” The Fund’s administration agreement with AWM continues until it is terminated, which may be done by either party on 90 days’ notice. AWM is located at 527 Madison Avenue, Suite 2600, New York, New York 10022 and currently occupies space at the same offices utilized by the General Partner.

Custodian

Banc of America Securities LLC, serves as the custodian of the assets, including portfolio securities, of the Fund. The services of the custodian are provided and performed pursuant to a custodian agreement between the Fund and the custodian. The custodian is paid certain fees and entitled to certain indemnification by the Fund as specified in such custodian agreement. The General Partner, Austin W. Marxe, David M. Greenhouse and Adam Stettner are not affiliated with, and have no financial interest in, the Fund’s custodian. The terms of this transaction were comparable in all material respects to the terms that would prevail in an arm’s-length transaction between unaffiliated third parties.

Counsel

Lowenstein Sandler PC has served as counsel to the Fund and the General Partner in connection with this offering of Units, and is expected to continue to act as counsel and provide subsequent advice to the Fund and the General Partner. Lowenstein Sandler PC will not be representing Limited Partners of the Fund. No independent counsel has been retained to represent Limited Partners of the Fund.

Auditors

It is expected that Anchin, Block & Anchin LLP, 1375 Broadway, 18th Floor, New York, New York 10018 will act as the Fund’s independent auditors and will audit the annual financial statements of the Fund.

Other Special Situations Funds

It is expected that from time to time the Fund will co-invest with the other funds described below and may acquire or hold securities in which such funds also own such securities. The funds described below may accept additional investments, and, therefore, their size may grow relative to the size of the Fund, thereby increasing the competition to the Fund for investments and management services. Such funds may also attract certain investors who might otherwise have invested in the Fund, thereby possibly limiting the Fund’s ability to grow and diversify its investments.

The Registered Fund. Special Situations Fund III, L.P., (the “Registered Fund”) commenced investment operations as of January 1, 1994. The investment objective of the Registered Fund is identical to the Fund. The Registered Fund is registered as an investment company under the 1940 Act. MGP is the general partner of the Registered Fund and serves as its investment adviser. MGP is an investment adviser registered under the Advisers Act. Austin W. Marxe, David M. Greenhouse and Adam Stettner are responsible for the Registered Fund’s investment decisions. Austin W. Marxe also serves as a managing individual general partner of the Registered Fund. In addition, AWM serves as the administrator of the Registered Fund, as well as the general partner of the General Partner.

Cayman Fund. AWM, the Administrator of the Fund, serves as the general partner, investment adviser and administrator of Special Situations Cayman Fund, L.P. (the “Cayman Fund”). The investment objective of the Cayman Fund is to seek long-term capital appreciation by investing primarily in publicly traded equity securities or securities with equity features which are listed on Nasdaq or are otherwise traded in “over-the-counter” markets in the United States; and to a lesser extent, in securities listed on national securities exchanges and publicly traded foreign securities, which possess technological, market or product niche, which may be, for various reasons, undervalued or with prospects of going private or being acquired. The Cayman Fund is not registered as an investment company under the 1940 Act in reliance upon the exemption afforded by Section 3(c)(1) of the 1940

Act. Austin W. Marxe and David M. Greenhouse are responsible for the Cayman Fund’s investment decisions.

Private Equity Fund. Austin W. Marxe and David M. Greenhouse formed Special Situations Private Equity Fund, L.P. (the “Private Equity Fund”) as of April 1, 1997. The Private Equity Fund primarily invests in privately negotiated and privately placed equity and equity-related securities of companies similar in type to the companies in which the Fund makes investments and to a lesser extent, invests in publicly traded equity and equity-related securities of such companies. The Private Equity Fund is not registered as an investment company under the 1940 Act in reliance upon the exemption afforded by Section 3(c)(1) of the 1940 Act. MG Advisers, L.L.C., (“MG”), a New York limited liability company which is controlled by Messrs. Marxe, Greenhouse and Stettner, is the general partner of, and investment adviser to, the Private Equity Fund. MG Advisers is registered as an investment adviser under the Advisers Act. Messrs. Marxe, Greenhouse and Stettner are principally responsible for the Private Equity Fund’s investment decisions.

Technology Funds. Special Situations Technology Fund, L.P. commenced investment operations as of April 1, 1997. On July 1, 2003, Special Situations Technology Fund, L.P. split into two funds: Special Situations Technology Fund, L.P. (“Tech Fund”) and Special Situations Technology Fund II, L.P. (“Tech Fund II” and together with Tech Fund, the “Technology Funds”). The investment objective of the Technology Funds is to maximize long-term capital appreciation by investing primarily in publicly traded equity and equity related securities of companies traded publicly on Nasdaq and “over-the-counter” or listed on national securities exchanges in the communications, information and other technology related fields. Tech Fund is not registered as an investment company under the 1940 Act in reliance upon the exemption afforded by Section 3(c)(1) of the 1940 Act. Tech Fund II is not registered as an investment company under the 1940 Act in reliance upon the exemption afforded by Section 3(c)(7) of the 1940 Act. SST Advisers L.L.C. (“SST”) is the general partner and serves as the investment adviser of each of the Technology Funds. SST is an investment adviser registered under the Advisers Act. Austin W. Marxe, David M. Greenhouse and Adam Stettner are responsible for the Technology Funds’ investment decisions. In addition, AWM serves as the administrator of the Technology Funds.

Life Sciences Fund. Special Situations Life Sciences Fund, L.P.(the “Life Sciences Fund”) commenced investment operations as of July 1, 2005. The investment objective of the Life Sciences Fund is to maximize long-term capital appreciation by investing primarily in a diversified portfolio of equity and equity-related securities of publicly traded companies that provide products and services in the health care, life sciences and related fields. The Life Sciences Fund is not registered as an investment company under the 1940 Act in reliance upon the exemption afforded by Section 3(c)(1) of the 1940 Act. LS Advisers, LLC (“LS”), a New York limited liability company which is controlled by Messrs. Marxe, Greenhouse and Stettner, is the general partner of, and investment adviser to the Life Sciences Fund. LS is an investment adviser registered under the Advisers Act. In addition, AWM serves as the administrator of the Life Sciences Fund.

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VI. SUMMARY OF THE OFFERING

The Fund is offering Units in the Fund. The minimum initial investment is $100,000 (4 Units). Purchases in excess of the minimum may be made in multiples of $25,000 (1 Unit). The General Partner reserves the right to waive or change the minimum investment required. The offering is not contingent upon the sale of a minimum amount of Units. The General Partner expects to admit new Limited Partners and accept additional Capital Contributions to the Fund from existing Limited Partners on a semi-annual basis. The General Partner reserves the right to suspend or terminate the offering of Units at any time without notice.

The full amount of a Limited Partner’s Capital Contribution is payable at the time of the acceptance of the Limited Partner’s subscription and admission of the subscriber to the Fund as a Limited Partner.

All proceeds of this offering will be available to the Fund for investment. Investors will not be charged fees or commissions when purchasing Units.

Plan of Distribution

The Units are being offered on a “best efforts” basis. It is intended that Units will be sold directly by the Fund. Neither the Fund nor the General Partner will receive commissions or other compensation for sales made in this manner.

The Fund reserves the right, however, to select one or more registered broker-dealers to effect sales of Units and to pay placement fees or commissions to such broker-dealers in amounts which the General Partner believes to be appropriate. Any such fees or commissions will be charged against the Capital Accounts of the Limited Partners to whom such expenses are attributable (provided the applicable Limited Partner consents to the payment) and will not be a Fund expense or otherwise affect the Capital Accounts of any other Partner. Any broker-dealer retained by the Fund must be a member in good standing of the National Association of Securities Dealers, Inc. and registered as a broker-dealer in any state in which Units would be offered by such broker-dealer. The General Partner also reserves the right to pay commissions or placement fees or to pay referral fees or finders fees directly out of the Incentive Allocation otherwise allocable to the General Partner.

Investor Qualifications

Units have been designed for investment solely by accredited investors (as defined in Rule 501 of Regulation D, adopted under the Securities Act) who are also qualified purchasers, as defined by Section 2(a)(51) of the 1940 Act and “qualified clients” within the meaning of Rule 205-3 under the Advisers Act. In the case of individuals, to be an accredited investor the investor must either (i) have a net worth, or joint net worth with that person’s spouse, at the time of subscription in excess of $1,000,000, or (ii) have had income in excess of $200,000 (or joint income with his spouse in excess of $300,000) in each of the two most recent years and must reasonably expect to reach the same income level in the current year. Other accredited investors that will be permitted to invest in the Fund include (i) banks acting in an individual or fiduciary capacity; (ii) insurance companies; (iii) certain qualified employee benefit plans; (iv) small business investment companies licensed by the U.S. Small Business Administration; and (v) a corporation, partnership or business trust (a) not formed for the purpose of acquiring Units in the Fund, which entity has total assets in excess of $5,000,000 or (b) in which all of the equity owners are accredited investors.

In general, a qualified purchaser is (a) a natural person who owns not less than $5,000,000 in “investments,” as defined by Section 270.2a51-1 of the 1940 Act; (b) a company that owns not less than $5,000,000 in “investments,” and that is owned directly or indirectly by or for two or more natural persons who are related in specified ways; or trusts established by or for the benefit of such persons; (c) a trust not covered by the preceding and not formed for the specific purpose of acquiring the securities offered, as to which the trustee or other person authorized to make decisions with respect to the trust, and each settlor or other person who has contributed assets to the trust, is a qualified purchaser; or (d) any person, acting for its own account or the accounts of other qualified purchasers, who, in the aggregate, owns and invests on a discretionary basis, not less than $25,000,000 in “investments.”

In addition to being an accredited investor and qualified purchaser, new investors must be a “qualified client” within the meaning of Rule 205-3 under the Advisers Act and maintain $750,000 under management with any one or more of the group of Special Situations Funds or have a net worth (or joint net worth with spouse) in excess of $1,500,000.

How to Subscribe; Acceptance of Subscriptions

The Fund reserves the right, in its absolute discretion, to accept or reject any subscription for Units, in whole or in part. The Fund will promptly notify any investor whose subscription has been rejected and will return such subscription as soon as practicable. Subscriptions are not subject to revocation by subscribers after they have been tendered to the Fund.

Current Limited Partners. Current Limited Partners of the Fund, may purchase additional Units at a purchase price of $25,000 per Unit. A minimum purchase of $25,000 (1 Unit) is required, although this minimum may be waived by the General Partner in its sole discretion. In order to subscribe for additional Units, a Limited Partner must complete and sign two copies of the Additional Capital Contribution Form and mail or deliver such copies to the Fund’s offices as follows:

Special Situations Fund III QP, L.P.

527 Madison Avenue, Suite 2600

New York, New York 10022

Attention: Subscription Department

New Investors. New investors may purchase Units at a purchase price of $25,000 per Unit. A minimum purchase of $100,000 (4 Units) is required, although this minimum may be waived by the General Partner in its sole discretion. In order to subscribe for Units, an investor must complete and sign two copies of the Subscription Documents accompanying this Memorandum and mail or deliver such copies to the Fund’s offices set forth above.

All Investors. Simultaneously with the delivery of the Additional Capital Contribution Forms or Subscription Documents (whichever is applicable), subscribers should make payment for their subscriptions for Units, by check or wire transfer, payable to SPECIAL SITUATIONS FUND III QP, L.P.- CONTRIBUTION ACCOUNT. Payments by check should be mailed or delivered to the Fund at its offices set forth above. Investors that wish to make payments by wire transfer should contact Rose M. Carling or Marianne Hicks of the Fund at (212) 207-6500.

All funds received from a subscriber for the purchase of Units will be deposited in a segregated account for the benefit of the subscriber. Funds held in such accounts will be invested in interest bearing accounts pending the closing of the semi-annual offering on December 31 or June 30, as the case may be, and will not be released to the Fund prior to such date. If the subscriber’s subscription is not accepted, all the funds then held in the segregated account will be returned to the subscriber, without

interest. If the subscriber’s subscription is accepted, the subscriber’s funds will be paid to the Fund as a capital contribution. The aggregate interest accrued on all capital contributions held in interest bearing accounts will be income of the Fund and will be allocated to all Limited Partners of the Fund pro rata based on their respective capital accounts.

Subscriptions will not be accepted unless they are accompanied by properly executed Additional Capital Contribution Forms or Subscription Documents (as applicable) and received by the Fund on or before the business day preceding January 1 or July 1, whichever is applicable.

Effect of Offering

Upon an acquisition of Units, a subscriber, whether a current Limited Partner or a new investor, will acquire a share of the Fund’s interest in all its assets, including its current securities portfolio; the exchange or subscription amount will be credited to such subscriber’s Capital Account; and new subscribers will be admitted to the Fund as Limited Partners.

Expenses of the Offering

The costs and expenses attributable to the organization of the Fund and effecting the Exchange Transaction, including any legal and regulatory fees associated with any SEC filings, will be borne by the Fund. Up to $5,000 of such organizational and offering expenses may be deducted in the first year of operation, with the remainder amortized over a one hundred eighty (180) month amortization period. Generally accepted accounting principles (“GAAP”) require that such costs be treated as an expense when incurred and, if such expenses were material, the intended treatment by the Fund would result in a departure from GAAP. However, the General Partner believes that the Fund’s intended treatment, which is consistent with the federal income tax treatment of such expenses, is more equitable to Limited Partners.

No Registration

The offer and sale of the Units will not be registered under the Securities Act nor, in most cases, under state securities laws, by reason of specific exemptions under the provisions of the Securities Act and laws. Units cannot be resold or transferred unless they are either subsequently registered under the Securities Act, or an exemption from such registration is available.

The Fund does not intend to register as an investment company under the 1940 Act in reliance upon the exemption afforded by Section 3(c)(7) of that statute. In general, that section provides that the Fund's outstanding Limited Partnership Interests may be held by an unlimited number of investors provided that each investor admitted to the Fund is a “qualified purchaser”.

Access to Information

Representatives of the Fund, at a reasonable time after reasonable prior notice, will make available to prospective investors nonproprietary materials relating to the Fund (for example, copies of the Partnership Agreement of the Fund, and financial statements), and will answer all inquiries from prospective investors concerning the Fund, the General Partner, the business of the Fund and any other matters relating to the formation of the Fund and the offer and sale of Units. Such representatives will also afford prospective investors the opportunity to obtain any additional nonproprietary information (to the extent such representatives possess that information or can acquire it without unreasonable effort or expense) necessary to verify the accuracy of any representations or information contained in this Memorandum. Prospective investors are invited to communicate directly to such representatives of the

Fund. Communications should be directed to the Fund’s offices, 527 Madison Avenue, Suite 2600, New York, New York 10022, telephone number (212) 207-6500, Attention: Austin W. Marxe.

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VII. ALLOCATION OF PROFIT AND LOSS

The Fund’s Book Profit or Book Loss for each of its fiscal periods is determined by reference to the increase or decrease, as the case may be, in the Fund’s net asset value during each such period. Book Profit and Book Loss for each fiscal period is allocated among the Partners in accordance with Article V of the Partnership Agreement. At the end of each fiscal period, the capital accounts of the Limited Partners will be debited, and the capital account of the General Partner will be credited, with the Incentive Allocation, which is equal to twenty (20%) percent of the Book Profit allocated to the Limited Partners during such fiscal period. The Incentive Allocation will be allocated on a “high water mark” basis such that, with respect to any Limited Partner, no Incentive Allocation will be allocated to the General Partner until any Book Loss of such Limited Partner shall have first been recovered. If a Limited Partner were to have his Units partially redeemed at a time when he had such an unrecovered Book Loss, the amount of his unrecovered Book Loss would be reduced in the same proportion as his Capital Account is reduced by such redemption.

Upon the allocation of the Fund’s Book Profit or Book Loss among the Partners for any particular fiscal period, the number of Units owned by each Partner shall be redetermined as of the end of such fiscal period to reflect the allocation of Book Profit or Book Loss to such Partner for such period. Accordingly, each Partner, at the end of a particular fiscal period, shall own a number of Units equal to the balance in such Partner’s capital account divided by $25,000, the stated value of a Unit of the Fund. As a result of such redetermination, a Partner may hold and own fractional Units in the Fund.

Upon the dissolution of the Fund, liquidating distributions will be made among the Partners, pro rata, in accordance with their respective capital account balances. The General Partner will be obligated to restore any deficit balance in its capital account at such time.

Reinvestment of Income and Gains Allocations for United States Income Tax Purposes

Allocations of taxable income or loss for United States income tax purposes will generally be made in a manner similar to the Fund’s allocations of Book Profit and Book Loss. However, tax allocations, in certain instances, will necessarily differ from allocations for book purposes. The Partnership Agreement resolves this disparity by requiring that capital gains and capital losses derived by the Fund first be allocated among the Partners to eliminate any differences between book and tax allocations, with any remaining capital gains and losses being allocated in the same manner as Book Profit or Book Loss. Upon a full redemption of Units by the Fund at the end of any particular fiscal period, the Fund will first allocate any taxable capital gain or capital loss for such fiscal period to those Partners redeeming Units in amounts sufficient to eliminate any differences between book and tax allocations with respect to the Units being redeemed by such Partners. See “CERTAIN FEDERAL INCOME TAX CONSEQUENCES.” Allocations of the Fund’s Book Profit or Book Loss and tax allocations will be made at the end of any fiscal period when the Fund effects redemptions or additional purchases of Units. See “REDEMPTIONS, TRANSFERS AND WITHDRAWALS OF UNITS.”

Reinvestment of Income and Gains

All revenues, income and gains realized by the Fund will be reinvested in Units of the Fund. Partners will not receive any distributions of such revenue, income or gains with respect to the Units owned by them. Any Partner of the Fund may, however, withdraw any such revenue, income or gains or any other amounts in such Partner’s capital account by a redemption of Units on June 30 and December 31 of each calendar year, subject to the limitations on such redemptions as provided in the Partnership Agreement. See “REDEMPTIONS, TRANSFERS AND WITHDRAWALS OF UNITS.”

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VIII. VALUATION OF ASSETS

The value of the Fund’s net assets will equal, as of any applicable determination date, the fair market value of the Fund’s assets, determined in accordance with the standards set forth below, less the amount of all liabilities of the Fund.

· Securities for which market quotations are available and which are freely tradeable will be determined, as of any applicable determination date, in accordance with the following standards:

· if the security is a “reported security” as that term is defined in Rule 11Aa3-a under the Exchange Act, the last sale price with respect to such security reported in the consolidated transaction reporting system (“consolidated system”) or the average of the highest current independent bid and lowest current independent offer for such security (reported pursuant to Rule 11Ac1-1 under the Exchange Act) if there are no reported transactions in the consolidated system that day;

· if the security is not a reported security, and the principal market for such security is an exchange, the last sale price on such exchange or the average of the highest current independent bid and lowest current independent offer on such exchange if there are no reported transactions on such exchange that day;

· if the security is not a reported security and is quoted on the Nasdaq, the average of the highest current independent bid and lowest current independent offer reported on Level 1 of the Nasdaq system; or

· for all other securities for which market quotations are available, the average of the highest current independent bid and lowest current independent offer determined on the basis of reasonable inquiry.

· Securities for which market quotations are not available and any other assets held by the Fund will be valued at fair value as determined in good faith by the General Partner.

· The General Partner may, in its sole discretion, rely upon the opinion of an independent third party (obtained at the Fund’s expense) as to the valuation of any security or other asset. In addition, the General Partner may appoint an advisory committee consisting of two or more Limited Partners, which are not affiliates of the General Partner, to determine the valuation of any security or other asset, and the General Partner in its sole discretion may rely upon such determination.

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IX. REDEMPTIONS, TRANSFERS AND WITHDRAWALS OF UNITS

Redemptions

Subject to the provisions of the Partnership Agreement, each Limited Partner has the right, as of June 30 and December 31 of any calendar year, to redeem all or any part of such Limited Partner’s Units by providing written notice to the General Partner on or before June 15 or December 15, as the case may be, of such calendar year, stating the number of Units or percentage of interest owned by such Limited Partner to be redeemed. In the event of a partial redemption, the Limited Partner must maintain a capital account, after giving effect to the withdrawal, of at least $100,000. A Limited Partner will, in no event, be permitted to redeem Units in excess of the amount estimated to be the positive balance of such Limited Partner’s capital account as finally adjusted at June 30 or December 31 of the calendar year. A Limited Partner redeeming Units will receive the proceeds of such redemption within 7 days after the end of the applicable fiscal period. Upon a redetermination of the number of Units held by Partners to reflect changes in the Fund’s Book Profit or Book Loss, the redemption of Units will be made at a price of $25,000 per Unit. The General Partner in its discretion may waive the notice period and minimum investment restrictions.

The General Partner has the right to limit the aggregate redemptions of Units by Limited Partners in any semi-annual fiscal period to 10% of the outstanding Units at the last day of the period, after the redetermination of Units to reflect the Fund’s Book Profit or Book Loss as of the end of such period. In any such event, Units will be redeemed, pro rata, among the Partners electing redemptions of Units on the basis of the number of Units submitted for redemption by each Partner. The General Partner will furnish a statement to each Partner redeeming Units, setting forth the number of Units redeemed by the Fund in accordance with any pro rata allocation as described herein.

The General Partner may redeem all or part of the Units of any Limited Partner at any time, upon at least five days’ prior written notice, without the consent of the Limited Partner. A Limited Partner whose Units are redeemed by the General Partner will receive the proceeds of such redemption within 7 days after the end of the applicable fiscal period. All such redemptions will be made at a price of $25,000 per Unit, after a redetermination of Units to reflect the Fund’s Book Profit or Book Loss as of the date of redemption.

The General Partner may redeem Units owned by it in the same manner and to the same extent as redemptions permitted by Limited Partners except that it may give notice of redemption up to the date of redemption, subject to any restrictions set forth in the Partnership Agreement.

Transfers

No Limited Partner may assign or otherwise transfer such Limited Partner’s Units or interest in the Fund, in whole or in part, unless such transfer or assignment is made in accordance with the provisions of the Partnership Agreement, which, among other things, requires the consent of the General Partner.

Withdrawals by Limited Partners

Other than by redemptions of Units, Limited Partners have no right to withdraw from the Fund prior to the Fund’s dissolution, except with the consent of the General Partner, which consent is in the sole discretion of the General Partner.

Withdrawals by the General Partner

The General Partner may voluntarily withdraw as General Partner upon the giving of at least 60 days’ prior written notice to each Limited Partner. Any such withdrawal would cause a dissolution of the Fund. The General Partner may assign its interest to its equity owners or otherwise in compliance with procedures specified in the Partnership Agreement.

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X. LEGAL CONSIDERATIONS

ERISA

Most pension or profit sharing plans, individual retirement accounts and other tax-advantaged retirement funds are subject to the provisions of the Code, ERISA, or both, which may be relevant to a decision as to whether such a fund should invest in the Fund. There may, for example, be issues as to whether such an investment is “prudent,” whether the retirement fund is diversified, and whether a fund’s need for liquidity has been balanced against the restrictions on transferability and the lack of liquidity associated with an investment in the Fund. Since the Fund will be permitted to borrow, tax-exempt Limited Partners may incur an income tax liability with respect to their share of the Fund’s “unrelated business taxable income.” Further, it is possible that the purchase of Units may be or become a “prohibited transaction.” It is recommended that legal counsel be consulted by such a retirement fund before investing in the Fund.

If the aggregate amount invested in the Fund by benefit plan investors (i.e., employee benefit plans as defined in Section 3(3) of ERISA, whether or not subject to Title I of ERISA, plans described in Section 4975(e)(1) of the Code, government plans, church plans, and entities the underlying assets of which include plan assets) were to equal or exceed twenty-five percent (25%) of the aggregate Capital Accounts of Limited Partners, equity participation by benefit plan investors would be considered “significant” under applicable Department of Labor regulations and, as a result, the underlying assets of the Fund would be deemed benefit plan assets for purposes of such regulations. If the assets of the Fund were deemed to be benefit plan assets of a benefit plan investor, the General Partner would be a fiduciary (as defined in ERISA) with respect to such plan and would be subject to the obligations and liabilities imposed upon fiduciaries by ERISA. Moreover, the Fund could be subject to various other requirements of ERISA. The General Partner intends to monitor the level of participation by benefit plan investors to avoid exceeding the twenty-five percent (25%) limitation.

Anti-Money Laundering Compliance

Partly in response to the events of September 11, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was enacted. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The Treasury Department has issued proposed rules that would apply the provisions of the USA PATRIOT Act to unregistered investment companies, such as the Fund.

According to the proposed rules, each covered fund, such as the Fund, must adopt an anti-money laundering program within 90 days after the adoption of the final rule. The minimum requirements of any anti-money laundering program include procedures reasonably designed to prevent money laundering or the financing of terrorist activities, independent testing for compliance, designation of a compliance officer, and ongoing training of employees. In addition, the proposed rules require each covered fund to file with the U.S. Treasury Department, Division of Financial Crimes Enforcement Network (“FinCEN”), and update periodically, a notice that gives FinCEN certain basic information concerning the fund.

The Fund has adopted procedures designed to comply with the rules under the USA PATRIOT Act as they have been proposed and will adopt procedures designed to comply with the rules when such rules are issued in final form. For example, the Fund’s Subscription Documents requires that

prospective investors make representations and undertakings to assist the Fund in complying with the Fund’s obligations under the USA PATRIOT Act. As part of its responsibility for the prevention of money laundering, the Fund reserves the right to request such information as is necessary to verify the identity of a subscriber, any beneficial owner underlying the account and the source of the payment. In the event of delay or failure by the subscriber or Partner to produce any information required for verification purposes, the Fund may refuse to accept a subscription or may cause the withdrawal of such Partner from the Fund. The Fund expects to monitor developments with respect to the USA PATRIOT Act and other anti-money laundering compliance laws, rules and regulations, and to comply with any such provisions as they are adopted.

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XI. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes certain aspects of United States federal income taxation of the Fund and its Partners that should be considered by a potential purchaser of Units. In view of the complexities of the tax laws applicable to partnerships and securities transactions, and since no attempt is made herein to mention all of the tax considerations that should be taken into account in evaluating a potential investment in the Fund or to provide a complete explanation of those issues that are summarized, a person considering investing in the Fund should consult his own tax advisor in order to understand fully the federal, state, local, and foreign tax consequences of such investment to his particular situation. No representation is made as to the tax consequences of operation of the Fund.

The following discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), the Treasury Regulations promulgated thereunder, including temporary and proposed regulations (“Treasury Regulations”), judicial decisions, current published administrative rulings of the Internal Revenue Service (the “Service”), and other applicable authority currently in effect as of the date of this Private Placement Memorandum. The Fund does not intend to request any rulings from the Service. A court may reach a contrary conclusion with respect to the issues addressed if the matter were contested. In addition, future legislative or administrative changes (including changes scheduled to occur in the future pursuant to existing legislative phase-in and “sunset” provisions) or court decisions may significantly change the conclusions expressed herein, and any such changes or decisions may have a retroactive effect.

Taxation of Fund Operations-General

The Fund will be classified as a partnership for federal income tax purposes and not as an association taxable as a corporation. As a partnership, the Fund itself will not be subject to federal income tax. The Fund will file an annual partnership information return, which will report the results of its operations. Each Partner will be required to report separately on the Partner’s own income tax return the Partner’s distributive share of the Fund’s net long-term capital gain or loss, net short-term capital gain or loss, net ordinary income or deduction, and various other categories of income, gain, loss, deduction, and credit. The Fund believes that its allocations of Fund tax items among the various Partners will be upheld under the provisions of the Code and Treasury Regulations dealing with tax allocations by partnerships. However, if it were determined that an allocation made by the Fund with respect to a particular item did not have “substantial economic effect” (within the meaning of the Code and Treasury Regulations) and was not in accordance with the Partners’ interests in the Fund, taking into account all the facts and circumstances, that item could be allocated, for tax purposes, in a different manner. In some circumstances, this could result in a Partner recognizing a greater or lesser amount of loss, deduction, gain, or income than the Partner would have recognized under the allocation made by the Fund or in such Partner recognizing an amount of loss, deduction, gain, or income at a different time than would have been recognized under the allocation made by the Fund.

The Incentive Allocation to the General Partner (i.e., the portion of the Book Profit so allocable that exceeds the amount that would be allocable based solely on the Units owned by the General Partner), is intended to be a distributive share of Fund income. The General Partner believes this result is supported by the fact that no such allocation will be made if the Fund has no Book Profit for a particular accounting period. However, the Service may seek to characterize some or all of the amount so allocable as a fee to the General Partner and an expense of the Fund, with the result that its deductibility may depend upon whether or not it is allowable as a trade or business expense. See discussion below.

Under the authority granted by the Partnership Agreement, a withdrawing Partner may be allocated certain income in order to equalize, to the extent possible, the value of the withdrawing Partner’s Capital Account with the income tax basis of his Interest in the Fund. Absent such a special allocation, unrealized gains (or losses) that have accrued economically to the benefit (or detriment) of the withdrawing Partner might be taxed to the remaining Partners. While such a special allocation would provide a result that would be more equitable and more reflective of economic reality, there can be no assurance that the Service would accept such an allocation.

Each Partner will be subject to tax on the Partner’s distributive share of the Fund’s taxable income or loss regardless of whether there has been any distribution of cash from the Fund.

Taxation of Fund Operations-Securities Transactions

The taxation of securities transactions (including transactions in derivatives) is extremely complex and no attempt is made herein to describe fully the various tax rules that apply to such transactions or to explain in complete detail those rules that are mentioned. However, some general points may be noted.

The Fund will file its tax returns on the basis that, for tax purposes, it is not a “dealer” with respect to its securities and derivative transactions. Generally, the gains and losses recognized by a taxpayer other than a dealer on the sale of securities are capital gains and losses (unlike the gains or losses of dealers, which are in whole or in part characterized as ordinary income), and the Fund expects that its gains and losses with respect to securities transactions will, in general, be so treated. These capital gains and losses may be long-term or short-term or a combination of both, depending on the length of time the particular investment position has been maintained and, in some cases, the nature of the transaction.

The net long-term capital gains of non-corporate taxpayers are taxed at preferential rates. Certain “qualified dividend income” is subject to the same preferential rates as net long-term capital gains. Generally, “qualified” dividends are those paid from domestic corporations and from certain foreign corporations. A dividend from a foreign corporation generally is qualified if (a) the corporation is incorporated in a U.S. possession; (b) the corporation is eligible for benefits under certain income tax treaties; or (c) the stock on which the dividend is paid is readily tradable on an established securities market in the United States. A dividend paid by a foreign corporation cannot be qualified if, in the tax year in which the dividend is paid or the preceding tax year, the corporation is a foreign personal holding company, a foreign investment company, or a passive foreign investment company. Several other types of dividends cannot be qualified, including (a) dividends on certain stock held for not more than sixty (60) days (ninety (90) days for certain preferred stock); (b) dividends on stock to the extent that the holder is required to make related payments with respect to positions in similar property (for example, pursuant to a short sale); (c) payments in lieu of dividends (such as with respect to stock lent by a broker pursuant to a short sale); (d) dividends electively treated as investment income offset by the deduction for investment interest; and (e) dividends paid by certain tax-exempt organizations.

The capital losses of a noncorporate taxpayer will offset capital gains. Any excess of capital losses over capital gains will offset ordinary income to the extent of $3,000 per year, with the unused capital losses being carried forward to other years, subject to certain limitations. Capital losses cannot be used to offset income from dividends, whether or not qualified.

For corporate taxpayers, all net capital gains, whether long-term or short-term, are taxed at the corporation’s regular rate. There are no special rules for qualified dividends. For such taxpayers, capital losses may offset only capital gains, but unused capital losses may be carried both backward and forward to other years, subject to certain limitations.

For financial statement presentation purposes, all securities held by the Fund (excluding securities of companies classified as private equity investments that are not readily marketable, which generally will be valued at the lesser of cost or fair market value) will be marked-to-market at the end of each accounting period, and the Book Profit or Loss from marking-to-market will be reported as income or loss. This mark-to-market treatment is inconsistent with the generally applicable tax rule that a transaction does not result in a gain or loss until it is closed by an actual sale or other disposition, although, as noted below, similar mark-to-market rules do apply for tax purposes with respect to certain commodity and futures transactions. The dichotomy between accounting and tax treatment may result in substantial variation between financial statement income (or loss) and taxable income (or loss) reported by the Fund.

The Fund may hold certain positions that constitute “straddles” for federal income tax purposes. Further, a Partner may hold certain positions in securities (directly or indirectly) outside of the Fund that, when aggregated with that Partner’s indirect interest in similar securities held by the Fund, also may constitute straddles for such purposes. In such a case, special rules that apply to straddles for federal income tax purposes could affect the holding period for the securities involved, may defer the recognition of losses with respect to such securities, and may require the capitalization of certain interest and carrying charges.

Gain or loss from a short sale of property generally is considered capital gain or capital loss to the extent the property used to close the short sale constitutes a capital asset in the taxpayer’s hands. Except with respect to certain situations where the property used to close a short sale has a long-term holding period on the date of the short sale, special rules generally treat the gains on short sales as short-term capital gains. In addition, the holding period of “substantially identical property” held by the taxpayer may be considered to begin only upon closing of the short sale. Moreover, a loss on a short sale will be treated as a long-term capital loss if, on the date of the short sale, the taxpayer has held substantially identical property for longer than the long-term holding period. The Code treats the acquisition of certain options to sell securities as short sales.

Under an exception to the general rule that gain is taxed only when realized (i.e., a transaction is closed by an actual sale or disposition), the Fund will recognize gain (but not loss) on any “constructive sale” of any “appreciated financial position” - even though the proceeds of the transaction may not be received until a subsequent taxable year. Appreciated financial positions subject to the constructive sale rules include any position with respect to any stock, debt instrument (other than certain “straight debt”), or partnership interest if gain would result on the sale, assignment, or other termination of that position at its fair market value. Subject to certain exceptions, a constructive sale would occur if the Fund were to enter into any one of the following transactions: (a) a short sale with respect to the same (or substantially identical) property; (b) an offsetting notional principal contract with respect to the same (or substantially identical) property; (c) a futures or forward contract to deliver the same (or substantially identical) property; (d) in the case of an appreciated financial position that is a short sale or a contract described in (b) or (c), a contract to acquire the same or substantially identical property; or (e) transactions to be enumerated in Treasury Regulations, having substantially the same effect as the above transactions. Alternatively, if the appreciated financial position were one of the above transactions, a constructive sale generally would occur if the Fund were to acquire property that was the same as (or substantially identical to) property that was the subject of the appreciated financial position.

The Fund may in certain circumstances be negatively impacted by certain special rules of the Code and Treasury Regulations relating to “wash sales.” For example, the wash sale rules could prevent the current utilization for tax purposes of a loss realized on the sale of a security if within thirty (30) days before or thirty (30) days after the sale, the Fund were to acquire substantially identical securities or enter into a contract or option to acquire such securities.

The Fund may realize ordinary income from dividends other than qualified dividends and from interest. In addition, the Fund may hold debt obligations with “original issue discount.” In such case, the Fund would be required to include amounts in taxable income on a current basis even though receipt of such amounts may occur in a subsequent year. The Fund may also acquire debt obligations with “market discount.” Upon disposition of such an obligation, the Fund generally would be required to treat gain realized as interest income to the extent of the market discount that accrued during the period the debt obligation was held by the Fund. Income or loss from transactions involving derivative instruments, such as swap transactions, entered into by the Fund also may constitute ordinary income or loss. Moreover, gain recognized from certain “conversion transactions” will be treated as ordinary income. Generally, a conversion transaction is one of several enumerated transactions in which substantially all of the taxpayer’s return is attributable to the time value of the net investment in the transaction. The enumerated transactions are: (a) the holding of any property (whether or not actively traded) and entering into a contract to sell such property (or substantially identical property) at a price determined in accordance with such contract, but only if such property were acquired and such contract were entered into on a substantially contemporaneous basis; (b) certain straddles; (c) generally, any other transaction that is marketed or sold on the basis that it has the economic characteristics of a loan, but with an interest-like return taxed as capital gain; or (d) any other transaction to be specified in Treasury Regulations.

Basis Limitation on the Deduction of Losses

Any net loss for a year allocated by the Fund to a Partner for tax purposes may be deducted by that Partner only to the extent of the Partner’s “adjusted tax basis” in his Units. Generally, a Partner’s basis in an Interest in the Fund initially will equal the Partner’s initial capital contribution. A Partner’s basis will be increased by (a) any subsequent capital contributions the Partner makes to the Fund; and (b) the Partner’s distributive share of Fund income for tax purposes. A Partner’s adjusted tax basis for his Interest in the Fund will be decreased (but not below zero) by (i) distributions to such Partner from the Fund; and (ii) his distributive share of Fund losses and deductions for tax purposes. Losses in excess of a Partner’s adjusted tax basis may be carried over to succeeding taxable years, subject to certain limitations. The “at-risk” rules of the Code also could have an adverse impact on a Partner in connection with the deductibility of losses from the Fund.

Section 469 of the Code

Section 469 of the Code imposes certain restrictions on the ability of noncorporate taxpayers, as well as certain closely held subchapter C corporations and personal service corporations, to deduct losses and credits from passive activities. Code section 469 generally provides that losses and credits from a passive activity may be used only to offset income from other passive activities. In addition, income from a passive activity generally may be offset by losses and credits from other passive activities and from an “active” business, but not by “portfolio” losses. However, with respect to certain closely held subchapter C corporations, passive losses and net income from an active business may be offset against each other.

Under Temporary Treasury Regulations, it appears that the Fund’s program of trading and investing should not be treated as a passive activity whether or not that program constitutes a trade or business. Accordingly, a Partner’s distributive share of the income (including any capital gains) or loss of the Fund should not be deemed to constitute passive income or loss. As a result, such distributive share could not be offset against passive loss or passive income from other sources. The Temporary Treasury Regulations should also prevent a closely held subchapter C corporation from treating any income from the Fund as income from an active business, which could be offset against passive losses from other sources. It is possible, however, that to the extent the Fund’s activities do not involve trading or investing

in property “of a type that is actively traded” (as specially defined), such activities could be treated as passive activities. Further, in the event (which the Fund believes to be unlikely) that any of such activities were categorized as those of a dealer, the Fund’s activities might be treated as passive activities to that extent.

The potential applicability of the passive activity rules to an investment in the Fund is subject to change when the Temporary Treasury Regulations discussed above are made final or when additional Treasury Regulations are issued. Potential investors are advised to consult their own tax advisors concerning the issues discussed in this subsection.

Limitations on Deductibility of Interest

For noncorporate taxpayers, section 163(d) of the Code limits the deduction for “investment interest” (i.e., interest expense (including certain short-sale expenses) allocable to investment property). Investment interest is not deductible to the extent that it exceeds the taxpayer’s net “investment income” (generally, the excess of (a) the ordinary income derived from investments and the net gain attributable to the disposition of property held for investment over (b) the deductions, other than for interest, that are connected directly with the production of investment income). However, net long-term capital gains and qualified dividends are excluded from the category of net investment income, except to the extent that a taxpayer elects to reduce his net capital gain eligible for the maximum rate generally applicable to net long-term capital gains. A Partner who cannot deduct investment interest currently as a result of the application of section 163(d) would be entitled to carry forward such deductions to future years, subject to the same limitation.

Whether or not the Fund’s activities are deemed to constitute the conduct of a trade or business, it is likely that the investment interest limitations would apply to the deductibility by a Partner of his share of the interest expenses attributable to the Fund’s operations as well as to any interest paid by him on money borrowed to finance his investment in the Fund. It would also appear that the excess of a Partner’s share of Fund income over that Partner’s share of Fund expenses would constitute net investment income. However, the above characterization of income and expenses would not apply to the extent that the Fund’s activities are deemed to be passive activities. See discussion above. Because of the uncertainties that exist regarding this area of the law, potential investors are advised to consult their own tax advisors concerning the issues discussed in this subsection.

In addition to the limitation on the deduction of investment interest expense, depending upon a given investor’s particular situation, if the investor owns tax-exempt obligations, interest paid on funds borrowed for the purpose of making an investment in the Fund may be considered to be incurred to enable the investor to continue to carry tax-exempt obligations; consequently it could be subject to the limitations of the Code that disallow any deduction for interest on indebtedness incurred or continued to purchase or carry tax-exempt obligations.

Deductibility of Certain Fund Expenses by Individual Partners

The expenses of an individual paid or incurred for the production of income (“section 212 expenses”) are deductible for any taxable year only to the extent that such expenses, along with certain other “miscellaneous itemized deductions,” exceed two percent (2%) of the individual’s adjusted gross income for that taxable year. In addition, the amount of the individual’s section 212 expenses and otherwise allowable itemized deductions for the year (with some exceptions) are reduced by three percent (3%) of the amount by which the individual’s adjusted gross income exceeds a specified amount (which amount is adjusted annually for inflation), except that no more than eighty percent (80%) of the individual’s otherwise allowable itemized deductions subject to this rule are disallowed. Further, as

miscellaneous itemized deductions, an individual’s section 212 expenses will not be deductible for alternative minimum tax purposes. These limitations on deductibility would apply to an individual Partner’s share of any expenses of the Fund categorized as section 212 expenses.

While the matter is not free from doubt and will depend on a number of factual circumstances that cannot be predicted with accuracy, the Fund may take the position that it is a trader engaged in a trade or business and therefore, the general and administrative expenses it incurs in connection with its activities will not be treated as section 212 expenses. It is alternatively possible that the Fund will take the position that it is an investor that is not engaged in a trade or business. If so, its general and administrative expenses would be section 212 expenses subject to the above limitations. As discussed above, it is possible that the expenses falling into this category would be deemed to include all or a portion of the Incentive Allocation of Book Profit to the General Partner. It also should be noted that future Treasury Regulations might provide that even if the Fund, but not an individual Partner, were deemed to be engaged in a trade or business, some or all of the above limitations would still apply to that Partner with respect to his share of the Fund’s expenses.

The two percent (2%) floor on the deductibility of section 212 expenses and the nondeductibility of such expenses for alternative minimum tax purposes also apply, in modified form, to estates and trusts. The consequences of these limitations will vary depending upon the personal tax situation of each taxpayer, and each Partner is advised to consult his own tax advisor with respect to the application of these limitations to that Partner.

Whether or not the Fund’s general and administrative expenses are subject to the above limitations as section 212 expenses, they should (except to the extent they may be allocated to a passive activity subject to the rules of Code section 469) constitute “investment expenses,” which will reduce a Partner’s “net investment income” for purposes of the limitation on the deductibility of investment interest under Code section 163(d). See discussion above.

Contributions, Distributions, and Dispositions of Interests in the Fund

No gain or loss will be recognized by a Partner upon the acquisition of Units for cash. However, if appreciated property was contributed to the Fund, and if the Fund was deemed to be an “investment company” within the meaning of section 721(b) of the Code, gain would be recognized to the contributing Partner at the time of the contribution. Prospective investors should consult their own tax advisors concerning this issue. Even if no gain were required to be recognized by a Partner on the contribution of appreciated property to the Fund, on a subsequent recognition of that appreciation by the Fund due to a taxable disposition of the property, the amount of such appreciation generally would be taxed to the contributing Partner for income tax purposes. The amount of such gain also could be taxed to the contributing Partner if the appreciated property were subsequently distributed by the Fund to a Partner other than the contributing Partner, or if other property were distributed by the Fund to the contributing Partner.

Typically, no gain or loss would be recognized by a Partner on the receipt of a distribution from the Fund. However, gain (but not loss) would be recognized to the extent the Fund distributed an amount of money (or in certain circumstances, marketable securities) that exceeded the Partner’s adjusted basis for his Units immediately before the distribution, after taking into account all allocations, including, in the case of a withdrawing Partner, any allocations (including special allocations for tax purposes) for the accounting period in which the withdrawal occurred. This gain would have the same character as would gain realized by a Partner upon a sale or exchange of Units. See below. A loss, if any, would be recognized by a Partner only upon a distribution in liquidation of his Units. Certain special rules would apply if the Fund were to distribute property rather than cash. If a Partner were to sell

his Interest in the Fund, then, with certain exceptions, any resulting gain or loss would be treated as a capital gain or capital loss. The sale or exchange within a twelve-month period of fifty percent (50%) or more of the total interest in Fund capital and profits may result, for federal income tax purposes, in a termination of the Fund, a constructive contribution of all of the Fund’s assets and liabilities to a new partnership, followed by a constructive distribution of interests in the new partnership to the Partners. Such a termination would close the Fund’s taxable year. Each Partner’s distributive share for that short year would be included in the taxable year for the Partner that includes the termination date. The termination could cause certain other adverse tax consequences.

The closing of the Fund’s taxable year also would occur with respect to a Partner who terminates his entire Interest. As a result, all income attributable to long-term appreciation of a Partner’s Interest over several years could be taxable to that Partner in the taxable year of such termination.

Basis Adjustment Election

Pursuant to the terms of the Partnership Agreement, the General Partner is authorized, but not required, to cause the Fund to elect under section 754 of the Code to have the basis of its assets adjusted in the event of a distribution of money or property to a Partner, or in the event of a transfer of Units by sale or exchange, or as a result of the death of a Partner. If made, such election could be revoked only with the consent of the Service. Until revoked, the election would apply to all such transactions during the year in which the election was made and for subsequent taxable years.

Foreign and Other Special Investors

Any foreign person or entity and any person or entity subject to special tax treatment that is considering acquiring Units in the Fund should consult his or its own tax advisors with respect to the federal, state, and local tax consequences of an investment in the Fund, and in the case of a foreign person or entity, the consequences of an investment in the Fund under the laws of any jurisdictions in which such person or entity is subject to tax.

Tax-Exempt Investors

A potential investor that is a tax-exempt entity, including a Code section 501(c)(3) organization, an individual retirement account, Keogh Plan, or a retirement plan qualified under ERISA, should consider, and discuss with its own tax advisors, the possibility that all or a portion of its distributive share of Fund income or gain will be subject to the special tax imposed by the Code on the unrelated business taxable income (“UBTI”) of a tax-exempt entity. The imposition of such a tax could reduce materially the effective return that a tax-exempt investor would derive from an investment in the Fund. The Fund’s income is expected to consist primarily of dividends, gains on dispositions of securities, and interest. These items of income generally would not be considered UBTI with respect to tax-exempt investors except to the extent to which they will be deemed to have “unrelated debt-financed income” by reason of (a) transactions of the Fund involving the acquisition of securities on margin or otherwise through borrowing; or (b) any borrowing done by the tax-exempt entity to finance its investment in the Fund. Tax-exempt investors also should note that any income or gain attributable to activities categorized as those of a dealer could be subject to the tax on UBTI in its entirety whether or not it constitutes unrelated debt-financed income.

Subsequent to each year, the Fund will use its best efforts to supply any Partner that it knows to be a tax-exempt organization (including any Partner that is itself a partnership having any partner that the Fund knows to be a tax-exempt organization) with information as to the portion of its

distributive share of Fund income and deductions that must be taken into account in computing UBTI. The Fund reserves the right to charge any such Partner for the expenses incurred in providing such information.

Fund Audits

The Service may audit income tax returns of the Fund. The tax treatment of the income, deductions, credits, and other distributive share items of the Fund generally will be determined at the Fund level in a single proceeding rather than by individual audits of the Partners. The General Partner, as the “tax matters partner,” will have considerable authority to make decisions affecting the tax treatment and procedural rights of all of the Partners. For example, the General Partner will decide how to report all “partnership items” on the Fund’s tax returns, and all Partners will be required to treat these items consistently on their own returns, unless they file a statement with the Service disclosing the inconsistency. In addition, the General Partner will have the right on behalf of all Partners to extend the statute of limitations with respect to the Partners’ tax liabilities on the Fund items.

An audit of the Fund may result in the disallowance, reallocation, or deferral of deductions claimed by the Fund, as well as the acceleration or deferral of income of the Fund. The audit also may result in transactions being treated as taxable that the Fund treated as nontaxable or in the treatment as ordinary income or as short-term capital gain items that the Fund reported as long-term capital gain. Any such change could cause a Partner to be required to pay additional tax, interest, and possibly penalties.

If the Service were to audit the Fund’s tax returns, an audit of the Partners’ own returns could result. If Partners’ returns were audited, adjustments could be made, including adjustments to items unrelated to the Fund. The legal and accounting costs incurred in connection with any audit of the Fund’s tax return would be borne by the Partners affected by the claim. The costs incurred in connection with any resulting audit of a Partner’s own tax return would be the sole obligation of the affected Partner.

Disclosure Regarding Tax Shelters

Certain transactions classified as “reportable transactions” must be disclosed to the Service by certain taxpayers and certain “material advisors.” In addition, Treasury Regulations impose a requirement on certain “material advisors” to maintain a list of persons participating in such transactions, which list must be furnished to the Service upon written request. A transaction may constitute a reportable transaction even if it would not be considered a “tax shelter” in the conventional sense. Consequently, it is possible that such disclosure may be required by the Fund, the Partners, or both if (a) the Fund incurs a significant loss on certain types of transactions (computed without regard to offsetting gains or other income); or (b) in the unlikely event that the Fund’s activities were to result in certain book/tax differences. Failure to disclose could result in the imposition of penalties.

Information

The Fund will furnish to its Partners (a) annual audited financial statements; and (b) (subject to the qualification discussed above with respect to the computation of UBTI) all necessary tax reporting information.

XII. RISKS FACTORS AND CONFLICTS OF INTEREST

An investment in the Fund involves risks not associated with other investment alternatives. Although the General Partner will seek to reduce the risks associated with the Fund’s investments, prospective investors should consider carefully, among other factors, the risks described below. Such risk factors are not meant to be an exhaustive listing of all potential risks associated with an investment in the Fund.

General

The Fund is designed for investors who do not require current income and who can accept a high degree of risk in their investments.

Reliance on Principals of the General Partner

The services of Austin W. Marxe, David M. Greenhouse and Adam Stettner are of critical importance to the General Partner and, in turn, to the Fund. In addition, Austin W. Marxe was born in 1940.

Restrictions on Transfer, Limited Marketability

The transferability and assignment of Units are subject to the restrictions on transferability contained in the Partnership Agreement. See “REDEMPTIONS, TRANSFERS AND WITHDRAWALS OF UNITS.”

There is currently no public market for Units and none is expected to develop. Consequently, investors may not be able to liquidate their investments in the event of an emergency or for any other reason, other than through semi-annual redemptions. Such factors may also adversely affect the value that an investor may be able to receive for his investment which he may sell only with the consent of the General Partner. Investors are not entitled to withdraw voluntarily from the Fund except through semi-annual redemptions of Units. Redemptions, however, may be limited at June 30 or December 31 of any calendar year, in the discretion of the General Partner, to 10% of the outstanding Units at such June 30 or December 31, and a Limited Partner may not be able to redeem all Units submitted for redemption at any such time. See “REDEMPTIONS, TRANSFERS AND WITHDRAWALS OF UNITS.”

Lack of Diversification

Pursuant to its investment policies, the Fund may not invest more than 15% of the value of its total assets (at the time of investment) in the equity securities of a particular issuer or more than 25% of the value of its total assets (at the time of investment) in the securities of issuers whose primary business is in a particular industry. The Fund presently intends to diversify its portfolio of investments in a wide variety of issuers and industries to the extent that it can practicably do so. If the Fund’s investments were to become concentrated in a small number of issuers or industries, the Fund would be exposed to the risk of adverse developments in or affecting a single issuer or industry to a greater extent than if its investments were diversified over a larger number of issuers and industries. See “INVESTMENT OBJECTIVE AND POLICIES.”

Possible Illiquidity of Portfolio Investments; Investments in Restricted Securities

A significant portion of the Fund’s investments may be in small capitalization companies, the securities of which are not actively traded, and the Fund may own a relatively large percentage of the outstanding securities of such companies. The Fund may also invest in securities that are subject to restrictions on sale because they were acquired from the issuer in “private placement” transactions or because the Fund is deemed to be an affiliate of the issuer. Generally, the Fund cannot sell these restricted securities publicly in the United States without the expense and time required to register the securities under the Securities Act and may not otherwise sell such securities in the United States unless such sale is exempt from registration under the applicable provisions of the Securities Act. Any such market or legal restrictions, or any contractual transfer limitations, on the Fund may result in the relative illiquidity of certain of the Fund’s investments, preventing or delaying any sale thereof or reducing the amount of proceeds that might otherwise be realized from their sale. Furthermore, if restricted securities are sold to the public, the Fund may be deemed an “underwriter” or a “controlling person” with respect to the restricted securities under the Securities Act and be subject to liability thereunder.

Special Situation Investments

The Fund endeavors to invest and maintain a substantial portion of its portfolio in “special situation investments” - investments in equity securities and securities with equity features of companies traded publicly “over-the-counter” or listed on national securities exchanges, that possess a technological, market or product niche, that may be, for various reasons, undervalued, or with prospects of going private or being acquired. Special situation investments can offer the opportunity for significant capital gains; however, such investments involve a high degree of business and financial risk that can result in substantial losses. The Fund may invest in companies whose capitalizations are limited and in companies operating at losses or with substantial variations in operating results from period to period. Certain of the Fund’s investments may involve “start-up” companies, companies developing new products or companies seeking to raise additional capital for expansion. In addition, the Fund may invest in companies which are in the process of, or have recently undergone, a reorganization after a bankruptcy. The Fund also may take significant positions in companies in rapidly changing high-technology fields that may be particularly susceptible to the risks of product obsolescence.

Time Required to Invest and for Maturity of Investments

There can be no assurance as to when cash contributions of investors in the Fund will be fully invested in portfolio securities, although the Fund does not anticipate incurring any significant delays in investing such contributions. In addition, there is no way to predict whether there will be sufficiently attractive investments available to the Fund at any given time so that it might be fully invested in accordance with its investment objectives. The Fund’s overall rate of return will be affected by the percentage of the Fund’s assets that remain in lower-yielding short-term investments and the length of time that assets remain in such investments pending selection of investments in accordance with the Fund’s investment objectives.

Moreover, once the Fund invests in special situation investments, it may take up to two years or longer before the investments have matured to a point considered appropriate by the Fund for their disposition. Thus, should the Fund for any reason, including its semi-annual repurchases of Units, be required to liquidate or dispose of its investments, it might receive a substantially lower return on such investments than may have been expected at the time of the Fund’s purchase of such investments. There is no way to predict how long the Fund will hold any of its portfolio investments, and, in any event, no assurance can be given that any of the Fund’s portfolio investments will generate gains.

Competition for Investments; Other Funds

The Fund will encounter competition for investment opportunities from other individuals or entities, including the Registered Fund, the Private Equity Fund, the Cayman Fund, the Technology Funds and the Life Sciences Fund. Other competitors may include affiliates of the General Partner, their respective clients, other partnerships or entities in which the General Partner or its affiliates may be partners or shareholders, and future clients of the General Partner. Such competition may limit the investment opportunities available to the Fund and/or the size of the Fund’s investment in particular securities. While the General Partner is obligated to use its best judgment in providing the Fund with a continuing and suitable investment program consistent with its investment objective and policies, the General Partner is not required to present to the Fund any particular investment opportunity which has come to its attention, even if such opportunity is within the investment objective and policies of the Fund. The Fund will invest in certain companies in which one or more of the Registered Fund, the Private Equity Fund, the Cayman Fund, the Technology Funds and the Life Sciences Fund have invested or may in the future invest, and the Fund may co-invest with the General Partner, its affiliates or its investment advisory clients. Because of different objectives or other factors, a particular special situation investment may be acquired by the General Partner or its affiliates or one of their clients, including the Fund, at a time when another of such entities is selling such investment. The General Partner will endeavor to resolve any conflicts with respect to investment opportunities in a manner equitable to the interests of the Fund and the General Partner’s other clients or affiliates, including the Registered Fund, the Private Equity Fund, the Cayman Fund, the Technology Funds and the Life Sciences Fund.

Allocation of Management Time and Services

Austin W. Marxe, David M. Greenhouse and Adam Stettner are principally responsible for the investment decisions of the Fund, the Registered Fund, the Private Equity Fund, the Cayman Fund, the Technology Funds and the Life Sciences Fund. See “THE MANAGEMENT TEAM - Other Special Situations Funds.” As such, each of them will be required to allocate his time and effort and his services among the Fund and the other Funds. In addition, each may be required to devote his time and services to other clients or funds with similar investment objectives to that of the Fund. Mr. Marxe, Mr. Greenhouse and Mr. Stettner may have a conflict of interest in allocating their time, services or functions among the Fund, the other Funds, and other clients or funds. Nonetheless, each has agreed to devote as much time as he considers necessary to conduct the business and affairs of the Fund.

Investment Company Act of 1940

The Fund believes that it does not come within the definition of an “investment company” as defined in Section 3(a) of the 1940 Act. Accordingly, the Fund, unlike the Registered Fund, does not intend to register under the 1940 Act and will not be subject to regulation thereunder. The 1940 Act contains various provisions applicable to registered investment companies, including provisions relating to management and transactions with affiliates, which may be inconsistent with the proposed manner of operations of the Fund. Accordingly, if the Fund were required to register under the 1940 Act, the Fund and its proposed manner of operation could be materially adversely affected.

Market Volatility

Recent years have evidenced significant volatility in both the United States and foreign securities markets, including the equity securities markets. The Nasdaq “national” and “small cap” securities markets, in particular, have experienced significant shifts in values, particularly in the technology and Internet-related industries. Domestic as well as foreign economic conditions may adversely affect the Fund’s activities. Interest rates, general levels of economic activity and participation

by other investors in the financial markets will affect the value of investments made or held by the Fund. Increased market volatility increases the risk of loss in securities investments as compared to the risk of loss during more stable market conditions.

Low-Rated and Unrated Debt Securities

The Fund may from time to time invest in debt securities, including those classified as low-rated or unrated by Moody’s and S&P. Low-rated and unrated debt securities generally offer higher current yields than higher rated securities, but involve greater volatility of price and risk of payment of principal and income, including the possibility of default by, or bankruptcy of, the issuers of the securities. In addition, the markets in which low-rated and unrated securities are traded are more limited than those in which higher rated securities are traded. The existence of limited markets for any particular debt security in which the Fund invests may diminish the Fund’s ability to sell such securities at fair value.

Non-United States Securities

The Fund may from time to time acquire securities of foreign issuers listed on foreign securities exchanges or traded in foreign markets as part of its investment portfolio. Any such investment would involve considerations not typically associated with investing in securities of United States companies or of foreign issuers listed or traded in the United States. Investing in such foreign securities, for example, could cause the Fund to be affected favorably or unfavorably by changes in currency exchange rates and revaluations of currencies. In addition, less information may be available about foreign companies than about United States companies, and foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements comparable to those applicable to United States companies. Such foreign securities and their markets may not be as liquid as United States securities and their markets. Investing in such foreign securities may result in higher expenses than investing in United States securities because of the cost of converting foreign currencies to United States dollars, expenses relating to foreign custody, the payment of fixed brokerage commissions on foreign exchanges, which generally are higher than commissions on United States exchanges, and the imposition of transfer taxes or transaction charges associated with foreign exchanges. In addition, investments in such foreign securities may be subject to local economic or political risks, including instability of some foreign governments, the possibility of currency blockage, the imposition of withholding taxes on dividend or interest payments, and the potential for expropriation, nationalization or confiscatory taxation and limitations on the use or removal of funds or other assets.

Leverage

The Fund may borrow money to purchase securities. Borrowing money to purchase securities would provide the Fund with the opportunity for greater capital gain and greater diversification but, at the same time, would increase the Fund’s current expenses and exposure to capital risk. To the extent that the Fund purchases securities with borrowed funds, Partners that are exempt from United States income taxation may be subject to tax on “unrelated business taxable income” as defined in the Code. See “CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.”

Short Sales

A short sale involves the sale of a security that is not owned in the expectation of purchasing the same security (or a security exchangeable therefor) at a later date at a lower price. To make delivery to the buyer, one must borrow the security, and is obligated to return the security to the lender, which is accomplished by a later purchase of the security by the short seller. When the Fund

makes a short sale in the United States, it must leave the proceeds thereof with the broker and it also must deposit with the broker an amount of cash or U.S. government securities or other securities sufficient under current margin regulations to collateralize the obligation to replace the borrowed securities that have been sold. If short sales are effected on a foreign exchange, such transactions are governed by local law. A short sale involves the risk of a theoretically unlimited increase in the market price of the security and the possibility of incurring a substantial loss in covering the short sale. In addition, short sellers are subject to the risk of a “short squeeze.” A short squeeze is a situation in which the short seller is prematurely forced out of a short position. The lender of a security used to cover a short generally has the right to demand the return of the stock that has been loaned at any time. In such event, the Fund would be required to replace the borrowed securities by borrowing the securities from another lender. It generally is more difficult to find securities that can be borrowed in the case of small-cap and mid-cap issuers. If the Fund were unable to replace the borrowed securities, it would be required to close out the short sale by buying the security in the market in order to make delivery. In such event, the Fund could incur a significant loss if the security sold short had increased in value. In addition, the Fund also could be forced to close out a short sale prematurely as a result of an increase in margin requirements, coupled with an inability to provide the required additional margin on short notice.

Performance-Based Advisory Fee

The General Partner will receive compensation, i.e. an Incentive Allocation, determined on the basis of Book Profit for its services as the Fund’s investment adviser. Book Profit, in turn, is based on, and includes, unrealized appreciation of the Fund’s portfolio investments which may never be realized as portfolio investments are sold or liquidated. Moreover, compensating the General Partner on the basis of the Fund’s performance may create an incentive for the General Partner to invest the Fund’s assets in investments that are riskier or more speculative than those in which the General Partner would invest if it were compensated in another manner. The General Partner will, however, be subject to a fiduciary duty to the Fund and to the restrictions of the Advisers Act in evaluating the acquisition, retention and disposition of the Fund’s investments. As a result of the General Partner’s receipt of an Incentive Allocation representing a share of the Fund’s Book Profit, the Units owned by the General Partner will increase disproportionately to any increase in the number of Units held by the Limited Partners. See “ALLOCATION OF PROFIT AND LOSS.”

Reliance on Management

All decisions with respect to the management of the Fund and its investments will be made by the General Partner. Limited Partners have no right or power to take part in the management of the Fund. An investor will not receive the detailed financial information issued by portfolio companies or other entities which is available to the General Partner. Accordingly, no person should purchase Units unless such person is willing to entrust all aspects of the operation and management of the Fund to the General Partner.

Lack of Separate Representation

The Fund and the General Partner are and have been represented by the same legal counsel in connection with the offering of Units. No legal counsel has been retained by the Fund or the General Partner to represent the interests of the Limited Partners. The agreements and arrangements among the Fund and the General Partner are not the result of arm’s-length negotiations.

Other Relationships with Portfolio Companies

The Fund may make investments in companies or other entities for which affiliates of the General Partner, such as MG, SST, AWM or LS may then, or in the future, be rendering advisory or financial services. As a result of the Fund’s investments, such affiliates may be able to negotiate on a favorable basis arrangements and fees inuring to their benefit. Moreover, the Fund may make investments in companies or other entities in which such affiliates may hold or own substantial interests. In all these instances, the General Partner, as a fiduciary to the Fund, will use its best efforts to act in the interests of the Fund and will endeavor to resolve any conflicts without adverse consequences to the Fund. In any event, the General Partner will not permit the Fund to make any such investments in such companies or other entities if any such investments would be in violation of any applicable provisions of ERISA.

Possible Loss of Limited Liability

In general, limited partners in a partnership are not liable for partnership obligations as general partners unless they take an active part in the control of the business of the partnership. Assuming compliance with the Partnership Agreement and relevant provisions of Delaware law, Limited Partners in the Fund should not be liable beyond their investments in Units and their shares of the Fund’s assets and undistributed profits, except for any part of their investments wrongfully distributed to them which may be recovered under applicable law.

***

EX-99.7 8 tex99a1vii.htm EXHIBIT 99.(A)(1)(VII) Exhibit 99.(a)(1)(vii)

Exhibit 99.(a)(1)(vii)

SPECIAL SITUATIONS FUND III QP, L.P.

AGREEMENT OF LIMITED PARTNERSHIP

Dated as of January 1, 2006

THE UNITS IN SPECIAL SITUATIONS FUND III QP, L.P. HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES OR “BLUE SKY” LAWS OF ANY STATE. THE UNITS MAY NOT BE RESOLD UNLESS (A) THEY ARE SUBSEQUENTLY REGISTERED UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS OR (B) EXEMPTIONS FROM ANY SUCH REGISTRATION ARE AVAILABLE. ADDITIONAL RESTRICTIONS ON TRANSFERABILITY ARE CONTAINED IN ARTICLE VIII OF THIS AGREEMENT.

ARTICLE I	DEFINITIONS	1
ARTICLE II	GENERAL PROVISIONS	5
2.1	Formation	5
2.2	Name	5
2.3	Principal Office; Registered Agent.	5
2.4	Duration	5
2.5	Investment Objective	6
2.6	Operating Policy and Powers.	6
2.7	Investment Restrictions	7
2.8	Further Assurances	8
2.9	Qualification	8
ARTICLE III	GENERAL PARTNER	8
3.1	General Partner	8
3.2	General Partner’s Contributions.	8
3.3	Management and Control.	9
3.4	Other Activities of the General Partner	9
3.5	Restrictions on Authority of the General Partner.	10
3.6	Exculpation.	10
3.7	Indemnification.	10
3.8	No Agency	11
3.9	Assignment	11
3.10	Expenses; Fees.	11
ARTICLE IV	LIMITED PARTNERS	12
4.1	Sale of Units; Admission of Limited Partners; Capital Contributions.	12
4.2	No Power to Control Business	12

4.3	Liability of Limited Partners	13
ARTICLE V	CAPITAL ACCOUNTS AND ALLOCATIONS	13
5.1	Capital Accounts	13
5.2	No Distributions	13
5.3	Allocations of Book Profit and Book Loss	13
5.4	Tax Accounts	14
5.5	Allocations of Net Income, Net Loss, Net Capital Gain and Net Capital Loss	14
5.6	Special Allocations of Capital Gain and Capital Loss Upon Redemption of All of a Partner’s Units.	15
5.7	Determinations by General Partner	16
5.8	New Issues.	16
ARTICLE VI	REDETERMINATION OF UNITS; REDEMPTIONS AND ADDITIONAL CONTRIBUTIONS; VALUATION	17
6.1	Redetermination of Units Held	17
6.2	Redemptions of Units.	17
6.3	Additional Capital Contributions	19
6.4	Net Asset Value	19
6.5	Valuation of Assets	19
ARTICLE VII	TRANSFERABILITY OF LIMITED PARTNERS’ UNITS	20
7.1	Assignments, Sales or Other Dispositions by Limited Partners.	20
7.2	Involuntary Transfers by a Limited Partner.	22
7.3	Prohibition Against Withdrawals	22
ARTICLE VIII	REPORTS TO PARTNERS	23
8.1	Records and Accounting	23
8.2	Fiscal Year	23

8.3	Statements.	23
8.4	Tax Information	23
8.5	Other Reports	23
8.6	Tax Matters Partner	24
ARTICLE IX	DISSOLUTION OF THE FUND	24
9.1	Dissolution.	24
9.2	Amount Reserved and Pending Claims.	25
ARTICLE X	MISCELLANEOUS	25
10.1	Binding Agreement	25
10.2	Notices	25
10.3	Counterparts	26
10.4	Entire Agreement: Amendments	26
10.5	Power of Attorney	26
10.6	Applicable Law	27
10.7	Severability	27
10.8	Captions	27
10.9	Insurance	27
10.10	Ownership of Good Will, Software, Intellectual Property	27
10.11	Pronouns and Plurals	28

iii

SPECIAL SITUATIONS FUND III QP, L.P.

(A Delaware Limited Partnership)

AGREEMENT OF LIMITED PARTNERSHIP of Special Situations Fund III QP, L.P. (the “Fund”), dated as of January 1, 2006, by and among MGP Advisers Limited Partnership, a Delaware limited partnership (the “General Partner”), and those Persons who now or in the future execute this Agreement as a Limited Partner or execute a Subscription Agreement for the purchase of a limited partnership interest which is accepted by the General Partner (the “Limited Partners”).

WHEREAS, the Fund is being formed as a limited partnership in accordance with the Delaware Act for the purposes described herein; and

WHEREAS, this Agreement is being entered into to admit the Limited Partners to the Fund and set out the rights, obligations and duties of the General Partner and the Limited Partners in the Fund.

NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants herein contained, hereby mutually covenant and agree as follows:

ARTICLE I

DEFINITIONS

The defined terms used in this Agreement shall have, unless the context otherwise requires, the meanings specified in this Article I.

“Affiliate”, with respect to any Person, shall mean (i) any Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person and (ii) any Person who is an officer, director, trustee, employee, stockholder or member of, or partner in, such Person or any Person referred to in clause (i) hereof. For the purposes hereof, “control” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.

“Agreement” shall mean this Agreement of Limited Partnership, as it may be amended, modified, supplemented or restated from time to time.

“Assignee” shall have the meaning specified in Section 7.1(b) hereof.

“Assignment” shall have the meaning specified in Section 7.1(a) hereof.

“Assignor” shall have the meaning specified in Section 7.1(b) hereof.

“Book Loss”, as calculated for each Fiscal Period, shall mean the amount, if any, by which (i) the Fund’s Net Asset Value as of the opening of business on the first day of such Fiscal Period (determined after any Capital Contributions on such date) shall exceed (ii) the

Fund’s Net Asset Value as of the close of business on the last day of such Fiscal Period (determined before any redemptions on such date).

“Book Profit”, as calculated for each Fiscal Period, shall mean the amount, if any, by which (i) the Fund’s Net Asset Value as of the close of business on the last day of such Fiscal Period (determined before any redemptions on such date) shall exceed (ii) the Fund’s Net Asset Value as of the opening of business on the first day of such Fiscal Period (determined after any Capital Contributions on such date).

“Capital Account” shall mean the capital account of each Partner described in Section 5.1 hereof.

“Capital Contribution” shall mean, for each Partner, any cash contributed to the Fund by such Partner.

“Capital Gain” shall mean an amount, calculated with respect to each sale or other disposition (including any deemed disposition under the Code) of a Portfolio Investment, equal to the gain, if any, reportable for Federal income tax purposes upon such sale or disposition.

“Capital Loss” shall mean an amount, calculated with respect to each sale or other disposition (including any deemed disposition under the Code) of a Portfolio Investment, equal to the loss, if any, reportable for Federal income tax purposes upon such sale or disposition.

“Certificate” shall mean the Fund’s Certificate of Limited Partnership, as originally filed with the Secretary of State of Delaware pursuant to the Delaware Act, as amended, modified, supplemented or restated from time to time.

“Closing Date” shall mean the date of the closing of an offering of Units.

“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of succeeding law).

“Contributed Assets” shall mean the assets of the Registered Fund consisting of cash, cash equivalents and securities, contributed to the Fund by the Registered Fund in return for the issuance to the Registered Fund of Units in the Fund.

“Covered Person” shall have the meaning set forth in Section 3.7(c) hereof.

“Delaware Act” shall mean the Delaware Revised Uniform Limited Partnership Act (6 Del. C. § 17-101, et seq.), as amended from time to time.

“Exchange” shall mean the exchange by the partners of the Registered Fund of Units in the Registered Fund for Units in the Fund issued in return for the Contributed Assets, which shall be effective at the end of the day on December 31, 2005.

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“Fiscal Period” shall mean the period beginning on the day next succeeding the last day of the immediately preceding Fiscal Period (or, in the case of the Fund’s first Fiscal Period, the Closing Date) and ending on the first to occur of the following:

(i) any date which is the last day of a Fiscal Year;

(ii) the day immediately preceding any date on which Capital Contributions shall be made to the Fund;

(iii) the effective date of any redemptions of Units from any Partner pursuant to Section 6.2 hereof; or

(iv) the effective date of a liquidation of the Fund pursuant to Section 9.1 hereof.

“Fiscal Year” shall mean a fiscal year of the Fund as set forth in Section 8.2 hereof.

“Fund” shall mean the limited partnership governed hereby, as such limited partnership may from time to time be constituted.

“General Partner” shall mean MGP Advisers Limited Partnership and any other Person that becomes a general partner of the Fund pursuant to this Agreement, in such Person’s capacity as a general partner of the Fund.

“Legal Representative” shall mean any executor, administrator, committee, guardian, conservator or trustee.

“Limited Partner” shall mean any Person who is a limited partner of the Fund, as listed in the books and records of the Fund (including any Person who shall become a Substituted Limited Partner pursuant to Section 7.1(c) hereof or an additional Limited Partner pursuant to Section 6.3 hereof), in such Person’s capacity as a limited partner of the Fund.

“Loss Carryforward” shall have the meaning specified in Section 5.3(a)(iii) hereof.

“Net Asset Value” shall have the meaning set forth in Section 6.4 hereof.

“Net Capital Gain” shall mean an amount, calculated for each Fiscal Period, equal to the excess, if any, of the Fund’s Capital Gains (other than Capital Gains allocated pursuant to Section 5.6 hereof) over the Fund’s Capital Losses (other than Capital Losses allocated pursuant to Section 5.6 hereof).

“Net Capital Loss” shall mean an amount, calculated for each Fiscal Period, equal to the excess, if any, of the Fund’s Capital Losses (other than Capital Losses allocated pursuant to Section 5.6 hereof) over the Fund’s Capital Gains (other than Capital Gains allocated pursuant to Section 5.6 hereof).

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“Net Income” shall mean an amount, calculated for each Fiscal Period, equal to the excess, if any, of (i) the sum of (A) the amount of the Fund’s taxable income, as determined for Federal income tax purposes, excluding Capital Gains and Capital Losses, and (B) the amount of any income exempt from tax derived by the Fund, over (ii) the sum of (A) the Fund’s taxable loss, as determined for Federal income tax purposes, excluding Capital Gains and Capital Losses, and (B) the amount of any expenditures of the Fund described in Section 705(a)(2)(B) of the Code or treated as expenditures described in such Section pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations.

“Net Loss” shall mean an amount, calculated for each Fiscal Period, equal to the excess, if any, of (i) the sum of (A) the Fund’s taxable loss, as determined for Federal income tax purposes, excluding Capital Gains and Capital Losses, and (B) the amount of any expenditures of the Fund described in Section 705(a)(2)(B) of the Code or treated as expenditures described in such Section pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations, over (ii) the sum of (A) the amount of the Fund’s taxable income, as determined for Federal income tax purposes, excluding Capital Gains and Capital Losses, and (B) the amount of any income exempt from tax derived by the Fund.

“1940 Act” shall mean the Investment Company Act of 1940 and the rules and regulations thereunder, as amended from time to time.

“Partners” shall mean the General Partner and the Limited Partners, collectively, and “Partner” shall mean each of them, individually.

“Person” shall mean any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or other entity.

“Portfolio Investments” shall mean all investments other than cash held by the Fund, including, without limitation, securities and short-term and temporary investments.

“Registered Fund” shall mean Special Situations Fund III, L.P. a Delaware limited partnership and a closed-end management investment company registered under the 1940 Act.

“Regulations” shall mean the Treasury Regulations promulgated under the Code.

“Securities Act” shall mean the Securities Act of 1933.

“Subscription Agreement” shall mean the subscription agreement executed or to be executed by a Limited Partner.

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“Substituted Limited Partner” shall mean any Person admitted to the Fund as a Limited Partner pursuant to the provisions of Section 7.1(c) hereof and shown as a Limited Partner on the books and records of the Fund.

“Tax Account” shall mean the account established and maintained for each Partner pursuant to Section 5.4 hereof.

“Units” shall mean the units of interest in the Fund’s capital and profits issued to its Partners.

Defined terms used in this Agreement, wherever set forth, shall apply equally to both the singular and plural forms and shall include equally both the masculine and feminine genders.

ARTICLE II

GENERAL PROVISIONS

2.1 Formation. The Partners hereby form the Fund under the Delaware Act in accordance with the provisions of this Agreement. The General Partner, on behalf of the Fund, shall execute the Certificate and all such other documents as are necessary or desirable to comply with all requirements for the formation or operation of the Fund. The rights and liabilities of the Partners shall be as provided in the Delaware Act, except as otherwise expressly provided herein.

2.2 Name. The name of the Fund shall be “Special Situations Fund III QP, L.P.” Title to all property, real, personal or mixed, owned by or leased to the Fund, shall be held in such name. The Fund’s business may be conducted under any other name or names deemed advisable by the General Partner. The words “Ltd.,” “Limited Partnership” or such other designation as the General Partner shall deem appropriate shall be included in the name as may be necessary to comply with the laws of any jurisdiction.

2.3 Principal Office; Registered Agent.

(a) The Fund shall maintain its principal office at 527 Madison Avenue, Suite 2600, New York, New York 10022. The General Partner may from time to time change the location of the Fund’s principal office or establish additional offices, as the General Partner may deem necessary or desirable for the conduct of the Fund’s business.

(b) The name and address of the registered agent of the Fund in the State of Delaware upon whom process may be served, and the address of the registered office of the Fund in the State of Delaware, is Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, County of New Castle, Delaware 19805. The General Partner may from time to time change the Fund’s registered agent or registered office in Delaware as the General Partner may deem necessary or desirable for the conduct of the Fund’s business.

2.4 Duration. The term of the Fund shall continue in perpetuity, unless the Fund is sooner dissolved pursuant to Section 9.1(a) hereof.

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2.5 Investment Objective. The investment objective of the Fund shall be to maximize long-term capital appreciation by investing primarily in equity securities and securities with equity features, such as common stocks, preferred stocks, convertible securities and warrants, of companies traded publicly on NASDAQ and “over-the-counter” or listed on national securities exchanges, which possess a technological, market or product niche, which may be, for many reasons, undervalued, or with prospects of going private or being acquired. The Fund may also invest, to a limited degree, in securities of non-public companies. The Fund’s investment portfolio will consist principally of common stocks and securities convertible into or exchangeable for common stocks, including warrants and rights. The Fund may also invest, to a limited degree, in preferred stocks and debt securities as they offer opportunities for capital appreciation. The Fund may also purchase and write options, purchase foreign securities and engage in related foreign currency transactions. In certain instances the Fund may invest a significant portion of its assets in securities of the United States government or retain cash or cash equivalents, such as money market instruments, certificates of deposit or commercial paper. There is no assurance that the Fund’s investment objective will be achieved.

2.6 Operating Policy and Powers.

(a) The Fund shall be authorized and empowered to operate, and intends to operate, as a limited partnership under the Delaware Act.

(b) Subject to the restrictions set forth in Section 2.7 hereof, the Fund shall be authorized and empowered to do any and all acts necessary or appropriate to carry out the investment objective and the business of the Fund, including without limitation, the following:

(i) To invest and trade, domestically or world-wide, in securities consistent with its investment objective;

(ii) To make short sales of securities and to purchase securities on margin;

(iii) To exercise all rights, powers, privileges and other incidents of ownership or possession with respect to securities, including without limitation the voting of the securities;

(iv) To engage personnel and professional advisers, and to do such other acts and incur such other expenses on behalf of the Fund as may be necessary or advisable in connection with the conduct of the Fund’s affairs;

(v) To open, maintain and close accounts with brokers or dealers, and to pay the fees and charges applicable to transactions in all such accounts;

(vi) To open, maintain and close bank accounts and to draw checks and other orders for the payment of money;

(vii) To make and execute all contracts, certificates and other documents relating to the Fund’s business or organization;

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(viii) To make loans of or encumber Portfolio Investments;

(ix) To engage one or more investment advisers and administrators for the Fund to supervise Portfolio Investments and to administer the affairs of the Fund;

(x) To invest or deposit the Fund’s cash, pending investment or expenditure thereof, in one or more checking or savings accounts, money market mutual funds, short term investment funds or other short term investments; and

(xi) To exercise any and all other powers which may be necessary or appropriate to implement the foregoing purposes, policies and powers of the Fund, including those granted to limited partnerships under the Delaware Act.

2.7 Investment Restrictions. The following restrictions of the Fund shall not be changed without the approval of the General Partner and Limited Partners holding at least a majority of the Units held by Limited Partners:

(a) The Fund will invest no more than 25% of the value of its total assets (at the time of investment) in the securities of issuers whose primary business is in any one industry, except that this restriction shall not apply to investments in obligations of the United States government, or its agencies, instrumentalities or authorities, money market funds, certificates of deposit, short-term commercial paper or bankers’ acceptances;

(b) The Fund will invest no more than 15% of the value of its total assets (at the time of investment) in the securities of a particular issuer, except that this restriction shall not apply to investments in obligations of the United States government, or its agencies, instrumentalities or authorities, money market funds, certificates of deposit, short-term commercial paper or bankers’ acceptances;

(c) The Fund will not lend money to other Persons, except through purchasing debt obligations, lending Portfolio Investments or entering into repurchase agreements in a manner consistent with the Fund’s investment objective and investment policies;

(d) The Fund will not underwrite the securities of other issuers, except insofar as the Fund may be deemed an underwriter under the Securities Act by virtue of disposing of its Portfolio Investments;

(f) The Fund will not purchase or sell commodities or commodity contracts, except that the Fund may engage in transactions to hedge interest rate or foreign currency risks, including, without limitation, investing in exchange traded or over-the-counter options or foreign currency futures contracts;

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(g) The Fund will not issue senior securities, as such term is defined in the 1940 Act, except in connection with borrowings described in clause (h) of this Section 2.7 or transactions involving short sales or options. Collateral arrangements with respect to options, margins and short sales are not considered by the Fund to be the issuance of senior securities;

(h) The Fund will not borrow money, except that the Fund may borrow from banks and other Persons to purchase Portfolio Investments if, after giving effect to any such borrowing, the ratio that (i) the value of the Fund’s total assets, less all liabilities and indebtedness not represented by senior securities (as such term is defined under the 1940 Act), bears to (ii) the aggregate amount of senior securities representing indebtedness, shall be at least 300%; and

(i) The Fund will not mortgage, pledge, hypothecate or otherwise encumber any of its Portfolio Investments, except as maybe necessary or appropriate in connection with borrowings described in clause (h) of this Section 2.7. This restriction shall not restrict the deposit in escrow of securities or other assets of the Fund in connection with short sales, put and call options and loans of portfolio securities.

2.8 Further Assurances. Each Limited Partner shall, at the request of the General Partner, execute such other documents, certificates, instruments and other writings as the General Partner shall deem necessary or appropriate in order to effectuate the provisions of this Agreement.

2.9 Qualification. The Fund shall use its best efforts to qualify to do business in each jurisdiction in which its activities shall make such qualification necessary.

ARTICLE III

GENERAL PARTNER

3.1 General Partner. MGP Advisers Limited Partnership, a Delaware limited partnership, is the sole general partner of the Fund. The amount of Capital Contributions made, and the number of Units owned, by the General Partner shall be set forth in the books and records of the Fund. Additional General Partners may be admitted to the Fund only with the consent of the General Partner and Limited Partners holding at least a majority of the Units held by Limited Partners.

3.2 General Partner’s Contributions.

(a) The General Partner shall contribute to the Fund through the purchase of Units from time to time, amounts sufficient to enable the General Partner to own at all times not less than one percent (1%) of the total number of the outstanding Units. The General Partner shall not sell, assign or otherwise dispose of any Units or elect to have Units redeemed pursuant to Section 6.2 hereof, if such actions would result in the failure of the General Partner to maintain such one percent (1%) interest.

(b) Except as provided herein, the General Partner shall not be required or obligated to make any additional Capital Contributions to the Fund; provided,

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however, that the General Partner shall be required to make a Capital Contribution in the amount of any deficit balance in its Capital Account upon a liquidation of the Fund pursuant to Section 9.1 hereof. Any Capital Contribution required to be made by the General Partner to fund a deficit balance in its Capital Account shall be paid to the Fund by the later of (i) the end of the Fiscal Year in which such liquidation shall occur or (ii) ninety (90) days after the date of such liquidation.

3.3 Management and Control.

(a) Subject to the terms of this Agreement, the management, operation and control of the business of the Fund shall be vested completely and exclusively in the General Partner, and the General Partner shall have the right, power and authority, on behalf of the Fund and in its name, to exercise all rights, powers and authority of a general partner under the laws of Delaware. The General Partner may enter into, execute, amend, supplement, acknowledge and deliver any and all contracts, agreements or other instruments, including, but not limited to, contracts with one or more banks, trust companies, administrators or broker-dealers for the performance of services to the Fund, including the investment and reinvestment of all or part of the Fund’s assets, the execution of portfolio transactions and the performance of any or all administrative functions. The General Partner may also appoint agents to perform such duties on behalf of the Fund as the General Partner may deem desirable. The General Partner may employ, retain, or otherwise secure or enter into contracts, agreements and other undertakings on behalf of the Fund with Affiliates of the General Partner, on such terms and for such consideration as the General Partner shall deem advisable; provided, however, that any such contracts, agreements or other undertakings shall be on terms and for consideration which are fair to the Fund.

(b) Persons dealing with the Fund shall be entitled to rely conclusively upon a certificate of the General Partner to the effect that it is then acting as the General Partner and upon the power and authority of the General Partner or the Fund as set forth herein.

3.4 Other Activities of the General Partner. The General Partner shall devote such time as it shall determine to be necessary for the efficient conduct of the Fund’s business. The General Partner and its Affiliates may engage or participate in other businesses or ventures, whether or not of the same nature as, or competing with, the business of the Fund, and any of them shall be permitted to perform duties for any other Person similar to, or competing with, the duties performed for the Fund. No Limited Partner shall be entitled to any profits which the General Partner or any of its Affiliates shall derive from any businesses or ventures other than the Fund, whether or not such businesses or ventures shall be of the same nature as, or competing with, the business of the Fund. The General Partner and its Affiliates, whether as investment adviser, dealer, broker or otherwise, shall in no way be prohibited by this Agreement from buying or selling securities, or making other investments for their own account, or for the account of any other Person, including securities and other investments which are the same as those held by the Fund. Notwithstanding the foregoing, neither the General Partner nor any of its Affiliates may, acting as principal, purchase any securities or other assets from, or sell any securities or other assets to, the Fund.

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3.5 Restrictions on Authority of the General Partner.

(a) The General Partner shall have no authority, without the approval of all the Limited Partners, to:

(i) do any act in contravention of this Agreement;

(ii) do any act that would make it impossible to carry on the ordinary business of the Fund;

(iii) possess any of the Fund’s property or assign, pledge or hypothecate the Fund’s rights in specific property for other than the purposes of the Fund; or

(iv) perform any act, unless specifically required by the terms of this Agreement, that would subject any Limited Partner to liability as a general partner in any jurisdiction.

(b) The General Partner shall have no authority, without the approval of Limited Partners holding at least a majority of the Units held by Limited Partners, to change the investment objective of the Fund as specified in Section 2.5 hereof.

(c) In the event that the requisite approval of Limited Partners shall be obtained under this Section 3.5, the General Partner shall amend this Agreement to the extent necessary to reflect any such action. Nothing in this Section 3.5 shall preclude a dissolution of the Fund in accordance with this Agreement.

3.6 Exculpation.

(a) No Covered Person shall be liable, responsible or accountable in damages or otherwise to any Limited Partner or the Fund for any act or omission of such Covered Person, except for acts or omissions constituting willful malfeasance, bad faith, gross negligence or reckless disregard of such Covered Person’s duties. Each Covered Person may consult with counsel and accountants in respect of the Fund’s affairs and shall be fully protected and justified in any action or inaction which shall be taken in accordance with the advice or opinion of such counsel or accountants.

(b) No Covered Person shall be personally liable to any Limited Partner or the Fund by reason of any change in any laws, including, without limitation, any tax laws, or in interpretations of those laws, as they apply to the Fund or the Partners whether the change shall occur through legislative, judicial or administrative action.

3.7 Indemnification.

(a) The Fund shall indemnify and hold each Covered Person harmless against all losses, claims, obligations, damages, liabilities and expenses, including, but not limited to, amounts paid in satisfaction of judgments, in compromise or settlement, or as fines or penalties, and reasonable fees and expenses, including without limitation, attorneys’ fees and expenses, incurred in connection with or resulting from the investigation, defense or disposition

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of any claim, action, suit or other proceeding, whether civil or criminal, before any court, tribunal or administrative or legislative body, in which such Covered Person may be or may have been involved as a party or otherwise, or with which such Covered Person may be or may have been threatened, by reason of or in any way relating to the Fund or its business or affairs, or arising out of or in connection with any action or failure to act on the part of such Covered Person, except with respect to any matter as to which such Covered Person shall have been finally adjudicated in a decision on the merits in any such action, suit or other proceeding to be liable to the Fund or its Partners by reason of willful malfeasance, bad faith, gross negligence or reckless disregard of such Covered Person’s duties. Expenses, including reasonable counsel fees incurred by any such Covered Person, may be paid from time to time by the Fund in advance of the final disposition of any such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Covered Person to repay amounts so paid if it shall be ultimately determined that indemnification of such expenses is not authorized hereunder.

(b) The termination of any action, suit or proceeding by settlement or compromise shall not, of itself, create a presumption that a Covered Person acted or failed to act in a manner constituting willful misfeasance, bad faith, gross negligence or reckless disregard of duties. The rights of indemnification provided herein shall be in addition to and shall not be exclusive of or affect any other rights to which any Covered Person may be entitled by contract or otherwise under law. The Fund may, but shall not be obligated to, purchase and maintain liability insurance for or on behalf of any Persons, including any Covered Person.

(c) As used in this Agreement, “Covered Person” shall mean (i) the General Partner and any Affiliate, member or agent of the General Partner (including any Person who shall serve at the General Partner’s or the Fund’s request as a director, officer, partner, agent or trustee of another organization in which the Fund shall have any interest as a shareholder, creditor or otherwise) and (ii) the Legal Representatives and any heirs or distributees of the Persons referred to in clause (i) hereof.

3.8 No Agency. Nothing in this Agreement shall be construed as establishing the General Partner as an agent of any Limited Partner except as the General Partner may act as an agent of the Fund in accordance with this Agreement.

3.9 Assignment. The General Partner may assign or otherwise transfer any portion of the General Partner’s Units so long as such assignment or transfer (i) shall not violate the provisions of Section 3.2(a) hereof and (ii) shall be in compliance with the limitations and other provisions of Article VIII hereof (governing Assignments by Limited Partners); provided, however, the General Partner may assign, distribute or otherwise transfer a portion of its Units to one or more of its equity owners without compliance with Article VII hereof.

3.10 Expenses; Fees.

(a) The Fund shall pay all expenses incurred, and the General Partner and its Affiliates shall be entitled to reimbursement from the Fund for all amounts expended by any of them on behalf of the Fund, in connection with the organization of the Fund, the Exchange and the offering of Units, including, but not limited to, accounting, legal, printing and clerical expenses, regulatory and filing fees of any kind, and mailing and courier expenses. Up

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to $5,000 of such organizational expenses may be amortized in the first year of operation, with the remainder amortized over a one hundred eighty (180) month amortization period.

(b) The Fund shall pay all expenses incurred in connection with the Fund’s business, including any fee or fees payable to the General Partner and its Affiliates pursuant to this Agreement or any other effective agreements. Notwithstanding the foregoing, the Fund shall not pay any general overhead expenses of the General Partner or its Affiliates, including rent and salaries of personnel, which expenses shall be borne by the General Partner or such Affiliates.

(c) The Fund shall pay an annual administrative fee of 0.75% of the Fund’s Net Asset Value to AWM Investment Company, Inc., an Affiliate of the General Partner, as administrator of the Fund. Such fee shall be payable in amounts equal to 0.1875% of the Net Asset Value of the Fund at the close of business on the last day of each calendar quarter (prior to any redemptions of Units on such date). Such fee shall be payable pursuant to the terms of an administration agreement between the Fund and such Affiliate.

ARTICLE IV

LIMITED PARTNERS

4.1 Sale of Units; Admission of Limited Partners; Capital Contributions.

(a) The General Partner shall have the right, without the consent of any Limited Partner, to offer, issue, and sell Units to such Limited Partners as shall not cause the Fund to be deemed an “investment company” for purposes of the 1940 Act. All such Units shall be sold for a price per Unit of $25,000, payable as a Capital Contribution. Units shall be offered to persons and entities who meet the investor qualification and suitability standards set forth in the Subscription Agreement. Unless waived by the General Partner, the minimum subscription by a Limited Partner on the Closing Date shall be 4 Units ($100,000).

(b) Each Limited Partner shall, on the Closing Date, make a Capital Contribution consisting of cash or other Contributed Assets to the Fund in return for Units, in the amount set forth in such Limited Partner’s Subscription Agreement. The General Partner shall maintain in the records of the Fund, a schedule setting forth the name, address and amount of Capital Contributions and Units of each Limited Partner.

(c) No Partner shall have the right to require partition of the Fund’s property or to compel any sale or appraisal of the Fund’s assets. Except as otherwise provided in Section 6.2 hereof, no Partner shall have the right to demand a return of such Partner’s Capital Contributions. The General Partner shall not be personally liable for the return of any Capital Contributions, it being expressly understood that any such return shall be made solely from the Fund’s assets. No Limited Partner shall have the right to demand or receive property other than cash for such Partner’s Units. No interest shall be paid on any Capital Contribution.

4.2 No Power to Control Business. A Limited Partner shall have no right to participate in and shall take no part in the control of the Fund’s business and shall have no right or authority to act for or bind the Fund.

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4.3 Liability of Limited Partners. The liability of the Limited Partners shall be limited in accordance with the Delaware Act. Except to the extent required under the Delaware Act, no Limited Partner, in such capacity, shall have any obligation to make any further Capital Contributions to the Fund or to contribute to the capital of the Fund the amount of any deficit balance in such Partner’s Capital Account upon the liquidation of such Partner’s interest in the Fund.

ARTICLE V

CAPITAL ACCOUNTS AND ALLOCATIONS

5.1 Capital Accounts. A Capital Account shall be established and maintained for each Partner. Each such Capital Account shall be credited with (i) such Partner’s Capital Contributions and (ii) the amount of Book Profit of the Fund allocated to such Partner pursuant to Section 5.3(a) hereof. Each such Capital Account shall be debited with (i) the amount of any proceeds payable to such Partner upon any redemption of Units pursuant to Section 6.2 hereof and (ii) the amount of Book Loss of the Fund allocated to such Partner pursuant to Section 5.3(b) hereof. The Capital Account of a Substituted Limited Partner shall include the portion allocable to it of the Capital Account of the Partner from whom it acquired Units, as such Capital Account existed on the effective date of the transfer of such Units to such Substituted Limited Partner.

5.2 No Distributions. No distributions of cash, Portfolio Investments or other assets will be made by the Fund, except for distributions in accordance with Section 9.1(c) hereof upon a dissolution of the Fund. Notwithstanding the foregoing, a Partner shall be entitled to tender Units for redemption by the Fund in accordance with the provisions of Section 6.2 hereof.

5.3 Allocations of Book Profit and Book Loss. Book Profit and Book Loss of the Fund shall be allocated among the Partners as follows:

(a) Book Profit for each Fiscal Period shall be allocated:

(i) first, to the General Partner until the General Partner shall have been allocated an amount equal to the aggregate amount of Book Loss, if any, previously allocated to it pursuant to Section 5.3(b)(ii) hereof and not offset by previous allocations of Book Profit pursuant to this Section 5.3(a)(i);

(ii) next, (A) a preliminary allocation of the remaining Book Profit shall be made to the Capital Account of each Partner in an amount (the “Preliminary Amount”) in proportion to the number of Units held by each Partner (determined on the first day of such Fiscal Period).

(B) In the case of the General Partner, the entire Preliminary Amount initially allocated to its Capital Account shall be finally allocated to that Account.

(C) In the case of each Limited Partner, the Preliminary Amount allocated to the Limited Partner for the Fiscal Period shall be finally allocated as follows:

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(1) an amount equal to that Limited Partner’s Loss Carryforward (defined below), but in no event more than the Preliminary Amount.

(2) next, eighty percent (80%) of the remaining portion of the Preliminary Amount, if any, shall be finally allocated to the Limited Partner’s Capital Account and twenty percent (20%) shall be finally allocated to the Capital Account of the General Partner.

(iii) For purposes of this Section 5.3, a Limited Partner’s “Loss Carryforward” with respect to his Capital Account shall mean the amount of Book Loss previously allocated to the Limited Partner pursuant to Section 5.3(b)(i) hereof that has not been offset by previous allocations of Book Profit pursuant to Section 5.3(a)(ii)(C)(1) hereof; provided, however, that the amount of a Limited Partner’s Loss Carryforward shall be reduced proportionately by any withdrawal from his Capital Account upon the redemptions of his Units at a time when he has a Loss Carryforward.

(b) Book Loss for each Fiscal Period shall be allocated:

(i) first, to the Partners in proportion to the number of Units held by each of them (determined on the first day of such Fiscal Period); provided, however, that no Limited Partner shall be allocated Book Loss to the extent that such allocation would cause or increase a negative Book Capital Account balance for such Limited Partner; and

(ii) thereafter, to the General Partner.

(c) The General Partner shall have the right, in its sole discretion and without notice to the Limited Partners, to agree to allocate none, or less than twenty percent (20%), of the remaining Preliminary Amount under Section 5.3(a)(C)(2) above with respect to any one or more Limited Partners.

5.4 Tax Accounts. A separate Tax Account shall be established and maintained for each Partner solely for the purpose of determining such Partner’s share of any Net Income, Net Loss, Capital Gain, Capital Loss, Net Capital Gain or Net Capital Loss derived by the Fund in any Fiscal Period. Each Partner’s Tax Account shall be credited with (i) such Partner’s Capital Contributions and (ii) the amount of any Net Income, Capital Gain and Net Capital Gain allocated to such Partner pursuant to Sections 5.5 and 5.6 hereof. Each Partner’s Tax Capital Account shall be debited with (i) the amount of any proceeds payable to such Partner upon any redemption of Units pursuant to Section 6.2 hereof and (ii) the amount of any Net Loss, Capital Loss and Net Capital Loss allocated to such Partner pursuant to Sections 5.5 and 5.6 hereof. The Tax Account of a Substituted Limited Partner shall include the portion allocable to it of the Tax Account of the Limited Partner from whom it acquired Units, as such Tax Account existed on the effective date of the transfer of such Units to such Substituted Limited Partner.

5.5 Allocations of Net Income, Net Loss, Net Capital Gain and Net Capital Loss. Solely for the purpose of enabling the Partners to compute their respective tax liabilities,

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any Net Income, Net Loss, Net Capital Gain or Net Capital Loss derived by the Fund in any Fiscal Period shall be allocated as follows:

(a) Net Income for such Fiscal Period shall be allocated among the Partners in the same manner as an equivalent amount of Book Profit was or would have been allocated among the Partners during such Fiscal Period pursuant to Section 5.3(a) hereof.

(b) Net Loss for such Fiscal Period shall be allocated among the Partners in the same manner as an equivalent amount of Book Loss was or would have been allocated among the Partners during such Fiscal Period pursuant to Section 5.3(b) hereof.

(i) first, to Partners who shall have balances in their Capital Accounts (determined after all allocations of Book Profit and Book Loss for such Fiscal Period) that shall exceed the balances in their Tax Accounts (determined after any allocations of Net Income or Net Loss pursuant to Sections 5.5(a) and (b) hereof and any allocations of Capital Gain or Capital Loss pursuant to Section 5.6 hereof for such Fiscal Period) in proportion to the respective amounts of such excesses for each of such Partners, until all such excesses shall have been eliminated; and

(ii) thereafter, among the Partners (other than Partners who shall have had all of their Units redeemed during such Fiscal Period) in the same manner as an equivalent amount of Book Profit would have been allocated pursuant to Section 5.3(a) hereof.

(d) Net Capital Loss for each Fiscal Period shall be allocated:

(i) first, to Partners who shall have balances in their Tax Accounts (determined after any allocations of Net Income or Net Loss pursuant to Sections 5.5(a) and (b) hereof and any allocations of Capital Gain or Capital Loss pursuant to Section 5.6 hereof for such Fiscal Period) that shall exceed the balance in their Capital Accounts (determined after all allocations of Book Profit and Book Loss for such Fiscal Period) in proportion to the respective amounts of such excesses for each of such Partners, until all such excesses shall have been eliminated; and

(ii) next, among the Partners (other than Partners who shall have had all of their Units redeemed during such Fiscal Period) in the same manner as an equivalent amount of Book Loss would have been allocated pursuant to Section 5.3(b) hereof.

5.6 Special Allocations of Capital Gain and Capital Loss Upon Redemption of All of a Partner’s Units.

(a) In the event that all of a Partner’s Units shall be redeemed at the end of any Fiscal Period pursuant to Section 6.2 hereof, such Partner shall be allocated, prior to any allocations of Net Capital Gain or Net Capital Loss for such Fiscal Period pursuant to Sections 5.5(c) or (d) hereof, but subsequent to any allocations of Net Income or Net Loss for such Fiscal Period pursuant to Sections 5.5(a) or (b) hereof, such portion of the Fund’s Capital Gain or Capital Loss for such Fiscal Period as shall be sufficient to cause such Partner’s Tax

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Account to equal his Capital Account (determined after all allocations of Book Profit and Book Loss for such Fiscal Period).

(b) In the event that the Fund shall not have sufficient Capital Gain or Capital Loss in any Fiscal Period to make all of the allocations required by Section 5.6(a) hereof, the Fund’s Capital Gain for such Fiscal Period shall be allocated among those Partners required to be allocated Capital Gain pursuant to Section 5.6(a) hereof in proportion to the amounts each such Partner would have been allocated pursuant to such Section 5.6(a) if the Fund had sufficient Capital Gains to make all of the allocations contemplated therein, and the Fund’s Capital Loss for such Fiscal Period shall be allocated among those Partners required to be allocated Capital Loss pursuant to Section 5.6(a) hereof in proportion to the amounts each such Partner would have been allocated pursuant to such Section 5.6(a) if the Fund had sufficient Capital Losses to make all of the allocations contemplated therein.

5.7 Determinations by General Partner. All matters concerning the allocation of items of taxable income, gain or loss among the Partners, tax elections (except as may otherwise be required by the income tax laws) and accounting procedures not expressly and specifically provided for by the terms of this Agreement shall be determined in good faith by the General Partner on a basis which is equitable among the Partners, and such determination shall be final and conclusive as to all of the Partners. The General Partner may modify the allocations set forth in Sections 5.5 and 5.6 hereof to the extent necessary to comply with the Regulations under Section 704 of the Code. No election shall be made by any Partner to be excluded from the application of the provisions of Subchapter K of the Code or from any similar provisions of state tax laws, and no such election shall be made by the Fund.

5.8 New Issues.

(a) In the event that the Fund invests in securities that are the subject of a public distribution and that are designated a “New Issue” (as that term is defined in Rule 2790 of the National Association of Securities Dealers, Inc.), such investment shall be accounted for in accordance with the provisions of this Section 5.8.

(b) To the extent “Restricted Persons”, as that term is defined in Rule 2790, have in the aggregate a beneficial interest in the Fund of ten percent (10%) or less as of the beginning of the Accounting Period, all Partners shall be allocated their share of profit and loss from New Issues investments in the proportion that (i) each Partner’s Capital Account as of the beginning of the Accounting Period bears to (ii) the sum of the Capital Accounts of all Partners as of the beginning of such Accounting Period.

(c) To the extent Restricted Persons have in the aggregate a beneficial interest in the Fund of greater than ten percent (10%) as of the beginning of the Accounting Period, those Restricted Persons will be allocated a total of ten percent (10%) of any profit and loss from New Issues investments during that Accounting Period. Each Restricted Person shall be allocated their share of profit and loss from New Issues investments in the proportion that (i) such Restricted Partner’s Capital Account as of the beginning of the Accounting Period bears to (ii) the sum of the Capital Accounts of all Restricted Partners as of the beginning of such Accounting Period. The remaining ninety percent (90%) of New Issues investments shall be

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allocated amongst those Partners who are not Restricted Persons in the proportion that (i) such unrestricted Partner’s Capital Account as of the beginning of the Accounting Period bears to (ii) the sum of the Capital Accounts of all unrestricted Partners as of the beginning of such Accounting Period.

(d) Notwithstanding subsections (b) and (c) above, to the extent the General Partner determines that it is impracticable for the Fund to determine the extent of the beneficial interests of Restricted Persons in the Fund at the time of any New Issues investment, the General Partner, in its sole discretion, may elect to allocate the New Issues investment only to those Partners who are not Restricted Persons.

(e) The purpose of this Section 5.8 is to comply with Rule 2790. The General Partner shall interpret and implement this Agreement, including Section 5.8 and this Article V, in the manner that the General Partner considers advisable to ensure compliance with Rule 2790, and the determination of the General Partner, including as to whether a particular Partner is a Restricted Person under Rule 2790, shall be final.

(f) Except as otherwise provided in this Section 5.8, all other provisions of this Article V shall apply to New Issues.

ARTICLE VI

REDETERMINATION OF UNITS; REDEMPTIONS AND

ADDITIONAL CONTRIBUTIONS; VALUATION

6.1 Redetermination of Units Held. The number of Units held by each Partner shall be redetermined as of the close of business on the last day of each Fiscal Period. The number of Units held by each Partner at any such time shall be adjusted so that, immediately after such adjustment, each Partner shall own a number of Units equal to the balance in such Partner’s Capital Account at such time (determined after all allocations of Book Profit and Book Loss for such Fiscal Period) divided by $25,000. As a result of such a redetermination of Units, a Partner may hold and own fractional Units in the Fund.

6.2 Redemptions of Units.

(a) Each Limited Partner may, by notice to the Fund, at any time on or before either June 15 or December 15 during any Fund Year, tender all or any portion of such Limited Partner’s Units for redemption, provided that in the event of a partial redemption, the Limited Partner must maintain a Capital Account, after giving effect to the withdrawal, of at least One Hundred Thousand Dollars ($100,000). The General Partner in its discretion may waive the notice period and minimum investment restrictions. The General Partner may, by notice to the Fund on or before either June 30 or December 31 of any Fund Year, tender any portion of its Units for redemption, subject to the limitations set forth in Section 3.2(a) hereof. Any such notice shall specify the number of Units, or the percentage of such Partner’s Units, tendered for redemption. The Fund shall, subject to the limitations of Section 6.2(b) hereof and other limitations set forth in this Agreement, redeem all Units tendered for redemption at a price of $25,000 per Unit. Any redemption of Units pursuant to this Section 6.2(a) shall be effective

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upon the close of business on June 30, with respect to any Units tendered for redemption on or before June 15 (or, in the case of the General Partner, June 30) in any Fund Year, or December 31, with respect to any Units tendered for redemption after June 15 but on or before December 15 (or, in the case of the General Partner, after June 30 but on or before December 31) in any Fund Year, immediately after the redetermination of Units pursuant to Section 6.1 hereof on such date. The Fund shall issue payment, in cash, of the redemption price within 7 days after the close of the fiscal period. Notwithstanding the foregoing, the General Partner may delay the payment of the redemption price to the extent necessary, in the opinion of the General Partner, in order to effect orderly liquidations of Portfolio Investments in a manner that is not detrimental to the Fund or the Fund’s remaining Partners, in which event any such delayed payment shall be made as soon thereafter as is practicable.

(b) If the number of Units tendered for redemption pursuant to Section 6.2(a) hereof in any semi-annual period shall exceed ten percent (10%) of the aggregate number of Units outstanding on the last day of such semi-annual period (immediately after the redetermination of Units on such date pursuant to Section 6.1 hereof), the General Partner may, in its sole discretion, elect to limit the number of Units to be redeemed to an amount not less than ten percent (10%) of such aggregate number of Units. Such election shall specify the number of Units to be redeemed and shall be made by the General Partner by notice to the Limited Partners, in the manner described in Section 10.2 hereof, which notice must be furnished on or before the thirtieth day following the close of the semi-annual period to which such election applies. In the event that the General Partner shall make an election with respect to any particular semi-annual period in accordance with this Section 6.2(b), each Partner who shall have tendered Units for redemption in accordance with Section 6.2(a) hereof during such semi-annual period, shall be entitled to have redeemed, in accordance with the provisions of Section 6.2(a) hereof, such Partner’s pro rata share (based upon the respective number of Units tendered for redemption during such semi-annual period by each such Partner) of the total number of Units elected to be redeemed pursuant to this Section 6.2(b). If the General Partner shall fail to make an election for any semi-annual period in accordance with this Section 6.2(b), each Partner who shall have tendered Units for redemption in accordance with Section 6.2(a) hereof during such semi-annual period shall be entitled to have all of such Units redeemed in accordance with such Section 6.2(a).

(c) The General Partner may, in its sole discretion, elect to redeem all or any portion of a Limited Partner’s Units upon at least 5 days prior written notice. The redemption price for all Units redeemed pursuant to this Section 6.2(c) shall be $25,000 per Unit. The Fund shall issue payment, in cash, for the redemption price within 7 days after the close of the fiscal period.

(d) The General Partner may withhold taxes from any redemption proceeds payable to any Partner to the extent required by the Code or any other applicable law. For purposes hereof, any taxes so withheld shall be deemed to be a distribution or payment to such Partner and reduce the Capital Account and Tax Account of such Partner.

(e) The right of any Partner to receive redemption proceeds pursuant to this Section 6.2 shall be subject to the provision by the General Partner for all the Fund’s

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liabilities in accordance with Section 17-607 of the Delaware Act and for reserves and contingencies.

(f) No interest shall be payable by the Fund in connection with any redemption pursuant to this Section 6.2 except for reserves established pursuant to Section 6.2(g) hereof.

(g) The redemption proceeds payable to a Partner may be subject to a reserve for a proportionate share of any material contingent liability of the Fund, such as pending litigation. The amount of such reserve shall be invested in an interest-bearing account (which may be commingled with similar accounts). The unused portion of any reserve shall be distributed, together with any interest accrued thereon, once the General Partner has determined that the need therefor shall have ceased.

6.3 Additional Capital Contributions. The General Partner may, without the consent of any other Limited Partner, cause the Fund to accept additional Capital Contributions in return for the purchase of additional Units in accordance with the provisions of this Section 6.3. Additional Capital Contributions will be accepted from Limited Partners or other Persons who meet the suitability criteria for Limited Partners set forth in the Subscription Agreement. If a purchaser of Units pursuant to this Section 6.3 is not already a Limited Partner, such purchaser shall agree to be bound by the terms of this Agreement, and shall be admitted to the Fund as an additional Limited Partner without the consent of any Limited Partner. Any purchases of Units pursuant to this Section 6.3 shall become effective on the opening of business on either January 1 or July 1 of any Fund Year, and shall be acquired for a Capital Contribution of $25,000 per Unit, payable in cash on such effective date. Unless waived by the General Partner, a new Limited Partner shall be required to make a Capital Contribution of $100,000. Unless waived by the General Partner, additional Capital Contributions by existing Limited Partners may be made in minimum amounts of not less than $25,000. Notwithstanding the foregoing limitations, additional Capital Contributions may be accepted from existing Limited Partners and a purchaser may be admitted to the Fund as an additional Limited Partner at such other times in addition to January 1 and July 1 as shall be determined by the General Partner in its sole discretion.

6.4 Net Asset Value. For purposes of this Agreement, the Fund’s Net Asset Value as of any applicable determination date shall be equal to the value of the Fund’s assets, determined in accordance with Section 6.5 hereof, less the amount of all liabilities of the Fund on such date.

6.5 Valuation of Assets. The value of any assets of the Fund (other than cash) shall be determined, as of any applicable determination date set forth in this Agreement, in accordance with the following standards:

(a) Securities for which market quotations shall be available and which shall be freely tradeable shall be valued as follows:

(i) if the security shall be a “reported security” as that term is defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934, the last sale price with respect to such security reported in the consolidated transaction reporting system (“consolidated

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system”) or the average of the highest current independent bid and lowest current independent offer for such security (reported pursuant to Rule 11Ac1-1 under the Securities Exchange Act of 1934) if there shall be no reported transactions in the consolidated system that day;

(ii) if the security shall not be a reported security, and the principal market for such security shall be an exchange, then the last sale price on such exchange or the average of the highest current independent bid and lowest current independent offer on such exchange if there shall be no reported transactions on such exchange that day;

(iii) if the security shall not be a reported security and shall be quoted in the National Association of Securities Dealers, Inc. Automated Quotation (NASDAQ) System, then the average of the highest current independent bid and lowest current independent offer reported on Level 1 of the NASDAQ System; and

(iv) for all other securities, the average of the highest current independent bid and lowest current independent offer determined on the basis of reasonable inquiry.

(b) Securities for which market quotations are not available and any other assets held by the Fund will be valued at fair value as determined in good faith by the General Partner.

(c) The General Partner may, in its sole discretion, rely upon the opinion of an independent third party (obtained at the Fund’s expense) as to the valuation of any security or other asset. In addition, the General Partner may appoint an advisory committee consisting of two or more Limited Partners, which are not Affiliates of the General Partner, to determine the valuation of any security or other asset, and the General Partner in its sole discretion may rely upon such determination. In the event such an advisory committee is appointed, the Limited Partners serving thereon shall be considered Covered Persons for purposes of Sections 3.6 and 3.7 hereof with respect to their acts or omissions in such capacity.

ARTICLE VII

TRANSFERABILITY OF LIMITED PARTNERS’ UNITS

7.1 Assignments, Sales or Other Dispositions by Limited Partners.

(a) No Limited Partner shall have the right to assign, transfer, sell, encumber, pledge or otherwise dispose of all or any portion of such Partner’s Units in the Fund (an “Assignment”), unless:

(i) the General Partner shall be satisfied that the purported Assignment complies with and does not violate any relevant provisions of law, including Federal and state securities laws and the Delaware Act, shall not subject the Fund, the General Partner or any Affiliates of the General Partner to additional regulatory requirements and shall not cause a dissolution of the Fund or cause the Fund to be treated as a publicly traded partnership under Section 7704 of the Code;

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(ii) such Assignment shall be made to a Person who meets the suitability criteria for Limited Partners set forth in the Subscription Agreement; and

(iii) the General Partner shall have given its prior written consent to such Assignment, which consent may be granted or withheld in the sole discretion of the General Partner.

Each Limited Partner shall, upon the request of the General Partner, execute such certificates or other documents and perform such acts as such General Partner shall deem appropriate to preserve the limited liability of the Limited Partners under the laws of the jurisdictions in which the Fund shall be doing business after an Assignment by that Limited Partner. Any purported Assignment in violation of the provisions of this Section 7.1(a) shall be null and void and shall not bind, or be recognized by, the Fund. Each Limited Partner shall, prior to the time of, and as a condition to, the General Partner’s consent to an Assignment, pay all expenses, including attorneys’ and accountants’ fees, incurred by the General Partner and the Fund in connection with such Assignment.

(b) A Person who shall have received from a Limited Partner all or a portion of such Limited Partner’s Units, in compliance with Section 7.1(a) hereof (an “Assignee”), shall be entitled to receive allocations of Book Profit and Book Loss and taxable income, gain or loss attributable to the assigned Units from and after the date on which the General Partner shall consent to the Assignment, but shall have no other rights of a Limited Partner hereunder (including, without limitation, rights to information provided or made available to the Limited Partners and accounting, inspection and voting rights provided herein or by law) until such time as such Assignee shall have been admitted as a Substituted Limited Partner pursuant to the provisions of Section 7.1(c) hereof. All rights withheld from an Assignee hereunder shall remain rights of the Limited Partner who made the Assignment (the “Assignor”) until such time as such Assignee shall have been be so admitted. Notwithstanding the foregoing, the Fund and the General Partner shall be entitled to treat the Assignor as the sole and absolute owner of the assigned Units in all respects, and shall incur no liability to any Person for distributions or allocations (or for transmittal of reports and notices required hereunder to be given to Limited Partners) to such Assignor, made prior to the date an Assignee shall be admitted to the Fund as a Substituted Limited Partner.

(c) Upon compliance with Section 7.1(a) hereof, an Assignee shall become a Substituted Limited Partner to the extent of the assigned Units, upon compliance with the following additional conditions:

(i) the General Partner shall have consented in writing to such substitution, which consent may be granted or withheld in the sole discretion of the General Partner;

(ii) the Assignee shall have executed such instruments as the General Partner shall have reasonably deemed necessary or desirable to admit such Assignee as a Substituted Limited Partner (including, without limitation a Subscription Agreement and such other documents as may be necessary under the Delaware Act); and

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(iii) the Assignor shall have paid or caused to have been paid to the Fund all costs and expenses incurred by the General Partner or the Fund in connection with such Assignment and substitution (including, but not limited to, attorneys’ and accountants’ fees).

(d) An Assignee who shall not have become a Substituted Limited Partner pursuant to Section 7.1(c) hereof and who shall desire to make a further Assignment of Units shall be subject to all the terms and conditions contained in this Article VII applicable to Assignments by Limited Partners.

(e) Each Limited Partner and each Assignee shall indemnify and hold harmless the Fund, the General Partner, every other Limited Partner and any Affiliate of the foregoing (each, an “Indemnified Person”) against all losses, claims, damages, liabilities, costs and expenses (including legal or other expenses incurred in investigating or defending against any such loss, claim, damage or liability, or any judgments, fines and amounts paid in settlement), joint or several, to which such Indemnified Persons may become subject by reason of or arising from (i) any Assignment made by such Limited Partner in violation of this Article VII and (ii) any misrepresentation or misstatement of facts or omission to state facts by such Limited Partner or such Assignee to the General Partner or the Fund in connection with any Assignment.

7.2 Involuntary Transfers by a Limited Partner.

(a) In the event of the death, incompetency, dissolution, termination, insolvency or bankruptcy of any Limited Partner, the successors, assigns, heirs, distributees or Legal Representatives, as the case may be, of such Limited Partner shall be deemed Assignees of such Limited Partner’s Units (without the requirement of obtaining the prior written consent of the General Partner). No such Assignee shall become a Substituted Limited Partner except in compliance with Section 7.1(c) hereof. The General Partner and the Fund shall be entitled to treat any such Assignee as the sole and absolute owner of such Units for all purposes hereof.

(b) The death, incompetency, withdrawal, dissolution, termination, insolvency or bankruptcy of a Limited Partner shall not dissolve the Fund, and each Limited Partner hereby authorizes the General Partner and each of its members, pursuant to the power of attorney granted in Section 10.5 hereof, to execute such instruments, documents and certificates as the General Partner shall deem necessary or appropriate or as are required by the Delaware Act to continue the valid existence of the Fund.

7.3 Prohibition Against Withdrawals. Except as provided in Section 6.2 hereof, Limited Partners may not withdraw from the Fund prior to the Fund’s dissolution, except with the consent of the General Partner, which consent may be granted or withheld in the sole discretion of the General Partner.

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ARTICLE VIII

REPORTS TO PARTNERS

8.1 Records and Accounting. The General Partner shall cause the Fund to maintain proper and complete records and books of account of the business of the Fund, including a list containing each Partner’s name and address, at the Fund’s principal place of business. Each Partner or such Partner’s duly authorized representatives may inspect any of the Fund’s books of account, records or reports at all reasonable times for any proper purpose reasonably related to such Partner’s Units; provided, however, that the Partners and their representatives shall not be entitled to inspect such books of account, records or reports which the General Partner shall reasonably determine to be confidential and all information concerning the Fund, Partners and its business and affairs shall be maintained as confidential by each Limited Partner.

8.2 Fiscal Year. The taxable year of the Fund shall be its Fiscal Year, which shall end on December 31.

8.3 Statements.

(a) As soon as reasonably practicable after the end of each Fiscal Year, the General Partner shall cause to be delivered to each Person who was a Partner at any time during such Fiscal Year (i) a statement of such Person’s Capital Account as of the close of such Fiscal Year (after any redemptions pursuant to Section 6.2 hereof) and (ii) an annual report containing financial statements of the Fund, including, without limitation, a statement of assets, liabilities and partners’ capital as of the end of such Fiscal Year and statements of operations and changes in partners’ capital for such Fiscal Year. Such financial statements shall be audited by a firm of independent public accountants selected by the General Partner.

(b) As soon as reasonably practicable after the end of each calendar quarter (other than the last quarter) of each Fiscal Year, the General Partner shall cause to be delivered to each Person who was a Partner at any time during such quarter, a quarterly report containing unaudited financial statements for the period covered.

8.4 Tax Information. As soon as reasonably practicable after the end of each Fiscal Year, the General Partner shall cause to be delivered to each Person who was a Partner at any time during such Fiscal Year, all information necessary for the preparation of such Person’s income tax returns, including, without limitation, a statement showing such Person’s share of the Fund’s taxable income, taxable loss, and other tax items for such Fiscal Year. Each Partner shall execute and deliver to the Fund any document or supply to the Fund any information which shall be required for the Fund to comply with the tax laws, regulations or administrative pronouncements of any jurisdiction.

8.5 Other Reports. The General Partner shall promptly notify each Limited Partner of any material lawsuit commenced by or against the Fund, any material investigation undertaken of the Fund or any transaction requiring the approval of the Partners.

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8.6 Tax Matters Partner. The General Partner shall represent the Fund in any negotiation or judicial or administrative hearing or proceeding in connection with any tax audit or appeal and otherwise fulfill the obligations of the “tax matters partner” as contemplated by Section 6221 et seq. of the Code, including, but not limited to, the entry into such administrative adjustments or settlements with respect to the treatment of any items for tax purposes as the General Partner, in the good faith exercise of its discretion, shall deem necessary and/or appropriate (in such capacity, the General Partner shall be referred to as the “Tax Matters Partner”). The Tax Matters Partner, in such capacity, shall incur no personal liability to the Fund, to the Partners or to other holders of Units as a result of any exercise of such Partner’s powers and duties hereunder so long as the Tax Matters Partner shall exercise such powers and duties in good faith, and the indemnification provisions set forth in Section 3.7 hereof shall extend to the Tax Matters Partner for all acts taken in good faith in such capacity.

ARTICLE IX

DISSOLUTION OF THE FUND

9.1 Dissolution.

(a) The Fund shall be dissolved upon the first to occur of:

(i) the election of the General Partner, upon notice to the Limited Partners;

(ii) the bankruptcy, insolvency, or dissolution of the General Partner; or

(iii) any event resulting in a dissolution required by operation of law.

Dissolution of the Fund shall be effective on the date on which the event giving rise to the dissolution shall occur, but the Fund shall not terminate until all necessary requirements under the Delaware Act shall have been complied with and the assets of the Fund shall have been distributed in accordance with Section 9.1(c) hereof.

(b) Upon the dissolution of the Fund, the General Partner or a liquidator appointed by the General Partner (or, if no General Partner shall remain, a liquidator appointed by Limited Partners holding a majority of the Units held by Limited Partners) shall proceed to wind up the affairs of the Fund and to liquidate its assets.

(c) As soon as practicable after the effective date of dissolution of the Fund, the Fund’s assets (except for amounts reserved pursuant to Section 9.2 hereof) shall be distributed in the following manner and order:

(i) the claims of all creditors of the Fund other than the General Partner, and the expenses of dissolution and winding up, shall be paid and discharged or adequately reserved against;

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(ii) the claims of the General Partner as a creditor of the Fund shall be paid and discharged or adequately reserved against; and

(iii) the remaining assets of the Fund shall be distributed to the Partners in cash or, subject to Section 9.1(d) hereof, in kind, as the General Partner or the liquidator, if appointed, may determine, in each case pro rata (as nearly as practicable in the case of distributions in kind) in accordance with the Capital Accounts of the Partners.

(d) In the event that the foregoing order of distribution shall not be permitted under the Delaware Act, distributions shall be made as closely as legally possible to the order of distribution required hereunder. The General Partner or the liquidator, if appointed, shall use its reasonable efforts, consistent with its judgment concerning maximizing value, not to distribute assets in kind. If certain assets cannot be liquidated, the General Partner or the liquidator, if appointed, may place such assets in a liquidating trust for the benefit of all Partners.

9.2 Amount Reserved and Pending Claims.

(a) If there shall be any pending transaction or pending or contingent claim by or against the Fund as to which the interest or obligation of the Fund and the resulting interest of any Partner therein cannot, in the judgment of the General Partner, be then ascertained, or if there is any asset of the Fund the value of which cannot be realized until sold or otherwise disposed of and such sale or disposition is not practicable without sacrificing a substantial portion of the value thereof, the value thereof or probable loss therefrom may be excluded from the valuation of assets for purposes of computing such Partner’s Capital Account upon liquidation. No amount shall be paid or charged to any such Partner’s Capital Account in respect of any such transaction or claim until its final settlement, in respect of such asset until sold or otherwise disposed of, or such earlier time as the General Partner shall determine. Moreover, the Fund may retain from any sums due any such Partner, an amount which the General Partner shall estimate, in its sole discretion, to be sufficient to cover the share of such Partner in any probable loss or liability on account of such transaction or claim.

(b) The General Partner shall, at the earliest practicable time, distribute any assets (or proceeds realized from the sale or otherwise disposition thereof) excluded or retained pursuant to Section 9.2(a) hereof to each Partner from whom such assets or proceeds shall have been withheld.

ARTICLE X

MISCELLANEOUS

10.1 Binding Agreement. Except as otherwise specifically provided to the contrary in this Agreement, this Agreement shall be binding upon and shall inure to the benefit of the Partners and their respective heirs, distributees, successors, assigns and Legal Representatives.

10.2 Notices. All notices hereunder shall be in writing and shall be given: (a) if to the Fund, at the address of its principal office as set forth in Section 2.2 hereof, with a copy to Lowenstein Sandler PC, 65 Livingston Avenue, Roseland, New Jersey 07068, Attention: Allen

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B. Levithan, Esq., or such other address or addresses as to which the Partners shall have been given notice; (b) if to the General Partner, at 527 Madison Avenue, Suite 2600, New York, NY 10022, with a copy to Lowenstein Sandler PC, 65 Livingston Avenue, Roseland, New Jersey 07068, Attention: Allen B. Levithan, Esq., or such other address or addresses as to which the Fund and the other Partners shall have been given notice; and (c) if to any Limited Partner, at the most recent address set forth in the books and records of the Fund, or such other address as to which the Fund shall have been given notice. Any notice shall be deemed to have been given if personally delivered or sent by mail or by overnight courier or delivery service or by facsimile or e-mail transmission and will be deemed received when actually received.

10.3 Counterparts. This Agreement may be executed in counterparts, each of which may be executed by less than all the parties, with the same effect as if the parties executed one instrument as of the day and year first above written; provided, however, that the several counterparts, in the aggregate, shall have been executed by all the parties hereto.

10.4 Entire Agreement: Amendments. This Agreement sets forth the entire understanding of the parties hereto and shall not be amended except by an instrument in writing approved by the General Partner and by Limited Partners holding a majority of the Units held by the Limited Partners; provided, however, that amendments may be made to this Agreement, from time to time, by the General Partner without the consent of any other Partner (i) to amend any provision of this Agreement which requires any action to be taken by or on behalf of the General Partner or the Fund pursuant to requirements of the Delaware Act if the provisions of the Delaware Act are amended, modified or revoked so that the taking of such action is no longer required, (ii) to add to the representations, duties or obligations of the General Partner, or to surrender any right or power granted to the General Partner herein, for the benefit of the Limited Partners provided, that any such surrender of a right or power would not adversely affect the limited liability of the Limited Partners, (iii) to take such action and make such amendments hereto in light of existing laws, rules and regulations, or changes therein, applicable or relating to the Fund or its investment activities, as the General Partner shall deem necessary to permit the Fund to continue in existence or to enable the Fund to achieve the purposes for which it was formed, (iv) to cure any ambiguity, to correct any mistake, or to correct or supplement any provision herein or in the Certificate which may be inconsistent with any other provision herein or therein, or to correct any printing, stenographic or clerical errors or omissions which shall not be inconsistent with the provisions of this Agreement or the status of the Fund as a partnership for Federal income tax purposes, (v) to reflect changes to the Fund permitted to be made by the General Partner without the consent of any other Partner, (vi) to prevent the Fund from in any manner being subject to registration under the 1940 Act or from being taxed as a corporation, and (vii) to make any changes hereto intended for the benefit of the Fund as a whole, or which are not materially adverse, taken as a whole, to any Limited Partner or group of Limited Partners; provided, further that no amendment shall reduce the Capital Account of any Partner without the written consent of such Partner.

10.5 Power of Attorney. Each Limited Partner hereby irrevocably constitutes and appoints the General Partner, and each member thereof, as such Partner’s true and lawful representative and attorney-in-fact, with full power and authority in such Partner’s name, place and stead, to make, execute, acknowledge, deliver, swear to, record, file and publish with respect to the Fund (i) any and all instruments, documents and certificates (including the Certificate and

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any amendments thereto) which, from time to time, may be required by the laws of Delaware or any other jurisdiction in which the Fund shall determine to do business, or any political subdivision or agency thereof, and to take any other action which the General Partner may deem necessary or appropriate, in the General Partner’s sole discretion, to execute, implement and continue or terminate the valid and subsisting existence and business operations of the Fund and (ii) any amendments to and restatements of this Agreement and the Certificate as such amendments and restatements are contemplated hereunder, including, without limitation, amendments for the purpose of admitting any Person as a Partner and effecting the withdrawal of any Partner from the Fund to the extent permitted hereunder or any other instruments relating to any such amendments. The foregoing grant of authority is a special power of attorney coupled with an interest, shall be irrevocable and shall continue in full force and effect notwithstanding the subsequent death, disability, insanity or incapacity (or, in the case of a Limited Partner that is not a natural person, the subsequent merger, dissolution or other termination of existence) of such Limited Partner. The special power of attorney may be exercised on behalf of a Limited Partner by a facsimile signature of the General Partner or any member thereof acting as attorney-in-fact for all of the Limited Partners. The special power of attorney shall survive the Assignment by a Limited Partner of the whole or any portion of his or its Units, except that in a case in which the Assignee of all the Units of a Limited Partner shall have furnished a power of attorney and shall have been approved by the General Partner for admission to the Fund as a Substituted Limited Partner, this power of attorney shall survive the Assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect the substitution and shall thereafter terminate. In addition, the special power of attorney shall survive the redemption of all of a Limited Partner’s Units as provided in Section 6.2 hereof, for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect the withdrawal of such Person as a Limited Partner.

10.6 Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to the choice of law provisions thereof.

10.7 Severability. If any sentence, paragraph or Section of this Agreement shall be declared by a court of competent jurisdiction to be void, such sentence, paragraph or Section shall be deemed severed from the remainder of the Agreement and the balance of the Agreement shall remain in effect.

10.8 Captions. Article and Section titles and captions contained in this Agreement are inserted only as a matter of convenience and for reference. The titles and captions shall in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof.

10.9 Insurance. The General Partner may procure and maintain insurance concerning the Fund’s activities in such amounts and covering such risks as may be deemed appropriate in the judgment of the General Partner.

10.10 Ownership of Good Will, Software, Intellectual Property. The good will associated with the Fund and its business and the computer software, trade secrets, know-how, trading techniques, inventions, trademarks, trade names, and other intellectual property utilized

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by the Fund is the property of the General Partner and shall not be or become the property of the Partnership, and no Limited Partner shall have any rights or interest therein.

10.11 Pronouns and Plurals. Whenever the context may require, any pronoun used herein shall include the corresponding masculine, feminine or neuter forms and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of January 1, 2006.


	GENERAL PARTNER MGP ADVISERS LIMITED PARTNERSHIP
	By:	AWM Investment Company, Inc., its General Partner
	By:
		Austin W. Marxe, President

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