10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2004

Commission File Number 1-8722

MSC.SOFTWARE CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware	95-2239450
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
2 MacArthur Place Santa Ana, California	92707
(Address of Principal Executive Offices)	(Zip Code)

(Registrant’s Telephone Number, Including Area Code): (714) 540-8900

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: Common Stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes o Nox

Indicated by check if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x

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

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

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

Large Accelerated filer o                                Accelerated filer x                                     Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes o No x

As of June 30, 2004, the approximate aggregate market value of MSC.Software Corporation’s voting stock held by non-affiliates was $269,668,000.

As of December 31, 2005, there were outstanding 30,803,859 shares of Common Stock of MSC.Software Corporation.

Documents Incorporated By Reference: Part I, Part II and Part III: None

MSC.SOFTWARE CORPORATION

INDEX TO FORM 10-K

DECEMBER 31, 2004

			Page
	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	25
Item 2.	Properties	25
Item 3.	Legal Proceedings	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26
Item 6.	Selected Financial Data	28
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	50
Item 8.	Financial Statements and Supplementary Data	52
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	106
Item 9A.	Controls and Procedures	106
Item 9B.	Other Information	114
	PART III
Item 10.	Directors and Executive Officers of the Registrant	115
Item 11.	Executive Compensation	118
Item 12.	Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters	129
Item 13.	Certain Relationships and Related Transactions	133
Item 14.	Principal Accounting Fees and Services	134
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	135

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CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in the Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this Report on Form 10-K are based on information available to us on the date hereof. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “targets,” “goals,” “projects,” “continue,” or variations of such words, similar expressions, or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Neither we nor any other person can assume responsibility for the accuracy and completeness of forward-looking statements. Important factors that may cause actual results to differ from expectations include, but are not limited to, those discussed in “Risk Factors” beginning on page 17 in this document. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

PART I

ITEM 1.BUSINESS

The filing of this Annual Report on Form 10-K for the year ended December 31, 2004 was delayed to permit us to complete our audit committee investigation, restate our consolidated financial statements for the year ended December 31, 2002 and prepare the consolidated financial statements for the years ended December 31, 2003 and 2004. In addition to the description of our business, this Part I includes, among other things, (i) a description of the audit committee investigation and (ii) an overview of the impact of the restatement adjustments on certain previously filed financial results. For a more complete description of the current restatement and the impact on specific periods, refer to Note 2—Restatement of 2002 Financial Results in Notes to Consolidated Financial Statements contained in this Form 10-K.

Audit Committee Investigation

In March 2004, we determined that the 2002 and prior period consolidated financial statements required restatement and that an independent investigation should be directed by our audit committee and counsel for the audit committee to address allegations of possible withholding of information from KPMG LLP (“KPMG”), our then independent registered public accounting firm, relating to accounting for stock options of a departing employee of a foreign subsidiary. We also announced that the filing of our 2003 annual report on Form 10-K would be delayed pending the completion of the restatements and the independent investigation.

In August 2004, we concluded that the independent investigation should be expanded to address alleged withholding of information from KPMG with respect to revenue recognition in our Asia Pacific region.

In February 2005, the independent counsel conducting the independent investigation issued its investigative report to our audit committee and this report was reviewed by our board of directors. The report concluded that certain information with respect to accounting for stock options of a departing employee of a foreign subsidiary and revenue recognition with respect to software contracts in Korea was withheld from KPMG, or if provided, was incomplete or misleading. In addition, the report identified

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instances where backdated documents were obtained, sought or provided, either to accelerate revenue or provided as audit documentation for KPMG.

The investigative report also described certain internal control weaknesses. The internal control weaknesses observed included (1) weak oversight in the overall control environment; (2) an organizational structure that compromised the regional finance function’s independence in evaluating judgments and estimates to achieve accurate financial reporting; (3) ambiguous and inconsistent internal accounting policies and procedures; (4) inadequate monitoring and Oracle system controls in the revenue data entry process; (5) insufficient documentation of assumptions and judgments to support historical accounting; and (6) insufficient skills and/or training to ensure that the Company’s internal accounting policies and procedures would generate financial reporting in accordance with GAAP. Refer to “Item 9a. Controls and Procedures” for further discussion on our evaluation of internal controls and procedures as of December 31, 2004.

The audit committee concluded that they were satisfied with the scope, procedures performed, and related findings in the report. As a result of the findings, the audit committee instituted a variety of remedial activities including but not limited to terminating various individuals, implementing organizational changes, changes to accounting policies and procedures, and restating prior period financial statements.

In April 2005, we announced that the SEC had begun an investigation of the Company and had issued a subpoena for certain documents. We believe such request for documents was in response to our February 16, 2005 announcement with regard to the completion of the independent investigation and issuance of the investigative report to our audit committee. We responded to the subpoena and continue to cooperate fully with the staff of the SEC in its investigation. To date, there has been no resolution of this matter.

On April 27, 2005 we announced that KPMG was dismissed as our independent registered public accounting firm. On May 19, 2005, we announced that Deloitte & Touche LLP was appointed by our audit committee as our new independent registered public accounting firm. In connection with the dismissal of KPMG as required by the rules of the SEC, KPMG provided a letter regarding the Company’s disclosure with respect to that dismissal. A copy of that letter is included as an Exhibit to the Company’s Form 8-K filed on May 12, 2005. The observations made by KPMG in that letter were considered and addressed, as necessary, by management and the audit committee during the restatement process.

Impact on Our SEC Filings

As a result of the audit committee investigation and our decision to restate certain prior period financial results, the filings of our 2003 Form 10-K and all subsequent required filings were delayed. However, we continued to file Form 8-K’s related to our announcements of certain quarterly financial information during 2004 and 2005 and conducted regular conference calls with respect to these preliminary operating results. After filing this Annual Report on Form 10-K for the year ended December 31, 2004, we will file the Form 10-Qs for the first, second and third quarters of 2005 and our Annual Report on Form 10-K for the year ended December 31, 2005 as soon as possible. We have not amended and do not intend to amend our previously filed annual reports on Form 10-K or quarterly reports on Form 10-Q for the periods affected by the restatements.

The consolidated financial statements for 2002 (as restated), 2003 and 2004 included in this annual report include adjustments to transactions that may have been recorded prior to January 1, 2002. Restated financial statements for periods prior to 2002 were not considered to be meaningful. Accordingly, financial information for the years ended December 31, 2000 and 2001 otherwise required to be included in “Item 6. Selected Financial Data” has been omitted. As a result, our chief executive officer and chief financial officer have taken exceptions for such omitted selected financial information, and for the late filing of this

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report, in their certifications under Section 906 of the Sarbanes-Oxley Act of 2002 that this report complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

For details regarding the restatement, see Note 2 to the consolidated financial statements included elsewhere in this Form 10-K.

Financial Statement Adjustments

The effects of the restatement adjustments on our previously filed Consolidated Statement of Operations for the year ended December 31, 2002, and for the first nine months in 2003 are presented below. The revenue restatement adjustments for these periods primarily resulted in previously recognized revenue being deferred until subsequent periods, as well as certain revenue being reclassified by type. The net effect of these revenue adjustments was to decrease revenue from continuing operations by $14.6 million in 2002 and by $0.2 million in the nine months ended September 30, 2003.

We also made certain non-revenue adjustments to our expenses and other accounts related primarily to software development costs, business combinations, pension accounting, valuation of long-lived assets, stock compensation, and the recognition of various expenses resulting from the timing and adequacy of various accruals and allowances. The net effect of the expense adjustments on our consolidated audited financial statements increased our operating costs and expenses by $5.5 million in 2002 and decreased our operating costs and expenses by $1.6 million in the nine months ended September 30, 2003.

The revenue and non-revenue adjustments, in addition to errors related solely to our tax provision, required us to make certain income tax related adjustments, which decreased our benefit for income taxes related to continuing operations by $7.0 million in 2002 and increased our benefit for income taxes by $5.1 million for the nine months ended September 30, 2003.

After considering all restatement adjustments, our previously reported 2002 net loss of $51.3 million increased $23.9 million or $0.82 per share and our previously reported net loss of $26.6 million in the first nine months of 2003 decreased by $3.3 million or $0.07 per basic share and $0.23 per diluted share.

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The nature and extent of the restatement adjustments are presented in summary below, and are more fully described in Note 2—Restatement of 2002 Financial Results in Notes to Consolidated Financial Statements contained in this Form 10-K with respect to the year ended December 31, 2002 (amounts in thousands, except per share data).

	For the Year Ended December 31, 2002										For the Nine Months Ended September 30, 2003
				(As Restated)										(As Restated)
	As Previously Reported			Restatement Adjustments				As Restated			As Previously Reported			Restatement Adjustments				As Restated
Net Revenue	$	248,151			$	(14,549	)	$	233,602		$	183,909			$	(220	)	$	183,689
Operating Expenses, including cost of revenue and operating expenses	256,804				5,516			262,320			179,514				(1,592		)	177,922
Operating Income (Loss)	(8,653		)		(20,065		)	(28,718		)	4,395				1,372			5,767
Other Expense (Income), net	7,608				71			7,679			9,847				(382		)	9,465
Provision (Benefit) for Income Taxes	(5,247		)		7,008			1,761			(1,922		)		(5,070		)	(6,992		)
Income (Loss) From Continuing Operations	(11,014		)		(27,144		)	(38,158		)	(3,530		)		6,824			3,294
Income (Loss) From Discontinued Operations	(1,015		)		2,755			1,740			(23,037		)		(3,502		)	(26,539		)
Cumulative Effect of Change in Accounting Principle	(39,300		)		500			(38,800		)	—				—			—
Net Loss	$	(51,329	)		$	(23,889	)	$	(75,218	)	$	(26,567	)		$	3,322		$	(23,245	)
Basic Earnings (Loss) Per Share From Continuing Operations	$	(0.37	)		$	(0.93	)	$	(1.30	)	$	(0.12	)		$	0.19		$	0.11
Diluted Earnings (Loss) Per Share From Continuing Operations	$	(0.37	)		$	(0.93	)	$	(1.30	)	$	(0.12	)		$	0.18		$	0.06
Basic Earnings (Loss) Per Share From Discontinued Operations	$	(0.03	)		$	0.09		$	0.06		$	(0.77	)		$	(0.12	)	$	(0.89	)
Diluted Earnings (Loss) Per Share From Discontinued Operations	$	(0.03	)		$	0.09		$	0.06		$	(0.77	)		$	0.05		$	(0.72	)
Basic and Diluted Loss Per Share From Change in Accounting Principle	$	(1.34	)		$	0.01		$	(1.33	)	$	—			$	—		$	—
Basic Loss Per Share	$	(1.75	)		$	(0.82	)	$	(2.57	)	$	(0.89	)		$	0.07		$	(0.78	)
Diluted Loss Per Share	$	(1.75	)		$	(0.82	)	$	(2.57	)	$	(0.89	)		$	0.23		$	(0.66	)

The following summarizes the nature of the various restatement adjustments that impacted our consolidated results of operations for the year ended December 31, 2002 and for the nine months ended September 30, 2003.

Revenue Adjustments

The revenue restatement adjustments primarily resulted in certain previously recognized revenue being deferred until subsequent periods, as well as reclassifying certain revenue by type within the accompanying statements of operations. Such restatement adjustments were caused primarily by the following issues.

Vendor-Specific Objective Evidence (“VSOE”)—Previously, the Company had believed they could establish VSOE for contracts within the Asia Pacific region. Due to an insufficient number of stand-alone enhancement and support (“E&S”) contracts and inconsistent discounting, we determined that we did not

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have adequate support to determine VSOE for the region for countries other than Japan. Accordingly, these transactions have been restated using subscription accounting rules as required by SOP 97-2, as amended by SOP 98-9, resulting in the deferral of the related paid-up software revenue, which will be recognized over the term of the bundled E&S, or if not bundled, over a period of twelve months. Furthermore, we completed VSOE analyses for our Americas and EMEA regions and determined that the VSOE rates for E&S, relative to achieved paid-up revenue, were not correct. Accordingly, we applied the recomputed annual VSOE rate of each region to all paid-up software arrangements and renewal rate contracts. The net effect of these revenue adjustments was to decrease software revenue by $6.8 million in 2002, and to increase software revenue by $2.5 million in the nine months ended September 30, 2003.

MSC.MasterKey—MSC.MasterKey is a token-based model, enabling customers to access our complete portfolio of products. However, not all products under these MasterKey licenses were delivered. Subsequent shipments of products were made as requested by the customer, or as new products became available. Since we did not meet the basic criteria under SOP 97-2 with respect to delivery of product or determining VSOE with respect to unspecified elements, software revenue previously recognized under the residual method was deferred and recognized over the initial term of the E&S contract using subscription accounting. The net effect of these revenue adjustments was to decrease software revenue by $10.2 million in 2002 and to increase software revenue by $0.2 million in the nine months ended September 30, 2003.

Timing and Cutoff—We found isolated instances where persuasive evidence of an arrangement did not exist at the time software revenue was recognized. Such instances included missing, unsigned and/or misdated software licensing arrangements and other supporting documentation, such as amendments and purchase orders. In addition, we found that certain software arrangements recorded in our EMEA region were recognized when invoiced, that delivery could not be substantiated, and that shipping terms were FOB Destination. As a result, revenue previously recognized has been deferred until pervasive evidence of an arrangement exists. The net effect of these revenue adjustments was to increase software revenue by $0.9 million in 2002 and to decrease software revenue by $0.3 million in the nine months ended September 30, 2003.

Contracted Services—Revenue for fixed-fee consulting arrangements entered into by our Asia Pacific and EMEA regions was incorrectly recognized using the percentage completion method as allowed under SOP 97-2 and SOP 81-1, “Accounting for Certain Construction Type and Certain Production Type Contracts,” referred to as contract accounting. The Asia Pacific region used input measures, such as time and costs, supported by a timekeeping and project accounting system to apply the percentage completion method. The EMEA region determined that its timekeeping or project accounting system was not able to adequately or accurately capture project costs and instead used milestones supported by customer acceptance confirmations as the supporting measure to determine the percentage of completion. However, during the restatement we determined that the milestones used by EMEA were not verifiable and should not be used with respect to percentage completion accounting. In addition, we determined that the timekeeping or project accounting system used in certain countries within Asia Pacific was not consistently utilized and that project costs were not accurately captured in determining revenue under the percentage of completion method. As a result of the inability to properly use the timekeeping or project accounting system or to properly document milestones, we concluded that previously recognized revenue should be deferred until final billing under the contract which approximates when services were completed and accepted by the customer. The net effect of these revenue adjustments was to decrease services revenue by $2.5 million in 2002 and $1.6 million in the nine months ended September 30, 2003. The decreases in revenue in 2002 and the first nine months of 2003 were substantially recognized in 2003 and 2004, respectively.

Training and Support Services—Revenue for certain training and post-contract customer support (“PCS”) sold separately from our software arrangements, including phone-based technical support related to third-party software, was recognized when invoiced to the customer. We reviewed these transactions and

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restated revenue based upon when the training was delivered and over the contract period for PCS. The net effect of these revenue adjustments was to decrease services revenue by $0.1 million in 2002 and $0.2 million in the nine months ended September 30, 2003. The decreases in revenue in 2002 and the first nine months of 2003 were substantially recognized in the first quarter of 2003 and the fourth quarter of 2003, respectively.

Regulatory Compliance—As part of our settlement with the Federal Trade Commission (“FTC”) we agreed to defer revenue related to the fair value of the converted software arrangements with respect to Nastran paid-up licenses and related maintenance. Such revenue would be recognized ratably over the greater of a 48 month term or the maintenance term specified in the agreement until the customer requests a refund or the twelve month period to request such a refund lapses, at which time the remaining deferred revenue will be recognized. The twelve month period to request a refund expired in June 2004. However, revenue for two customer agreements in the fourth quarter of 2002, and three agreements in the first quarter of 2003, were not properly deferred and have been restated. The net effect of these revenue adjustments was to decrease software revenue by $0.5 million in 2002 and to increase software revenue by $0.1 million in the nine months ended September 30, 2003.

In addition, we reversed and recognized the $6.4 million of revenue initially identified and deferred under the settlement and accrued $1.5 million for sales allowances representing the actual amounts of refunds made to customers through June 2004. The net effect of these revenue adjustments was to increase software revenue by $4.9 million in 2002 and to decrease software revenue by $0.8 million in the nine months ended September 30, 2003.

Revenue Classification and Other Adjustments—Historically, we allocated a certain amount of E&S revenue to our services segment that represented the estimated amount of PCS. The remaining amount of E&S revenue, representing enhancements and upgrades was reported as software revenue. For the restated consolidated statements of operations included in this report, all E&S revenue is reported as maintenance revenue. The net effect of these reclassifications was to decrease previously reported software revenue by $25.1 million in 2002 and $25.8 million in the nine months ended September 30, 2003, and to decrease previously reported services revenue by $48.1 million in 2002 and $40.8 million in the nine months ended September 30, 2003.

Non-Revenue Adjustments

Software Development Costs

We capitalized costs incurred for software developed for sale or lease after determining technological feasibility as required under Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed”. We evaluated the criteria used to determine technological feasibility and performed analyses of project costs incurred after reaching technological feasibility and release dates of products compared to our detailed product design specification. Our evaluation and analysis determined that technological feasibility was assessed prematurely or could not be supported as evidenced by a pattern of consistent significant cost overruns and delayed release dates of new products. As a result, previously capitalized software development costs were written off and the corresponding amortization of such costs was corrected. The net effect of these adjustments was to decrease cost of revenue by $9.9 million in 2002 and $7.6 million in the nine months ended September 30, 2003, and to increase research and development expenses by $14.7 million in 2002 and $9.8 million in the nine months ended September 30, 2003. In addition, an impairment charge of $4.8 million recorded in 2002 was reversed.

We also reviewed the costs capitalized for software purchased or developed for internal use pursuant to Statement of Position No. 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use” and determined that certain costs were improperly capitalized or were impaired. As a result, certain previously capitalized software development costs were written off and the amortization was

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corrected. The net effect of these adjustments was to increase research and development expenses by $0.3 million and other operating expenses by $0.3 million in 2002 and to decrease other operating expenses by $0.5 million in the nine months ended September 30, 2003.

Business Combinations Accounting

During 2001, 2002 and 2003, we made several business acquisitions. The two largest were the acquisition of AES in 2001 and Mechanical Dynamics, Inc. (“MDI”) in 2002. We revised the purchase accounting for AES with respect to (i) the effective transaction date, (ii) the improper inclusion of an assumed liability subsequently deemed to be a contingent liability pursuant to FASB No. 141, “Business Combinations,” and (iii) the recognition of compensation expense related to shares issued to the prior owners of AES subsequent to the acquisition. We also corrected the purchase accounting for AES and MDI and other acquisitions with respect to the allocation of purchase price to customer lists, as required by EITF 02-17, “Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination .” In addition, certain accruals established in connection with these and other acquisitions were adjusted.

The net effect of restatement adjustments related to purchase accounting was to increase operating expenses by $1.5 million in 2002 and $0.6 million in the nine months ended September 30, 2003.

Stock Compensation

In connection with severance agreements entered into with two terminated employees during 2002 we extended the exercise dates with respect to options that had previously been granted. The extension is a modification in terms and we should have recognized compensation expense as required under Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25” (FIN 44). As a result, we recorded adjustments to properly recognized additional stock compensation expense of $0.7 million in 2002.

Pension Accounting

We determined that certain foreign defined benefit plans had not been properly accounted for in accordance with SFAS No. 87, “Employer’s Accounting for Pensions”. We have subsequently obtained actuarial valuations and other relevant information for all such plans and have adjusted the pension liabilities and related accounts in our consolidated financial statements accordingly. The net effect of these adjustments was to increase operating expenses by $0.1 million in 2002.

Long-lived Assets Impairments

We previously recorded charges to reflect the impairment of goodwill and other intangibles, and other long-term assets in accordance with SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” As a result of the restatement, we reevaluated the impairment charges for goodwill originally recorded in 2002 based on an updated valuation model using the restated financial statements and concluded that the cumulative effect of the change in accounting was overstated by $0.5 million.

Other Adjustments

During our substantiation of the results of the Systems business, which was discontinued in the third quarter of 2003, we identified certain transactions that were incorrectly included and reported as discontinued operations. Accordingly, such transactions were reclassified and included within the results of our continuing operations. The net effect of these adjustments increased operating costs and expenses by $3.6 million in 2002 and decreased operating costs and expenses by $2.4 million in the nine months ended September 30, 2003

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We also identified various restatement adjustments related to the timing or adequacy of certain estimates or accruals recorded. These adjustments related primarily to provisions for bad debt, accrued professional services, accrued compensation and related expenses, including vacation, employee health plans and bonus, restructuring reserves and accounts payable. The net effect of these adjustments was to decrease operating costs and expenses by $1.0 million in 2002 and by $1.5 million in the nine months ended September 30, 2003. In addition, we reclassified the amortization of developed technology from operating expenses to cost of software revenue. These reclassifications totaled $5.1 million in 2002 and $4.6 million in the nine months ended September 30, 2003.

Similar adjustments were made to interest and other expenses (income) primarily as a result of other restatement adjustments discussed above which increased such expenses by $0.1 million in 2002 and decreased such expenses by $0.4 million in the nine months ended September 30, 2003.

Tax Adjustments

We identified a number of errors related to current and deferred federal, state and foreign taxes, and corresponding current and deferred tax expense. These errors included (i) not establishing deferred tax assets and, to the extent necessary, corresponding valuation allowances for unrealizable deferred tax assets, (ii) not accurately applying, the asset and liability approach for deferred taxes required under GAAP, (iii) not considering all relevant information at the date of issuance of the financial statements and (iv) accounting for income taxes in certain foreign jurisdictions on a cash basis. In addition, our provision was impacted by changes in the variance between our effective foreign tax rates and our statutory federal tax rate. We also adjusted our estimated reserves for tax contingencies related to the FTC settlement and research and development credits after consideration of subsequent facts, and established new tax reserves related to transfer pricing exposures in certain of our foreign jurisdictions. The net effects of these adjustments decreased our benefit for income taxes related to our continuing operations by $7.0 million in 2002 and increased our benefit for income taxes by $5.1 million in the nine months ended September 30, 2003.

General

We are a leader in the development, marketing and support of virtual product development (“VPD”) products, including simulation software and related services. We have been providing simulation software and related services to manufacturing and technology companies, as well as universities and research institutions around the world for over 40 years. Simulation software allows engineers to construct computer models of products, components, systems and assemblies and to simulate performance conditions and predict physical responses to certain variables, such as stress, motion and temperature. These capabilities allow our customers to optimize product designs, improve product quality and reliability, comply with regulatory and safety guidelines, reduce product development costs and shorten the timeline in bringing new products to market. We also provide a broad range of strategic consulting services to help our customers implement VPD solutions and improve the integration and performance of their product development process, which will lower the total cost of ownership of their technology investments. We serve customers in various industries, including aerospace, automotive, defense, machinery, electronics, consumer products, biomedical, shipbuilding and rail. Advances in computer technology have made virtual product development solutions available for any and all companies who manufacture products.

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Our goal is to provide our customers with leading edge VPD solutions, which will integrate design and engineering processes to ensure optimal product performance and efficient product development. We seek to be an industry leader in each of the product categories in which we compete and to expand into new and emerging markets within the product lifecycle management (“PLM”) industry.

Industry

The PLM industry includes four significant segments: conception of the product, design of the product, manufacture of the product and maintenance of the product. These product lifecycle segments utilize various digital technologies and software tools, often referred to as PLM tools, including mechanical computer-aided design (“CAD”), computer-aided engineering (“CAE”), computer-aided manufacturing (“CAM”), and product data management (“PDM”) and related services.

VPD solutions, including our software and services, are used in conjunction with these PLM tools throughout the entire product lifecycle. VPD solutions integrate CAE simulation software technologies with traditional physical testing techniques during all phases of the product development process. As a result, designers, analysts and others on the product development team gain greater and more timely insight into product behavior, thus providing a strategic element in achieving business objectives. Before the development of CAD and CAE software applications, product development was disjointed and required intensive manual redesign prior to and during manufacturing. With a lack of predictive analysis within product development, engineers were involved in “design-build-test-break” processes which limited the number of times such processes could be repeated due to time and cost limitations.

With VPD solutions, engineers have the ability to prototype, simulate, test and iterate scenarios in a virtual environment an unlimited number of times within the same or shorter timeframes. This VPD environment will allow engineers to migrate to “design-analyze-confirm” processes, which creates a more flexible, efficient and cost effective solution for product development. As a result, companies obtain a competitive advantage through innovation, manufacturing efficiency, speed to market and lower costs.

According to a recent industry report from Daratech, Inc. CAE software and services topped $2.1 billion in 2004, a year-over-year increase of 12%. Spending on PLM tools was more than $8.6 billion in 2004 and is projected by Daratech, Inc. to continue to grow at 8% each year through 2008. According to Daratech, Inc., approximately 25% of PLM investments came from CAE in 2004 and over the next five years, is expected to have the highest growth rate of all segments within PLM, rising 12% annually over that time.

Our Competitive Strengths and Growth Strategy

We currently support seven distinct simulation technologies across a portfolio of more than several hundred simulation software products. We consider this portfolio of simulation products to be one of the broadest and most widely used within the CAE segment of the engineering software market. We believe our simulation software is the de-facto standard within the aerospace and automotive industries, capable of being utilized on various computer platforms ranging from large mainframes to basic laptops, and designed to operate seamlessly with other leading mechanical CAD and CAE software products in the market, thereby giving our customers a complete integrated suite of simulation software for many engineering disciplines. With thousands of global accounts among diverse industries, including aerospace, automotive, machinery, electronics, equipment and consumer products, we believe we have a unique competitive advantage in leveraging new product releases and related professional services to existing and new customers and in penetrating new markets.

We will maintain this competitive advantage by providing superior technology and functional breadth of simulation solutions and collaborating with customers to deliver the next generation of enterprise VPD solutions. We will continue to evaluate our business model, including our product mix and positioning,

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marketing strategies and sales channels to maximize our market opportunities and to significantly improve our operating results. We are committed to improving our cost structures and will continue to streamline our business operations as necessary to successfully compete in all our geographic locations.

Our goal for growth is to expand our leading position in the simulation software market by further penetrating our installed base, by adding new customers from the supply chains in our existing aerospace and automotive markets, and by expanding with new customers in new markets such as biomedical and consumer products.

Software Products

Our simulation software products consist primarily of physics-based solvers, integrated with graphical user interfaces, sometimes referred to as pre- and post-processors. These solvers are capable of simulating many mechanical and structural phenomena. The governing principle for our enterprise software is to provide an integrated suite of simulation software applications to enhance engineering productivity for the product design teams at large global manufacturers.

We market our enterprise simulation software products under three main suites:

SimOffice—This category includes enterprise software to model and simulate the performance characteristics of a wide variety of complex mechanical conditions. Within this category, we include our core enterprise simulation software, including MSC.Nastran, MSC.Patran, MSC.ADAMS, MSC.Marc, MSC.Dytran, MSC.EASY5 and SOFY.

SimDesigner—This product category includes VPD technology through CAD-embedded simulation products designed for desktop use.

SimManager—This product category includes enterprise solutions related to the management of simulation processes and data, models and material properties.

We offer other proprietary software products which address specific simulation market niches and we also marketthird party software products including CAD, CAM and CAE software such as CATIA, Autodesk and SMARTEAM.

SimOffice Product Category

MSC.Nastran.MSC.Nastran is derived from NASTRAN, an open-source computer program owned by the United States Government. We have improved upon NASTRAN since it was first released in 1970, resulting in substantially greater capabilities and scope of our product, MSC.Nastran. MSC.Nastran is the leading program for engineering analysis worldwide, based on capability, functionality, international acceptance and number of installations. It is used to analyze structures in order to determine their strength, safety and other performance characteristics without building physical models.

MSC.Patran.MSC.Patran is a universal graphical user interface, which provides finite element modeling, analysis data integration, analysis simulation, and visualization capabilities. All of the functions of MSC.Patran may be integrated, automated and tailored to the user’s specific requirements using a powerful programming command language.

MSC.ADAMS.MSC.ADAMS is a motion simulation product that simulates system-level motion and loads. MSC.ADAMS is used to perform dynamic simulations of systems and subsystems, such as suspensions and engines, and evaluate attributes like vehicle handling, vibrational behavior and durability.

MSC.Marc.MSC.Marc simulates nonlinear physical behavior due to material contact conditions resulting in material failure under extreme stress. MSC.Marc is used in areas where materials undergo large deformations, such as rubber, plastics or metal forming and many other applications.

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MSC.Dytran.MSC.Dytran is complementary to MSC.Marc and uniquely combines fluid-structure interaction to facilitate the simulation of high-speed interactions including crash and projectiles.

MSC.EASY5.MSC.EASY5 is a system-level, block-diagram-oriented simulation program that includes a large number of “application libraries” with pre-built, ready-to-use components targeted to a specific engineering discipline.

SOFY.SOFY is a system-level, block-diagram-oriented simulation program that includes a large number of “application libraries” with pre-built, ready-to-use components targeted to a specific engineering discipline.

SimDesigner Product Category

The SimDesigner product suite includes CAD-embedded simulation solutions that allow design engineers to streamline and automate the task of building and testing virtual prototypes by simulating stress, motion, heat transfer and other physical attributes of components and assemblies within their preferred CAD environment. SimDesigner products include three categories:

Generative.   Generative products seamlessly embed our simulation solutions into the CAD environment, and focus on integrated attribute assessment across multiple disciplines, such as linear structures, motion, thermal, nonlinear structures, and fatigue.

Gateway.   Gateway products provide a seamless bidirectional link between the CAD environment and the customer’s chosen stand-alone VPD application such as MSC.Nastran and MSC.Marc.

Application-specific.   Application-specific products address specific markets, such as suspension design for the automotive industry. These applications enable the capture, storage, and reuse of product evaluation and process knowledge associated with building, testing, and validating products directly inside the CAD environment.

SimManager Product Category

SimManager is web-based environment that manages and automates simulation processes, manages all associated data and data history, and increases efficiency and innovation by delivering product performance knowledge earlier in the product development cycle. SimManager improves quality by ensuring best-practice simulation processes and full traceability of input parameters, and increases productivity by greatly reducing the number of manual tasks required. SimManager can interface with enterprise PDM systems to provide a truly collaborative environment.

Other Software Products

We also offer other software products, including:

MSC.Actran, used for determining the acoustics and vibro-acoustics performance of structural and mechanical systems;

MSC.Acumen, used to capture and automate a customer’s product development process;

MSC.Fatigue, used for durability analysis;

MSC.SuperForge, used for forging simulation; and

Third party software including Dassault Systemes products: CATIA, ENOVIA, DELMIA and SMARTEAM, as well as a select suite of Autodesk, Inc. products.

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Professional Services

We offer professional services in the areas of process automation, engineering consulting, PLM implementation, funded development, and training and onsite support services. Terms of the projects are set forth in the individual arrangements with each customer, including services to be provided, amounts to be charged, and other terms of the engagement. Consulting and training services are not included in software license fees, but are generally provided on a time and materials basis.

With process automation engagements, we work closely with our customers to enhance their VPD processes, enabling them to make better products in less time and for less cost. We use a three-step process to do this by assessing our customers’ current VPD processes, comparing them to industry best practices and indicating areas for improvement. As a result of these assessments we design new enhanced processes and implement them within the customer’s product development process.

With engineering consulting engagements, we provide engineering simulation to our existing software customers and to companies who do not use our software. These services are delivered to our current customers to provide simulation or design expertise that they may not have and to augment their capabilities if they have a personnel shortage. These services are also provided to companies who do not have any simulation or design professionals on staff, but who need these capabilities provided via outsourcing. We have provided services to automotive, aerospace, biomedical, electronic packaging, petrochemical, nuclear and consumer product manufacturers and suppliers.

With PLM implementation, we provide services that allow our customers to efficiently and effectively deploy PLM software, including CATIA, ENOVIA, and SMARTEAM software. We provide these services when we license the PLM software, and also to companies who have purchased their PLM software elsewhere.

Our training and onsite support services help our customers get the most out of their MSC.Software enterprise solution. We have developed educational tools designed to train users of our products as an extension of our software business. Training seminars are conducted in local languages on a frequent basis at our offices worldwide, and at client sites. We also provide onsite support for our software. This service enables our customers to receive a dedicated level of technical support, with our personnel or adding to the expertise of onsite staff.

Research and Development

We dedicate significant resources to the development and enhancement of our suite of software products, as well as to new product research and development. Our development activities have historically involved adding new capabilities to our suite of simulation programs or converting those programs for use on new computer platforms. These activities are intended to prevent technological obsolescence and to provide our clients the maximum flexibility in selecting compatible computer hardware. In 2002, 2003 and 2004, our research and development expenditures totaled $42.9 million, $40.7 million and $42.1 million, respectively. In 2005, we invested over $45 million in research and development.

Sales and Marketing

We market and sell our products and services in North America and Latin America (“the Americas”), Europe, the Middle East and Africa (“EMEA”), and Asia Pacific through a dedicated sales force, as well as through third parties, including value added resellers. In fiscal 2002, 2003, and 2004, our foreign operations generated approximately 60.4%, 65.4%, and 67.8%, respectively, of our total revenue.

We also market our products by advertising in trade publications, participating in industry trade shows and exhibits, conducting training seminars and working with our strategic partners.

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Historically, our software products were used primarily in the design phase of product development. Accordingly, we targeted our marketing efforts on the product design engineers of our customers. With the addition of our MSC.Marc and SimManager products, we expanded our marketing efforts to target the manufacturing engineers and the IT organizations of our customers. We now have offerings that cover the entire lifecycle of a product.

Pricing

In general, we provide two types of licensing alternatives for the use of our software products. Our software products are offered on an annual non-cancelable license or on a perpetual (paid-up) basis. We also offer MSC.MasterKey, a token-based model, enabling customers to access our portfolio of simulation software from a single, flexible license. MasterKey tokens are offered on an annual license or on a paid-up basis. With both annual and paid-up software licenses, the license fee is set at a fixed rate and the customer is invoiced at the time of sale. Software licenses are generally sold with maintenance, which entitles the customer to receive unspecified upgrades, enhancements and support. Maintenance fees typically approximate 20% of software license fees, and maintenance agreements are generally for one year.

Pricing of products licensed in Europe through our European subsidiaries are generally denominated in Euros or other local currencies and products licensed in Asia Pacific through our Asia Pacific subsidiaries are generally denominated in Japanese Yen or other local currencies.

Post Sales Support

Client service is an integral aspect of our marketing program. We maintain toll-free numbers and a hot line service for our clients. We conduct formal training for clients, ranging from three-day introductory courses to intensive courses on specialized subjects for experienced users. Onsite courses for clients are provided for larger user organizations. We also host technology conferences in the United States, Europe, Asia Pacific, Australia and Latin America to gather data on client needs, new engineering applications, and new trends in computing technology.

Sales and Support Offices

We have sales and client support offices at our worldwide headquarters in Santa Ana, California, and in over 50 other locations throughout the Americas, EMEA and Asia Pacific. Our products are marketed, distributed and supported outside of North America through a network of foreign subsidiary offices including a European subsidiary, headquartered in Munich, Germany, and an Asia Pacific subsidiary headquartered in Tokyo, Japan. Product support and training are also available in many of our locations.

Customers

Our customer base consists of thousands of companies and is diversified across industry sectors and geographies. The majority of our customers are the industry leaders in automotive, aerospace, defense and heavy machinery. No single customer accounted for more than 10% of our revenue in 2002, 2003 or 2004.

We have long-standing relationships with many of our customers, and the average tenure of our top 10 customers is more than 20 years. Our major end-user customers, based upon 2004 revenue, include: Boeing, Lockheed Martin, Nissan Motor (NML), Toyota, Northrop Grumman, Airbus, BMW and Renault.

Backlog

We generally ship our software products within 30 days after acceptance of an order and execution of a software license agreement. Accordingly, we do not believe that our backlog of software arrangements at

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any particular point in time is indicative of future sales. Backlog for our consulting services is currently not material.

Intellectual Property Rights

We regard our software as proprietary and rely on a combination of trade secret, copyright and trademark laws, license agreements, nondisclosure and other contractual provisions, and technical measures to protect our proprietary rights in our products. We distribute our software products under software license agreements that grant customers nonexclusive licenses for the use of our products, which are generally nontransferable. Use of the licensed software is restricted to designated computers at specified sites, unless the customer obtains a license offering other access to the software. Software and hardware security measures are also employed to prevent unauthorized use of our software, and the licensed software is subject to terms and conditions prohibiting unauthorized reproduction and export of the software. In 2002, we entered into a settlement with the Federal Trade Commission that required us to license MSC.Nastran (Version 2001) to another company, thereby giving this other company the unrestricted, perpetual right to license this technology to others.

MSC, MSC/, MSC.ADAMS, MSC/Patran, MSC/Mvision, MSC/Dytran, MSC.SuperModel, MARC, MENTAT and EASY5 are some of our registered trademarks. NASTRAN is a registered trademark of NASA. MSC.Nastran is an enhanced proprietary version of NASTRAN. Many of our trademarks have also been registered in foreign countries.

In addition, we maintain federal statutory copyright protection with respect to our software programs and products and have copyrights on documentation and manuals related to these programs.

Competition

The CAD, CAE, and broader PLM markets are intensely competitive and characterized by rapidly changing technology and evolving standards. We expect competition to increase both from existing competitors and new market entrants. We believe that the principal competitive factors affecting the software business include ability to solve customer problems, quality, functionality, performance, ease of use and, to a lesser extent, price. In our services business, we believe that the principal competitive factor is expertise.

With respect to our software business, the Company’s primary competitors include:

·Altair Engineering, Inc.

·ANSYS, Inc.

·Dassault Systemes

·LMS International

In our services business, we compete with in-house information technology personnel and consulting groups.

Although we believe we currently compete effectively with respect to these factors, we may not be able to maintain our competitive position against current and potential competitors, who may have greater financial, technical, marketing and other resources than we do. It is also possible that partnerships among competitors may emerge and acquire market share or that competition will increase as a result of industry consolidation. Increased competition could result in price reductions, reduced profitability and loss of market share, any of which could materially adversely affect our business, operating results or financial conditions.

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Employees

As of December 31, 2004, we employed 1,374 persons, of whom 260 were involved in technical activities, 866 in sales, marketing and field support, and 248 in administration. None of our U.S. employees are represented by a labor union. Certain foreign jurisdictions have workers councils that typically represent workers on matters generally affecting terms of employment. We have never experienced any work stoppages and believe our relations with employees are good. Reliance upon employees in other countries may increase risks associated with government instability or regulation unfavorable to foreign-owned companies that could negatively impact our operations in the future.

Recruiting and retaining highly skilled employees, especially software developers and engineers, is highly competitive. We believe our growth and future success is dependent on our ability to attract, retain and motivate highly skilled employees.

Available information

We were re-incorporated in Delaware in 1994 and have been in business since 1963. Our executive offices are located at 2 MacArthur Place, Santa Ana, California, 92707, and the telephone number at that location is (714) 540-8900. Ourweb site is www.mscsoftware.com.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments filed pursuant to Sections 13(a) and 15(d) of the Securities Act of 1934, as amended are available free of charge under Investor Relations menu on our website at www.mscsoftware.com. These reports are posted on our website the same day they are filed with the SEC. In addition, copies of our code of business conduct and ethics, and any waivers thereto, are on our website and available in print to any shareholder upon request to our Investor Relations department. The contents of our website are not part of this Form 10-K.

ITEM 1A.RISK FACTORS

Downturns in the aerospace and automotive industries we serve would adversely affect our sales and operating results.

In 2004, sales to customers in the aerospace and automotive industries accounted for a majority of our revenue. Reductions in capital spending by, and cyclical trends affecting, customers in these industries could adversely affect revenue from these customers and our results of operations. In addition, these types of customers tend to adhere to a technology choice for long periods, possibly an entire development cycle. As a result, a lost opportunity with a given customer may not again become a new opportunity for several years.

If we do not continue to acquire other companies, we may not be able to increase our revenue at historical growth rates.

Our historical revenue growth has been augmented by acquisitions. Our future revenue growth rate may decline if we do not make acquisitions of similar size and at a comparable rate as in the past.

We have acquired and may continue to acquire other companies and may be unable to integrate successfully such companies with our operations, and we have recorded, and may continue to record, a significant amount of goodwill in connection with our acquisitions.

We acquired Mechanical Dynamics, Inc. or MDI in 2002, Advanced Enterprise Solutions, Inc. or AES in 2001 and five other businesses in 1998 and 1999. In 2002 we also acquired certain assets and technology, collectively known as EASY5, and in 2004 acquired SOFY. We may continue to expand and diversify our

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operations with additional acquisitions. Some of the risks that may affect our ability to integrate or realize any anticipated benefits from companies we acquire include those associated with:

·integrating the operations, technologies, products and personnel;

·unexpected losses of key employees or customers of the acquired company;

·conforming the acquired company’s standards, processes, procedures and controls with our operations;

·coordinating our new product and process development;

·hiring additional management and other critical personnel;

·increasing the scope, geographic diversity and complexity of our operations;

·difficulties in consolidating facilities and transferring processes and know-how;

·other difficulties in the assimilation of acquired operations, technologies or products;

·adverse effects on existing business relationships with customers.

If we are unsuccessful in integrating these companies or product lines with our operations, or if integration is more difficult than anticipated, we may experience disruptions that could have a material adverse effect on our business, financial condition and results of operations. As a result of our acquisitions, goodwill accounted for approximately $158.7 million, or 34.1%, of our total assets, as of December 31, 2004. We may record additional goodwill related to future acquisitions. Under current generally accepted accounting principles, we do not amortize goodwill. We will, however, perform an impairment analysis on the carrying value of our goodwill at least annually. If the financial benefits of our acquisitions do not ultimately exceed the associated costs, we could be required to write down some or all of the unamortized goodwill. As a result, our results of operations would be adversely affected.

Mergers and acquisitions and investments in technology companies are inherently risky, and no assurance can be given that our previous or future acquisitions or investments will be successful and will not materially adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results. Even when an acquired company has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to products or the acquiree’s business. If we are unable to complete an acquisition or an acquisition is delayed, our business could be adversely affected due to diversion of management attention and company resources from alternative approaches, which may prevent us from achieving strategic goals.

We may also incur third party costs in the evaluation, negotiation and completion of acquisitions. These costs are deferred and treated as part of the acquisition cost upon completion of the acquisition. If an acquisition is not completed, the deferred costs are charged to earnings in the period in which the acquisition is certain not to be completed, which can impact our results of operations.

We have had losses and, should they recur, it could have a material adverse effect on our business, results of operations and financial condition.

Our net income (loss) for the years ended December 31, 2002, 2003 and 2004 was $(75.2) million, $(29.8) million and $10.9 million, respectively, and we had an accumulated deficit of $122.6 million as of December 31, 2004. We cannot assure you that we will operate profitably, and if we cannot operate profitably, we may not be able to meet our debt service requirements or our working capital or other

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needs. Our inability to meet these needs could have a material adverse effect on our business, results of operations and financial condition.

We may periodically restructure our operations or change our pricing model, which could adversely impact our operating results in the short term before we receive any benefits from these changes, if at all.

We continually evaluate the strengths and weaknesses of our operations. In connection with this evaluation, we may decide to reduce or realign our available resources and, as a result, consolidate, shut down or sell product lines that do not fit into our long-term business plan. If we reduce headcount in the future, we will incur significant severance and termination costs and other related expenses that could harm our business before we were to receive any benefit, if at all, from the reduced headcount expenses. If we shut down or otherwise dispose of any of our product lines in the future, we may incur costs or charges, receive less in the sale than such assets are worth, disrupt customer goodwill or lose revenue streams in connection with such a restructuring that could harm our business before we were to receive any benefit, if at all, from the restructuring. In addition, we may introduce changes to our pricing model, and these changes may not result in increased or even the same level of revenue in the timeframes that we anticipate, or at all.

The management team may not be effective

Since October 2004 we have hired a new chief executive officer, president and chief operating officer, chief financial officer, and general counsel. These four individuals constitute the current executive management team. None of these individuals have a past employment history with us. There is no assurance that this management team will be effective. If the new management team is not effective, it could have a material, adverse effect on our revenue and results of operations.

Our operating results are dependent in part on our ability to develop and introduce new and enhanced products and we may not be able to develop new and enhanced products to satisfy changes in demand.

Our operating results depend in part on our ability to develop and introduce new and enhanced products on a timely basis. Successful product development and introduction depends on numerous factors, including our ability to anticipate customer requirements, changes in technology, our ability to differentiate our products from those of our competitors, and market acceptance. We may not be able to develop and introduce new or enhanced products in a timely or cost-effective manner or to develop and introduce products that satisfy customer requirements. Our products also may not achieve market acceptance or correctly anticipate technological changes.

Our sales cycle is lengthy and complicated.

The development of a business relationship with a potential licensee can be a lengthy process, spanning twelve months or longer, especially for large enterprise transactions. The sales cycle can involve multiple divisions within a potential licensee’s organization and multiple layers of management, thus making our sales process relatively complicated and long. Additionally, negotiating the terms of a new license agreement can be a protracted process with no set timetable for completion. Due to the length and complicated nature of our sales cycle, predicting the fiscal period in which a new license agreement will be entered into, if at all, and the financial terms of such an agreement is difficult.

Pending governmental investigations may adversely affect us.

In April 2004, our Audit Committee engaged the services of outside legal counsel to direct an independent investigation of accounting issues. This independent investigation was initially launched by the Audit Committee to determine whether information may have been withheld from our former independent registered public accounting firm. This investigation was subsequently expanded to include

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the timing of revenue recognition and to review other non-revenue restatement items. The independent investigation was completed in December 2004 and a draft report was delivered to the Audit Committee at that time. In January 2005, the Audit Committee accepted the final report on the investigation. In April 2005, we were notified that the SEC had opened an investigation, and this investigation is ongoing. We cannot predict the final outcome of this SEC investigation and accordingly cannot be assured that it will not result in the taking of actions adverse to us. In addition, as a result of the financial restatement undertaken by the Company, we may be the subject of future stockholder litigation and/or class action lawsuits.

On April 27, 2005 we announced that KPMG was dismissed as our independent registered public accounting firm. On May 19, 2005, we announced that Deloitte & Touche LLP was appointed by our audit committee as our new independent registered public accounting firm. In connection with the dismissal of KPMG as required by the rules of the SEC, KPMG provided a letter regarding the Company’s disclosure with respect to that dismissal. A copy of that letter is included as an Exhibit to the Company’s Form 8-K filed on May 12, 2005. The observations made by KPMG in that letter were considered and addressed, as necessary, by management and the audit committee during the restatement process.

The timing of orders and shipments, which frequently occur at the end of a quarter, can cause fluctuations of our operating results that, in turn, may impact the price of our common stock.

We derive most of our revenue from licensing software products and selling services to high-end users of the product design markets. Our revenue growth and our ability to match spending levels with revenue growth rates will directly affect our future operating results. Historically, a significant portion of our revenue has been generated in the last month of a quarter, with this revenue frequently concentrated in the last weeks or days of a quarter. In addition, higher volumes of orders have been experienced in the fourth quarter. The concentration of orders makes projections of quarterly financial results difficult. Accordingly, we may experience fluctuations in our future operating results on a quarterly or annual basis which, in turn, could adversely affect the price of our common stock.

Our future results could be harmed by economic, political, regulatory and other risks associated with international sales and operations.

Although we may not be successful in expanding into particular international markets, or generating revenue from foreign operations, we currently anticipate that revenue from international operations will continue to represent a substantial portion of our total revenue. Expansion into international markets requires management attention and resources. We may not be successful in expanding into particular international markets or in generating revenue from foreign operations. Accordingly, our future results could be harmed by a variety of factors related to our international operations, including:

·changes in foreign currency exchange rates;

·changes in a specific country’s or region’s political or economic conditions, particularly in emerging markets;

·burdens on complying with a wide variety of foreign laws and regulations;

·meeting import and export licensing requirements

·natural disasters or outbreaks of infectious diseases affecting the regions in which we or our licenses sell products;

·tariffs, trade protection measures and import or export licensing requirements;

·potentially negative consequences from changes in foreign government regulations, tax laws and regulatory requirements

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·difficulty in managing a geographically dispersed workforce in compliance with diverse local laws and customs;

·disproportionate management attention or company resources;

·changes in diplomatic and trade relationships

·longer accounts receivable payment cycles; and

·less effective protection of intellectual property.

We are subject to changes in demand for our products and services resulting from exchange rate fluctuations that make our products and services relatively more or less expensive in international markets. If exchange rate fluctuations occur, our business could be harmed by decreases in demand for our products and services or reductions in gross margins.

We have entered into agreements with third parties for the inclusion of their technology as a component of some of our products. The termination of these agreements could adversely affect our business.

Some of our products include technology licensed from third parties and we have entered into several royalty agreements for use of such technology. Should these agreements be terminated, we would need to find an alternative source to replace the functionality of such technology. We believe that we would be able to find an alternative source of the technology, or replace the functionality through internal development. In addition, these agreements allow for significant lead time prior to termination by the third party, which should allow us sufficient time to replace the functionality. However, in the event that all of these agreements were terminated within a very short time period, there is no guarantee that we could replace the technology and the marketability of our products could be harmed if we were unable to do so. In addition, certain products or technologies acquired or developed by us may incorporate so-called “open-source” software. Open source software is typically licensed for use at no initial charge, but certain open source software licenses impose on the licensee of the applicable open source software certain requirements to license or make available to others both the open source software as well as the software that relates to, or interacts with, the open source software. Our ability to commercialize products or technologies incorporating open source software or otherwise fully realize the anticipated benefits of any such acquisition may be restricted as a result of using such open source software because, among other reasons:

·open source license terms may be ambiguous and may be subject to unanticipated obligations regarding our products and technologies;

·competitors may have improved access to information that may help them develop competitive products:

·open source software cannot be protected under trade secret law;

·it may be difficult for us to accurately determine the origin of the open source code and whether the acquired open source software in fact infringes third party intellectual property rights; and

·open source software potentially increases customer support cost because (i) such software typically does not contain warranties as to functionality or is not accompanied by any support offerings from the provider of such open source software and (ii) licensees can modify the software and potentially introduce errors

In addition, the operation of our software will be impaired if errors occur in third-party software that we utilize. It may be more difficult for us to correct any defects in third-party software because the development and maintenance of the software is not in our control. Accordingly, our business could be adversely affected in the event of any errors in our software. There can be no assurance that these third-

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parties will continue to make their software available to us on acceptable terms, to invest the appropriate level of resources in their products and services to maintain and enhance the software capabilities, or to remain in business.

Our operating expenses are fixed in advance. Therefore, we have limited ability to reduce expenses in response to any revenue shortfalls.

We plan our operating expense levels, in part, on expected revenue growth. Our expense levels, however, are generally committed in advance and, in the near term, we are able to change only a relatively small portion of our expenses. As a result, our ability to convert operating outlays into expected revenue growth at profitable margins will affect our future operating results. If our future revenue is less than expected, our net income may be disproportionately affected since expenses are relatively fixed.

Strong competition in the simulation software industry may affect prices, which could reduce margins and adversely affect our operating results and financial position, and we may not be able to maintain our competitive position against current and potential competitors.

The simulation software industry is highly competitive. The industry may experience pricing and margin pressure which could adversely affect our operating results and financial position. Some of our current and possible future competitors have greater financial, technical, marketing and other resources than we do, and some have well-established relationships with our current and potential customers. It is also possible that alliances among competitors may emerge and rapidly acquire significant market share or that competition will increase as a result of software industry consolidation. To remain competitive, we must continue to invest significant resources in research and development, sales and marketing and customer support. Increased competition may result in price reductions, reduced profitability and loss of market share, any of which could have a material adverse effect on our business, financial condition and results of operations. We believe that the principal competitive factors affecting the software business include quality, functionality, ease-of-use and, to a lesser extent, price. In our professional services business, we believe that the principal competitive factor is expertise We cannot assure you that we will be able to maintain our competitive position against current and potential competitors.

Our future success depends in part on the continued service of our key technical and management personnel and our ability to identify, hire and retain additional personnel.

There is intense competition for qualified personnel in the software industry. We may not be able to continue to attract and retain qualified personnel necessary for the development of our business or to replace qualified personnel who may leave our employ in the future. Any growth we experience is expected to place increased demands on our resources and will likely require the addition of management and technical personnel, and the development of additional expertise by existing management personnel. Loss of the services of, or failure to recruit, key technical and management personnel could harm our business.

Business interruptions could adversely affect our business.

Our operations and those of our licensees, developers and customers are vulnerable to interruptions by fire, flood, earthquake, power loss, telecommunications failure, terrorist attacks, wars and other events beyond our control. Our corporate headquarters are located in California, near major earthquake faults. A catastrophic event that results in the destruction of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations and as a result, our future operating results could be adversely affected. The business interruption insurance under which we are covered may not be sufficient to compensate us fully for losses or damages that may occur as a result of these events, if at all. Any such losses or damages incurred by us could have a material adverse effect on our business.

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If we cannot adequately protect our intellectual property rights, our financial results may suffer.

Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, the steps we take to protect our proprietary information may not be adequate to prevent misappropriation of our technology, and our competitors may independently develop technology that is substantially similar or superior to our technology.

We may be required to spend significant resources to monitor and police our intellectual property rights. Policing the unauthorized use of our products or intellectual property is difficult and litigation may be necessary in the future to enforce our intellectual property rights. Regardless of the merits of any claim, intellectual property litigation is expensive and time-consuming and could divert our management’s attention from operating our business. Despite our efforts, we may not be successful in any litigation or other enforcement action we may bring may not be able to detect infringement and, as a result, may lose competitive position in the market. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture market share.

Despite our efforts to protect our proprietary rights, existing laws, contractual provisions and remedies afford only limited protection. Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, among other things, and we cannot assure you that we will be successful in enforcement of, or defending ourselves against, intellectual property claims. Moreover, attempts may be made to copy or reverse engineer aspects of out product or to obtain and use information that we regard as proprietary. Accordingly, we cannot assure you that we will be able to protect our proprietary rights against unauthorized third-party copying or use. Unauthorized use by others of our proprietary rights could materially harm our business.

We could be harmed by litigation involving intellectual property rights.

We may be accused of infringing the intellectual property rights of third parties. Furthermore, we may have certain indemnification obligations to customers with respect to the infringement of third-party intellectual property rights by our products. Infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims may be asserted in the future and such assertions, if proven to be true, may harm our business. Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, would at a minimum be costly and could divert the efforts and attention of our management and technical personnel. In the event of any adverse ruling in any such litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party claiming infringement. A license might not be available on reasonable terms, or at all.

Certain provisions of our certificate of incorporation may delay, defer or prevent a change of control which could impact the price of our stock.

Certain provisions of our Certificate of Incorporation, as amended, and Restated Bylaws could make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to stockholders. These provisions include the following:

·division of our board of directors into three classes, with each class serving a staggered three-year term;

·removal of directors for cause only;

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·ability of the board to authorize the issuance of preferred stock in series;

·vesting of authority in the board to determine the size of the board (subject to certain limited exceptions) and to fill vacancies thereon; and

·advance notice requirements for stockholder proposals and nominations for election to the board.

In addition to the above provisions, in 1998 we adopted a shareholder rights plan. This plan was amended as of October 18, 2004. This plan entitles each registered holder to purchase from us, under certain circumstances, one one-hundredth of a share of Junior Participating Preferred Stock at a price of $35.00, subject to adjustments. The rights are generally exercisable only if a person or group acquires 12.5% or more of our stock or announces a tender or exchange offer the completion of which would result in ownership by a person or group of 12.5% or more of our stock. In the event of a transaction commonly known as a “squeeze-out merger,” each holder of Junior Participating Preferred Stock may purchase either our common stock or the common stock of the merged entity at one-half of such stock’s market value. We may redeem the rights at a nominal value until ten days after the announcement of the acquisition of such a 12.5% interest and under certain other circumstances. Ninety days after we are in full compliance with our SEC filing requirements, the trigger for exercising these rights will revert back to 20%, the percent set forth in the original shareholders rights plan adopted in 1998.

Recent accounting pronouncement requiring change in accounting for employee stock options could materially and adversely affect us.

Currently, we do not recognize compensation expense for stock option grants in our statement of operations. In December 2004, the FASB issued SFAS No. 123(R) which will require us to measure all employee stock-based compensation awards using a fair value method and record such amounts as an expense to our income statement. We are required to adopt SFAS No. 123(R) in the first quarter of 2006. The additional expense associated with stock options will be substantial and materially reduce operating income, operating margins, net income and earnings per share. Refer to Note 1 of our Notes to Consolidated Financial Statements included in this report for a discussion on our current methods of accounting for stock-based compensation plans and pro forma disclosures currently required under SFAS No. 123(R).

In addition, new regulations implemented by NASDAQ National Market generally requiring stockholder approval for stock option plans could make it more difficult for us to grant options to employees in the future. To the extent that new regulations make it more difficult or expensive to grant stock options to employees, we may incur increased compensation costs, change equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business.

Our common stock is not currently listed on any securities exchange.

One March 11, 2005 the New York Stock Exchange (“NYSE”) suspended trading in our common stock and the staff of the Exchange informed us that they had recommended that delisting procedures be commenced. The NYSE stated that this action was taken because of the overall uncertainty surrounding the completion of our current financial statement filing requirements with the SEC due to the previously announced restatement of our financial results for the period subsequent to 2001. We have applied for listing on the NASDAQ Stock Market, but there is no assurance that our application will be approved. Since the suspension of trading on the NYSE took effect on March 11, 2005, our common stock has been traded in the Pink Sheets under the symbol “MNSC.”

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ITEM 1B.UNRESOLVED STAFF COMMENTS

Not applicable

ITEM 2.   PROPERTIES

All of our offices are leased under agreements expiring at various times over the next one to 10 years. Our corporate headquarters in Santa Ana, California includes 203,511 square feet under a lease expiring in 2013, of which approximately 92,000 square feet is sublet. We also lease approximately 400,000 square feet in over 50 other offices throughout the world for sales, support, research and development, consulting and administrative personnel. All facilities are in good condition and are adequate to meet our requirements for the foreseeable future. See Note 12—Commitments and Contingencies in Notes to Consolidated Financial Statements for additional information regarding our lease obligations.

ITEM 3.   LEGAL PROCEEDINGS

We are subject to various claims and legal proceedings that arise in the ordinary course of our business, including claims and legal proceedings that have been asserted against us by former employees.

In April 2005, the Enforcement Division of the SEC issued the Company a formal order of investigation which we believe is related to the financial restatement for periods subsequent to December 31, 2000. While we continue to cooperate with the SEC, as of this date there has been no final resolution of this matter.

Further, we may have indemnification obligations with respect to current and former employees and officers with respect to this SEC investigation.

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

No matters were submitted to a vote of shareholders during the fourth quarter of the year ended December 31, 2004.

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PART II

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Through March 10, 2005, our common stock was listed for trading on the NYSE under the symbol “MNS”. On February 8, 2005, the New York Stock Exchange (the “NYSE”) informed us that, because of the ongoing delay in the filing of our 2003 annual report on Form 10-K with the SEC, the NYSE would suspend trading in our stock on the NYSE before the opening of the market on March 11, 2005. On March 11, 2005 our stock began trading on the Pink Sheets electronic quotation system under the ticker symbol “MNSC.” The following table sets forth the high, low, average and closing prices, as reported on the NYSE composite trading system, for the periods shown:

	Sales Prices
	High		Low		Close
Calendar Year 2004:
Fourth Quarter	$	10.58	$	7.96	$	10.47
Third Quarter	$	8.68	$	6.03	$	8.04
Second Quarter	$	10.15	$	8.31	$	8.95
First Quarter	$	11.30	$	8.20	$	8.81
Calendar Year 2003:
Fourth Quarter	$	11.19	$	7.30	$	9.45
Third Quarter	$	9.35	$	6.25	$	7.20
Second Quarter	$	8.70	$	6.10	$	6.74
First Quarter	$	9.66	$	6.74	$	7.75

As of October 1, 2005, there were 272 record holders of our common stock. Because many of our shares are held by brokers or other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by the record holders.

We eliminated our dividend in September 1996 and do not anticipate paying a dividend in the foreseeable future.

We maintain the MSC.Software Profit Sharing Plan which includes a 401(k) feature that allows participants to make contributions to the plan from their compensation on a before-tax basis. A participant’s contributions to the plan are credited to an account maintained in his or her name under the plan. Through March 2005, a participant was permitted to invest his or her Profit Sharing Plan account in the MSC Stock Fund, an investment alternative under the plan that was invested principally in our common stock. Shares held in the MSC Stock Fund under the Profit Sharing Plan were purchased by the plan trustee on the open market using contributions invested in that fund. This practice was suspended in March 2005 after our common stock was delisted from the NYSE. As of December 31, 2003 and 2004, the number of shares of our common stock held in the MSC Stock Fund totaled 234,057 and 174,843, respectively.

Recent Sales of Unregistered Securities and Stock Option Grants.

On May 4, 2004, the company granted 5,000 stock options with a per share exercise price of $8.80 to one employee. On May 12, 2004, the company granted a total of 350,000 stock options with a per share exercise price of $8.92 to nine employees. On June 1, 2004, the company granted 1,500 stock options with a per share exercise price of $9.00 to one employee and on June 22, 2004 the company granted 10,000 stock options to an employee at a per share exercise price of $8.51. On July 13, 2004, the company granted a total of 19,500 stock options to six employees with a per share exercise price of $7.39. On July 27, 2004, the company granted 2,000 stock options with a per share exercise price of $7.32 to one employee. On

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August 9, 2004, the company granted 500 stock options with a per share exercise price of $6.80 to one employee. On November 15, 2004, the company granted 4,000 stock options to one employee with a per share exercise price of $9.81, and on November 18, 2004, the company granted 500 stock options to one employee with a per share exercise price of $9.61 per share.

During 2004, in connection with the employment of an executive officer, the Company granted the right to purchase up to 100,000 shares of restricted common stock at $7.00 per share, which was less than the then fair market value of $8.71 per share. Pursuant to the restricted stock offer, the executive purchased 25,000 shares of restricted common stock for a total of $175,000. The Company recognized a stock based compensation charge of $18,000 related to this transaction in 2004. The purchase was subsequently rescinded on March 8, 2005 and replaced with the restricted stock transaction discussed below.

On March 8, 2005, the Company granted the executive officer 25,000 restricted shares with an exercise price of $7.00 per share, which was less than the then fair market value of $11.40 per share. On March 31, 2005 the executive officer exercised his right to purchase the 25,000 restricted shares of common stock. Compensation expense recognized in 2005 related to this transaction totaled $75,000.

In addition, the following directors each received a grant for 10,000 options upon their election to the board on such date and at an exercise price per share as follows: Mark A. Stevens: August 3, 2004, $7.12; Gregory P. Spivy: December 3, 2004, $9.68 and William J. Weyand: December 3, 2004, $9.68.

These issuances of securities were issued in private placement in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. The proceeds from the issuance of securities from the executive officer’s purchase of shares of stock of the company in 2004 were used for general working capital purposes. No proceeds were created by the grant of any options described above.

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ITEM 6.     SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and the related Notes to Consolidated Financial Statements, included elsewhere in this Form 10-K. The financial data for the years ended December 31, 2002, 2003 and 2004 is derived from the audited consolidated financial statements that are included in this report (amounts in thousands, except per share data). We did not restate or re-audit the years ended December 31, 2000 and 2001. Accordingly, financial information regarding those years otherwise required to be included in this Item 6 has been omitted. See “Item 1. Business—Impact on Our SEC Filings.”

	As of and for the Years Ended December 31,
	2002				2003			2004
	(As Restated)(1)
Statement Of Operations Data:
Revenue		$	233,602		$	252,673		$	277,296
Operating Income (Loss)		$	(28,718	)	$	13,483		$	18,513
Other Expense, net		$	7,679		$	10,324		$	924
Income (Loss) From Continuing Operations		$	(38,158	)	$	(2,813	)	$	10,879
Income (Loss) From Discontinued Operations		$	1,740		$	(26,951	)	$	—
Cumulative Effect of Change in Accounting Principle		$	(38,800	)	$	—		$	—
Net Income (Loss)		$	(75,218	)	$	(29,764	)	$	10,879
Basic Earnings (Loss) Per Share From Continuing Operations		$	(1.30	)	$	(0.09	)	$	0.36
Diluted Earnings (Loss) Per Share From Continuing Operations		$	(1.30	)	$	(0.09	)	$	0.30
Basic and Diluted Earnings (Loss) Per Share From Discontinued Operations		$	0.06		$	(0.90	)	$	—
Basic and Diluted Loss Per Share From Cumulative Effect of Change in Accounting Principle		$	(1.33	)	$	—		$	—
Basic Earnings (Loss) Per Share		$	(2.57	)	$	(1.00	)	$	0.36
Diluted Earnings (Loss) Per Share		$	(2.57	)	$	(1.00	)	$	0.30
Balance Sheet Data:
Cash and Cash Equivalents		$	29,387		$	42,045		$	39,946
Working Capital (Deficiency)		$	(24,626	)	$	(2,782	)	$	20,542
Total Assets		$	488,228		$	455,365		$	464,889
Deferred Revenue		$	113,781		$	120,028		$	116,211
Total Long-Term Debt		$	57,475		$	107,015		$	107,195
Total Shareholders’ Equity		$	178,957		$	148,073		$	165,015

(1)   See Note 2 to the consolidated financial statements for further details

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ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements and Factors That May Affect Future Results

This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Item 1A. Risk Factors” included elsewhere in this report. You should also carefully review the risk factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission, particularly Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. You should also read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included in this report.

Overview

We are a leader in the development, marketing and support of virtual product development (“VPD”) products, including simulation software and related services. Our simulation software and services help customers combine virtual product development technologies and traditional physical prototype-based testing methods. With our simulation software, engineers can construct computer models of products, components, systems and assemblies, as well as simulate performance conditions and predict physical responses to certain variables, such as stress, motion and temperature. These capabilities allow our customers to optimize product designs, improve product quality and reliability, comply with regulatory and safety guidelines reduce product development costs and shorten the timeline in bringing new products to market. We also provide a broad range of strategic consulting services to help our customers implement VPD solutions and improve the integration and performance of their product development process, and lower the total cost of ownership of their technology investments. We serve customers in various industries, including aerospace, automotive, defense, machinery, electronics, consumer products, biomedical, shipbuilding and rail.

We manage our business under two operating segments—software and services. Our revenue is derived through our direct sales force, a network of value-added resellers and other sales agents. Software revenue consists of licensing fees that are earned through 1) monthly, annual or longer lease (time-based) arrangements and through 2) paid-up (perpetual) license arrangements, whereby the customer purchases a license for the use of our software. Both lease and paid-up arrangements are typically sold with maintenance for a period of time. Maintenance revenue includes unspecified software upgrades, enhancements and technical post-contract support (together known as “E&S”). Services revenue includes consulting and training services, including services provided in connection with software installation.

Our revenue has grown from $233.6 million in 2002 to $277.3 million in 2004 due to acquisitions, the weakening of the U.S. dollar against the Euro and Japanese Yen and our long-term relationships with major OEM’s and their key suppliers, who have embedded our VPD software solutions within their collaborative design and manufacturing processes. Such embedding of our software provides new and recurring revenue opportunities with respect to the development and marketing of new products, renewal of maintenance contracts, and consulting services.

A significant amount of our expenses are considered fixed and do not vary based upon revenue levels. Our most significant fixed expenses include compensation, benefits and facilities, all of which are difficult to reduce quickly should our revenue levels not meet expectations. During the last several years, we have reevaluated our software and services businesses and have scaled the operations in response to economic conditions. Management has taken the actions required to reduce operating expenses and to improve operating margins, including the decision to discontinue our Systems business in 2003 and the initiation of separate restructuring initiatives in 2002 and 2003. We are committed to building a business model that best serves the marketplace, and will allow us to successfully compete in all our geographic locations.

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We operate our business in three geographic regions: The Americas (United States, Canada and Brazil), EMEA (Europe, Middle East and Africa), and Asia Pacific (Japan, Korea, The People’s Republic of China, Taiwan, Southeast Asia and India), and manage all of our operations based on software sold and services provided to our customers. These regions operate similarly with respect to industries, customer base and sales channels, but each has unique challenges and opportunities. Although our consolidated results are reported in United States currency, our foreign regions conduct a significant number of transactions in local currency. As a result, our consolidated results of operations may be significantly impacted by changes in foreign currency exchange rates.

The following table shows the changes in the reporting currencies of our EMEA and Asia Pacific regions from which we derive a significant portion of our revenue:

Average Exchange Rate to $1 US	2002	2003	% Change			2004	% Change
EMEA—Euro	1.0628	0.8853		20.0	%	0.8051		10.0	%
Asia Pacific—Japanese Yen	125.2775	116.0075		7.9	%	108.1637		7.3	%

Discontinued Business Operations

In the second quarter of 2003, we decided to exit our Systems business and ceased the operations in the third quarter of 2003. Accordingly, all current and prior financial information related to the Systems business has been presented as discontinued operations in the accompanying consolidated financial statements.

For the year ended December 31, 2003, as part of the accounting for discontinued operations, we recorded restructuring charges totaling $8.4 million and asset impairment charges totaling $18.6 million, including $12.0 million related to goodwill. See Note 16—Discontinued Operations in Notes to Consolidated Financial Statements.

Acquisitions

On April 19, 2002, we completed the acquisition of the outstanding common stock of Mechanical Dynamics, Inc. (“MDI”) through a tender offer. MDI developed, marketed and supported functional virtual prototyping solutions that expanded our core software offerings, complemented our existing product and service offerings and increased our presence in the product lifecycle management market to better serve customers. The acquisition of MDI has been accounted for as a purchase, and accordingly, the results of operations of MDI since April 19, 2002 are included in our consolidated statements of operations. See Note 3—Business Acquisitions in Notes to Consolidated Financial Statements.

2004 Highlights

In 2004, our revenue increased 9.7% to $277.3 million when compared to 2003. The increase was attributable to an increase in maintenance revenue and services revenue provided to our larger global accounts, partially offset by a decrease in software revenue, coupled with favorable foreign exchange rates. Excluding the effects of foreign currency fluctuations, our revenue increased approximately 4.0% when compared to 2003.

Our operating income increased 37.3% to $18.5 million in 2004 compared to 2003 and included $8.1 million of expenses incurred in connection with the independent investigation.

Cash, cash equivalents and investments totaled $76.7 million at December 31, 2004 and $48.5 million at December 31, 2003. In 2004, we generated $33.9 million in cash from operations, compared to $24.7 million in 2003.

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Our goal for growth is to expand our leading position in the simulation software market by further penetrating our installed base, by adding new customers from the supply chains in our existing aerospace and automotive markets, and by expanding with new customers in new markets such as biomedical and consumer products. In 2005, our management is focused on, among other things, (i) improving global sales execution; (ii) strengthening our relationships with our most significant customers; (iii) accelerating time-to-market for our new products through increasing the productivity of our research and development organization; (iv) selling more enterprise-wide transactions; and (v) reducing our overhead and infrastructure costs.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require us to make estimates, judgments and assumptions that affect the reported amounts of revenue, costs and expenses, assets, liabilities and contingencies, and related disclosures. All significant estimates, judgments and assumptions are developed based on the best information available to us at the time made and are regularly reviewed and updated when necessary. Actual results will generally differ from these estimates. Changes in estimates are reflected in our financial statements in the period of change based upon on-going actual experience, trends or subsequent settlements and realizations depending on the nature and predictability of the estimates and contingencies.

The following accounting policies are considered to be critical in evaluating and understanding our financial results because they involve inherently uncertain matters and their application requires the most significant and complex judgments and estimates.

Revenue Recognition

We derive revenue from licensing our software products and providing maintenance, consulting, and training services. Our standard software license agreement is a perpetual license to use our products on an end user basis.

We record revenue from licensing our software products to end users provided there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection is reasonably assured and delivery of the product has occurred, as prescribed by Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition.” For arrangements with multiple elements, and for which vendor specific objective evidence (“VSOE”) of fair value exists for the undelivered elements, revenue is recognized for the delivered elements based upon the residual method in accordance with SOP 98-9, “Modifications of SOP 97-2 with Respect to Certain Transactions.” Amounts billed or payments received in advance of revenue recognition are recorded as deferred revenue.

Maintenance agreements are generally twelve-month prepaid contracts that are recognized ratably over the service period. VSOE of fair value for maintenance is measured by the stated renewal rate included in the agreement or, when not stated in the agreement, VSOE is calculated based on actual, historical evidence.

Customers may also enter into arrangements that are either on a time and materials basis or for a fixed fee for consulting and training services. VSOE of fair value for consulting and training services is based upon the standard hourly rate we charge for such services when sold separately. Training services are generally prepaid prior to rendering the service. Consulting and training revenue are typically recognized as earned. Consulting revenue is generated primarily from implementation services related to the installation of our products and other VPD solutions. These arrangements are generally accounted for separately from the license revenue because the arrangements qualify as “service transactions” as defined in SOP 97-2. Our services are generally not essential to the functionality of the software. Our products are

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fully functional upon delivery of the product and implementation does not require significant modification or alteration. Our consulting revenue under fixed fee arrangements is generally recognized using the percentage-of-completion method of contract accounting in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Product-Type Contracts” and Accounting Research Bulletin No. 45, “Long-Term Construction-Type Contracts,” which approximates the proportional performance method. When percentage-of-completion accounting is not possible due to our inability to accurately calculate percentage-of-completion, we recognize revenue using the completed-contract method.

If the fair value of any undelivered element included in a multiple-element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered, services have been performed, or until fair value can be objectively determined. License revenue from agents is recognized upon sell-through to the end customer. If we determine that collection of a license fee is not reasonably assured, the fee is deferred and revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.

If in the future we were unable to support VSOE of fair value for an undelivered element, the entire amount of revenue from the arrangement would be deferred and recognized ratably over the life of the contract.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the unwillingness or inability of our customers to make required payments. This requires us to make estimates of future write-offs of bad debt accounts related to current period revenue. The amount of our reserves is based on historical experience and our current analysis of the collectibility of accounts receivable. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required which would result in an additional general and administrative expense in the period such determination was made. While such amounts have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. If for some reason we did not reasonably estimate the amount of our doubtful accounts in the future, it could have a material impact on our consolidated results of operations.

Income Taxes

During the preparation of our consolidated financial statements, we estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, a valuation allowance is established. To the extent we establish a valuation allowance or increase this allowance in a period, an expense is recorded within the tax provision in the consolidated statements of operations.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. We record a valuation allowance when uncertainties exist as to our ability to utilize some of our deferred tax assets before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which we operate and the period over which the deferred tax assets will be recoverable. In the event that actual results differ from these estimates, or these estimates are adjusted in future periods, additional

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valuation allowances may need to be recorded which could materially impact our financial position and results of operations.

Our accounting for income taxes also requires us to exercise judgment for issues relating to known matters under discussion with tax authorities and transactions yet to be settled. If material, we record tax liabilities for known tax contingencies when, in our judgment, it is probable that a liability has been incurred and regularly assess the adequacy of this tax liability. It is reasonably possible that actual amounts payable resulting from audits by tax authorities could be materially different from the liabilities we have recorded due to the complex nature of the tax legislation that affects us.

Valuation of Goodwill, Intangibles, and Long-Lived Assets

We account for goodwill under Statement of Financial Accounting Standards SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires us to review for impairment of goodwill on an annual basis and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. This impairment review involves a two-step process as described in Note 1 in Notes to Consolidated Financial Statements. Based upon our management of resources, we have determined that we have two reporting units—software and services, and we are required to make estimates regarding the fair value of each reporting unit when testing for potential impairment. We estimate the fair value of our reporting units using the income approach.

We account for finite-lived intangibles and long-lived assets under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires us to review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors considered important which could trigger an impairment review include (1) significant underperformance relative to historical or projected future operating results, (2) significant changes in the manner of use of the assets or the strategy for our overall business, (3) significant decrease in the market value of the assets, and (4) significant negative industry or economic trends. Costs allocated to acquired in-process research and development (“IPR&D”) are charged to operations on the acquisition date.

Assets to be disposed of are separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheets, if material.

Contingencies and Litigation

We are subject to various proceedings, lawsuits and claims relating to products and services, technology, labor, shareholder and other matters. We are required to assess the likelihood of any adverse outcomes and the potential range of probable losses in these matters. If the potential loss is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. If the potential loss is considered less than probable or the amount cannot be reasonably estimated, disclosure of the matter is considered. The amount of loss accrual or disclosure, if any, is determined after analysis of each matter, and is subject to adjustment if warranted by new developments or revised strategies. Due to uncertainties related to these matters, accruals or disclosures are based on the best information available at the time. Significant judgment is required in both the assessment of likelihood and in the determination of a range of potential losses. Revisions in the estimates of the potential liabilities could have a material impact on or consolidated financial position or consolidated results of operations.

New Accounting Pronouncements

In January 2004, the FASB issued a revision to SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. The revision to SFAS No. 132 requires new annual disclosures about

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the types of plan assets, investment strategy, measurement date, plan obligations and cash flows as well as the components of the net periodic benefit cost recognized in interim periods. The revision relates to disclosures only and is effective for domestic defined benefit plans for fiscal years ending after December 15, 2003, except for expected future benefit payments, which must be disclosed for fiscal years ending after June 15, 2004. The revision is effective for all foreign defined benefit plans for fiscal years ending after June 15, 2004. As this revision relates to disclosures only, the adoption of this statement will not impact the Company’s consolidated balance sheets or statements of operations. We have adopted this standard as it relates to our foreign defined benefit plans. Refer to Note 10—Pensions and Other Employee Benefits.

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF Issue No. 03-1 provides new guidelines for the evaluation and determination of whether a loss on certain investments is other-than-temporary and requires certain additional disclosures pertaining to unrealized investment losses in a company’s financial statements. The effective date of the evaluation and measurement criteria of EITF Issue No. 03-1 have been delayed pending issuance of additional implementation guidance by the FASB. The additional disclosure requirements, however, remain effective for annual periods ending after December 15, 2004. Management continues to monitor the FASB’s progress and does not currently expect the adoption of the evaluation and measurement criteria, once issued to have a material impact on the Company’s consolidated results of operations or financial position.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning after June 15, 2005. The Company does not expect the adoption of Statement 153 will have a material effect on its consolidated financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes Opinion 25, and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) generally requires share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized in the statement of operations based on their fair values. Pro forma disclosure of fair value recognition will no longer be an alternative.

SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

·Modified prospective method: Compensation cost is recognized beginning with the effective date of adoption (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date of adoption and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of adoption that remain unvested on the date of adoption.

·Modified retrospective method: Includes the requirements of the modified prospective method described above, but also permits restatement using amounts previously disclosed under the pro forma provisions of SFAS No. 123 either for (a) all prior periods presented or (b) prior interim periods of the year of adoption.

In April 2005, the Securities and Exchange Commission announced that SFAS No. 123(R)’s effective transition date will be extended to annual periods beginning after June 15, 2005. The Company is required to adopt this new standard effective January 1, 2006, with early-adoption permitted.

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SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under current accounting rules. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Total cash flow will remain unchanged from what would have been reported under prior accounting rules.

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method. As a consequence, the Company generally does not recognize compensation cost for employee stock options and purchases under the Employee Stock Purchase Plan. Although the adoption of SFAS No. 123(R)’s fair value method will have no adverse impact on the Company’s balance sheet or total cash flows, it will affect the Company’s net income and diluted earnings per share. The actual effects of adopting SFAS No. 123(R) will depend on numerous factors including the amounts of share-based payments granted in the future, the valuation model the Company uses to value future share-based payments to employees and estimated forfeiture rates. We expect the effect of adopting this standard will be material. The effect on reported net income and net income and earnings per share if we had accounted for stock options and stock purchase plans using the fair value recognition provisions of SFAS No.123 is shown in Note 1 under discussion of stock-based compensation.

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment,” regarding the SEC Staff’s interpretation of SFAS 123(R). This interpretation provides the SEC Staff’s views regarding interactions between SFAS 123(R) and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS 123(R) and investors and users of the financial statements in analyzing the information provided. The Company will apply the requirements of SAB 107 upon the adoption of SFAS No. 123(R).

In December 2004, the FASB issued FSP No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004.” See Note 8—Income Taxes, for further description of the effects on the financial statements of FSP No. 109-2.

In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of FASB Statement No. 143. FIN 47 is effective no later than fiscal years ending after December 15, 2005. FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company does not expect the adoption of FIN 47 to have a material impact on its results of operations or financial position.

Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement of our financial statements for 2002 and should be read in conjunction with the consolidated financial statements and related notes contained in this Form 10-K, including Note 2 in Notes to Consolidated Financial Statements describing the 2002 restatement. Certain restatement adjustments have significantly changed the previously announced unaudited operating results in 2003 and subsequent interim periods.

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The following table sets forth items included in the consolidated statements of operations data (amounts in thousands).

	2002				% of Revenue			2003			% of Revenue			2004			% of Revenue
Revenue:
Software		$	128,604			55.1	%	$	125,626			49.7	%	$	127,536			46.0	%
Maintenance and Services		104,998				44.9	%	127,047				50.3	%	149,760				54.0	%
Total Revenue		233,602						252,673						277,296
Cost of revenue:
Software		17,691				7.6	%	13,541				5.4	%	16,654				6.0	%
Maintenance and Services		54,299				23.2	%	54,721				21.7	%	57,296				20. 7	%
Total Cost of Revenue		71,990				30.8	%	68,262				27.0	%	73,950				26.7	%
Gross profit		161,612				69.2	%	184,411				73.0	%	203,346				73.3	%
Operating Expenses:
Research and Development		42,879				18.4	%	40,733				16.1	%	42,115				15.2	%
Selling, General and Administrative		138,567				59.3	%	124,957				49.5	%	141,193				50.9	%
Amortization of Intangibles		1,608				0.7	%	1,551				0.6	%	799				0.3	%
Restructuring and Other Charges		7,276				3.1	%	3,687				1.5	%	726				0.3	%
Total Operating Expense		190,330				81.5	%	170,928				67.6	%	184,833				66.7	%
Operating Income (loss)		(28,718		)		(12.3	)%	13,483				5.3	%	18,513				6.7	%
Other expense:
Interest Expense		7,174				3. 1	%	5,346				2.1	%	4,628				1.7	%
Other Expense (Income), net		505				0.2	%	4,978				2.0	%	(3,704		)		(1.3	)%
Total Other Expense, net		7,679				3.3	%	10,324				4.1	%	924				0.3	%
Income (loss) from Continuing Operations Before Provision for Income Taxes		(36,397		)		(15.6	)%	3,159				1.3	%	17,589				6.3	%
Provision (Benefit) for Income Taxes		1,761				0.8	%	5,972				2.4	%	6,710				2.4	%
Income (loss) from Continuing Operations		(38,158		)		(16.3	)%	(2,813		)		(1.1	)%	10,879				3.9	%
Total Income (Loss) from Discontinued Operations		1,740				0.7	%	(26,951		)		(10.7	)%	—
Cumulative Effect of Change in Accounting Principle		(38,800		)		(16.6	)%	—						—
Net income (loss)		$	(75,218	)		(32.2	)%	$	(29,764	)		(11.8	)%	$	10,879			3.9	%

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Revenue by Geography by Type

The following table sets forth for the periods indicated, revenue, in each of the three geographic regions in which we operate (amounts in thousands):

	2002				2003			% Change			2004			% Change
Total Revenue:
Americas
Software		$	49,088		$	37,823			(22.9	)%	$	35,303			(6.7	)%
Maintenance and Services		43,381			49,621				14.4	%	54,067				9.0	%
		92,469			87,444				(5.4	)%	89,370				2.2	%
EMEA
Software		42,408			44,203				4.2	%	46,567				5.3	%
Maintenance and Services		30,864			37,619				21.9	%	49,394				31.3	%
		73,272			81,822				11.7	%	95,961				17.3	%
Asia Pacific
Software		37,108			43,599				17.5	%	45,664				4.7	%
Maintenance and Services		30,753			39,808				29.4	%	46,301				16.3	%
		67,861			83,407				22.9	%	91,965				10.3	%
Total revenue		$	233,602		$252,673				8.2	%	$277,296				9.7	%
% Revenue by Geography:
Americas		39.6		%	34.6		%				32.2		%
EMEA		31.4		%	32.4		%				34.6		%
Asia Pacific		29.0		%	33.0		%				33.2		%

In 2004 and 2003 our software revenue decreased in the Americas and increased in both EMEA and AsiaPacific compared to 2003 and 2002, respectively. The decrease in the Americas was due primarily to fewer conversions from software on lease to a long term or perpetual license and to some extent the negative impact of the FTC settlement on both potential and current customers buying decisions. The conversion from a leasing model to a perpetual model began in prior years and was substantially completed by fiscal 2003. In 2004 the increases in EMEA and AsiaPacific were due to favorable foreign currency exchange rates compared to 2003. In 2004 in constant dollar terms EMEA and AsiaPacific software revenue decreased approximately 4.2% and 2.0%, respectively, compared to 2003. In 2003 EMEA software revenue increased due to favorable foreign currency exchange rates while AsiaPacific increased as a result of both favorable foreign currency exchange rates and an increased volume compared to 2002. In constant dollar terms, EMEA software revenue decreased approximately 13.1% and AsiaPacific software revenue increased approximately 8.7% compared to 2002.

In 2004 and 2003 our maintenance and services revenue increased in all three regions due to both favorable foreign currency exchange rates and an increase in our installed customer base and additional consulting services. In 2004 in constant dollar terms our maintenance and services revenue increased approximately 19.6% and 9.0% in EMEA and AsiaPacific, respectively, compared to 2003. In 2003 in constant dollar terms our maintenance and services revenue increased 2.0% and 19.7% in EMEA and AsiaPacific, respectively, compared to 2002.

Risks inherent in our international revenue include the impact of longer payment cycles, greater difficulty in accounts receivable collection, unexpected changes in regulatory requirements, seasonality, tariffs and other trade barriers, difficulties staffing and managing foreign operations and the uncertainty of foreign currency fluctuations. These factors may have a material adverse effect on our future international revenue.

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Our future profitability and rate of growth, if any, will be directly affected by increased competition and an increasingly higher revenue base from which to grow. Our growth rate and net revenue depend significantly on renewals of existing orders as well as our ability to respond successfully to the pace of technological change and expand our customer base. If our renewal rate or our pace of new customer acquisition slows, our net revenue and operating results would be adversely affected.

Year-Over-Year Comparisons

Revenue

Total revenue increased 9.7% in 2004 compared to 2003 and increased 8.2% in 2003 compared to 2002. The growth in revenue for both periods was primarily attributed to the impact of favorable foreign currency exchange rates, higher maintenance revenue due to growth in our installed customer base and an increase in our consulting services.

The change in foreign currency exchange rates favorably affected total revenue in 2004 by approximately $14.5 million compared to 2003 and favorably affected total revenue in 2003 by approximately $19.7 million, in both cases due to the increase in strength of the Euro and Japanese Yen against the U.S. dollar.

Due to the cyclical nature of new product releases and spending by larger global accounts, our revenue is sensitive to individual large transactions that are neither predictable nor consistent in size or timing. No single customer or reseller represented more than 10% of total revenue during the periods presented.

Software revenue.Software revenue increased 1.5% to $127.5 million in 2004 from $125.6 million in 2003. In constant dollars terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen, software revenue decreased approximately 4.2% in 2004 when compared to 2003 due to reduced corporate IT spending for our core software, particularly in our Americas region. As a percent of total revenue, software revenue was 46.0% in 2004 and 49.7% in 2003.

Software revenue decreased 2.3% to $125.6 million in 2003 from $128.6 million in 2002. In constant dollars terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen, software revenue decreased approximately 10.6% in 2003 when compared to 2002 due to fewer conversions of software on lease to paid-up licenses in the Americas region and reduced corporate IT spending for our core products among larger global accounts in our EMEA region, which were partially offset by stronger sales in our Asia Pacific region in the automotive industry and the full year effect on incremental revenue from our 2002 acquisition of MDI. As a percent of revenue, software revenue was 49.7% in 2003 and 55.1% in 2002.

Maintenance and services revenue.Maintenance and services revenue increased 17.9% to $149.8 million in 2004 compared to 2003. Maintenance revenue increased 14.4% to $93.3 million in 2004 primarily due to year-over-year growth of our installed customer base. Services revenue increased 24.1% to $56.4 million primarily due to additional consulting services provided to our larger global accounts, particularly in the aerospace and automotive sectors, and increased sales of services relating to new licensing contracts. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen, maintenance and services revenue increased approximately 12.1% in 2004 when compared to 2003. As a percent of total revenue, maintenance and services revenue was 54.0% in 2004 and 50.3% in 2003.

Maintenance and services revenue increased 21.0% to $127.0 million in 2003 compared to 2002. Maintenance revenue increased 19.1% to $81.6 million in 2003 primarily due to year over year growth of our installed customer base. Services revenue increased 24.5% to $45.5 million primarily due to additional consulting services provided to our larger global accounts, particularly in the aerospace and automotive sectors, and increased sales of services relating to new licensing contracts. In constant dollar terms, due to

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the decline of the U.S. Dollar against the Euro and Japanese Yen maintenance and services revenue increased approximately 12.3% in 2003 when compared to 2002. As a percent of total revenue, maintenance and services revenue was 50.3% in 2003 and 44.9% in 2002.

Cost of Revenue

Cost of software revenue.Cost of software revenue, which consists primarily of royalty expenses, amortization of developed technology and the cost of product packaging and documentation materials, increased 23.0% to $16.7 million or 6.0% of revenue compared to 2003 primarily due to higher royalty expenses resulting from changes in product mix. Cost of software revenue decreased 23.5% to $13.5 million or 5.4% of revenue in 2003 compared to 2002 primarily due to lower royalty expenses related to product mix. Cost of software revenue as a percent of software revenue was 13.1% in 2004, 10.8% in 2003 and 13.8% in 2002.

Cost of maintenance and services revenue.Cost of maintenance and services revenue consists largely of compensation and benefits for support, consulting, and training personnel. Cost of maintenance and services revenue increased 4.7% to $57.3 million in 2004 compared to 2003. The increase in cost of maintenance and services revenue in 2004 compared to 2003 was principally due to increases in compensation related expenses and subcontractor costs. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen cost of maintenance and services revenue decreased approximately 1.0%. Cost of maintenance and services revenue as a percent of maintenance and services revenue decreased to 38.3% from 43.1% in 2003 due to improved utilization rates.

Cost of maintenance and services revenue increased 0.8% to $54.7 million in 2003 from $54.3 million in 2002. The increase in cost of maintenance and services revenue in 2003 compared to 2002 was principally due to increases in compensation related expenses and subcontractor costs, partially attributable to the acquisition of MDI. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen cost of maintenance and services revenue decreased approximately 7.1%. Cost of maintenance and services revenue as a percent of maintenance and services revenue decreased to 43.1% from 51.7% in 2002 due to improved utilization rates.

Operating Expenses

Operating expenses increased 8.1% in 2004 to $184.8 million compared to 2003, and decreased 10.2% to $170.9 million in 2003 compared to 2002. As with revenue, our expenses are impacted by foreign currency fluctuations. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen, operating expenses increased approximately 4.8% and decreased approximately 14.4%, in 2004 and in 2003, respectively.

Research and development.Research and development expense increased 3.4% to $42.1 million in 2004, or 15.2% of revenue, from $40.7 million in 2003, or 16.1% of revenue. The increase was mainly attributable to higher compensation and other costs ($1.9 million) primarily due to an increase in our research and development headcount partially offset by lower subcontractor costs ($0.5 million) due to less outsourcing of development projects. Additionally, in early 2004 we wrote off $0.3 million of acquired IPR&D in connection with the acquisition of SOFY Technologies Corporation. The projects associated with this charge were completed by the end of 2004. We will continue to invest in developing new product offerings and enhancing our existing solutions.

Research and development expense decreased 5.0% to $40.7 million in 2003 or 16.1% of revenue from $42.9 million in 2002, or 18.4% of revenue. The decrease was primarily due to a write-off in 2002 of $2.2 million and $0.2 million of IPR&D in connection with the acquisitions of MDI and EASY 5, respectively. These charges were associated with development projects which had not reached technological feasibility and had no future alternative uses upon closing of the respective acquisitions. The projects

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associated with the write off in 2004 were completed by the end of 2004. The projects associated with the write offs in 2002 were both completed by the end of 2003.

Selling, general and administrative.   Selling, general administrative expenses primarily include employee compensation and related benefits, facility and related costs, marketing communications, conference and trade show expenses and sales commissions and incentives. Selling, general and administrative expenses increased 12.9% to $141.2 million, or 50.9% of revenue, compared to $125.0 million, or 49.5% of revenue, in 2003. The increase in selling, general and administrative expenses, in addition to the decline of the U.S. Dollar against the Euro and Japanese Yen, was primarily due to costs incurred in connection with the independent investigation ($8.1 million) and higher compensation and related expenses including commissions and severance charges to departing executives ($7.6 million) which were partially offset by lower facility costs ($4.1 million) related to the closure or downsizing of various facilities worldwide. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen, selling, general and administrative expenses increased 8.6%.

In 2003, selling, general and administrative expenses decreased 9.7% to $125.0 million, or 49.5% of revenue, compared to $138.6 million, or 59.3% of revenue, in 2002. The decrease in selling, general and administrative expenses was primarily due a decrease in general and administrative expenses incurred in connection with the settlement of the FTC lawsuit in 2002 ($9.5 million) combined with workforce reductions related to a company restructuring. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen, selling, general and administrative expenses decreased approximately 15.0%.

Amortization of intangibles.Amortization of intangibles was $0.8 million for 2004, $1.6 million in 2003 and $1.6 million in 2002. Our amortization expense is primarily related to customer lists with useful lives ranging from five to fifteen years. The change in amortization between years reflects acquisition activity and expiration of useful lives.

Restructuring and other charges.Restructuring and other charges include costs related to restructuring activities and asset impairments and related write-offs. In 2004 and 2003 we recorded charges for impaired assets of $0.7 million and $1.6 million, respectively. In 2003 and 2002, pursuant to separate corporate restructuring plans designed to bring costs more in line with revenue and strengthen the financial performance of the company, we recorded restructuring charges totaling $2.1 million and $7.2 million, respectively. We account for restructuring activities in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This standard supersedes the guidance provided by Emerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” which was applied to our restructuring activity in fiscal year 2002. Under both standards, the costs associated with our restructuring activity are included as charges to our results of operations. As of December 31, 2004, $0.1 million remained accrued for such charges related to our continuing operations.

Interest Expense

Interest expense was $4.6 million in 2004 compared to $5.3 million in 2003 and $7.2 million in 2002. The decreases are the result of a debt refinancing. In May 2003, we sold $100 million of 2.5% Senior Subordinated Convertible Notes in a private offering, which is more fully discussed under the caption “Liquidity and Capital Resources.” From the proceeds, we repaid our notes payable which bore interest at significantly higher interest rates.

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Other Expense (Income), Net

Other expense (income) includes interest income, gains and losses on property and equipment, foreign currency transaction gains and losses, and other non-operating income and expense. Other expense (income) was ($3.7 million) in 2004 compared to $5.0 million in 2003 and $0.5 million in 2002. Other income in 2004 was primarily related to foreign currency transaction gains ($1.4 million) and a favorable outcome of a contract dispute ($1.5 million) while other expense in 2003 included prepayment penalties of $3.8 million and a write-off of approximately $2.3 million of unamortized debt issuance costs related to the refinancing of our debt, partially offset by foreign currency gains ($0.3 million). Other expense of $0.5 million in 2002 primarily included foreign currency losses.

Provision for Income Taxes

Our effective annual income tax rate was approximately 38.1%, 189.1% and (4.8)% in 2004, 2003 and 2002, respectively. Our effective income tax rate is affected by various permanent differences between accounting and tax net income (loss), as well as the proportionate amount of income or loss earned in the various tax jurisdictions in which we operate. As book income (loss) approaches break even, the permanent differences have a greater impact on the effective tax rate. The effective tax rates for 2003 and 2002 reflect changes in valuation allowances totaling $6.0 million and $9.5 million, respectively.

Discontinued Operations

On June 30, 2003, we decided to exit our systems business. In 2003, we recorded a $8.4 million loss, net of tax from discontinued operations and a $18.6 million loss, net of tax from the disposal of discontinued operations.

Cumulative Effect of Change in Accounting Principle

During 2002 we completed the transitional impairment tests required under Financial Accounting Standard No. 141 (SFAS No. 141), “Business Combinations” and SFAS No. 142, “Goodwill and other Intangible Assets” and recorded a non-cash charge of $38.8 million. The charge was almost entirely in connection with the AES acquisition in 2001.

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Quarter-Over Quarter Comparisons

To supplement our discussion and analysis of results of operations provided above, we have provided quarterly discussion and analysis of the three interim periods in 2003 and 2004, which would normally be provided in our Form 10-Q’s. Refer to Note 17 in Notes to Consolidated Financial Statements.

	Quarters Ended
	March 31, 2004				March 31, 2003				June 30, 2004			June 30, 2003			Sept. 30, 2004				Sept. 30 2003
	(in thousands, except per share data)
Revenue:
Software		$	31,894			$	35,371			$	30,251	$	28,452			$	32,945			$	27,999
Maintenance and Services		34,973				31,431				36,005		28,143				37,006				32,293
Total Revenue		66,867				66,802				66,256		56,595				69,951				60,292
Cost of Revenue:
Software		4,424				3,171				4,208		3,612				3,987				2,252
Maintenance and Services		14,363				13,381				14,632		13,592				14,272				13,728
Total Cost of Revenue		18,787				16,552				18,840		17,204				18,259				15,980
Gross Profit		48,080				50,250				47,416		39,391				51,692				44,312
Operating Expenses:
Research and Development		11,238				10,190				10,289		10,976				10,444				9,360
Selling, General and Administrative		36,665				30,464				33,290		32,203				34,723				30,120
Amortization of Intangibles		181				394				188		405				215				387
Restructuring and Other Charges		76				—				—		3,687				—				—
Total Operating Expenses		48,160				41,048				43,767		47,271				45,382				39,867
Operating Income (Loss)		(80		)		9,202				3,649		(7,880		)		6,310				4,445
Other Expense (Income)
Interest Expense		1,100				1,873				1,113		1,360				1,179				1,034
Other expense (Income), Net		(587		)		(119		)		119		6,158				(526		)		(841		)
Total Other Expense (Income), Net		513				1,754				1,232		7,518				653				193
Income (Loss) From Continuing Operations Before Provision (Benefit) For Income Taxes		(593		)		7,448				2,417		(15,398		)		5,657				4,252
Provision (Benefit) For Income Taxes		(226		)		14,080				922		(29,110		)		2,158				8,038
Income (Loss) From Continuing Operations		(367		)		(6,632		)		1,495		13,712				3,499				(3,786		)
Discontinued Operations
Loss From Discontinued Operations		—				(1,843		)		—		(2,840		)		—				(3,045		)
Income (Loss) From Disposal of Discontinued Operations		—				—				—		(18,811		)		—				—
Total Loss From Discontinued Operations		—				(1,843		)		—		(21,651		)		—				(3,045		)
Net Income (Loss)		$	(367	)		$	(8,475	)		$	1,495	$	(7,939	)		$	3,499			$	(6,831	)
Basic Earnings (Loss) Per Share From Continuing Operations		$	(0.01	)		$	(0.22	)		$	0.05	$	0.46			$	0.11			$	(0.13	)
Diluted Earnings (Loss) Per Share From Continuing Operations		$	(0.01	)		$	(0.22	)		$	0.05	$	0.35			$	0.10			$	(0.13	)
Basic Loss Per Share From Discontinued Operations		$	—			$	(0.06	)		$	—	$	(0.73	)		$	—			$	(0.10	)
Diluted Loss Per Share From Discontinued Operations		$	—			$	(0.06	)		$	—	$	(0.57	)		$	—			$	(0.10	)
Basic Earnings (Loss) Per Share		$	(0.01	)		$	(0.29	)		$	0.05	$	(0.28	)		$	0.11			$	(0.23	)
Diluted Earnings (Loss) Per Share		$	(0.01	)		$	(0.29	)		$	0.05	$	(0.22	)		$	0.10			$	(0.23	)
Basic Weighted-Average Shares Outstanding		30,442				29,606				30,619		29,753				30,683				30,039
Diluted Weighted-Average Shares Outstanding		30,442				29,606				43,142		37,670				42,762				30,039

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Quarter Ended March 31, 2004 versus Quarter Ended March 31, 2003

Revenue

Total revenue increased 0.1% to $66.9 million for the quarter ended March 31, 2004 compared to the same quarter in 2003. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen total revenue decreased approximately 8.0%.

Software revenue.Software revenue decreased 9.8% to $31.9 million due to reduced corporate IT spending for our software. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen software revenue decreased approximately 17.6%. As a percent of total revenue software revenue was 47.7% in 2004 and 52.9% in the same quarter in 2003.

Maintenance and services revenue.Maintenance and service revenue increased 11.3% to $35.0 million. Maintenance revenue increased 13.1% to $22.0 million primarily due to the increase in our installed customer base. Services revenue increased 8.4% to $13.0 million primarily due to additional consulting services provided to our larger global accounts, particularly in the aerospace and automotive sectors, and increased sales of services relating to new software transactions. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen, maintenance and services revenue increased approximately 2.9%. As a percent of total revenue, maintenance revenue was 32.9% and 29.1% in 2004 and 2003, respectively, and services revenue was 19.4 % and 18.0% in 2004 and 2003, respectively.

Cost of Revenue

Cost of software revenue.   Cost of software revenue increased 39.5% to $4.4 million for the quarter ended March 31, 2004 compared to the same quarter in 2003 due to higher royalty expenses resulting from changes in product mix. Cost of software revenue as a percent of software revenue was 13.9% in 2004 and 9.0% in the same quarter in 2003.

Cost of maintenance and service revenue.Cost of maintenance and service revenue increased 7.3% to $14.4 million for the quarter ended March 31, 2004 compared to the same quarter in 2003 due to increases in employee expenses and subcontractor costs. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen, cost of maintenance and services revenue decreased approximately 1.4%. Cost of maintenance and service revenue as a percent of maintenance and service revenue decreased to 41.1% for the quarter ended March 31, 2005 from 42.6% in the same quarter in 2003 as a result of higher utilization rates.

Operating Expenses

Operating expenses increased 17.3% to $48.2 million for the quarter ended March 31, 2004 compared to the same quarter in 2003. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen operating expenses increased approximately 11.8%. As a percent of total revenue, operating expenses increased to 72.0% from 61.4% in the same quarter in 2003.

Research and development.Research and development expenses increased 10.3% to $11.2 million for the quarter ended March 31, 2004 compared to the same quarter in 2003 primarily due to an increase in incentive compensation based on financial performance ($0.6 million) and other miscellaneous expenses. As a percent of revenue, research and development expenses was 16.8% in 2004 and 15.3% in the same quarter in 2003. Additionally, we wrote-off $0.3 million of IPR&D related to the acquisition of SOFY Technologies Corporation. The IPR&D charge was associated with development projects which had not reached technological feasibility and had no future alternative use upon closing of the acquisition. The projects associated with this charge were completed by the end of 2004.

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Selling, general and administrative.Selling, general and administrative expenses increased 20.4% to $36.7 million for the quarter ended March 31, 2004 compared to the same quarter in 2003. The increase was primarily attributable to higher compensation expenses, sales commissions and other incentives ($7.9 million) partially offset by decreases in both internal software licenses ($0.8 million) and facilities ($0.5 million). In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen selling, general and administrative expenses increased approximately 12.9%. As a percent of revenue, selling, general and administrative expenses were 54.8% in 2004 and 45.8% in the same quarter in 2003.

Amortization of intangibles   Amortization of intangibles decreased $0.2 million from the same quarter in 2003. Our amortization expense is primarily related to developed technology and customer lists with useful lives ranging from five to fifteen years. The change in amortization between years reflects acquisition activity and expiration of useful lives.

Restructuring and other charges   For the quarter ended March 31, 2004 we wrote off $0.1 million of previously capitalized software developed for internal use.

Interest Expense

Interest expense decreased to $1.1 million for the quarter ended March 31, 2004 from $1.9 million in the same quarter in 2003 primarily as a result of debt re-financing. In May 2003 we sold $100 million of 2.5% Senior Subordinated Convertible Notes in a private offering, which is more fully discussed under the caption “Liquidity and Capital Resources”. From the proceeds we repaid our notes payable which bore interest at significantly higher rates.

Other Expense (Income), Net

Other income increased to $0.6 million for the quarter ended March 31, 2004 from $0.1 million in the same quarter in 2003 primarily due to foreign currency transaction gains ($0.4 million).

Provision (Benefit) for Income Taxes

Our effective tax rate for the quarter ended March 31, 2004 was 38.1% compared to 189.1% in the same quarter of 2003.

Discontinued Operations

We recorded a loss of $1.8 million, net of tax in the quarter ended March 31, 2003 as a result of our decision to exit the systems business.

Quarter Ended June 30, 2004 versus Quarter Ended June 30, 2003

Revenue

Total revenue increased 17.1% for the quarter ended June 30, 2004 compared to the same quarter in 2003 primarily due to increases in our maintenance and services revenue. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen total revenue increased approximately 11.7%.

Software revenue.Software revenue increased 6.3% to $30.2 million compared to the same quarter in 2003. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen software revenue increased approximately 0.9%. As a percent of total revenue, software revenue was 45.7% in 2004 and 50.3% in the same quarter in 2003.

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Maintenance and services revenue.Maintenance and service revenue increased 27.9% to $36.0 million. Maintenance revenue increased 13.5% to $23.0 million primarily due to the increase in our installed customer base. Services revenue increased 65.2% to $13.0 million primarily due to additional consulting services provided to our larger global accounts, particularly in the aerospace and automotive sectors, and increased sales of services relating to new software transactions. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen, maintenance and services revenue increased approximately 22.7%. As a percent of total revenue, maintenance revenue was 34.7% and 35.8% in 2004 and 2003, respectively, and services revenue was 19.6% and 13.9% in 2004 and 2003, respectively.

Cost of Revenue

Cost of software revenue.Cost of software revenue increased 16.5% to $4.2 million for the quarter ended June 30, 2004 compared to the same quarter in 2003 due to lower royalty expenses resulting from changes in product mix. Cost of software revenue as a percent of software revenue increased to 13.9% from 12.7% in the same quarter in 2003.

Cost of maintenance and service revenue.   Cost of maintenance and service revenue increased 7.7% to $14.6 million for the quarter ended June 30, 2004 compared to the same quarter in 2003 due to increases in employee expenses and subcontractor costs. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen, cost of maintenance and services revenue increased approximately 2.5%. Cost of maintenance and service revenue as a percent of maintenance and service revenue was 40.6% in 2004 and 48.3% in 2003 as a result of higher utilization rates.

Operating Expenses

Operating expenses decreased 7.4% to $43.8 million for the quarter ended June 30, 2004 compared to the same quarter in 2003. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen operating expenses decreased approximately 9.7%. As a percent of revenue operating expenses decreased to 66.1% from 83.5% in the same quarter in 2003.

Research and development.Research and development expenses decreased 6.3% to $10.3 million for the quarter ended June 30, 2004 compared to the same quarter in 2003 primarily due to lower compensation and related expenses ($1.0 million), and lower expenses for outside contractors ($0.3 million), partially offset by miscellaneous other expenses ($0.4 million). As a percent of revenue, research and development expenses was 15.5% in 2004 and 19.4% in 2003.

Selling, general and administrative.Selling, general and administrative expenses increased 3.4% to $33.3 million for the quarter ended June 30, 2004. The increase was primarily due to costs associated with the independent investigation ($2.9 million). In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen selling, general and administrative expenses increased approximately 1.8%. As a percent of revenue, selling, general and administrative expenses were 50.2% in 2004 and 56.9% in 2003.

Amortization of Intangibles.   Amortization of intangibles decreased $0.2 million to $0.2 million for the quarter ended June 30, 2004 compared to the same quarter in 2003. The change in amortization between years reflects acquisition activity and expiration of useful lives.

Restructuring and Other Charges.   We recorded restructuring and impairment charges totaling $3.7 million in the quarter ended June 30, 2003 related to a reduction in workforce resulting from our decision to exit the Systems business. See Note 16—“Discontinued Operations” in Notes to the Consolidated Financial Statements.

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Interest Expense

Interest expense decreased to $1.1 million for the quarter ended June 30, 2004 from $1.4 million in the same quarter in 2003 primarily as a result of debt re-financing. In May 2003 we sold $100 million of 2.5% Senior Subordinated Convertible Notes in a private offering, which is more fully discussed under the caption “Liquidity and Capital resources”. From the proceeds we repaid our notes payable which bore interest at significantly higher rates.

Other Expense (Income), Net

Other expense decreased to $0.1 million for the quarter ended June 30, 2004 from $6.2 million in the same quarter of 2003 when prepayments, other penalties and a write-off of unamortized debt issuance costs related to the refinancing of our debt were expensed.

Provision (Benefit) for Income Taxes

Our effective tax rate for the quarter ended June 30, 2004 was 38.1% compared to 189.1% in the same quarter of 2003.

Discontinued Operations

On June 30, 2003, we decided to exit our systems business. We recorded a $2.8 million loss, net of tax from discontinued operations and a $18.8 million loss, net of tax from the disposal of discontinued operations.

Quarter Ended September 30, 2004 versus Quarter Ended September 30, 2003

Revenue

Total revenue increased 16.0% for the quarter ended September 30, 2004 compared to the same quarter in 2003. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen total revenue increased approximately 10.7%.

Software revenue.Software revenue increased 17.7% to $33.0 million due to favorable foreign currency exchange rates and higher corporate IT spending. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen software revenue increased approximately 12.1%. As a percent of total revenue, software revenue was 47.1% in 2004 and 46.4% in 2003.

Maintenance and services revenue.Maintenance and service revenue increased 14.6% to $37.0 million. Maintenance revenue increased 13.6% to $23.7 million primarily due to the increase in our installed customer base. Services revenue increased 16.3% to $13.3 million primarily due to additional consulting services provided to our larger global accounts, particularly in the aerospace and automotive sectors, and increased sales of services relating to new software transactions. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen, maintenance and services revenue increased approximately 9.4%. As a percent of total revenue, maintenance revenue was 33.8% and 34.5% in 2004 and 2003, respectively, and services revenue was 19.1% and 19.0% in 2004 and 2003, respectively.

Cost of Revenue

Cost of software revenue.   Cost of software revenue increased 77.0% to $4.0 million for the quarter ended September 30, 2004 compared to the same quarter in 2003 due to higher royalty expenses resulting from changes in product mix. Cost of software revenue as a percent of software revenue was 12.1% in 2004 and 8.0% in the same quarter in 2003.

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Cost of maintenance and service revenue.   Cost of maintenance and service for the quarter ended September 30, 2004 increased 4.0% to $14.3 million compared to the same quarter in 2003 due to increases in employee expenses and subcontractor costs. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen, cost of maintenance and services revenue decreased approximately 1.1%. Cost of maintenance and service revenue as a percent of maintenance and service revenue was 38.6% in 2004 and 42.5% in the same quarter in 2003 as a result of higher utilization rates.

Operating Expenses

Operating expenses increased 13.8% to $45.4 million for the quarter ended September 30, 2004 compared to the same quarter in 2003. In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen operating expenses increased approximately 10.8%. As a percent of revenue operating expenses were 64.9% in 2004 and 66.1% in the same quarter in 2003.

Research and development.Research and development expenses increased 11.6% to $10.4 million for the quarter ended September 30, 2004 compared to the same quarter in 2003 primarily due to an increase in compensation related expenses ($1.1 million). As a percent of revenue, research and development expenses was 14.9% in 2004 and 15.5% in the same quarter in 2003.

Selling, general and administrative.Selling, general and administrative expenses increased 15.3% to $34.7 million for the quarter ended September 30, 2004 compared to the same quarter in 2003. The expense increase was primarily due to costs associated with the independent investigation ($2.7 million) combined with higher compensation expenses, including commissions, other incentives and severance costs ($2.6 million), partially offset by lower facilities expenses ($0.8 million). In constant dollar terms, due to the decline of the U.S. Dollar against the Euro and Japanese Yen selling, general and administrative expenses increased approximately 11.8%. As a percent of revenue selling, general and administrative expenses were 49.6% in 2004 and 50.0% in the same quarter in 2003.

Amortization of Intangibles.Amortization of intangibles decreased $0.2 million to $0.2 million for the quarter ended September 30, 2004 compared to the same quarter in 2003. The change in amortization between years reflects acquisition activity and expiration of useful lives.

Interest Expense

Interest expense increased to $1.2 million for the quarter ended September 30, 2004 from $1.0 million in the same quarter of 2003 primarily due to the increase in the coupon rate on the Senior Subordinated Convertible Notes from 2.5% to 3.0%. According to the terms of the Notes the increase was required since we were delinquent in filing our Annual Report on Form 10-K for 2003 and our quarterly reports on Form 10-Q for the first two quarters of 2004.

Other Expense (Income), Net

Other income decreased to $0.5 million for the quarter ended September 30, 2004 from $0.8 million in the same quarter in 2003 to due to lower foreign currency transaction gains.

Provision (Benefit) for Income Taxes

Our effective tax rate for the quarter ended September 30, 2004 was 38.1% compared to 189.1% in the same quarter of 2003.

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Discontinued Operations

In the quarter ended September 30, of 2003, we recorded a $3.0 million loss, net of tax from discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

	For the Year Ended December 31,
	2002				2003			2004
	(in thousands)
Cash, cash equivalents and investments		$	34,564		$	48,534		$	76,668
Working capital (deficiency)		$	(24,626	)	$	(2,782	)	$	20,542
Net cash provided by operating activities		$	22,735		$	24,709		$	33,942
Net cash used in investing activities		$	(128,190	)	$	(29,431	)	$	(34,025	)
Net cash provided by financing activities		$	47,492		$	21,063		$	—

Our cash, cash equivalents and investments at December 31, 2004 increased 58.0% when compared to December 31, 2003 and increased 40.4% at December 31, 2003 when compared to December 31, 2002. The increases were due primarily to improving cash flows from operations, favorably impacted by our results of operations, the timing of cash receipts on billings and reduced levels of recurring expenditures, resulting in part from our restructuring initiatives in 2002 and 2003 and the discontinuance of our Systems business in July 2003, offset by debt service payments.

In the past, working capital needed to finance our operations has been provided by cash on hand and from cash flow from operations. We believe that cash and cash equivalents and cash generated from operations will continue to provide sufficient capital for normal working capital needs for at least the next 12 months. As a software company, we have significant amounts of accounts receivable, but do not have a significant amount of inventory or manufacturing costs that require extensive amounts of working capital. Our ability to generate cash flows from operations is dependent on collections of trade accounts receivable and payment of our expenses primarily related to compensation, benefits and facilities. Outside of these expenses, we do not have a significant amount of vendor payables. Currently, our debt obligations are long term in nature and will not require significant cash outflows until 2008. We may engage in additional financing methods that we believe are advantageous, particularly to finance acquisitions.

Our working capital (current assets minus current liabilities) increased $23.3 million to $20.5 million at December 31, 2004 when compared to working capital deficiency of $2.8 million at December 31, 2003, and increased $21.8 million as of December 31, 2003 when compared to the working capital deficiency of $24.6 million at December 31, 2002. The increases in working capital were primarily due to the timing of cash receipts on billings and payment of restructuring activities, non-recurring expenses and other liabilities, changes in deferred tax assets and the refinancing of our debt in 2003, which reduced current liabilities.

We are currently under an SEC investigation. As a result of this investigation, we may be exposed to penalties and other contingencies or obligations that may be material to our consolidated financial statements. Refer to Note 12—Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements.

Net cash provided by operations was $33.9 million for 2004 compared to $24.7 million for 2003 and $22.7 million for 2002. The increase in cash flows from operations during 2004 was due primarily to the timing of billings and payment of liabilities. Cash flow from operations decreased in 2003 when compared to 2002 primarily due to the timing of payments of liabilities in the fourth quarter. Our accounts receivable aging improved in 2004 with days sales outstanding decreasing to 92 days at December 31, 2004 compared to 100 days at December 31, 2003. Days sales outstanding at December 31, 2003 increased when compared

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to 97 days at December 31, 2002. Overall our days sales outstanding are negatively impacted by the revenue mix between our domestic and international operations as it is common business practice in countries outside the U.S. to have longer payment terms. In addition, our days sales outstanding are also negatively impacted due to a significant volume sales transactions and invoicing which occurs near the end of any given quarter.

Net cash used in investing activities was $34.0 million in 2004 compared to $29.4 million in 2003 and $128.2 million in 2002. The decrease in cash used in investing activities during 2003 was primarily due to the acquisition of MDI in the second quarter of 2002, offset by the purchase of $11.8 million of U.S. Government securities in connection with the issuance of our subordinated convertible notes. The U.S. Government securities were purchased to fund 100% of the interest payments on our subordinated convertible notes. Capital expenditures for property and equipment decreased in 2004 and 2003 as the result of management’s continuing effort to limit capital expenditures to required additions. Our capital expenditures vary from year to year, as required by business needs. We intend to continue to expand the capabilities of our computer equipment used in the development and support of our software products. The nature and amount of capital expenditures in 2005 were comparable with 2004.

There was no net cash provided by financing activities in 2004 compared to $21.1 million in 2003 and $47.5 million in 2002. During 2003, financing activities included the refinancing of a significant portion of our debt through the issuance of $100.0 million of subordinated convertible notes as described below.

In connection with the acquisition of MDI in April 2002, we entered into a Revolving Credit and Term Loan Agreement and subsequent amendments (“Loan Agreement”) with a bank. The Loan Agreement included a $6.7 million revolving line of credit and a $65.0 million term loan. In November 2002, we replaced the Loan Agreement with a new Loan and Security Agreement, as amended (“New Loan Agreement”), with a new lender (“Lender”). The New Loan Agreement included a $15.0 million revolving line of credit and a $55.0 million term loan. Borrowings under the revolving line of credit were limited to a borrowing base of up to 85% of eligible domestic accounts receivable, as defined. The term loan was payable in 48 equal principal payments plus interest. All amounts outstanding under the previous Loan Agreement were repaid with proceeds from the New Loan Agreement. In connection with the New Loan Agreement, we capitalized $2.5 million of loan fees and wrote off $1.5 million of unamortized loan fees related to the Loan Agreement in November 2002.

The term loan under the New Loan Agreement was secured by substantially all of our assets and bore interest at the greater of 7% or the Lender’s prime rate plus 5%. Advances on the revolving line of credit bore interest at the greater of 7% or the Lender’s prime rate plus 2.25%. The New Loan Agreement required an origination fee of approximately $2.1 million, which was to be amortized to expense over the 48 months of the term loan. In addition, an annual facility fee of 1.50% of the total outstanding commitment was to be paid and expensed quarterly.

Under the terms of the New Loan Agreement, we had the option, at any time upon 90 days’ prior notice, to terminate the New Loan Agreement by, among other things, repaying all amounts outstanding under the New Loan Agreement (or collateralizing any letters of credit to remain outstanding at 105% of the amount of such letters of credit) and paying the Lender a prepayment premium initially equal to 4% in the first year and decreasing by 1% in each year thereafter of the aggregate of the maximum available under the revolving line, the amount outstanding under the term loan and unscheduled payments on account of the term loan during the 30-day period ending on the date of the termination. The New Loan Agreement required maintenance of certain financial and non-financial covenants.

In May 2003, we sold $100.0 million of 2.5% Senior Subordinated Convertible Notes (the “Convertible Notes”) in a private offering. The Convertible Notes were offered to investors at 100% of their principal amount.

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The Convertible Notes mature on May 5, 2008 and bear interest at 2.5% with interest payments due semi-annually on May 5 and November 5, beginning on November 5, 2003. The Convertible Notes are convertible into our common stock at a conversion price of $8.515 per share, subject to adjustment upon the occurrence of specified events. This represents a 30% conversion premium based on the closing price of $6.55 of our common stock. Each $1,000 principal amount of the Convertible Notes is initially convertible into 117.4398 shares of our common stock. The holders of the Convertible Notes may convert their Convertible Notes at any time on or before the maturity date. We may redeem the Convertible Notes on or after May 5, 2006, assuming the price of our common stock has attained and remained at certain price levels. We incurred approximately $3.8 million of debt issuance costs, which are being amortized over the five year term of the Convertible Notes.

We used the proceeds from the Convertible Notes to repay all amounts outstanding under the New Loan Agreement and $20.0 million of the notes payable to shareholders issued in connection with the acquisition of AES in July 2001. Approximately $11.9 million of the proceeds were used to acquire U.S. Government securities that are pledged to a trustee for the payment of all scheduled interest payments on the Convertible Notes when due. As of December 31, 2004, the balance of the pledged securities is $8.4 million.

In connection with the issuance of the Convertible Notes, we terminated the New Loan Agreement and paid approximately $3.8 million of prepayment penalties and wrote-off approximately $2.3 million of unamortized debt issuance costs related to the New Loan Agreement in May 2003.

Due to the fact we were delinquent in filing our Annual Report on Form 10-K for 2003 and our quarterly reports on Form 10-Q in 2004, the coupon rate on the Convertible Notes increased from 2.5% to 3.0% in May 2004.

Contractual Obligations

The following summarizes our contractual obligations at December 31, 2004 (in thousands).

	As of December 31, 2004
	Total		Less Than 1 Year			1-3 Years		3-5 Years		More than 5 Years
Contractual Obligations:
Subordinated Notes Payable	$	8,000		$	—	$	—	$	8,000		$	—
—Interest Payments	3,200			640		1,280		1,280			—
Subordinated Convertible Debentures	100,000			—		—		100,000			—
—Interest Payments	9,000			2,750		5,000		1,250			—
Operating Lease Obligations	76,579			14,960		24,488		17,762			19,369
Capital Lease Obligations	457			186		271		—			—
Pension Obligations	8,252			112		252		416			7,472
Severance Agreements	846			272		574		—			—
Total Contractual Obligations	$	206,334		$	18,920	$	31,865	$128,708			$	26,841

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of foreign currency fluctuations and interest rate changes.

Foreign Currency Risk

International revenue represented 60.4%, 65.4%, and 67.8% of our total revenue for 2002, 2003 and 2004, respectively. International sales are made mostly from our foreign sales subsidiaries in Europe and Asia Pacific and are typically denominated in the local currency of each country. These subsidiaries also

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incur most of their expenses in the local currency. Accordingly, all foreign subsidiaries use the local currency as their functional currency.

Our exposure to foreign exchange rate fluctuations arises in part from intercompany accounts in which cash from sales of our foreign subsidiaries are transferred back to the United States. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary in order to centralize foreign exchange risk with the parent company in the United States. We are also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into United States Dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and impact overall expected profitability. In 2004, a 5% change in both the EURO and Yen would have impacted our revenue by approximately $8.9 million and our income from continuing operations by approximately $2.2 million.

We do not currently hedge any of our foreign currencies.

Interest Rate Risk

We do not have any variable interest rate borrowings and, accordingly, our exposure to market rate risks for changes in interest rates is limited. Refer to Note 1 in the accompanying Notes to Consolidated Financial Statements discussing fair value of financial instruments.

We have not used derivative financial instruments in our investment portfolio. We invest our excess cash primarily in debt instruments of U.S. municipalities and other high-quality issuers and, by policy, limit the amount of credit exposure to any one issuer. We protect and preserve our invested funds by limiting default, market and reinvestment risk.

Investment Risk

As of December 31, 2002, 2003 and 2004 our investments included marketable equity securities and auction rate securities. We periodically evaluate whether any declines in fair value of our investments are other-than-temporary, which may result in an impairment of such assets. This evaluation consists of a review of qualitative and quantitative factors. We had no such impairments during 2002, 2003 or 2004. Refer to Note 1 in the accompanying Notes to Consolidated Financial Statement, discussing fair value of financial instruments.

Our equity securities consist entirely of stock in Geometric Software Solutions Co. Ltd. (“GSSL”), a public company headquartered in India, which we use for certain software development projects. See Item 13 for discussion of our relationship with GSSL and related transactions. All unrealized gains and losses related to our investment in the stock of GSSL are recorded as a component of other comprehensive income. In the event we decide to sell all or any part of the stock of GSSL, amounts realized from such sale, and any resulting gains or losses, would be dependent upon the market price of the stock at the time of sale. As of December 31, 2004, we owned 1,040,000 shares of GSSL stock with an original cost of $68,000.

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ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Consolidated Balance Sheets as of December 31, 2002 (As Restated), 2003 and 2004	53
Consolidated Statements of Operations for the Years Ended December 31, 2002 (As Restated), 2003 and 2004	54
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2002 (As Restated), 2003 and 2004	55
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002 (As Restated), 2003 and 2004	56
Notes to Consolidated Financial Statements	57
Report of Independent Registered Public Accounting Firm	105

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MSC.SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002, 2003 AND 2004
(in thousands except per share value amounts)

	2002				2003			2004
	(As Restated)
	(See Note 2)
ASSETS
Current Assets:
Cash and Cash Equivalents		29,387			42,045			39,946
Investments		5,177			6,489			36,722
Trade Accounts Receivable, less Allowance for Doubtful Accounts of $2,363, $2,425 and $3,340 respectively.		63,369			75,233			74,224
Deferred Tax Assets		31,020			24,934			21,105
Current Assets of Discontinued Operations		35,040			—			—
Other Current Assets		15,830			15,756			10,531
Total Current Assets		179,823			164,457			182,528
Property and Equipment, Net		36,706			32,493			24,934
Goodwill and Indefinite Lived Intangibles, Net		185,376			185,803			185,453
Other Intangible Assets, Net		49,652			40,723			37,702
Deferred Tax Assets		7,015			10,441			14,285
Other Assets		11,618			21,448			19,987
Long-Term Assets of Discontinued Operations		18,038			—			—
Total Assets		$	488,228		$	455,365		$	464,889
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable		11,416			10,703			8,752
Current Portion of Long-Term Debt		13,750			—			—
Compensation and Related Expenses		13,947			17,879			16,822
Restructuring Reserve		4,105			1,229			102
Deferred Revenue		113,781			120,028			116,211
Other Current Liabilities		24,398			14,400			17,873
Current Liabilities of Discontinued Operations		23,052			3,000			2,226
Total Current Liabilities		204,449			167,239			161,986
Deferred Income Taxes		26,431			20,455			16,734
Long-Term Debt, less Current Portion		57,475			107,015			107,195
Other Long-Term Liabilities		11,572			12,583			13,959
Long-Term Liabilities of Discontinued Operations		9,344			—			—
Total Liabilities		309,271			307,292			299,874
Shareholders’ Equity:
Preferred Stock, $0.01 Par Value, 10,000,000 Shares Authorized; No Shares Issued and Outstanding		—			—			—
Common Stock, $0.01 Par Value, 100,000,000 Shares Authorized; 29,554,000, 30,179,000 and 30,780,000 Issued; and 29,514,000, 30,139,000 and 30,740,000 Outstanding, respectively		296			302			308
Additional Paid-In Capital		284,389			286,236			291,765
Accumulated Other Comprehensive Income (Loss)
Currency Translation Adjustment, net of tax		(5,258		)	(9,464		)	(10,862		)
Unrealized Investment Gain, net of tax		3,495			4,728			6,654
Total Accumulated Other Comprehensive Income (Loss)		(1,763		)	(4,736		)	(4,208		)
Accumulated Deficit		(103,688		)	(133,452		)	(122,573		)
Treasury Shares, At Cost (40,000 Shares)		(277		)	(277		)	(277		)
Total Shareholders’ Equity		178,957			148,073			165,015
Total Liabilities and Shareholders’ Equity		$	488,228		$	455,365		$	464,889

See accompanying notes to consolidated financial statements.

53

MSC.SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(in thousands, except per share data)

	2002				2003			2004
	(As Restated)
	(See Note 2)
Revenue:
Software		$	128,604		$	125,626		$	127,536
Maintenance and Services		104,998			127,047			149,760
Total Revenue		233,602			252,673			277,296
Cost of Revenue:
Software		17,691			13,541			16,654
Maintenance and Services		54,299			54,721			57,296
Total Cost of Revenue		71,990			68,262			73,950
Gross Profit		161,612			184,411			203,346
Operating Expenses:
Research And Development		42,879			40,733			42,115
Selling, General and Administrative		138,567			124,957			141,193
Amortization of Intangibles		1,608			1,551			799
Restructuring and Other Charges		7,276			3,687			726
Total Operating Expense		190,330			170,928			184,833
Operating Income (Loss)		(28,718		)	13,483			18,513
Other Expense (Income):
Interest Expense		7,174			5,346			4,628
Other Expense (Income), Net		505			4,978			(3,704		)
Total Other Expense, Net		7,679			10,324			924
Income (Loss) From Continuing Operations Before Provision
(Benefit) For Income Tax		(36,397		)	3,159			17,589
Provision (Benefit) For Income Taxes		1,761			5,972			6,710
Income (Loss) From Continuing Operations		(38,158		)	(2,813		)	10,879
Discontinuing Operations:
Income (Loss) From Discontinued Operations, Net of Income Taxes		1,740			(8,355		)	—
Loss From Disposal Of Discontinued Operations, Net of Income Taxes		—			(18,596		)	—
Total Income (Loss) From Discontinued Operations		1,740			(26,951		)	—
Income (Loss) Before Cumulative Effect of Change In Accounting Principle		(36,418		)	(29,764		)	10,879
Cumulative Effect of Change In Accounting Principle		(38,800		)	—			—
Net Income (Loss)		$	(75,218	)	$	(29,764	)	$	10,879
Basic Earnings (Loss) Per Share From Continuing Operations		$	(1.30	)	$	(0.09	)	$	0.36
Diluted Earnings (Loss) Per Share From Continuing Operations		$	(1.30	)	$	(0.09	)	$	0.30
Basic Earnings (Loss) Per Share From Discontinuing Operations		$	0.06		$	(0.90	)	$	—
Diluted Earnings (Loss) Per Share From Discontinuing Operations		$	0.06		$	(0.90	)	$	—
Basic and Diluted Loss Per Share From Cumulative Effect of Change in Accounting Principle		$	(1.33	)	$	—		$	—
Basic Earnings (Loss) Per Share		$	(2.57	)	$	(1.00	)	$	0.36
Diluted Earnings (Loss) Per Share		$	(2.57	)	$	(1.00	)	$	0.30
Basic Weighted-Average Shares Outstanding		29,248			29,883			30,619
Diluted Weighted-Average Shares Outstanding		29,248			29,883			43,026

See accompanying notes to consolidated financial statements.

54

MSC.SOFTWARE CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

(in thousands)

															Shareholders' Equity
	Shares of														Accumulated				Retained
	Common Stock										Additional				Other				Earnings				Treasury				Net
				Treasury			Common				Paid-in				Comprehensive				(Accumulated				Shares,				Shareholders'
	Issued			Shares			Stock				Capital				Income (Loss)				Deficit)				At Cost				Equity
Balance at January 1, 2002 (As Restated—See Note 2)		28,495			(40	)		$	285			$	275,019			$	(7,748	)		$	(28,470	)		$	(277	)		$	238,809
Net Loss (As Restated— See Note 2)		—			—			—				—				—				(75,218		)		—				(75,218		)
Currency Translation Adjustment, net of Tax Provision of $0		—			—			—				—				4,508				—				—				4,508
Unrealized Investment Gain, net of Tax Provision of $400		—			—			—				—				1,477				—				—				1,477
Comprehensive Loss (As Restated—See Note 2)		—			—			—				—				—				—				—				(69,223		)
Expense Recognized from Modification of Stock Options		—			—			—				667				—				—				—				667
Exchange of Debt for Warrants		300			—			3				2,504				—				—				—				2,507
Compensation Expense from Warrants Issued		—			—			—				97				—				—				—				97
Shares Issued as Compensation		61			—			1				1,332				—				—				—				1,333
Shares Issued Under Employee Stock Option and Employee Stock Purchase Plans		698			—			7				4,770				—				—				—				4,777
Balance at December 31, 2002 (As Restated—See Note 2)		29,554			(40	)		296				284,389				(1,763		)		(103,688		)		(277		)		178,957
Net Loss		—			—			—				—								(29,764		)		—				(29,764		)
Currency Translation Adjustment, net of Tax Benefit of $0		—			—			—				—				(4,206		)		—				—				(4,206		)
Unrealized Investment Gain, net of Tax Provision of $79		—			—			—				—				1,233				—				—				1,233
Comprehensive Loss		—			—			—				—				—				—				—				(32,737		)
Shares Returned Relating to Business Acquired		(109	)		—			(1		)		(999		)		—				—				—				(1,000		)
Shares Issued as Compensation		15			—			—				130				—				—				—				130
Shares Issued Under Employee Stock Option and Employee Stock Purchase Plans		719			—			7				2,716								—				—				2,723
Balance at December 31, 2003		30,179			(40	)		302				286,236				(4,736		)		(133,452		)		(277		)		148,073
Net Income		—			—			—				—				—				10,879				—				10,879
Currency Translation Adjustment, net of Tax Benefit of $0		—			—			—				—				(1,398		)		—				—				(1,398		)
Unrealized Investment Gain, net of Tax Provision of $278		—			—			—				—				1,926				—				—				1,926
Comprehensive Income		—			—			—				—				—				—				—				11,407
Shares Issued as Compensation		307			—			3				3,138				—				—				—				3,141
Shares Issued for Business Acquired		87			—			1				878				—				—				—				879
Expense Recognized from Modification of Stock Options		—			—			—				145				—				—				—				145
Shares Issued Under Employee Stock Option and Employee Stock Purchase Plans		207			—			2				1,368				—				—				—				1,370
Balance at December 31, 2004		30,780			(40	)		$	308			$291,765				$	(4,208	)		$	(122,573	)		$	(277	)		$	165,015

See accompanying notes to consolidated financial statements.

55

MSC.SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(in thousands)

	2002				2003			2004
	(As Restated)
	(See Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)		$	(75,218	)	$	(29,764	)	$	10,879
Cumulative Effect of Change in Accounting Principle		38,800			—			—
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities:
Provision (Credit) for Doubtful Accounts		(23		)	(173		)	1,006
Depreciation and Amortization of Property and Equipment		12,418			15,318			11,480
Amortization of Intangibles		7,310			7,995			6,150
Amortization of Debt Issuance Costs		680			1,003			912
Write-off of Acquired In-Process Technology		2,380			—			338
Write-off of Debt Issuance Costs		1,451			2,287			—
Loss on Disposal of Property and Equipment		699			849			669
Impairment of Assets		2,869			9,695			1,736
Impairment of Goodwill		—			12,033			—
Stock Based Compensation		2,097			130			3,283
Deferred Income Taxes		(10,115		)	(1,886		)	(4,133		)
Other		(88		)	56			—
Changes in Assets and Liabilities, Net of Effects of Acquisitions:
Trade Accounts Receivable		17,493			(11,691		)	4
Other Current Assets		198			(697		)	5,034
Other Assets		(1,154		)	2,769			728
Accounts Payable		(4,785		)	(713		)	(2,021		)
Other Current Liabilities		4,777			(9,840		)	3,269
Deferred Revenue		20,111			6,247			(4,036		)
Compensation and Related Expenses		5,944			5,427			(17		)
Restructuring Reserve		7,277			3,647			560
Other Liabilities		(3,900		)	(3,015		)	(1,127		)
Discontinued Operations		(6,486		)	15,032			(772		)
Net Cash Provided By Operating Activities		22,735			24,709			33,942
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment		(12,361		)	(13,833		)	(4,245		)
Proceeds from Sale of Property and Equipment		7			3			6
Businesses Acquired, Net of Cash Received		(118,194		)	(3,762		)	(1,786		)
Purchases of Investment Securities		—			—			(28,000		)
Proceeds from Sale and Maturities of Investment Securities		2,512			—			—
Purchases of Investment Securities		—			(11,839		)	—
Discontinued Operations		(154		)	—			—
Net Cash Used In Investing Activities		(128,190		)	(29,431		)	(34,025		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Subordinated Convertible Debentures		—			100,000			—
Proceeds from Note Payable		120,000			—			—
Repayments of Note Payable		(68,273		)	(65,843		)	—
Payment of Debt Issuance Costs		(4,235		)	(3,750		)	—
Repayment of Note Payable—Discontinued Operations		—			(9,344		)	—
Net Cash Provided By Financing Activities		47,492			21,063			—
EFFECT OF EXCHANGE RATE CHANGES ON CASH		3,577			(3,683		)	(2,016		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(54,386		)	12,658			(2,099		)
Cash and Cash Equivalents at Beginning of the Year		83,773			29,387			42,045
CASH AND CASH EQUIVALENTS AT END OF THE YEAR		$	29,387		$	42,045		$	39,946
Supplemental Cash Flow Information:
Income Taxes Paid		$	4,485		$	9,345		$	7,513
Interest Paid		$	3,330		$	5,149		$	5,194
Exchange of Debt for Warrants		$	(3,000	)	$	—		$	—
Property and Equipment acquired using Capital Leases		$	565		$	—		$	544
Reconciliation of Businesses Acquired, Net of Cash Received:
Fair Value of Assets Acquired		$	144,557		$	3,911		$	3,216
Non-Cash Financing of Purchase Price and Liabilities Assumed:
Issuance of Common Stock		$	—		$	—		$	(880	)
Liabilities Assumed		$	(26,363	)	$	(149	)	$	(550	)
Businesses Acquired, Net of Cash Received		$	118,194		$	3,762		$	1,786

See accompanying notes to consolidated financial statements.

56

MSC.SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

NOTE 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Software Business—MSC.Software Corporation (“MSC” or the “Company”) is a provider of virtual product development tools, including simulation software and related professional services. We design, produce and market proprietary computer software products and provide related services for use in computer-aided engineering. Our products and services are marketed internationally to various industries, including aerospace, automotive and other industrial concerns, computer and electronics manufacturers, biomedical, shipbuilding and rail.

Principles of Consolidation—The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.

The Company acquired Mechanical Dynamics, Inc. (“MDI”) in 2002 and completed several other smaller acquisitions in 2003 and 2004. The results of the operations of the acquired companies have been included in the consolidated statements of operations from the dates of acquisition. Refer to Note 3—Business Acquisitions.

Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Significant estimates include those related to revenue recognition, accounts receivable allowances, income taxes, valuation of long-lived assets, and certain accrued liabilities, among others. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.

Revenue Recognition—We derive revenue from licensing our software products and providing maintenance, consulting, and training services. Our standard software license agreement is a perpetual license to use our products on an end user basis.

We record revenue from licensing our software products to end users provided there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection is reasonably assured and delivery of the product has occurred, in accordance with Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition.” For arrangements with multiple elements, and for which vendor specific objective evidence (“VSOE”) of fair value exists for the undelivered elements, revenue is recognized for the delivered elements based upon the residual method in accordance with SOP 98-9, “Modifications of SOP 97-2 with Respect to Certain Transactions.” Amounts billed or payments received in advance of revenue recognition are recorded as deferred revenue.

Maintenance agreements are generally twelve-month prepaid contracts that are recognized ratably over the service period. VSOE of fair value for maintenance is measured by the stated renewal rates included in the agreements or, when not stated in the agreement VSOE is calculated based upon actual, historical evidence.

Customers may also enter into arrangements that are typically on a time and materials basis for consulting and training services. VSOE of fair value for consulting and training services is based upon the standard hourly rate we charge for such services when sold separately. Training services are generally prepaid prior to rendering the service. Consulting and training revenue are typically recognized as earned. Consulting revenue is generated primarily from implementation services related to the installation of our

57

products and other VPD solutions. These arrangements are generally accounted for separately from the license revenue because the arrangements qualify as “service transactions” as defined in SOP 97-2. Our services are generally not essential to the functionality of the software. Our products are fully functional upon delivery of the product and implementation does not require significant modification or alteration. Our consulting revenue is generally recognized using the percentage-of-completion method of contract accounting in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Product-Type Contracts” and Accounting Research Bulletin No. 45, “Long-Term Construction-Type Contracts” which approximates the proportional performance method. When percentage-of-completion accounting is not possible due to our inability to accurately estimate percentage-of-completion, we recognize revenue using the completed-contract method.

If the fair value of any undelivered element included in a multiple-element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered, services have been performed, or until fair value can be objectively determined. License revenue from agents is recognized upon sell-through to the end customer. If we determine that collection of a license fee is not reasonably assured, the fee is deferred and revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.

If in the future we were unable to support VSOE of fair value for an undelivered element, the entire amount of revenue from the arrangement would be deferred and recognized ratably over the life of the contract.

Revenue is derived through the Company’s direct sales force, a network of value-added resellers and other sales agents. Revenue from the sale of products by other sales agents, for which a commission is due to the sales agent, is reported as net revenue (gross sales price less commission due to the sales agent) earned from the product sale. Revenue from the sale of products provided by other suppliers, for which a royalty is due to the suppliers, is reported as gross revenue earned from the product sale. Royalties due to these other suppliers are recorded as royalty expense in cost of software revenue. The Company does not offer any rights of return, rebates, stock balancing rights or price protection on the Company’s software products.

Discontinued Operations—The Company ceased operations of its Systems business in 2003. Accordingly, all current and prior financial information related to the Systems business has been presented as discontinued operations in the accompanying consolidated financial statements. Refer to Note 16—Discontinued Operations.

Cash and Cash Equivalents—The Company considers investments with original maturities of three months or less to be cash equivalents.

Investments—Marketable equity securities and debt securities are classified as trading, held-to-maturity or available-for-sale in accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” Management determines the appropriate classification of securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with temporary unrealized gains and losses, net of tax, reported in shareholders’ equity as a separate component of accumulated other comprehensive income (loss) in the consolidated balance sheets, until realized.

As of December 31, 2002 and 2003, all of our short-term investments included marketable equity securities classified as available-for-sale. As of December 31, 2004, our short-term investments consisted of marketable equity securities and auction rate securities classified as available-for-sale.

Even though the stated maturity dates of these investments may be one year or more beyond the balance sheet dates, we have classified all marketable investments, including auction rate securities, as short-term investments as they are available for current operations. Realized gains and losses on sales of

58

investment securities and declines in value judged to be other than temporary are included in other expense (income) in the consolidated statements of operations. The cost of securities sold is based on the specific identification method.

Our debt securities are classified as held-to-maturity and are reported at amortized cost in the consolidated balance sheets as other assets. Such debt securities are referred to as pledged securities in connection with our Convertible Debentures. Refer to Note 4—Long-Term Debt.

As of December 31, 2002, 2003 and 2004, our non-qualified supplemental retirement plan had investments in marketable equity securities classified as available-for-sale, which are included in other assets in the accompanying consolidated balance sheets. Refer to Note 10—Pensions and Other Employee Benefits.

Available-for-sale and held-to-maturity equity and debt securities were as follows at December 31:

	Amortized		Gross Unrealized		Gross Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
	(In thousands)
2002:
Available-for-sale securities (carried at fair value) classified as current assets:
Equity Investments.		$      68		$ 5,109		$ —			$ 5,177
Auction Rate Securities		—		—		—			—
		68		5,109		—			5,177
Available-for-sale securities (carried at fair value) classified as long-term assets:
Investments Held in Supplemental Retirement Plan		819		167		—			986
Held-to-maturity securities (carried at amortized cost) classified as long-term assets:
Pledged Securities		—		—		—			—
		$    887		$ 5,276		$ —			$ 6,163
2003:
Available-for-sale securities (carried at fair value) classified as current assets:
Equity Investments.		$      68		$ 6,421		$ —			$ 6,489
Auction Rate Securities		—		—		—			—
		68		6,421		—			6,489
Available-for-sale securities (carried at fair value) classified as long-term assets:
Investments Held in Supplemental Retirement Plan		819		672		—			1,491
Held-to-maturity securities (carried at amortized cost) classified as long-term assets:
Pledged Securities		10,731		—		(13	)		10,718
		$ 11,618		$ 7,093		$ (13	)		$ 18,698
2004:
Available-for-sale securities (carried at fair value) classified as current assets:
Equity Investments.		$      68		$ 8,624		$ —			$ 8,692
Auction Rate Securities		28,000		30		—			28,030
		28,068		8,654		—			36,722
Available-for-sale securities (carried at fair value) classified as long-term assets:
Investments Held in Supplemental Retirement Plan		819		1,128		—			1,947
Held-to-maturity securities (carried at amortized cost) classified as long-term assets:
Pledged Securities		8,417		—		(81	)		8,336
		$ 37,304		$ 9,782		$ (81	)		$ 47,005

59

Contractual maturities of available-for-sale and held-to-maturity equity and debt securities at December 31, 2004 were as follows:

	Available-for- Sale Securities				Held-to- Maturity Securities
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In thousands)
Due in less than one year		$ —		$ —		$ 2,500		$ 3,522
Due in 1-5 years						5,917		4,814
		$ —		$ —		$ 8,417		$ 8,336

Allowance for Doubtful Accounts—We maintain allowances for doubtful accounts for estimated losses resulting from the unwillingness or inability of our customers to make required payments. This requires us to make estimates of future write-offs of bad debt accounts related to current period revenue. The amount of the allowance is based on historical experience and our current analysis of the collectibility of accounts receivable. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, additional bad debt provisions may be recorded in the period such determination was made.

Our allowance for doubtful accounts was $2,363,000 at December 31, 2002, $2,425,000 at December 31, 2003 and $3,340,000 at December 31, 2004. Our provision (credit) for doubtful accounts totaled $(23,000), $(173,000) and $1,006,000 in 2002, 2003 and 2004, respectively, and were recorded in selling, general and administrative expense in the consolidated statements of operations.

Property and Equipment—Property and equipment, including software for internal use, are recorded at cost, less accumulated depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful lives of the assets, ranging from two to five years. Amortization of leasehold improvements is calculated on the straight-line method over the shorter of the estimated useful lives of the assets or the corresponding lease term. Refer to Note 5—Property and Equipment.

Software for internal use is capitalized in accordance with SOP 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use.” Costs for purchased software and internal software development activities are capitalized beginning when the Company has determined (1) that technology exists to achieve the performance requirements, (2) buy versus internal development decisions have been made and (3) the Company’s management has authorized the funding for the project. Capitalization of software costs ceases when the software is substantially complete and is ready for its intended use and is amortized over its estimated useful life of two years using the straight-line method. Amounts capitalized have not been material to the Company’s consolidated financial statements.

Long-Lived Assets—We evaluate the recoverability of our long-lived assets, including property and equipment and certain identifiable intangible assets, in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 requires the Company to review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors considered important which could trigger an impairment review include:

·Significant underperformance relative to historical or projected future operating results;

·Significant changes in the manner of use of the assets or the strategy for our overall business;

·Significant decrease in the market value of the assets; and

·Significant negative industry or economic trends

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When we determine that the carrying amount of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators, we assess the assets for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying amount over its fair value. Fair value is generally determined based on the estimated future discounted cash flows over the remaining useful life of the asset using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. The assumptions supporting the cash flows, including the discount rates, are determined using management’s best estimates as of the date of the impairment review. If these estimates or their related assumptions change in the future, the Company may be required to record additional impairment charges for these assets, and future results of operations could be adversely affected.

Assets to be disposed of are separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheets, if material. As of December 31, 2004, long-lived assets with a net book value of $1,250,000 were held for sale and classified as other current assets.

Goodwill and Other Indefinite Lived Intangibles—We account for goodwill and other indefinite lived intangibles under SFAS 142, “Goodwill and Other Intangible Assets,” which requires the Company to review for impairment of the intangible asset on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. This impairment review involves the following two-step process:

·Step 1—Compare the fair value of our reporting units to the carrying value, including goodwill, of each of those units. If a unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary. For each reporting unit where the carrying value, including goodwill, exceeds the unit’s fair value, Step 2 is required.

·Step 2—Allocate the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities. This will derive an implied fair value for the reporting unit’s goodwill. Compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment loss must be recognized for the excess.

In calculating the impairment charge, the fair value of the impaired reporting unit would be estimated using the income approach. Significant management judgment is required in determining the allocations required under this process and projecting cash flows. Any changes in the assumptions used in projecting cash flows or determining an appropriate discount rate could impact the assessed value of an asset and result in an impairment charged equal to the amount by which its carrying value exceeds its actual or estimated fair value.

We performed our goodwill impairment tests upon adoption of SFAS 142 effective January 1, 2002 and recorded an impairment charge of $38,800,000. The impairment related entirely to our Systems reporting unit, which was almost entirely generated from the AES acquisition. Such charge is reflected as a cumulative effect of change in accounting principle in the accompanying consolidated statements of operations. In calculating the impairment charge, the fair value of the impaired reporting unit underlying the System segment was estimated using a discounted cash flow methodology and recent comparable transactions. The Systems business was discontinued in 2003. As a result, the Company wrote off $12,033,000 of additional Systems goodwill in 2003. Refer to Note 16—Discontinued Operations.

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We performed our annual impairment test during the fourth quarters of 2002, 2003 and 2004 and were not required to record any impairment losses on goodwill. Refer to Note 6—Goodwill and Other Intangible Assets.

Software Development Costs—Development costs for software to be sold or otherwise marketed are included in research and development expenses as incurred. After technological feasibility is established, significant software development costs are capitalized and amortized on a straight-line basis over the estimated life of the software product. To date, the period between achieving technological feasibility, which typically occurs when the beta testing commences on a working model, and the general availability of such software to our customers has been short. As a result, software development costs qualifying for capitalization have been insignificant and we have not capitalized any software development costs.

Advertising Expense—The cost of advertising is expensed as incurred. The Company incurred $1,764,000, $1,528,000 and $1,087,000 in advertising costs during the years ended December 31, 2002, 2003 and 2004, respectively.

Royalties to Third Parties—The Company has agreements with third parties requiring the payment of royalties for sales of third party products or inclusion of such products as a component of the Company’s products. Royalties are charged to cost of software license revenue when incurred and totaled $4,920,000, $7,518,000 and $6,658,000 in 2002, 2003 and 2004, respectively.

Stock-Based Compensation—The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants using the intrinsic method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and FASB Interpretation No. 44 (“FIN 44”), Accounting for Certain Transactions Involving Stock-Based Compensation, an Interpretation of APB Opinion No. 25” and related interpretations in accounting for its stock-based compensation plans. The Company has adopted the disclosure only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” as amended. Accordingly, no compensation expense is recognized for the stock option grants, unless required due to award modification.

Had compensation cost for the Company’s stock option plans and Employee Stock Purchase Plan (“ESPP”) been determined based on the estimated fair value at the grant date for awards during the years ended December 31, 2002, 2003 and 2004 consistent with the provisions of SFAS No. 123, the Company’s Net Income (Loss), Basic Earnings (Loss) Per Share and Diluted Earnings (Loss) Per Share would have been adjusted to the pro forma amounts as follows (in thousands, except per share data):

	Years Ended December 31,
	2002			2003		2004
Net Income (Loss), As Reported		$ (75,218	)	$ (29,764	)	$ 10,879
Add (Deduct): Stock-Based Employee Compensation Included in Reported Net Income (Loss), Net of Related Tax Effects		131		(245	)	116
(Deduct) Add: Total Stock-Based Employee Compensation Expense Determined under Fair Value Based Method for All Awards, Net of Related Tax Effects		(8,772	)	5,251		(3,502	)
Pro Forma Net Income (Loss)		$ (83,859	)	$ (24,758	)	$ 7,493
Earnings (Loss) Per Share:
Basic—As Reported		$   (2.57	)	$   (1.00	)	$   0.43
Basic—Pro Forma		$   (2.87	)	$   (0.83	)	$   0.24
Diluted—As Reported		$   (2.57	)	$   (1.00	)	$   0.30
Diluted—Pro Forma		$   (2.87	)	$   (0.83	)	$   0.18

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Using the Black-Scholes valuation model, the estimated per share weighted-average fair value of stock options granted during the years ended December 31, 2002, 2003 and 2004 was $7.13, $4.38 and $5.29, respectively.

The pro forma effect on the Company’s Net Income (Loss) and Basic and Diluted Earnings (Loss) Per Share for 2002, 2003 and 2004 may not be representative of the pro forma effect in future years. The pro forma effect does not take into consideration compensation expense related to grants in future years, which are anticipated. The fair value of each option and each ESPP share is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the periods indicated:

	Years Ended December 31,
	2002	2003	2004
Stock Options:
Dividend Yield	0.0%	0.0%	0.0%
Expected Volatility	65.6%	67.0%	70.0%
Risk-Free Interest Rate	4.23%	2.95%	3.48%
Estimated Life	5 years	5 years	5 years
ESPP Shares:
Dividend Yield	0.0%	0.0%	0.0%
Expected Volatility	65.6%	54.0%	54.0%
Risk-Free Interest Rate	1.73%	1.21%	1.01%
Estimated Life	0.5 years	0.5 years	0.5 years

Through March 2005, pursuant to the Company’s ESPP, eligible employees were entitled to purchase common stock semi-annually, by means of limited payroll deductions, at a 10% discount from the fair market value of the common stock as of specific dates. This qualified ESPP under Sections 421 and 423 of the Internal Revenue Code was offered to all eligible employees and was non-compensatory under APB Opinion No. 25. Refer to Note 11—Stock Option Plans, Warrants and Stock Based Compensation.

Income Taxes—The Company uses the asset and liability method of accounting for income taxes. Provision is made in the Company’s consolidated financial statements for current income taxes payable and deferred income taxes arising primarily from temporary differences in accounting for intangible assets, capitalized software costs, deferred revenue, foreign deferred taxes, undistributed earnings of international subsidiaries, compensation and various state and federal tax credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance to reduce deferred tax assets to an amount whose realization is more likely than not. Refer to Note 8—Income Taxes.

Foreign Currency—The Company translates the assets and liabilities of its foreign subsidiaries at the rate of exchange in effect at the end of the period. Revenue and expenses are translated using an average of exchange rates in effect during the period. Translation adjustments are recorded in shareholders’ equity as a separate component of accumulated other comprehensive income (loss) in the consolidated balance sheets. Transaction gains and losses are included in net income in the period in which they occur.

Our intercompany accounts are typically denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables that we consider to be of a long-term investment nature are recorded in accumulated other comprehensive income (loss) while gains and losses resulting from the remeasurement of intercompany receivables from those international subsidiaries for which we anticipate settlement in the foreseeable future are recorded in the

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consolidated statements of operations. The aggregate foreign currency transaction gains (losses) included in other expense (income) on the consolidated statements of operations were $(1,095,000), $281,000 and $1,574,000 for the years ended December 31, 2002, 2003 and 2004, respectively.

Earnings (Loss) Per Share—Basic Earnings (Loss) Per Share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted Earnings Per Share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock. Diluted Earnings Per Share is computed by using the weighted-average number of common and potentially dilutive shares outstanding during each period. Potentially dilutive shares are not included in the per share calculations where their inclusion would be anti-dilutive. Refer to Note 14—Earnings (Loss) Per Share.

Other Comprehensive Income (Loss)—Comprehensive income (loss) includes foreign currency translation adjustments, unrealized gains and losses on marketable securities categorized as available-for-sale, and recognition of minimum pension liabilities. Comprehensive income (loss) and its components are presented in the accompanying consolidated statements of shareholders’ equity and comprehensive income (loss).

Concentrations—Financial instruments that potentially subject MSC to a concentration of credit risk are principally comprised of cash and cash equivalents, short-term investments, and accounts receivable. Regarding cash equivalents and short-term investments, MSC only invests in instruments with investment grade credit ratings. We place our investments for safekeeping with high-credit-quality financial institutions and, by policy, limit the amount of credit exposure from any one issuer.

The Company has historically derived a significant portion of its net revenue from computer software products for use in computer-aided engineering. These products are expected to continue to account for a significant portion of net revenue for the foreseeable future. As a result of this revenue concentration, the Company’s business could be harmed by a decline in demand for, or in the prices of, these products as a result of, among other factors, any change in pricing model, a maturation in the markets for these products, increased price competition or a failure by the Company to keep up with technological change.

In addition, the Company derives a significant portion of its revenue from the automotive and aerospace industries. As a result of this concentration, the Company’s business could be harmed if any one or more of these industries experienced economic difficulties.

For 2002, 2003, and 2004, we had no customers that accounted for 10% or more of total revenue. As of December 31, 2002, 2003 and 2004, we had no customers that accounted for 10% or more of gross accounts receivable. MSC does not require collateral from its customers prior to granting credit.

Self-Insurance—Beginning in 2003 the Company self-insured certain medical claims and benefits offered to our employees. Based on analysis of the historical data, the estimated cost of future claims as of December 31, 2003 and 2004 was $603,000 and $509,000, respectively, which is reflected as an accrued liability in the accompanying consolidated balance sheets.

Fair Values of Financial Instruments—At December 31, 2002, 2003 and 2004, the Company’s financial instruments included cash and cash equivalents, trade receivables, marketable securities, accounts payable, notes payable to shareholders, subordinated notes payable and subordinated convertible debentures. The carrying amount of cash and cash equivalents, trade receivables and accounts payable approximates fair value due to the short-term maturities of these instruments. The estimated fair value of marketable equity investments, debt securities and subordinated convertible debentures were determined based on quoted market prices at year-end. The estimated fair value of the notes payable to shareholders and subordinated notes payable was determined based on the present value of their future cash flows using a discount rate that approximates the Company’s current borrowing rate.

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The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (in thousands):

	December 31, 2002							December 31, 2003						December 31, 2004
	Carrying Amount			Estimated Fair Value				Carrying Amount			Estimated Fair Value			Carrying Amount			Estimated Fair Value
Financial Instrument Assets:
Equity Investments	$	5,177			$	5,177		$	6,489		$	6,489		$	8,692		$	8,692
Auction Rate Securities	$	—			$	—		$	—		$	—		$	28,030		$	28,030
Pledged Securities	$	—			$	—		$	10,731		$	10,718		$	8,417		$	8,336
Investments Held in Supplemental Retirement Plan	$	986			$	986		$	1,491		$	1,491		$	1,947		$	1,947
Financial Instrument Liabilities:
Notes Payable to Shareholders	$	(19,881	)		$	(19,007	)	$	—		$	—		$	—		$	—
Term Loan	$	(53,854	)		$	(53,854	)	$	—		$	—		$	—		$	—
Subordinated Notes Payable, including Current Portion	$	(6,834	)		$	(7,509	)	$	(7,015	)	$	(7,490	)	$	(7,195	)	$	(7,490	)
Subordinated Convertible Debentures	$	—			$	—		$	(100,000	)	$	(131,000	)	$	(100,000	)	$	(129,600	)

Impact of Recently Issued Accounting Standards

In January 2004, the FASB issued a revision to SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. The revision to SFAS No. 132 requires new annual disclosures about the types of plan assets, investment strategy, measurement date, plan obligations and cash flows as well as the components of the net periodic benefit cost recognized in interim periods. The revision relates to disclosures only and is effective for domestic defined benefit plans for fiscal years ending after December 15, 2003, except for expected future benefit payments, which must be disclosed for fiscal years ending after June 15, 2004. The revision is effective for all foreign defined benefit plans for fiscal years ending after June 15, 2004. As this revision relates to disclosures only, the adoption of this statement will not impact the Company’s consolidated balance sheets or statements of operations. We have adopted this standard as it relates to our foreign defined benefit plans. Refer to Note 10—Pensions and Other Employee Benefits.

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF Issue No. 03-1 provides new guidelines for the evaluation and determination of whether a loss on certain investments is other-than-temporary and requires certain additional disclosures pertaining to unrealized investment losses in a company’s financial statements. The effective date of the evaluation and measurement criteria of EITF Issue No. 03-1 have been delayed pending issuance of additional implementation guidance by the FASB. The additional disclosure requirements, however, remain effective for annual periods ending after December 15, 2004. Management continues to monitor the FASB’s progress and does not currently expect the adoption of the evaluation and measurement criteria, once issued to have a material impact on the Company’s consolidated results of operations or financial position.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning after June 15, 2005. The Company does not expect the adoption of Statement 153 will have a material effect on its consolidated financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes Opinion 25, and amends SFAS No. 95, “Statement of

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Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) generally requires share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized in the statement of operations based on their fair values. Pro forma disclosure of fair value recognition will no longer be an alternative.

SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

·Modified prospective method: Compensation cost is recognized beginning with the effective date of adoption (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date of adoption and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of adoption that remain unvested on the date of adoption.

·Modified retrospective method: Includes the requirements of the modified prospective method described above, but also permits restatement using amounts previously disclosed under the pro forma provisions of SFAS No. 123 either for (a) all prior periods presented or (b) prior interim periods of the year of adoption.

In April 2005, the Securities and Exchange Commission announced that SFAS No. 123(R)’s effective transition date will be extended to annual periods beginning after June 15, 2005. The Company is required to adopt this new standard effective January 1, 2006, with early-adoption permitted.

SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under current accounting rules. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Total cash flow will remain unchanged from what would have been reported under prior accounting rules.

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method. As a consequence, the Company generally does not recognize compensation cost for employee stock options and purchases under the Employee Stock Purchase Plan. Although the adoption of SFAS No. 123(R)’s fair value method will have no adverse impact on the Company’s balance sheet or total cash flows, it will affect the Company’s net income and diluted earnings per share. The actual effects of adopting SFAS No. 123(R) will depend on numerous factors including the amounts of share-based payments granted in the future, the valuation model the Company uses to value future share-based payments to employees and estimated forfeiture rates. We expect the effect of adopting this standard will be material. The effect on reported net income and net income and earnings per share if we had accounted for stock options and stock purchase plans using the fair value recognition provisions of SFAS No.123 is shown in Note 1 under discussion of stock-based compensation.

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment,” regarding the SEC Staff’s interpretation of SFAS 123(R). This interpretation provides the SEC Staff’s views regarding interactions between SFAS 123(R) and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS 123(R) and investors and users of the financial statements in analyzing the information provided. The Company will apply the requirements of SAB 107 upon the adoption of SFAS No. 123(R).

In December 2004, the FASB issued FSP No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004.” See Note 8—Income Taxes, for further description of the effects on the financial statements of FSP No. 109-2.

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In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of FASB Statement No. 143. FIN 47 is effective no later than fiscal years ending after December 15, 2005. FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company does not expect the adoption of FIN 47 to have a material impact on its results of operations or financial position.

NOTE 2—RESTATEMENT OF 2002 FINANCIAL RESULTS

Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2002, the Company determined that the consolidated financial statements should be restated to adjust for errors primarily related to revenue recognition, capitalized software development costs and income taxes.

The following table presents the impact of the restatement adjustments described below on net loss for the year ended December 31, 2002 and accumulated deficit as of January 1, 2002 (in thousands):

	Net Loss for the Year Ended December 31, 2002				Retained Earnings (Accumulated Deficit) at January 1, 2002
As Previously Reported		$	(51,329	)		$	15,097
Revenue Adjustments:
VSOE		(6,845		)		(14,276		)
MasterKey contracts		(10,181		)		(12,602		)
Timing and Cutoff		872				(4,577		)
Contracted Services		(2,548		)		(994		)
Training and Support Services		(52		)		(6		)
Regulatory Compliance		4,393				—
Other		(188		)		(605		)
Subtotal		(14,549		)		(33,060		)
Costs and Operating Expenses Adjustments:
Cost of Revenue—Software Development		9,933				11,360
Cost of Revenue—Reclass of Amortization—Developed Technology		(5,062		)		—
Cost of Revenue—Other		(92		)		(375		)
Software Development		(10,529		)		(38,336		)
Business Combinations		(1,495		)		(272		)
Stock Compensation		(667		)		—
Pension Accounting		(86		)		(1,332		)
Long-lived Asset Impairment		(38		)		—
Reclass of Amortization—Developed Technology		5,062				—
Other		(2,542		)		(1,668		)
Subtotal		(5,516		)		(30,623		)
Other Adjustments:
Other (Expense) Income, net		(71		)		262
Income Taxes		(7,008		)		20,893
Discontinued Operations		2,755				(1,039		)
Cumulative Effect of Change in Accounting Principle		500				—
Subtotal		(3,824		)		20,116
As Restated		$	(75,218	)		$	(28,470	)

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Revenue Adjustments

Vendor-Specific Objective Evidence (“VSOE”)—Previously, the Company had believed they could establish VSOE for contracts within the Asia Pacific region. Due to an insufficient number of stand-alone enhancement and support (“E&S”) contracts and inconsistent discounting, we determined that we did not have adequate support to determine VSOE for the region for countries other than Japan. Accordingly, these transactions have been restated using subscription accounting rules as required by SOP 97-2, as amended by SOP 98-9, resulting in the deferral of the related paid-up software revenue, which will be recognized over the term of the bundled E&S, or if not bundled, over a period of twelve months. Furthermore, we completed VSOE analyses for our Americas and EMEA regions and determined that the VSOE rates for E&S, relative to achieved paid-up revenue, were not correct. Accordingly, we applied the recomputed annual VSOE rate of each region to all paid-up software arrangements and renewal rate contracts.

MSC.MasterKey—MSC.MasterKey is a token-based model, enabling customers to access our complete portfolio of products. However, such license agreements did not always specify what products were covered and therefore not all products under these MasterKey licenses were delivered. Subsequent shipments of products were made as requested by the customer, or as new products became available. Since we did not meet the basic criteria under SOP 97-2 with respect to delivery of product or determining VSOE with respect to unspecified elements, software revenue previously recognized under the residual method was deferred and recognized over the initial term of the E&S contract using subscription accounting.

Timing and Cutoff—We found instances where persuasive evidence of arrangement did not exist at the time revenue on software arrangements was recognized. Such instances included missing, unsigned and/or misdated software licensing arrangements and other supporting documentation, such as amendments and purchase orders. In addition, we found that certain software arrangements recorded in our EMEA region were recognized when invoiced, that delivery could not be substantiated, and that shipping terms were FOB Destination. As a result, revenue previously recognized has been deferred until persuasive evidence of an arrangement existed.

Contracted Services—Revenue for fixed-fee consulting arrangements entered into by our Asia Pacific and EMEA regions was incorrectly recognized using the percentage completion method as allowed under SOP 97-2 and SOP 81-1, “Accounting for Certain Construction Type and Certain Production Type Contracts,” referred to as contract accounting. The Asia Pacific region used input measures, such as time and costs, supported by a timekeeping and project accounting system to apply the percentage completion method. The EMEA region determined that its timekeeping or project accounting system was not able to adequately or accurately capture project costs and instead used milestones supported by customer acceptance confirmations as the supporting measure to determine the percentage of completion. However, during the restatement, we determined that the milestones used by EMEA were not verifiable and should not be used with respect to percentage completion accounting. In addition, we determined that the timekeeping or project accounting system used in certain countries within Asia Pacific was not consistently utilized and that project costs were not accurately captured in determining revenue under the percentage of completion method. As a result of the inability to properly use the timekeeping or project accounting system or properly document milestones, we concluded that previously recognized revenue should be deferred until final billing under the contracts.

Training and Support Services—Revenue for certain training and post-contract customer support (“PCS”) sold separately from our software arrangements, including phone-based technical support related to third-party software, was recognized when invoiced to the customer. We reviewed these transactions and restated revenue based upon when the training was delivered or over the contract period for PCS as appropriate.

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Regulatory Compliance—As part of our settlement with the Federal Trade Commission (“FTC”) in November 2002, we agreed to defer revenue related to the fair value of the converted software arrangements with respect to Nastran paid-up license and related maintenance. Such revenue would be recognized ratably over the greater of a 48 month term or the maintenance term specified in the agreement until the customer requests a refund or the twelve month period to request such a refund lapses, at which time the remaining deferred revenue will be recognized. The twelve month period to request a refund expired in June 2004. However, revenue for two customer agreements in the fourth quarter of 2002, and three agreements in the first quarter of 2003, were not properly deferred and have been restated. In addition, our restated 2002 results include the recognition of the revenue initially identified and deferred under the settlement and an accrual for sales allowances representing the actual amounts of refunds made to customers through June 2004.

Revenue Classification—Historically, we allocated a certain amount of E&S revenue to our services segment that represented the estimated amount of PCS. The remaining amount of E&S revenue, representing enhancements and upgrades was reported as software revenue. For the restated consolidated statements of operations included in this report, all E&S revenue is reported as maintenance revenue. The net effect of these reclassifications was to decrease previously reported software revenue by $25.1 million in 2002 and $25.8 million in the nine months ended September 30, 2003, and to decrease previously reported services revenue by $48.1 million in 2002 and $40.8 million in the nine months ended September 30, 2003.

Non-Revenue Adjustments

Software Development

We capitalize costs incurred for software developed for sale or lease after determining technological feasibility as required under Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed”. We evaluated the criteria used to determine technological feasibility and performed analyses of project costs incurred after reaching technological feasibility and release dates of products compared to our detailed product design specification. Our evaluation and analysis concluded that technological feasibility was prematurely determined or could not be supported as evidenced by a pattern of consistent cost overruns and delayed release dates of new products. As a result, previously capitalized software development costs were written-off and the corresponding amortization of such costs was corrected.

We also reviewed the costs capitalized for software purchased or developed for internal use pursuant to Statement of Position No. 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use” and determined that certain costs were improperly capitalized or were impaired. As a result, certain previously capitalized software development costs were written-off and the amortization was corrected.

Business Combinations Accounting

During 2001, 2002 and 2003, we made several business acquisitions. The two largest were the acquisition of AES in 2001 and Mechanical Dynamics, Inc. (“MDI”) in 2002. We corrected the purchase accounting for AES with respect to (i) the effective transaction date, (ii) the improper inclusion of an assumed liability subsequently deemed to be a contingent liability pursuant to FASB No. 141, “Business Combinations,” and (iii) the recognition of compensation expense related to shares issued to the prior owners of AES subsequent to the acquisition. We also corrected the purchase accounting for AES, MDI and other acquisitions with respect to the allocation of purchase price to customer lists, as required by EITF 02-17, “Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination.” In addition, certain accruals established in connection with these and other acquisitions were adjusted.

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Stock Compensation

In connection with severance agreements entered into with two terminated employees during 2002 we extended the exercise dates with respect to options that had previously been granted. The extension is a modification in terms and therefore the Company should have recognized compensation expense as required under Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25” (FIN 44). We have recorded adjustments to properly recognize stock compensation in 2002.

Pension Accounting

We determined that certain foreign defined benefit plans were not accounted for in accordance with SFAS No. 87, “Employer’s Accounting for Pensions” but were recorded in accordance with local standards. We have subsequently obtained actuarial valuations and other relevant information for all such plans and have adjusted the pension liabilities and related accounts in our consolidated financial statements accordingly.

Long-lived Assets Impairments

We previously recorded charges to reflect the impairment of goodwill and other intangibles, and other long-term assets in accordance with SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” As a result of the restatement, we reevaluated the impairment charges for goodwill originally recorded in 2002 based on an updated valuation model using the restated financial statements and concluded that the cumulative effect of the change in accounting was overstated.

Other Adjustments

During our substantiation of the results of the Systems business, which was discontinued in the third quarter of 2003, we identified certain transactions that were incorrectly included and reported as discontinued operations. Accordingly, such transactions were reclassified and included within the results of our continuing operations.

We also identified various restatement adjustments related to the timing or adequacy of certain estimates or accruals recorded. These adjustments related primarily to provisions for bad debt, accrued professional services, accrued compensation and related expenses, including vacation, employee health plans and bonus, restructuring reserves and accounts payable. In addition, we reclassified the amortization of developed technology from operating expenses to cost of software revenue.

Similar adjustments were made to interest and other expenses (income), primarily as a result of other restatement adjustments discussed above.

Tax Adjustments

We identified a number of errors related to current and deferred federal, state and foreign taxes, and corresponding current and deferred tax expense. These errors included (i) not establishing deferred tax assets and, to the extent necessary, corresponding valuation allowances for unrealizable deferred tax assets, (ii) not accurately applying, the asset and liability approach for deferred taxes required under GAAP, (iii) not considering all relevant information at the date of issuance of the financial statements and (iv) accounting for income taxes in certain foreign jurisdictions on a cash basis. In addition, our provision was impacted by changes in the variance between our effective foreign tax rates and our statutory federal tax rate. We also adjusted our estimated reserves for tax contingencies related to the FTC settlement and research and development credits after consideration of subsequent facts, and established new tax reserves related to transfer pricing exposures in certain of our foreign jurisdictions.

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The following table presents the impact of the restatement adjustments described above on the provision (benefit) for income taxes for the year ended December 31, 2002 (in thousands):

Benefit for Income Taxes, as Previously Reported	$	(5,247	)
U.S.
Increase in Pre-Tax Loss	(2,431		)
State Income Taxes	333
Research and Development Tax Credits	741
Amortization of Intangibles	(637		)
Valuation Allowance	9,455
Other	(191		)
Foreign
Increase in Pre-Tax Loss	(4,617		)
Tax Rate Variance	4,355
Benefit for Income Taxes, as Restated	$	1,761

The accompanying 2002 consolidated financial statements reflect the restatement adjustments described above. To conform to the 2003 presentation, our Systems business is presented as discontinued operations (refer to Note 16—Discontinued Operations). The net effect of these adjustments increased the loss from continuing operations by $27,144,000 or $0.93 per share for the year ended December 31, 2002.

Refer to Note 17—Selected Quarterly Financial Data (Unaudited) for presentation of quarterly interim periods in 2002 and 2003 impacted by the restatement.

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CONSOLIDATED STATEMENT OF OPERATIONS

	For the Year Ended December 31, 2002
	As Previously Reported				Restatement Adjustments				As Restated
	(in thousands, except per share amounts)
Revenue:
Software		$	160,361			$	(31,757	)		$	128,604
Maintenance and Services		87,790				17,208				104,998
Total Revenue		248,151				(14,549		)		233,602
Cost of Revenue:
Software		22,468				(4,777		)		17,691
Maintenance and Services		54,299				—				54,299
Total Cost of Revenue		76,767				(4,777		)		71,990
Gross Profit		171,384				(9,772		)		161,612
Operating Expenses:
Research And Development		27,777				15,102				42,879
Selling, General And Administrative		131,871				6,696				138,567
Amortization Of Intangibles		6,574				(4,966		)		1,608
Restructuring And Other Charges		13,815				(6,539		)		7,276
Total Operating Expense		180,037				10,293				190,330
Operating Loss		(8,653		)		(20,065		)		(28,718		)
Other Expense (Income) :
Interest Expense		7,443				(269		)		7,174
Other Expense, Net		165				340				505
Total Other Expense, Net		7,608				71				7,679
Loss From Continuing Operations Before Benefit For Income Taxes		(16,261		)		(20,136		)		(36,397		)
Provision (Benefit) For Income Taxes		(5,247		)		7,008				1,761
Loss From Continuing Operations		(11,014		)		(27,144		)		(38,158		)
Income (Loss) From Discontinued Operations, Net of Income Taxes		(1,015		)		2,755				1,740
Loss Before Cumulative Effect of Change In Accounting Principle		(12,029		)		(24,389		)		(36,418		)
Cumulative Effect of Change In Accounting Principle		(39,300		)		500				(38,800		)
Net Loss		$	(51,329	)		$	(23,889	)		$	(75,218	)
Basic and Diluted Loss Per Share From Continuing Operations		$	(0.37	)		$	(0.93	)		$	(1.30	)
Basic and Diluted Earnings (Loss) Per Share From Discontinued Operations		$	(0.03	)		$	0.09			$	0.06
Basic and Diluted Loss Per Share From Change In Accounting Principle		$	(1.34	)		$	0.01			$	(1.33	)
Basic and Diluted Loss Per Share		$	(1.75	)		$	(0.82	)		$	(2.57	)
Basic Weighted-Average Shares Outstanding		29,379								29,248
Diluted Weighted-Average Shares Outstanding		29,379								29,248

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CONSOLIDATED BALANCE SHEET

	As of December 31, 2002
	As Previously Reported				Restatement Adjustments				As Restated
	(in thousands, except per share amounts)
Current Assets:
Cash and Cash Equivalents		$	29,387			$	—		$	29,387
Investments		5,177				—			5,177
Trade Accounts Receivable, net		60,896				2,473			63,369
Deferred Tax Assets		19,839				11,181			31,020
Current Assets of Discontinued Operations		38,341				(3,301		)	35,040
Other Current Assets		15,737				93			15,830
Total Current Assets		169,377				10,446			179,823
Property and Equipment, Net		34,888				1,818			36,706
Capitalized Software Costs, Net		25,957				(25,957		)	—
Goodwill and Indefinite Lived Intangibles, Net		197,652				(12,276		)	185,376
Other Intangible Assets, Net		48,730				922			49,652
Deferred Tax Assets		—				7,015			7,015
Other Assets		11,641				(23		)	11,618
Long-Term Assets of Discontinued Operations		19,029				(991		)	18,038
Total Assets		$	507,274			$	(19,046	)	$	488,228
Current Liabilities:
Accounts Payable		$	9,919			$	1,497		$	11,416
Current Portion of Note Payable		13,750				—			13,750
Current Portion of Notes Payable to Shareholders		4,590				(4,590		)	—
Compensation and Related Expenses		13,370				577			13,947
Restructuring Reserve		4,105				—			4,105
Current Liabilities of Discontinued Operations		24,868				(1,816		)	23,052
Other Current Liabilities		23,659				739			24,398
Deferred Revenue		67,327				46,454			113,781
Total Current Liabilities		161,588				42,861			204,449
Deferred Income Taxes		29,243				(2,812		)	26,431
Note Payable, Less Current Portion		40,104				—			40,104
Notes Payable to Shareholders, Less Current Portion		10,537				—			10,537
Subordinated Notes Payable		6,817				17			6,834
Other Long-Term Liabilities		7,161				4,411			11,572
Notes Payable to Shareholders—Discontinued Operations		9,344				—			9,344
Total Liabilities		264,794				44,477			309,271
Shareholders’ Equity:
Common Stock		298				(2		)	296
Additional Paid-In Capital		282,058				2,331			284,389
Accumulated Other Comprehensive (Income) Loss		(3,367		)		1,604			(1,763		)
Accumulated Deficit		(36,232		)		(67,456		)	(103,688		)
Treasury Shares		(277		)		—			(277		)
Total Shareholders’ Equity		242,480				(63,523		)	178,957
Total Liabilities and Shareholders’ Equity		$	507,274			$	(19,046	)	$	488,228

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NOTE 3—BUSINESS ACQUISITIONS

SOFY Corporation

In February 2004, the Company acquired certain assets and technology known as SOFY Corporation (“SOFY”) for cash of $1,800,000 and 88,000 shares of MSC common stock valued at $880,000 in addition to $191,000 of forgiveness of prepaid expenses and the assumption of certain liabilities. The Company believes this transaction will enhance the Virtual Product Development (VPD) product line and expand the penetration in the global automotive marketplace. The Company allocated the purchase price to developed technology, customer list and other identifiable intangibles. The Company also acquired $338,000 of in-process research and development costs, which were charged to operating expense at acquisition. The pro forma effect of this acquisition was not material to the consolidated financial statements presented herein.

Other Acquisitions of Businesses and Technology

In fiscal 2003, the Company acquired the remaining minority interest of three foreign subsidiaries for cash of $2,786,000. Pro forma financial information for these acquisitions has not been presented as their historical operations were not material to the Company’s consolidated financial statements either individually or in the aggregate.

Mechanical Dynamics, Inc.

On April 19, 2002, the Company, through a wholly owned subsidiary, completed the acquisition of the outstanding common stock of Mechanical Dynamics, Inc. (“MDI”) through a tender offer. MDI developed, marketed and supported functional virtual prototyping solutions. The Company believes that the acquisition of MDI will expand the Company’s core software offerings, complement the Company’s existing product and service offerings, and increase the Company’s presence in the product lifecycle management market to better serve customers. It is for these reasons that the purchase price exceeds the fair value of net tangible and intangible assets, resulting in goodwill.

To accomplish the acquisition of MDI, the Company entered into the Agreement and Plan of Merger dated March 15, 2002 (the “Merger Agreement”), with MDI, pursuant to which, following the consummation of a tender offer at $18.85 per share in cash and the satisfaction or waiver of certain conditions, all of the remaining outstanding shares of common stock of MDI were converted into the right to receive $18.85 per share in cash. The tender offer and merger resulted in the Company acquiring 6,214,870 shares of common stock of MDI, representing 100 percent of the outstanding shares of MDI, at an aggregate price of approximately $117,150,000. The Company also agreed to redeem all outstanding MDI stock options (922,340 options) for total consideration of $10,531,000 (the difference between $18.85 and the exercise price of the options).

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The acquisition of MDI has been accounted for as a purchase, and accordingly, the results of operations of MDI since April 19, 2002 are included in the Company’s consolidated statements of operations. A valuation of the intangible assets acquired has been performed and the allocation of the purchase price is as follows (in thousands):

Net Tangible Assets Acquired(1)	$	17,722
Fair Value of Intangible Assets Acquired, net of deferred taxes of $11,442	42,768
Fair Value of In-Process R&D	2,170
Goodwill	68,780
Total Cost of Acquisition	$	131,440
Cash Paid for outstanding MDI common shares	$	117,150
Cash Paid for outstanding MDI stock options	10,531
Direct Costs of Acquisition	3,759
	$131,440

(1)Includes accrual of $5,794,000 for restructuring costs. Refer to Note 7—Restructuring Reserve.

Intangible assets included $31,110,000 of developed technology to be amortized over ten years and $23,100,000 of other intangibles, consisting primarily of trademarks and trade names that were deemed to have indefinite lives, in accordance with SFAS No. 142.

The goodwill of $68,780,000 was assigned to the software and services segments in the amounts of $47,458,000 and $21,322,000, respectively. No portion of the total amount is expected to be deductible for tax purposes.

A portion of the purchase price totaling $2,170,000 was allocated to acquired in-process research and development. In-process research and development (“IPR&D”) projects were identified and valued through analysis of data provided by MDI concerning developmental products, their stage of development, the time and resources needed to complete them, if applicable, their expected income generating ability, target markets and associated risks. The primary technique utilized in valuing the acquired IPR&D was the income approach, which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows. We determined that the related IPR&D projects had not reached technological feasibility and had no future alternative uses, and were charged to research and development expense upon closing of the acquisition. The projects associated with the write-offs in 2002 were both completed by the end of fiscal 2003.

The following summarized unaudited pro forma consolidated results of operations reflect the effect of the MDI acquisition as if it had occurred on January 1, 2002. The unaudited pro forma consolidated results of operations for the year ended December 31, 2002 presented below are not necessarily indicative of operating results which would have been achieved had the acquisition been consummated as of January 1, 2002 and should not be construed as representative of future operations.

	2002
	(in thousands, except per  share data)
Revenue		$	248,013
Cost of Revenue and Operating Expenses		$	278,714
Loss from Continuing Operations		$	(41,169	)
Income From Discontinued Operations		$	1,740
Net Loss		$	(78,230	)
Basic and Diluted Loss Per Share From Continuing Operations		$	(1.41	)
Basic and Diluted Earnings Per Share From Discontinued Operations		$	0.06
Basic and Diluted Loss Per Share		$	(2.67	)

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EASY5

In May 2002, the Company acquired certain assets and technology known as EASY5 for cash of $4,418,000 and the assumption of certain liabilities. The Company believes this transaction will increase existing simulation capabilities. As a result of this transaction, the Company recognized goodwill of approximately $2,464,000, indefinite lived intangibles of $400,000 and other identifiable intangibles of $2,540,000, to be amortized over ten years. Goodwill from this transaction was assigned to the software segment and the amount is expected to be fully deductible for income tax purposes. The Company also acquired $210,000 of in-process research and development costs, which were expensed in 2002. The pro forma effect of this acquisition was not material to the consolidated financial statements presented herein.

NOTE 4—LONG-TERM DEBT

As of December 31, 2002, 2003 and 2004, long-term debt included the following (in thousands):

	2002			2003		2004
Term Loan		$	53,854	$	—	$	—
8% Subordinated Notes Payable due June 17, 2009, net of unamortized discount of $1,166, $985 and $805, respectively		6,834		7,015		7,195
2.5% Senior Subordinated Debentures due May 5, 2008		—		100,000		100,000
7% Promissory Notes Payable for Acquisition of AES, net of unamortized discount of $120		19,881		—		—
		80,569		107,015		107,195
Less: 7% Promissory Notes Payable Allocated to Discontinued Operations		9,344		—		—
Less: Current Portion		13,750		—		—
Long-Term Debt		$	57,475	$	107,015	$	107,195

Term Loan

In November 2002, the Company replaced its revolving credit and term loan agreement (“Loan Agreement”) with a new Loan and Security Agreement, as amended, (“New Loan Agreement”) with a new lender (“Lender”). The New Loan Agreement included a $15,000,000 revolving line of credit and a $55,000,000 term loan. Borrowings under the revolving line of credit were limited to a borrowing base of up to 85% of eligible domestic accounts receivable, as defined. The term loan was payable in 48 equal principal payments plus interest. All amounts outstanding under the previous Loan Agreement were repaid with proceeds from the New Loan Agreement. In connection with the New Loan Agreement, $1,451,000 of capitalized loan fees related to the Loan Agreement were written off in November 2002 and included as interest expense in the accompanying consolidated statements of operations.

The term loan under the New Loan Agreement was secured by substantially all of the Company’s assets and bore interest at the greater of 7% or the Lender’s prime rate plus 5%. Advances on the revolving line of credit bore interest at the greater of 7% or the Lender’s prime rate plus 2.25%. The New Loan Agreement required an origination fee of $2,100,000, which was to be amortized to expense over the 48 months of the term loan. In addition, an annual facility fee of 1.50% of the total outstanding commitment was to be paid and expensed quarterly.

Under the terms of the New Loan Agreement, the Company had the option, at any time upon 90 days’ prior notice, to terminate the New Loan Agreement by, among other things, repaying all amounts outstanding under the New Loan Agreement (or collateralizing any letters of credit to remain outstanding at 105% of the amount of such letters of credit) and paying the Lender a prepayment premium initially equal to 4% in the first year and decreasing by 1% in each year thereafter of the aggregate of the maximum available under the revolving line, the amount outstanding under the term loan and unscheduled

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payments on account of the term loan during the 30-day period ending on the date of the termination. All outstanding amounts were paid and the New Loan Agreement was cancelled in 2003—see below.

Subordinated Convertible Debentures

In May 2003, the Company sold $100,000,000 of 2.5% Senior Subordinated Convertible Notes (the “Convertible Notes”) in a private offering. The Convertible Notes were offered to investors at 100% of their principal amount.

The Convertible Notes mature on May 5, 2008 and bear interest at 2.5% with interest payments due semi-annually on May 5 and November 5, beginning on November 5, 2003. The Convertible Notes are convertible into the Company’s common stock at a conversion price of $8.515 per share. This represents a 30% conversion premium. Each $1,000 principal amount of the Convertible Notes is initially convertible into 117.4398 shares of the Company’s common stock. The holders of the Convertible Notes may convert their Convertible Notes at any time on or before the maturity date. The Company may redeem the Convertible Notes on or after May 5, 2006, assuming the price of the Company’s common stock has attained and remained at certain price levels. The Company incurred approximately $3,750,000 of debt issuance costs, which are being amortized over the five year term of the Convertible Notes.

The Company used the proceeds from the Convertible Notes to repay all amounts outstanding under the New Loan Agreement and $20,000,000 of the notes payable to shareholders issued in connection with the acquisition of AES in July 2001. The proceeds were also used to acquire $11,876,000 of U.S. Government securities that are pledged to a trustee for the payment of all scheduled interest payments on the Convertible Notes when due. These securities are classified as held-to-maturity and reported at amortized cost in the accompanying balance sheets. As of December 31, 2004, the balance of the pledged securities is $8,417,000. The portion of pledged securities that will be used to pay interest each May and November is included in other current assets and the remaining $5,917,000 is included in other assets in the accompanying consolidated balance sheet as of December 31, 2004.

In connection with the issuance of the Convertible Notes, the Company terminated the New Loan Agreement, paid $3,797,000 of prepayment penalties and wrote-off $2,287,000 of unamortized debt issuance costs related to the New Loan Agreement. These refinancing related costs totaling $6,084,000 are included in other expense in the accompanying consolidated statement of operations for the year ended December 31, 2003.

Subordinated Notes Payable

In June 1999, in connection with an acquisition, the Company issued subordinated notes payable in the aggregate principal amount of $14,236,000. The subordinated notes payable were recorded at their estimated fair value at the time of issuance, net of a discount of $2,596,000. The subordinated notes payable bear interest at 8% with interest payments due semi-annually in January and July. At December 31, 2004, the principal balance of the subordinated notes payable was $8,000,000 and their carrying amount was $7,195,000, net of an unamortized discount of $805,000. The unamortized discount is being amortized to interest expense using the effective-interest method over the term of the notes payable. The entire remaining principal balance is due in June 2009.

Notes Payable to Shareholders

In July 2001, in connection with the AES acquisition, the Company issued promissory notes in the aggregate principal amount of $20,000,000. The notes were recorded at their estimated fair value at time of issuance, net of a discount of $411,000. The promissory notes bore interest at 7% with interest payments due semi-annually in January and July. These subordinated notes were repaid in full from the proceeds of the sale of the Convertible Notes as described above.

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The maturities of the Company’s debt, excluding $859,000 of unamortized discounts, are approximately as follows (in thousands):

Year Ending December 31,	Maturities
2005	$	—
2006	—
2007	—
2008	100,000
2009	8,000
2010 and Thereafter	—
	$	108,000

NOTE 5—PROPERTY AND EQUIPMENT

As of December 31, 2002, 2003 and 2004 property and equipment, at cost consisted of the following (in thousands):

	Depreciable Lives	2002				2003			2004
Software, Computers and Other Equipment	2-5 years		$	49,962		$	56,831		$	52,086
Leasehold Improvements	Over lease term		12,497			13,058			13,093
Furniture and Fixtures	5 years		9,493			10,649			10,276
			71,952			80,538			75,455
Less Accumulated Depreciation and Amortization			(35,246		)	(48,045		)	(50,521		)
Property and Equipment, Net			$	36,706		$	32,493		$	24,934

Included in software, computers and other equipment are capital lease costs totaling $565,000, $565,000 and $544,000 as of December 31, 2002, 2003 and 2004, respectively.

Depreciation and amortization expense on property and equipment for the years ended December 31, 2002, 2003, and 2004 was $12,418,000, $15,318,000 and $11,480,000, respectively. In connection with our 2002 restructuring, the Company wrote down property and equipment, net of depreciation and amortization, by $1,943,000. Refer to Note 7—Restructuring Reserve. In connection with discontinuing our Systems business in 2003, the Company wrote down property and equipment, net of depreciation, by $525,000. Refer to Note 16—Discontinued Operations.

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NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for each of our reporting units are as follows (in thousands):

	Software Segment			Services Segment			Total			Discontinued Operations
Balance at January 1, 2002	$	69,732		$	18,537		$	88,269			$	50,833
Goodwill from the acquisition of MDI	47,458			21,322			68,780				—
Goodwill from the acquisition of Easy 5	1,700			764			2,464				—
Impairment charge related to AES	—			—			—				(38,800		)
Purchase accounting adjustments	(644		)	(261		)	(905		)		—
Balance at December 31, 2002	118,246			40,362			158,608				12,033
Goodwill from the acquisition of minority interests	1,570			705			2,275				—
Impairment charge related to AES	—			—			—				(12,033		)
AES Escrow Shares	(710		)	(290		)	(1,000		)		—
Purchase accounting adjustments	(526		)	(322		)	(848		)		—
Balance at December 31, 2003	118,580			40,455			159,035				—
Purchase accounting adjustments	(242		)	(108		)	(350		)		—
Balance at December 31, 2004	$	118,338		$	40,347		$	158,685			$	—

As a result of our decision to discontinue our Systems business in 2003, the goodwill related to the Systems Segment was reclassified to Long Term Assets of Discontinued Operations. In 2002, the impairment charge of $38,800,000 resulted from the adoption of SFAS No. 141 and SFAS No. 142. Under these rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to impairment tests annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. In 2003, we wrote off the remaining goodwill of $12,033,000. Refer to Note 16—Discontinued Operations.

Other intangible assets continue to be amortized over their useful lives.

As of December 31, 2002, 2003 and 2004, indefinite lived intangibles totaled $26,768,000, primarily consisting of trademarks and trade names.

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As of December 31, 2002, 2003 and 2004, other intangible assets consisted of the following (in thousands):

	Estimated Useful Life	2002				2003			2004
Developed Technology	10 years		$	57,297		$	57,418		$	50,655
Customer List	5-15 years		8,403			6,322			7,612
Value-Added Reseller Distribution Channel	4 years		5,200			5,200			—
Other			235			—			211
			71,135			68,940			58,478
Less Accumulated Amortization			(21,483		)	(28,217		)	(20,776		)
Other Intangible Assets, Net			$	49,652		$	40,723		$	37,702

Estimated amortization expense for each of the five succeeding fiscal years is as follows (in thousands):

Years Ended December 31,	Estimated Amortization Expense
2005		$	6,029
2006		6,029
2007		5,965
2008		5,959
2009		4,706
Thereafter		$	10,000

NOTE 7—RESTRUCTURING RESERVE

The Company had three separate and distinct restructuring plans, including the restructuring plan initiated in 2001 (the “2001 Plan”), the restructuring plan initiated in the second quarter of 2002 (the “2002 Plan”) and the restructuring plan initiated in the second quarter of 2003 (the “2003 Plan”). A portion of the 2001 Plan and 2002 Plan has been reclassified to current liabilities of discontinued operations. Refer to Note 16—Discontinued Operations.

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The following is the activity in the restructuring reserve for the periods indicated by plan year (in thousands):

	1999 Plan				2001 Plan				2002 Plan												2003 Plan				Total
									Workforce								Asset				Workforce				Restructuring
	Facilities				Facilities				Reductions				Facilities				Impairments				Reductions				Reserve
Balance at January 1, 2002		$	835			$	183			$	—			$	—			$	—			$	—			$	1,018
Restructuring Charges		(86		)		420				5,421				489				994				—				7,238
Acquisition Related Additions		—				—				4,093				752				949				—				5,794
Cash Payments		(475		)		(410		)		(6,439		)		(678		)		—				—				(8,002		)
Non-Cash Write-Offs		—				—				—				—				(1,943		)		—				(1,943		)
Balance at December 31, 2002		274				193				3,075				563				—				—				4,105
Restructuring Charges		—				—				—				—				—				2,117				2,117
Cash Payments		(274		)		(193		)		(2,235		)		(417		)		—				(1,874		)		(4,993		)
Balance at December 31, 2003		—				—				840				146				—				243				1,229
Cash Payments		—				—				(738		)		(146		)		—				(243		)		(1,127		)
Balance at December 31, 2004		$	—			$	—			$	102			$	—			$	—			$	—			$	102

2003 Plan

In 2003, management determined that further cost reductions were necessary to improve profitability. In addition, the Company discontinued its Systems business in 2003, which resulted in the ability to reduce headcount in other areas. Accordingly, during the second quarter of 2003, the Company recorded restructuring charges of $2,117,000 under the 2003 Plan related to a workforce reduction. Prior to December 31, 2003, the Company terminated 55 employees and the termination benefits were communicated to affected employees in detail sufficient to enable them to determine the nature and amounts of their individual severance benefits under the 2003 Plan. No further terminations occurred under the 2003 Plan.

2002 Plan

In 2002, management determined that current and future revenue could not support the Company’s existing cost structure due to the weakened economic conditions in all three world areas in which the Company operates. A review of the Company’s structure indicated several areas in which the Company could reduce costs. It was determined that workforce reductions and facility consolidations would be necessary to return the Company to profitability. In addition, the acquisition of MDI created certain redundant expenses that needed to be eliminated. The Company accrued $5,794,000 of restructuring costs related to the integration of MDI, including severance and related charges associated with a worldwide reduction in force of MDI employees, costs related to closing redundant facilities and terminating contracts and other exit costs associated with the acquisition. In accordance with EITF No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” (“EITF 95-3”), the costs related to the integration of MDI were included as assumed liabilities in the net tangible assets acquired. In addition, the Company recorded a restructuring charge of $6,904,000 in 2002 related to the Company’s

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existing business operations. These additional restructuring charges related to workforce reductions, impairment of assets caused by the MDI acquisition, the consolidation of existing office facilities and other costs. Under the 2002 Plan, the Company terminated 310 employees.

Prior to December 31, 2002, management with the appropriate level of authority, approved and committed the Company to a plan of termination which included the benefits terminated employees would receive. Expected termination benefits under the 2002 Plan were communicated to employees in detail sufficient to enable them to determine the nature and amounts of their individual severance benefits.

The Company estimated the cost of exiting and terminating the facility leases based on the contractual terms of the agreements and then current real estate market conditions. The Company determined that it would take approximately six to twenty-four months to sublease the various properties that will be vacated in connection with the consolidation program. Amounts related to the lease expense (net of anticipated sublease proceeds) related to the consolidation of facilities will be paid over the respective lease terms. The Company has subleased or terminated the leases on certain facilities in the 2002 Plan.

2001 Plan

The acquisition of AES in 2001 created certain redundant expenses that needed to be eliminated. In the third quarter of 2001, the Company recorded a restructuring charge of $1,894,000. In addition, the Company recorded $563,000 of additional acquisition costs related to the integration of AES. In accordance with EITF 95-3, the costs relating to the consolidation of AES office facilities were included in the purchase price allocation, resulting in additional goodwill.

Prior to December 31, 2001, management with the appropriate level of authority, approved and committed the Company to a plan of termination which included the benefits terminated employees would receive. Expected termination benefits under the 2001 Plan were communicated to employees in detail sufficient to enable them to determine the nature and amounts of their individual severance benefits.

The Company estimated the cost of exiting and terminating the facility leases based on the contractual terms of the agreements and then current real estate market conditions. The Company determined that it would take approximately six to twenty-four months to sublease the various properties that will be vacated in connection with the consolidation program. Amounts related to the lease expense (net of anticipated sublease proceeds) related to the consolidation of facilities will be paid over the respective lease terms. All facilities included in the 2001 Plan have been subleased or the lease has been terminated.

The following is the activity in the restructuring reserve for the periods indicated by geographic segment (in thousands):

	The Americas				Europe			Asia Pacific				Total
Balance at January 1, 2002		$	887		$	48			$	83		$	1,018
Restructuring Charges		4,647			1,754				837			7,238
Acquisition Related Additions		3,946			1,642				206			5,794
Cash Payments		(5,521		)	(1,318		)		(1,163		)	(8,002		)
Non-Cash Write-Offs		(1,899		)	(44		)		—			(1,943		)
Balance at December 31, 2002		2,060			2,082				(37		)	4,105
Restructuring Charges		1,448			541				128			2,117
Cash Payments		(2,670		)	(2,191		)		(132		)	(4,993		)
Balance at December 31, 2003		838			432				(41		)	1,229
Cash Payments		(567		)	(560		)		—			(1,127		)
Balance at December 31, 2004		$	271		$	(128	)		$	(41	)	$	102

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NOTE 8—INCOME TAXES

The provision (benefit) for taxes based on income (loss) from continuing operations consists of the following (in thousands):

	Years Ended December 31,
	2002			2003			2004
Current:
Federal	$	(404	)	$	—		$	59
State	—			—			(60		)
Foreign	10,171			9,288			10,447
Current Provision (Benefit)	9,767			9,288			10,446
Deferred:
Federal	—			—			—
State	—			—			—
Foreign	(8,006		)	(3,316		)	(3,736		)
Deferred Provision (Benefit)	(8,006		)	(3,316		)	(3,736		)
Provision (Benefit) for Income Taxes	$	1,761		$	5,972		$	6,710

The foreign tax provision for 2002, 2003 and 2004 includes withholding taxes of approximately $2,941,000, $4,055,000, and $2,907,000, respectively, assessed to the Company by foreign authorities on amounts remitted to the United States.

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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2002, 2003 and 2004 are as follows (in thousands):

	2002				2003			2004
Deferred Tax Assets:
Deferred Revenue		$21,981			$17,911			$11,248
State Taxes		785			691			656
Foreign Deferred Tax Assets		21,911			26,941			30,454
Business Credits		5,166			6,098			7,094
Foreign Tax Credits		7,471			10,216			14,405
Capitalized Research and Development		256			6,467			5,784
Depreciation		—			—			807
Net Operating Losses		4,453			5,531			5,257
Restructuring Reserve		1,696			996			367
Allowance for Doubtful Accounts		439			107			120
Foreign Currency Translation		2,107			3,802			4,365
Other		2,392			2,677			2,970
Total Deferred Tax Assets		68,657			81,437			83,527
Valuation Allowance		(22,466		)	(35,677		)	(32,988		)
Total Deferred Tax Assets, Net		46,191			45,760			50,539
Deferred Tax Liabilities:
Intangible Assets		28,761			24,427			22,542
Unrealized Gain on Investment		2,059			2,588			3,476
Depreciation		369			379			—
Undistributed Earnings of Foreign Subsidiaries		1,972			306			2,948
Foreign Deferred Tax Liabilities		1,426			3,140			2,917
Total Deferred Tax Liabilities		34,587			30,840			31,883
Net Deferred Tax Assets		$	11,604		$	14,920		$	18,656

The balance sheet presentation of the net deferred tax assets (liabilities) is as follows (in thousands):

	December 31,
	2002			2003			2004
Current Deferred Tax Assets, Net	$	31,752		$	25,160		$	21,273
Long-Term Deferred Income Taxes, Net	(20,148		)	(10,240		)	(2,617		)
Net Deferred Tax Assets	$	11,604		$	14,920		$	18,656

In assessing the realizability of deferred tax assets, management considers whether it is “more likely than not” that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. Based on the Company’s history of cumulative losses and anticipated uncertainty regarding future taxable income, management believes it is not “more likely than not” that the Company will realize the benefit of the domestic net deferred tax assets existing as of the years ended December 31, 2002, 2003 and 2004. Management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income; however, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future

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years. The Company currently has no tax planning or other strategies they could implement to supplement earnings from operations to realize a portion of the existing deferred tax assets.

The Company has a valuation allowance of $32,988,000 against its deferred tax assets as of December 31, 2004. If and when the valuation allowance is released, approximately $1,284,000 will be accounted for as an increase to stockholder’s equity and approximately $3,239,000 will be credited directed to goodwill. During the years ended December 31, 2003 and 2004, the Company recognized a credit to additional paid-in capital and reduction to income taxes payable of $140,000 and $55,000, respectively, related to the tax benefit from exercises of stock options under the Company’s stock option plans.

At December 31, 2004, the Company has federal, state and foreign net operating losses of approximately $11,902,000, $20,581,000 and $9,536,000, respectively. The federal and state net operating loss carryforwards begin to expire in 2021 and 2011, respectively. Approximately $508,000 of the foreign net operating losses expire in 2008 and 2009; the remaining $9,028,000 of foreign net operating losses have an unlimited carryforward.

At December 31, 2004, the Company had federal, state and non-U.S. income tax credit carryforwards of approximately $3,616,000, $3,478,000 and $233,000, respectively. Federal income tax credits will expire at various dates from 2018 through 2024, state income tax credits have no expiration date, and foreign income tax credits expire at various dates from 2008 through 2010.

At December 31, 2004, the Company had U.S. foreign tax credit carryforwards of approximately $14,405,000. These foreign income tax credits expire at various dates from 2007 through 2009.

The following table reconciles the provision (benefit) for income taxes from continuing operations based on income from continuing operations before income taxes to the statutory federal income tax rate of 35% for the years ended December 31, 2002, 2003 and 2004 (in thousands).

	2002				2003			2004
Income Tax Provision (Benefit) from Income (Loss)
From Continuing Operations		$	(12,739	)	$	1,105		$	6,154
Increase (Decrease) Related To:
State Income Taxes, Net of Federal Benefits		—			—			(39		)
Federal and State Research and Development Tax Credits		(295		)	(439		)	(346		)
Extraterritorial Income Exclusion		—			(276		)	(68		)
Acquired In-Process Technology		760			—			—
Foreign Tax Rate Variance		4,355			(526		)	2,857
Change in Valuation Allowance		9,455			6,022			(1,966		)
Other, Net		225			86			118
Income Tax Provision from Income (Loss) From Continuing Operations		$	1,761		$	5,972		$	6,710

For the years ended December 31, 2002, 2003 and 2004, the Company’s foreign and domestic operations realized combined income (loss) from continuing operations before taxes, including intercompany charges which eliminate in consolidation, as follows (in thousands):

	2002				2003			2004
Foreign		$	(15,094	)	$	5,963		$	6,590
Domestic		(21,303		)	(2,804		)	10,999
		$	(36,397	)	$	3,159		$	17,589

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NOTE 9—SEGMENT INFORMATION

The Company applies SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” to determine its operating segments. Operating segments, as defined by SFAS No. 131, are components of an enterprise for which separate financial information is available and is evaluated regularly by key decision makers in deciding how to allocate resources and in assessing performance. SFAS No. 131 also requires disclosure about products and services, geographic areas and major customers. The Company currently operates in two operating segments—software and services, for purposes of SFAS No. 131.

Our senior management reviews financial information to manage the business consistent with the presentation in the consolidated financial statements, focusing on the revenue and gross profit for each segment. The Company does not allocate research and development, selling, or general and administrative expenses to each segment, as management does not use this information to measure the performance of the operating segments. Our senior management does not review assets by operating segment. Consequently, such information is not provided herein. Maintenance and services revenue is derived from software upgrades, technical support, consulting and training. The revenue and gross margins attributable to these segments are included in the following table (in thousands):

	Years Ended December 31,
	2002			2003		2004
Revenue:
Software		$	128,604	$	125,626	$	127,536
Maintenance and Services		104,998		127,047		149,760
		$	233,602	$	252,673	$	277,296
Gross Profit:
Software		$	110,913	$	112,085	$	110,882
Maintenance and Services		50,699		72,326		92,464
		$	161,612	$184,411		$	203,346

International operations consists primarily of foreign sales offices selling software developed in the United States combined with local service revenue. Revenue is attributed to the country in which the customer is located. No customer accounted for 10% or more of total consolidated revenue. The following tables summarize consolidated revenue of the Company’s operations by geographic location (in thousands):

	Years Ended December 31,
	2002			2003		2004
Revenue:
The Americas(1)		$	92,469	$	87,444	$	89,370
Europe(2)		73,272		81,822		95,961
Asia Pacific(3)		67,861		83,407		91,965
Total Revenue		$	233,602	$	252,673	$	277,296
Identifiable Assets:
The Americas(1)		$	383,600	$341,303		$342,107
Europe(2)		47,192		47,367		56,108
Asia Pacific(3)		57,436		66,695		66,674
Total Identifiable Assets		$	488,228	$455,365		$464,889

(1)Substantially the United States

(2)    Substantially Germany

(3)    Substantially Japan

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The net assets of the Company’s foreign subsidiaries totaled $24,230,000, $18,684,000 and $17,569,000 as of December 31, 2002, 2003 and 2004, respectively, excluding intercompany items. Included in these amounts were long-lived assets totaling $8,376,000, $8,790,000 and $8,037,000 as of December 31, 2002, 2003 and 2004, respectively. The income (loss) before taxes of the Company’s foreign subsidiaries is reported in Note 8—Income Taxes.

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NOTE 10—PENSIONS AND OTHER EMPLOYEE BENEFITS

Defined Benefit Pension Plans

The Company has defined benefit plans (the “Plans”) covering substantially all of its full-time employees in Japan, Korea, Taiwan and Germany. The Plans typically provide for a lump sum payment upon retirement, which is generally based upon years of service and compensation. The Plans do not provide continuing salary or benefits upon retirement. As of December 31, 2002, 2003 and 2004, there were 176, 244, and 243 active participants, respectively. During the years ended December 31, 2002, 2003 and 2004, the Company recognized expense of $975,000, $797,000 and $820,000, respectively.

The Company uses a December 31 measurement date for all of its pension plans. The fair value of plan assets is determined by market value. The Company expects to contribute approximately $463,000 to its pension plans in 2005, but such amount is subject to change.

Information on benefit obligations, funded status and plan assets is as follows (in thousands):

	Year Ended December 31,
	2002				2003			2004
Change in Benefit Obligations
Benefit Obligation at Beginning of Year		$	4,506		$	5,801		$	7,442
Service Cost		719			1,055			1,168
Interest Cost		221			251			291
Actuarial (Gain) Loss		222			(316		)	537
Benefits and Expenses Paid		(509		)	(115		)	(684		)
Special Termination Benefit		—			—			172
Impact of Foreign Currency Changes		642			766			666
Benefit Obligation at End of Year		$	5,801		$	7,442		$	9,592
Change in Plan Assets
Fair Value of Plan Assets at Beginning of Year		$	284		$	263		$	588
Actual (Loss) Return on Plan Assets		(22		)	(5		)	(3		)
Employer Contributions		480			393			409
Benefits and Expenses Paid		(507		)	(113		)	(127		)
Impact of Foreign Currency Changes		27			50			37
Fair Value of Plan Assets at End of Year		$	262		$	588		$	904
Funded Status		$	(5,539	)	$	(6,854	)	$	(8,688	)
Unrecognized Net Actuarial Loss/Gain		228			67			1,046
Unrecognized Net Transition Obligation		272			255			249
Net Amount Recognized		$	(5,039	)	$	(6,532	)	$	(7,393	)

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	Year Ended December 31,
	2002				2003			2004
Amounts Recognized in Consolidated Balance Sheets
Prepaid Benefit Cost		$	—		$	—		$	—
Accrued Benefit Cost		(5,219		)	(6,677		)	(7,589		)
Intangible Assets		180			145			196
Net Amount Recognized		$	(5,039	)	$	(6,532	)	$	(7,393	)
Accumulated Benefit Obligation		$	3,814		$	4,982		$	6,156
Pensions with ABO in Excess of Plan Assets
Projected Benefit Obligation		$	5,801		$	7,442		$	9,592
Accumulated Benefit Obligation		$	3,814		$	4,982		$	6,156
Fair Value of Plan Assets		$	262		$	588		$	904
Components of Net Periodic Benefit Cost
Service Cost		$	719		$	1,055		$	1,168
Interest Cost		221			251			291
Expected Return on Plan Assets		(6		)	(6		)	(6		)
Amortization of Transition Asset		20			17			21
Amortization of Net (Gain) Loss		—			2			(4		)
Recognized Actuarial (Gain) Loss		—			(2		)	1
Net Periodic Benefit Cost		954			1,317			1,471
Special Termination Benefits Acquisition		—			(124		)	172
Total Net Periodic Benefit Cost		$	954		$	1,193		$	1,643
Weighted-Average Assumptions
Benefit Obligation Determination
Discount Rate		4.52		%	4.32		%	4.18		%
Rate of Compensation Increase		4.21		%	3.81		%	3.75		%
Net Periodic Benefit Cost
Discount Rate		4.32		%	3.77		%	3.64		%
Expected Long-Term Return on Plan Assets		1.50		%	0.75		%	0.75		%
Rate of Compensation Increase		4.65		%	3.95		%	3.99		%

The Company has plan assets in one of its pension plans only. These plan assets are invested solely in a general account with an insurance company, which is an investment vehicle that complies with pension fund requirements of the corresponding country. The insurance company manages the funds invested and guarantees a minimum return of 0.75% per annum. The minimum rate of return may be revised and dividends may also be declared on funds invested in this general account based on current economic conditions and investment performance. Investment in this general account bears minimal risk as the rate of return is fixed and the insurance company bears risk of loss on the investment of funds that it manages. The Company does not currently have specific investment policies or an investment committee in place to oversee the investment of its pension fund.

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There are no contributions paid into an external plan and no asset of the Company identified, segregated or invested specifically to fund the remaining pension plans. The estimated future benefit payments of these plans are expected to be paid directly by the Company. The following benefit payments, which reflect expected future service, as appropriate, are projected to be paid as follows (in thousands):

Years ending December 31,
2005	$	112
2006	117
2007	135
2008	198
2009	218
2010 through 2014	3,127
	$	3,907

Employee Savings Plan

The Company contributes an amount, integrated with Social Security, to a defined contribution plan, covering substantially all North American full-time employees who have completed a specified term of service with the Company. For the years ended December 31, 2002, 2003, and 2004, contributions charged to expense in connection with this plan were $2,612,000, $2,925,000 and $2,747,000, respectively. The plan has a 401(k) feature to permit voluntary employee contributions, which does not affect the Company’s expenses. The company’s contribution vests over a three year period.

Non-Qualified Supplemental Retirement Plan

In 1995, the Company adopted a non-qualified supplemental retirement plan. The Company contributes an amount, integrated with Social Security and the Company’s defined contribution plan, covering certain key employees who have completed a specified term of service with the Company. For the years ended December 31, 2002, 2003, and 2004, contributions charged to expense in connection with this plan were $208,000, $130,000, and $115,000, respectively. As of December 31, 2002, 2003 and 2004, the fair value of plan assets and obligations was $986,000, $1,491,000 and $1,947,000, respectively, and are classified in other assets and other long-term liabilities in the accompanying consolidated balance sheets.

NOTE 11—STOCK OPTION PLANS, WARRANTS AND STOCK BASED COMPENSATION

Stock Option Plans

The Company has four stock-based compensation plans:  the 2001 Stock Option Plan (“the 2001 Plan”), the 1998 Stock Option Plan (“the 1998 Plan”), the 1991 Stock Option Plan (“the 1991 Plan”), and the AES Options.

The MSC.Software Corporation’s 2001, 1998 and 1991 Plans , as amended, consists of two parts: a “Key Employee Program” that allowed for discretionary awards of non-transferable incentive stock options and non-qualified stock options to officers and other key employees, and a “Non-Employee Director Program” that provides for automatic annual grants of non-transferable, non-qualified stock options to non-employee directors.

The “Key Employee Program” section of the 2001, 1998, and 1991 Plans provided for the granting of both incentive stock options and non-qualified options for the purchase of up to 2,750,000, 3,440,000, and 2,500,000, respectively, authorized but unissued shares of the Company’s common stock at the fair market value of such shares on the date the option is granted, or for non-qualified options at such price as the Compensation Committee may determine.

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The “Non-Employee Director Program” section of the 2001, 1998, and 1991 Plans provided for automatic grants to members of the Company’s Board of Directors who are not officers or employees of the Company or its subsidiaries. Under the 1998 and 1991 Plans, a maximum of 60,000, and 500,000 shares, respectively, of authorized but unissued shares of the Company’s common stock may be issued upon the exercise of options under the “Non-Employee Director Program”.  All eligible directors received annual non-discretionary grants of non-qualified stock options for the purchase of 5,000 shares of the Company’s common stock. Options to be granted to non-employee directors under the 2001 Plan did not begin until after the termination of the “Non-Employee Director Program” 1998 Plan on May 15, 2002. Under the 1998 and 1991 Plans, all eligible directors received annual non-discretionary grants of non-qualified stock options for the purchase of 3,000 shares of the Company’s common stock. Options to be granted to non-employee directors under the 1998 Plan did not begin until 2000 and ceased on May 15, 2002. Directors received only 3,000 shares of the Company’s common stock per year from either the 1991 or 1998 Plans.

Options under the Plans are exercisable up to ten years from the date of grant, subject to transfer restrictions and vesting provisions outlined at the grant date. Generally, options vest annually over four years. The Plans provide that vesting may be accelerated in certain events related to changes in control of the Company, unless prior to such change in control the Compensation Committee determines otherwise. Similarly, the Plans provide that the Compensation Committee has discretion, subject to certain limits, to modify the terms of outstanding options. No amendment or cancellation and re-grant, subject to permitted adjustments, shall reduce the per share exercise price to a price less than 100% of the fair market value of the Company’s common stock on the option date of the initial option.

AES Options

As part of the acquisition of AES, the Company assumed outstanding options to acquire AES common stock, which were converted into fully vested options to acquire 718,898 shares of the Company’s common stock (the “AES Options”). All such options have an exercise price of $0.10 and were immediately exercisable.

A summary of stock option activity for the Plans is as follows:

	Options		Option Price Per Share					Weighted-Average Exercise Price
Outstanding at December 31, 2001	6,222,624		$	0.10	to	$	27.50		$	11.26
Granted	1,034,567		$	4.68	to	$	22.60		$	13.43
Exercised	(578,633	)	$	0.10	to	$	15.38		$	5.74
Canceled	(379,621	)	$	4.68	to	$	22.60		$	13.29
Outstanding at December 31, 2002	6,298,937		$	0.10	to	$	27.50		$	12.00
Granted	1,219,100		$	6.37	to	$	10.30		$	7.48
Exercised	(512,316	)	$	0.10	to	$	10.01		$	2.21
Canceled	(991,105	)	$	4.68	to	$	19.35		$	13.10
Outstanding at December 31, 2003	6,014,616		$	0.10	to	$	27.50		$	11.74
Granted	747,000		$	6.80	to	$	10.74		$	8.83
Exercised	(15,847	)	$	0.10	to	$	5.25		$	2.38
Canceled	(375,170	)	$	0.10	to	$	17.60		$	11.99
Outstanding at December 31, 2004	6,370,599		$	0.10	to	$	27.50		$	11.40

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As of December 31, 2004, the number of options outstanding and exercisable under the Plans, by range of exercise prices, was as follows:

	Options Outstanding				Weighted-		Options Exercisable
		Weighted-			Average			Weighted-
	Number	Average			Remaining		Number	Average
	of	Exercise			Contractual		of	Exercise
Range of Exercise Prices	Options	Price			Life		Options	Price
At $0.10	84,257		$	0.10		6.5	84,257		$	0.10
$  4.68 to $  6.99	1,213,271		$	5.86		5.5	1,066,521		$	5.74
$  7.10 to $10.60	2,547,471		$	8.68		6.9	1,577,553		$	8.73
$10.74 to $15.98	1,618,300		$	14.20		6.2	1,394,678		$	14.26
$16.18 to $22.60	619,800		$	20.62		6.3	506,675		$	20.45
$25.00 to $27.50	287,500		$	26.63		6.1	287,500		$	26.63
Total	6,370,599		$	11.40		6.4	4,917,184		$	11.76

At December 31, 2002, 2003 and 2004, the number of options exercisable under all of the Plans, the per-share weighted-average exercise prices of the stock options exercisable under all of the Plans and the number of options available for future grant under all of the Plans were as follows:

					Options
	Options Exercisable				Available
	Number of Options	Weighted-Average Exercise Price			for Future Grants
December 31, 2002	3,989,345		$	10.67	1,218,340
December 31, 2003	4,118,227		$	11.82	815,195
December 31, 2004	4,917,184		$	11.76	231,917

Employee Stock Purchase Plan

In September 1996, the Company’s Board of Directors adopted the MSC.Software Corporation 1996 Employee Stock Purchase Plan (“the Employee Stock Purchase Plan”). The Employee Stock Purchase Plan was approved by the Company’s shareholders at the 1997 Annual Meeting of Shareholders. Under the Employee Stock Purchase Plan, a maximum of 1,250,000 shares of the Company’s common stock has been made available for purchase by eligible employees electing to participate in the Employee Stock Purchase Plan. The Employee Stock Purchase Plan is intended to provide participating eligible employees an additional incentive to advance the best interests of the Company through ownership of common stock. This qualified Employee Stock Purchase Plan under Sections 421 and 423 of the Internal Revenue Code is offered to all eligible employees and is non-compensatory under APB Opinion No. 25. As of December 31, 2004, a total of 213 eligible employees elected to participate in the Employee Stock Purchase Plan with total payroll deductions during 2004 totaling $620,000. Purchases were as follows for the periods indicated:

	Shares	Price Per Share			Total Purchases
January 31, 2002	38,408		$	18.14	$	697,000
July 31, 2002	80,352		$	9.46	$	760,000
January 31, 2003	112,661		$	7.23	$	815,000
July 31, 2003	95,716		$	6.68	$	639,000
January 31, 2004	94,258		$	6.66	$	628,000
July 31, 2004	96,995		$	6.63	$	643,000

Since July 31, 2004, there have been no additional purchases of the Company’s stock under the Employee Stock Purchase Plan.

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As of December 31, 2004, there are 201,699 remaining shares eligible for purchase under the Employee Stock Purchase Plan. On January 31, 2005, there were no shares purchased.

Stock-Based Compensation

During the years ended December 31, 2002, 2003 and 2004, the Company issued a total of 61,500, 15,100 and 31,900 shares of its common stock, respectively, to certain of its officers pursuant to the MSC.Software Corporation 2000 Executive Cash or Stock Bonus Plan. The Company has recognized stock based compensation charges of $1,333,000, $130,000 and $275,000 for the years ended December 31, 2002, 2003 and 2004, respectively.

During 2004, in connection with the employment of an executive officer, the Company granted the right to purchase up to 100,000 shares of restricted common stock at $7.00 per share, which was less than the then fair market value of $8.71 per share. Pursuant to the restricted stock offer, the executive purchased 25,000 shares of restricted common stock for a total of $175,000. The Company recognized a stock based compensation charge of $18,000 related to this transaction in 2004. The purchase was subsequently rescinded on March 8, 2005 and replaced with the restricted stock transaction discussed below.

On March 8, 2005, the Company granted the executive officer 25,000 restricted shares with an exercise price of $7.00 per share, which was less than the then fair market value of $11.40 per share. On March 31, 2005 the executive officer exercised his right to purchase the 25,000 restricted shares of common stock. Compensation expense recognized in 2005 related to this transaction totaled $75,000.

During 2004, the Company modified the stock options of one departing executive to extend the life of the options. During 2002, the Company modified the stock options of two departing employees to extend the life of the options. The modification of the stock options was valued using the intrinsic value method pursuant to APB Opinion No. 25. The Company recorded a non-cash charge of $667,000 in 2002 and $145,000 in 2004 as a result of these modifications, which are included in selling, general and administrative expenses in the accompanying consolidated statement of operations.

Warrants

Pursuant to a March 1998 arrangement with Kubota Solid Technology Corporation (“KSTC”), the Company issued warrants which expired without being exercised in 2003 and 2004.

In June 1999, in connection with an acquisition, the Company issued five-year warrants to purchase 1,400,000 shares of the Company’s common stock at an exercise price of $10.00 per share. In 2002, 300,000 of such warrants were exercised. The exercise price of $3,000,000 was paid through a reduction of the principal amount of the Company’s subordinated notes payable. The remaining warrants to purchase 1,100,000 shares of the Company’s common stock expired in 2004.

In November 1999, in connection with an acquisition, the Company issued five-year warrants to purchase 110,000 shares of the Company’s common stock at an exercise price of $10.00 per share all of which were outstanding as of December 31, 2003 and 2002. None of the warrants were exercised prior to their expiration in 2004.

In May 2002, the Company issued five-year warrants to purchase 15,000 shares of the Company’s common stock at an exercise price of $15.00 per share. The warrants were recorded at fair value based on the Black-Scholes valuation method using the following assumptions: dividend yield of 0.0%; expected volatility of 57%; and a risk free interest rate of 4.56%. The warrants were issued to the former President of MDI in exchange for consulting services and the fair value of $97,000 was expensed on the issuance date and included in selling, general and administrative expenses in the accompanying 2002 statement of operations.

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NOTE 12—COMMITMENTS AND CONTINGENCIES

Leases

The Company leases facilities and equipment under various lease agreements, which range from one to twelve years, which require the following minimum annual rental commitments (in thousands):

Operating Leases Years Ending December 31,
2005	$	14,960
2006	13,170
2007	11,318
2008	9,260
2009	8,502
Thereafter	19,369
	$	76,579

For the years ended December 31, 2002, 2003 and 2004, the combined annual rental cost for various facilities and equipment under operating leases approximated $15,108,000, $17,991,000 and $16,484,000, respectively. Although the above table reflects the company’s obligation on leases until the end of its term, management expects that, in the normal course of business, most leases will be renewed or replaced by others.

The Company subleases all or part of some of its facilities to third parties. In 2002, 2003 and 2004, we recognized sublease income of none, $198,000 and $1,126,000, respectively which is included in our selling, general and administrative expenses.  Annual minimum rental commitments on these subleases are as follows (in thousands):

Subleases Years Ending December 31,
2005	$	1,132
2006	1,142
2007	731
2008	614
2009	240
Thereafter	41
	$	3,900

Note Payable to AES Shareholders

As part of the acquisition of AES in 2001, a note payable of $5 million to an affiliated party existed but was deemed to be a contingent liability and ultimately not recorded in purchase accounting. Refer to Note 2—Restatement of 2002 Financial Results. The note bears interest at 3.2%, and along with the principal is reduced quarterly based on the amount of commissions earned on sales of certain products of the affiliated party.  As of December 31, 2004, the contingent liability was $2,543,000. Refer to Note 15—Related Party Transactions.

Litigation

We are subject to various claims and legal proceedings that arise in the ordinary course of our business, including claims and legal proceedings that have been asserted against us by former employees. Additionally, the Company is periodically audited by various taxing authorities in the United States of America and in other countries in which the Company does business. In the opinion of management, these

94

matters will not have a material adverse effect on the Company’s consolidated balance sheet, statements of operations or liquidity.

In addition, a formal investigation is being conducted by the SEC in connection with matters related to the restatement of financial statements for the period subsequent to December 31, 2000. Further, we may have indemnification obligations with respect to current and former employees and officers depending on how the investigation proceeds.

Indemnifications

The Company indemnifies its software customers against claims that software or documentation purchased from the Company infringes upon a copyright, patent or the proprietary rights of others. In the event of such a claim, the Company agrees to obtain the rights for continued use of the software for the customer, to replace or modify the software or documentation to avoid such claim or to provide a credit to the customer for the unused portion of the software license. Due to the nature of this indemnification and the various options in which the Company can satisfy the indemnification, it is not possible to calculate the maximum potential amount of future payments that may be required.

As permitted under Delaware law, the Company is authorized to provide for indemnification of its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s term in such capacity. The maximum potential amount of future payments we could be required to make for such indemnification is the fullest extent permitted by law; however, the Company has a director and officer insurance policy that limits the Company’s exposure and enables recovery of a portion of any future amounts paid in certain circumstances. As a result of the insurance policy coverage, the Company believes the estimated fair value of these indemnifications is minimal.

In connection with the issuance of the Convertible Notes, the Company agreed to indemnify the initial purchasers of the Convertible Notes against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the initial purchasers may be required to make in respect of those liabilities. The Company believes the estimated fair value of this indemnification is minimal. Accordingly, there are no liabilities recorded for these types of liabilities as of December 31, 2002, 2003 and 2004.

The Company warrants that its software products will perform in all material respects in accordance with standard published specifications in effect at the time of delivery of the licensed products to the customer for 90 days. If necessary, the Company would provide for the estimated cost of product warranties based on specific warranty claims and claim history. However, the Company has not incurred significant expense under its product warranties. As a result, the Company believes the estimated fair value on these agreements is minimal. Accordingly, there are no liabilities recorded for these agreements as of December 31, 2002, 2003 and 2004.

NOTE 13—SHAREHOLDERS’ EQUITY

Shareholder Rights Plan

In October 1998, the Company adopted a Shareholder Rights Plan (“the Rights Plan”). As part of the Rights Plan, a special type of dividend was declared on the common stock of the Company distributing these rights to all stockholders of record on October 16, 1998. These rights, which do not have any shareholder rights, including voting or dividend rights, will expire on October 5, 2008, unless earlier redeemed by the Company prior to expiration at a price of $0.01 per right. The rights automatically transfer with a transfer of common stock until the time they become exercisable, which happens when certain specified events occur. If the rights become exercisable, they entitle the holders thereof to purchase stock of the Company at a price of $35.00 per share, subject to certain other provisions of the Rights Plan.

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Reserved Shares

As of December 31, 2004, excluding shares that may be issued under the Rights Plan, shares of common stock reserved for issuance were as follows (in thousands):

Common Stock Warrants	15
Employee Stock Option Plans:
1991 Plan	964
1998 Plan	2,766
2001 Plan	2,556
AES Options	84
Employee Stock Purchase Plan	202
Convertible Debt	11,744
	18,331

AES Indemnification Settlement

In 2003, the Company settled certain indemnification provisions in the Agreement and Plan of Merger related to the AES acquisition. As a result, the Company received and cancelled 109,400 shares of common stock, valued at $1,000,000, which had the effect of adjusting goodwill.

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NOTE 14—EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of Basic and Diluted Earnings (Loss) Per Share (in thousands, except per share data):

	Year Ended December 31,
	2002			2003			2004
Numerator:
Numerator for Basic Earnings (Loss) Per Share—Income (Loss) from Continuing Operations	$	(38,158	)	$	(2,813	)	$	10,879
Effect of Dilutive Securities:
Convertible Debentures	—			—			2,192
Numerator for Diluted Earnings (Loss) Per Share—Income (Loss)from Continuing Operations	(38,158		)	(2,813		)	13,071
Income (Loss) from Discontinued Operations	1,740			(26,951		)	—
Cumulative Effect of Change in Accounting Principle	(38,800		)	—			—
Numerator for Diluted Earnings (Loss) Per Share—Net Income (Loss)	$	(75,218	)	$	(29,764	)	$	13,071
Denominator:
Denominator for Basic Earnings (Loss) Per Share—Weighted-Average Shares Outstanding	29,248			29,883			30,619
Effect of Dilutive Securities:
Employee Stock Options, Stock Purchase Plan and Common Stock Warrants	1,773			777			663
Convertible Debentures	—			—			11,744
Dilutive Potential Common Shares	1,773			777			12,407
Denominator for Diluted Earnings (Loss) per Share	31,021			30,660			43,026
Basic Earnings (Loss) Per Share From Continuing Operations	$	(1.30	)	$	(0.09	)	$	0.36
Diluted Earnings (Loss) Per Share From Continuing Operations	$	(1.30	)	$	(0.09	)	$	0.30
Basic Loss Per Share From Discontinued Operations	$	0.06		$	(0.90	)	$	—
Diluted Loss Per Share From Discontinued Operations	$	0.06		$	(0.90	)	$	—
Basic And Diluted Loss Per Share From Cumulative Effect Of Change In Accounting Principle	$	(1.33	)	$	—		$	—
Basic Earnings (Loss) Per Share	$	(2.57	)	$	(1.00	)	$	0.36
Diluted Earnings (Loss) Per Share	$	(2.57	)	$	(1.00	)	$	0.30

For additional disclosures regarding the subordinated convertible debentures, employee stock options, common stock warrants and the employee stock purchase plan, refer to Note 4—Debt and Note 11—Stock Option Plans, Warrants and Stock Based Compensation.

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The following table shows the common stock equivalents that were outstanding as of December 31, 2002, 2003 and 2004, but were not included in the computation of Diluted Earnings (Loss) Per Share because the common stock equivalents’ exercise price was greater than the average market price of the common shares for the period presented and, therefore, the effect would be anti-dilutive, or the effect of the conversion would otherwise be anti-dilutive:

	Number of Shares	Price Per Share
Anti-Dilutive Stock Options:
As of December 31, 2002	2,893,470	$	6.38 to $27.50
As of December 31, 2003	2,365,879	$	9.55 to $27.50
As of December 31, 2004	2,587,466	$	9.46 to $27.50
Anti-Dilutive Common Stock Warrants:
As of December 31, 2002	1,387,031	$	7.13 to $15.00
As of December 31, 2003	1,263,216	$	9.81 to $15.00
As of December 31, 2004	15,000	$15.00

NOTE 15—RELATED PARTY TRANSACTIONS

The Company utilizes, in the normal course of business, the services of Geometric Software Solutions Co. Ltd. (“GSSL”), a public company headquartered in India that provides CAD/CAM/CAE/PDM software applications, component technology and development services. Through February 2005, the former chairman and chief executive officer of the Company served as a director of GSSL. For the years ended December 31, 2002, 2003 and 2004, the amounts paid by the Company to GSSL were approximately $890,000, $631,000 and $749,000, respectively. As of December 31, 2004, the Company also owns 1,040,000 shares of GSSL (approximately 10%) stock with an original cost of $68,000 and a fair market value of $8,692,000 based on quoted market prices. These marketable equity securities, classified as available-for-sale, are included in investments in the accompanying consolidated balance sheets. Refer to Note 1.

Dassault Systemes is deemed a beneficial owner of more than five percent (5%) of our common stock. On or about April 20, 2001, the Company formed a strategic alliance with Dassault Systemes S.A. pursuant to which the Company was to develop our next generation of simulation software using Dassault Systemes’ Version 5 Architecture. The Company also acted as a strategic distribution channel for the joint Version 5 Analysis and Simulation portfolio.

NOTE 16—DISCONTINUED OPERATIONS

In the second quarter of 2003, the Company decided to exit its Systems business. In the third quarter of 2003, the Company completed the terminations of the workforce employed by and ceased operations of the Systems business. Accordingly, all current and prior financial information related to the Systems business has been presented as discontinued operations in the accompanying consolidated financial statements.

For the year ended December 31, 2003, the Company recorded restructuring charges of $3,548,000, including $2,027,000 for workforce reductions and $1,521,000 related to closing or consolidating facilities, and asset impairment charges totaling $18,596,000, including $12,033,000 of goodwill and $5,057,000 of other intangibles, net of amortization, $981,000 of other current assets and $525,000 of fixed assets. Revenue and expenses included in discontinued operations consist of systems revenue and cost of revenue and operating expenses specifically attributable to the Company’s Systems business.

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The results of the discontinued Systems business included in the accompanying consolidated statements of operations for the years ended December 31, 2002, 2003 and 2004 were as follows (in thousands):

	2002		2003			2004
Net Revenue	$	95,426	$	44,026			$	—
Income (Loss) from Operations Before (Provision) Benefit for Income Taxes	$	1,740	$	(8,355	)		$	—
(Provision) Benefit for Income Taxes	—		—				—
Loss from Discontinued Operations	$	1,740	$	(8,355	)		$	—
Loss from Disposal before Benefit for Income Taxes	$	—	$	(18,596	)		$	—
Benefit for Income Taxes	—		—				—
Loss from Disposal of Discontinued Operations	$	—	$	(18,596	)		$	—

Assets and liabilities of discontinued operations consist primarily of accounts receivable, goodwill, accounts payable and notes payable to shareholders. Notes payable to shareholders—discontinued operations of $9,344,000 represent an allocation of the $20,000,000 of debt incurred in the acquisition of AES, using the same percentage used to allocate goodwill to the Systems business at the time of acquisition. As a result interest expense of $658,000 and $285,000 has been included in the results of the discontinued Systems business in 2002 and 2003, respectively. The $20,000,000 of debt related to the acquisition of AES was repaid in full in 2003. As of December 31, 2004, there were no material assets to be liquidated or non-restructuring liabilities to be paid.

The following is the activity in the restructuring reserve related to discontinued operations during 2002, 2003 and 2004 (in thousands):

	Workforce Reductions				Facilities				Total
Balance at January 1, 2002		$	—			$	386		$	386
Cash Payments		—				(284		)	(284		)
Balance at December 31, 2002		—				102			102
Restructuring Charges		2,027				1,521			3,548
Cash Payments		(1,757		)		(621		)	(2,378		)
Balance at December 31, 2003		270				1,002			1,272
Cash Payments		(266		)		(164		)	(430		)
Balance at December 31, 2004		$	4			$	838		$	842
Current		$	4			$	155		$	159
Long-term		$	—			$	683		$	683

The restructuring reserve for facilities relates to lease commitments that will terminate in 2010.

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NOTE 17—SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is selected unaudited quarterly financial data for the years ended December 31, 2002, 2003 and 2004. All the periods in 2002 and the first, second and third quarters in 2003 have been restated to reflect the restatement adjustments described in Note 2—2002 Restatement. The “as previously reported” quarterly financial data for these same periods does not reflect the impact of discontinued operations except for the third quarter of fiscal 2003.

	Year Ended December 31, 2004
	First Quarter				Second Quarter			Third Quarter				Fourth Quarter
	(in thousands, except per share data)
Revenue:
Software		$	31,894			$	30,251		$	32,945			$	32,446
Maintenance and services		34,973				36,005			37,006				41,776
Total revenue		66,867				66,256			69,951				74,222
Cost of revenue:
Software		4,424				4,208			3,987				4,035
Maintenance and services		14,363				14,632			14,272				14,029
Total cost of revenue		18,787				18,840			18,259				18,064
Gross profit		48,080				47,416			51,692				56,158
Operating expense:
Research and development		11,238				10,289			10,444				10,144
Selling, general and administrative		36,665				33,290			34,723				36,515
Amortization of goodwill and other intangibles		181				188			215				215
Restructuring and other charges		76				—			—				650
Total operating expense		48,160				43,767			45,382				47,524
Operating income (loss)		(80		)		3,649			6,310				8,634
Other expense (income):
Interest expense		1,100				1,113			1,179				1,236
Other expense (income), Net		(587		)		119			(526		)		(2,710		)
Total other (income) expense, net		513				1,232			653				(1,474		)
Income (loss) before provision (benefit) for income taxes		(593		)		2,417			5,657				10,108
Provision (benefit) for income taxes		(226		)		922			2,158				3,856
Net income (loss)		$	(367	)		$	1,495		$	3,499			$	6,252
Basic earnings (loss) per share		$	(0.01	)		$	0.05		$	0.11			$	0.20
Diluted earnings (loss) per share		$	(0.01	)		$	0.05		$	0.10			$	0.16
Basic weighted-average shares outstanding		30,442				30,619			30,683				30,731
Diluted weighted-average shares outstanding		30,442				43,142			42,762				43,238

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	Year Ended December 31, 2003
	First Quarter				First Quarter				Second Quarter				Second Quarter				Third Quarter				Third Quarter				Fourth Quarter
	(As Previously Reported)				(As Restated)				(As Previously Reported)				(As Restated)				(As Previously Reported)				(As Restated)
	(in thousands, except per share data)
Revenue:
Software		$	36,897			$	35,371			$	35,962			$	28,452			$	35,569			$	27,999			$	33,804
Maintenance and services		24,481				31,431				24,435				28,143				26,565				32,293				35,180
Systems		23,691				—				19,911				—				—				—				—
Total revenue		85,069				66,802				80,308				56,595				62,134				60,292				68,984
Cost of revenue:
Software		3,721				3,171				5,378				3,612				5,887				2,252				4,506
Impairment of Capitalized development costs		—				—				782				—				—				—				—
Maintenance and services		13,381				13,381				13,592				13,592				13,728				13,728				14,020
Systems		22,115				—				19,145				—				—				—				—
Total cost of revenue		39,217				16,552				38,897				17,204				19,615				15,980				18,526
Gross profit		45,852				50,250				41,411				39,391				42,519				44,312				50,458
Operating expense:
Research and development		7,520				10,190				7,049				10,976				6,711				9,360				10,207
Selling, general and administrative		32,594				30,464				33,577				32,203				31,106				30,120				32,170
Amortization of goodwill and other intangibles		1,901				394				1,913				405				1,896				387				365
Restructuring and other charges		—				—				24,593				3,687				—				—				—
Total operating expense		42,015				41,048				67,132				47,271				39,713				39,867				42,742
Operating income (loss)		3,837				9,202				(25,721		)		(7,880		)		2,806				4,445				7,716
Operating expense (income):
Interest Expense		2,117				1,873				1,560				1,360				1,107				1,034				1,079
Other expense (income), net		(25		)		(119		)		6,187				6,158				(814		)		(841		)		(220		)
Total other expense, net		2,092				1,754				7,747				7,518				293				193				859
Income (loss) from continuing operations before provision (benefit) for income taxes		1,745				7,448				(33,468		)		(15,398		)		2,513				4,252				6,857
Provision (benefit) for income taxes		611				14,080				(5,672		)		(29,110		)		1,106				8,038				12,964
Income (loss) from continuing operations		1,134				(6,632		)		(27,796		)		13,712				1,407				(3,786		)		(6,107		)
Discontinued Operations:
Income (loss) from discontinued operations		—				(1,843		)		—				(2,840		)		188				(3,045		)		(364		)
Income (loss) from disposal of discontinued operations		—				—				—				(18,811		)		(1,500		)		—				(48		)
Total loss from discontinued operations		—				(1,843		)		—				(21,651		)		(1,312		)		(3,045		)		(412		)
Net income (loss)		$	1,134			$	(8,475	)		$	(27,796	)		$	(7,939	)		$	95			$	(6,831	)		$	(6,519	)
Basic earnings (loss) per share from continuing operations		$	0.04			$	(0.22	)		$	(0.93	)		$	0.46			$	0.05			$	(0.13	)		$	(0.20	)
Diluted earnings (loss) per share from continuing operations		$	0.04			$	(0.22	)		$	(0.93	)		$	0.35			$	0.04			$	(0.13	)		$	(0.20	)
Basic loss per share from discontinued operations		$	—			$	(0.06	)		$	—			$	(0.73	)		$	(0.04	)		$	(0.10	)		$	(0.01	)
Diluted loss per share from discontinued operations		$	—			$	(0.06	)		$	—			$	(0.57	)		$	(0.03	)		$	(0.10	)		$	(0.01	)
Basic earnings (loss) per share		$	0.04			$	(0.29	)		$	(0.93	)		$	(0.27	)		$	0.00			$	(0.23	)		$	(0.22	)
Diluted earnings (loss) per share		$	0.04			$	(0.29	)		$	(0.93	)		$	(0.22	)		$	0.01			$	(0.23	)		$	(0.22	)
Basic weighted-average shares outstanding		29,827				29,606				29,968				29,753				30,258				30,039				30,127
Diluted weighted-average shares outstanding		30,366				29,606				29,968				37,670				42,360				30,039				30,127

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	Year Ended December 31, 2002
	First Quarter			First Quarter			Second Quarter			Second Quarter			Third Quarter			Third Quarter			Fourth Quarter		Fourth Quarter
	(As Previously Reported)			(As Restated)			(As Previously Reported)			(As Restated)			(As Previously Reported)			(As Restated)			(As Previously Reported)		(As Restated)
	(in thousands, except per share data)
Revenue:
Software		$ 32,274			$ 29,586			$ 45,109			$ 34,269			$ 35,303			$ 34,508			$ 47,675		$ 30,241
Maintenance and services		13,698			17,003			22,970			27,689			26,287			30,455			24,835		29,851
Systems		20,468			—			27,037			—			19,440			—			29,055		—
Total revenue		66,440			46,589			95,116			61,958			81,030			64,963			101,565		60,092
Cost of revenue:
Software		5,476			3,862			6,066			4,556			5,744			4,768			5,182		4,505
Maintenance and services		9,298			9,298			15,033			15,033			14,976			14,976			14,992		14,992
Systems		15,495			—			21,432			—			17,586			—			26,846		—
Total cost of revenue		30,269			13,160			42,531			19,589			38,306			19,744			47,020		19,497
Gross profit		36,171			33,429			52,585			42,369			42,724			45,219			54,545		40,595
Operating expense:
Research and development		5,960			9,542			9,092			12,334			6,589			9,745			8,107		11,258
Selling, general and administrative		33,013			32,379			42,317			40,612			33,763			32,471			36,427		33,106
Amortization of goodwill and other intangibles		1,061			396			1,685			397			1,910			467			1,918		348
Restructuring and other charges		—			—			7,799			3,166			6,016			4,110			—		—
Total operating expense		40,034			42,317			60,893			56,509			48,278			46,793			46,452		44,712
Operating income (loss)		(3,863	)		(8,888	)		(8,308	)		(14,140	)		(5,554	)		(1,574	)		8,093		(4,117	)
Other Expense (Income):
Interest Expense		729			499			1,617			1,386			2,088			1,858			3,667		3,431
Other Expense (Income), net		(688	)		(619	)		(788	)		(719	)		876			945			765		898
Total other expense, net		41			(120	)		829			667			2,964			2,803			4,432		4,329
Income (loss) from continuing operations before provision (benefit) for income taxes		(3,904	)		(8,768	)		(9,137	)		(14,807	)		(8,518	)		(4,377	)		3,661		(8,446	)
Provision (benefit) for income taxes		(1,523	)		424			(3,010	)		716			(2,720	)		213			1,384		407
Income (loss) from continuing operations		(2,381	)		(9,192	)		(6,127	)		(15,523	)		(5,798	)		(4,590	)		2,277		(8,853	)
Discontinued operations:
Income (loss) from discontinued Operations, net of tax		—			4,293			—			1,977			—			(1,407	)		—		(3,123	)
Loss from disposal of discontinued Operations, net of tax		—			—			—			—			—			—			—		—
Total income (loss) from discontinued operations, net of tax		—			4,293			—			1,977			—			(1,407	)		—		(3,123	)
Income (loss) before cumulative effect of change in accounting principle		(2,381	)		(4,899	)		(6,127	)		(13,546	)		(5,798	)		(5,997	)		2,277		(11,976	)
Cumulative effect of change in accounting principle		—			—			(39,300	)		(38,800	)		—			—			—		—
Net income (loss)		$ (2,381	)		$ (4,899	)		$ (45,427	)		$ (52,346	)		$ (5,798	)		$ (5,997	)		$  2,277		$ (11,976	)
Basic earnings (loss) per share from continuing operations		$ (0.08	)		$ (0.32	)		$   (0.21	)		$   (0.53	)		$ (0.20	)		$ (0.16	)		$     0.08		$   (0.30	)
Diluted earnings (loss) per share from continuing operations		$ (0.08	)		$ (0.32	)		$   (0.21	)		$   (0.53	)		$ (0.20	)		$ (0.16	)		$     0.08		$   (0.30	)
Basic earnings (loss) per share from discontinued operations		$      —			$  0.15			$        —			$    0.07			$      —			$ (0.05	)		$         —		$   (0.11	)
Diluted earnings (loss) per share from discontinued operations		$      —			$  0.15			$        —			$    0.07			$      —			$ (0.05	)		$         —		$   (0.11	)
Basic and diluted loss per share from cumulative effect of change in accounting principle		$      —			$      —			$   (1.33	)		$   (1.32	)		$      —			$      —			$         —		$        —
Basic earnings (loss) per share		$ (0.08	)		$ (0.17	)		$   (1.54	)		$   (1.79	)		$ (0.20	)		$ (0.20	)		$     0.08		$   (0.41	)
Diluted earnings (loss) per share		$ (0.08	)		$ (0.17	)		$   (1.54	)		$   (1.79	)		$ (0.20	)		$ (0.20	)		$     0.08		$   (0.41	)
Basic weighted-average shares outstanding		28,993			28,769			29,513			29,303			29,626			29,403			29,730		29,508
Diluted weighted-average shares outstanding		28,993			28,769			29,513			29,303			29,626			29,403			30,194		29,508

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Restatement Tables

The following tables reconcile the Company's previously reported consolidated financial statements to the restated consolidated financial statements. Refer to Note 2—Restatement of 2002 Financial Results.

	Nine Months Ended September 30, 2003
	First Quarter				Second Quarter				Third Quarter				Total
	(in thousands, except per share data)
Revenue, As Previously Reported		$	61,378			$	60,397			$	62,134		$	183,909
Adjustments:
VSOE		1,746				350				416			2,512
MasterKey contracts		392				(1,500		)		1,285			177
Timing and Cutoff		2,122				(2,151		)		(309		)	(338		)
Training and support services		(152		)		56				(99		)	(195		)
Contracted Services		347				(940		)		(961		)	(1,554		)
Regulatory compliance		(409		)		69				(423		)	(763		)
Other		1,378				313				(1,750		)	(59		)
Revenue, As Restated		66,802				56,594				60,293			183,689
Costs and Operating Expenses, As Previously Reported		56,571				63,615				59,328			179,514
Adjustments:
Cost of Revenue—Software development		(1,981		)		(3,022		)		(2,612		)	(7,615		)
Cost of Revenue—Reclass of Amortization—Developed Technology		1,531				1,531				1,531			4,593
Cost of Revenue—Other		(100		)		(1,057		)		(2,554		)	(3,711		)
Software development		2,932				3,979				2,450			9,361
Business combinations		258				258				97			613
Pension		—				—				—			—
Long-lived asset impairment		—				—				—			—
Stock compensation		—				—				—			—
Reclass of Amortization—Developed Technology		(1,531		)		(1,531		)		(1,531		)	(4,593		)
Other		(80		)		701				(861		)	(240		)
Costs and Operating Expenses, As Restated		57,600				64,474				55,848			177,922
Operating Income (Loss), As Previously Reported		4,807				(3,218		)		2,806			4,395
Operating Income (Loss), As Restated		9,202				(7,880		)		4,445			5,767
Income Taxes and Other Non-Operating Items, As Previously Reported		3,673				24,578				2,711			30,962
Adjustments:
Income taxes		13,038				(25,040		)		6,932			(5,070		)
Other Expenses, net		(173		)		(109		)		(100		)	(382		)
Discontinued Operations		1,139				630				1,733			3,502
Cumulative Effect of Change in Accounting Principle		—				—				—			—
Income Taxes and Other Non-Operating Items, As Restated		17,677				59				11,276			29,012
Net Income (Loss), As Previously Reported		$	1,134			$	(27,796	)		$	95		$	(26,567	)
Net Loss, As Restated		$	(8,475	)		$	(7,939	)		$	(6,831	)	$	(23,245	)

p

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	Year Ended December 31, 2002
	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
	(in thousands)
Revenue, As Previously Reported		$	45,972			$	68,079			$	61,590			$	72,510
VSOE		307				(5,589		)		514				(2,077		)
MasterKey contracts		39				1,248				1,107				(12,575		)
Timing and Cutoff		1,836				(1,164		)		2,922				(2,722		)
Training and support services		(86		)		(19		)		(23		)		76
Contracted Services		(794		)		(189		)		(1,333		)		(232		)
Regulatory compliance														4,393
Other		(685		)		(408		)		185				720
Revenue, As Restated		46,589				61,958				64,962				60,093
Costs and Operating Expenses, As Previously Reported		51,280				77,321				64,785				63,418
Adjustments:
Cost of Revenue—Software development		(2,930		)		(2,435		)		(2,396		)		(2,172		)
Cost of Revenue—Other		626				(387		)		(48		)		(99		)
Cost of Revenue—Reclass of Amortization—Developed Technology		689				1,312				1,467				1,594
Software development		4,681				(280		)		2,592				3,536
Business combinations		189				668				272				366
Pension		—				—				—				86
Long-lived asset impairment		6				20				6				6
Stock compensation		667				—				—				—
Reclass of Amortization—Developed Technology		(689		)		(1,312		)		(1,467		)		(1,594		)
Other		965				1,170				1,332				(925		)
Costs and Operating Expenses, As Restated		55,484				76,077				66,543				64,216
Operating Income (loss), As Previously Reported		(5,308		)		(9,242		)		(3,195		)		9,092
Operating Income (loss), As Restated		(8,895		)		(14,119		)		(1,581		)		(4,123		)
Income Taxes and Other Non-Operating Items, As Previously Reported		(2,927		)		36,185				2,603				6,815
Adjustments:
Income Taxes		2,427				4,039				1,968				(1,426		)
Other Expenses (Income), net		3				3				3				62
Discontinued Operations		(3,499		)		(1,500		)		(158		)		2,402
Cumulative Effect of Change in Accounting Principle		—				(500		)		—				—
Income Taxes and Other Non-Operating Items, As Restated		(3,996		)		38,227				4,416				7,853
Net Income, As Previously Reported		$	(2,381	)		$	(45,427	)		$	(5,798	)		$	2,277
Net Income, As Restated		$	(4,899	)		$	(52,346	)		$	(5,997	)		$	(11,976	)

NOTE 18—SUBSEQUENT EVENTS (UNAUDITED)

Sale of a Subsidiary

On January 31, 2006, the Company entered into a Stock Sale and Purchase Agreement to sell its wholly owned Japanese service subsidiary, ESTECH Corporation, to Information Services International—Dentsu, Ltd. (ISID). On March 18, 2006, the sale was consummated and the Company received 1.2 billion Yen, or approximately $10.2 million, resulting in an estimated pre-tax loss of approximately $2.0 million. ESTECH Corporation was acquired in 2002 as part of the MDI acquisition and provides expert technical services, primarily in structural dynamics, motion, vibration and acoustics to customers primarily in the automotive and precision electronics industries. During 2002, 2003 and 2004, ESTECH’s revenue totaled $6.3 million, $9.8 million and $10.1 million, respectively, gross profit was $3.4 million, $3.3 million and $3.0 million, respectively, and net income totaled $0.4 million, $2.3 million and $1.5 million, respectively.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
MSC.Software Corporation
Santa Ana, California

We have audited the accompanying consolidated balance sheets of MSC.Software Corporation and subsidiaries (the “Company”) as of December 31, 2002, 2003 and 2004, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MSC.Software Corporation and subsidiaries as of December 31, 2002, 2003 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Notes 1 and 6 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

As discussed in Note 2, the accompanying 2002 consolidated financial statements have been restated.

We were engaged to audit, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, and our report dated April 14, 2006 disclaimed an opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting because of a scope limitation and expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of material weaknesses and the effects of a scope limitation.

DELOITTE & TOUCHE LLP
Costa Mesa, California
April 14, 2006

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

Not applicable.

ITEM 9A.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We evaluated the design and operating effectiveness of our disclosure controls and procedures as of December 31, 2004, under the supervision and with the participation of our management, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures as defined in Rule 13a-15(e) were not effective. Notwithstanding the material weaknesses in our internal control over financial reporting as of December 31, 2004 described below, we believe that the consolidated financial statements contained in this report present our financial condition, results of operations, and cash flows for the fiscal years covered thereby in all material respects. To address the material weaknesses in our internal control over financial reporting described below the Company performed additional manual procedures and analysis and other post-closing procedures in order to prepare the consolidated financial statements included in this Annual Report on Form 10-K.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, pursuant to Rule 13a-15(c) of the Securities Exchange Act. This system is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States (“GAAP”).

A company’s internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

In accordance with the internal control reporting requirements of the Securities and Exchange Commission our management attempted to complete an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth in the Internal Control—Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The COSO framework summarizes each of the components of a company’s internal control system, including the: (i) control environment, (ii) risk assessment, (iii) information and communication, and (iv) monitoring (collectively, the “entity-level controls”), as well as a company’s control activities (“process-level controls”). In addition to utilizing substantial internal resources, management also engaged an outside consulting firm to assist in various aspects of its evaluation and compliance efforts. However, due to the significant time and resources dedicated to complete the restatement of our consolidated financial statements for the year ended December 31, 2002 included in this report, our management did not fully complete its evaluation of the overall design and operating effectiveness of the Company’s internal control over financial reporting for the year ended December 31, 2004. However, based on the material weaknesses noted in the evaluation of

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the internal control design, and the material weaknesses noted in the operating effectiveness of the internal controls as a result of the testing that was performed, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2004. In conducting its assessment management did not complete its review and testing of entity level controls, controls in the income tax process, and the financial closing and reporting process.

Management’s evaluation of the design and operating effectiveness of our internal controls over financial reporting identified material weaknesses resulting from design and operating deficiencies in the internal control system. A “material weakness” is defined as a significant deficiency or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is defined as a control deficiency, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected.

Management identified the following material weaknesses in our internal control over financial reporting as of December 31, 2004:

Entity-Level Controls

As of December 31, 2004, management had sufficiently documented the Company’s control environment using the COSO internal control framework but concluded that it did not sufficiently perform testing of the control environment to adequately assert as to the operating effectiveness of the entity-level controls. Management concluded that it did not maintain a control environment that fully emphasized the establishment of, adherence to, or adequate communication regarding appropriate internal control for all aspects of its operations. Specifically, management concluded that the Company did not have adequate controls with respect to: (i) oversight by the Audit Committee of the Board of Directors, (ii) effective and continuous communication of the Company’s commitment to ethical business practices and standards, (iii) identification, monitoring and disclosure of related party relationships, and (iv) adequate segregation of duties and/or supervisory controls in certain departments. Based on the deficiencies noted in the design of the Company’s control environment and due to the lack of testing performed to validate the operating effectiveness of the existing entity-level internal controls, and inability to complete its assessment management determined that the Company had an ineffective control environment. Additionally, due to the deficiencies noted above management determined that the monitoring function and dissemination of information and communication did not operate effectively. These deficiencies constitute a material weakness in the control environment, monitoring, and information and communication components of COSO. These material weaknesses increase the likelihood of potential material errors in our financial reporting.

Revenue Accounting

In conjunction with management’s efforts to appropriately recognize software and services revenue as of December 31, 2004 and the Company’s evaluation of the internal controls over financial reporting, management identified material weaknesses in the internal controls over revenue recognition. Specifically, management concluded that the Company did not have adequate internal controls in the following areas for the purposes of recognizing, recording and disclosing the Company’s software revenue in accordance with generally accepted accounting principles , specifically SOP 97-2 and its progeny: (i) management review of significant revenue transactions, (ii) evidence of executed and signed contractual agreements, (iii) proper accounting treatment of multiple element sales arrangements, and (iv) sufficient evidence of customer delivery and acceptance. Furthermore, management concluded that the Company did not have

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adequate internal controls to properly and consistently recognize contracted services revenue in accordance with the percentage completion method as allowed under SOP 97-2 and SOP 81-1.

Overall, our management has concluded that given the magnitude of the revenue adjustments recorded and the potential for misstatements to occur as a result of internal control deficiencies in revenue accounting existing as of December 31, 2004, there is more than a remote likelihood that a material misstatement in our interim or annual financial statements could occur and would not be prevented or detected by our internal control over financial reporting.

Financial Closing and Reporting Process

Management concluded that it did not have adequate controls designed and implemented in the financial close and reporting process to provide reasonable assurance that material misstatements would be prevented or detected. Specifically, management concluded that the Company did not have adequate controls in the following areas for the purposes of identifying, recording and disclosing the Company’s financial results of operations: (i) formalized global accounting policies and procedures that govern the summarization and resolution of significant non-routine, unusual or complex accounting matters, (ii) formalized global accounting policies and procedures that govern the identification and disclosure of related party transactions, (iii) adequate oversight and review of the Company’s implementation of accounting treatments in accordance with generally accepted accounting principles, (iv) adequate evaluation and review of significant estimates and judgments made by management, (v) adequate management review and monitoring of significant transactions at the Company’s foreign business units.

During the 2004 year-end management review and financial statement closing process, we identified a series of adjustments not previously known, which related to complex transactions and reconciliations of significant balance sheet accounts. Given the number of adjustments identified, the significance of the financial closing and reporting process to the preparation of reliable financial statements, and the potential for errors to significant account balances to occur as of December 31, 2004, our management has concluded that there is more than a remote likelihood that a material misstatement in our interim or annual financial statements could occur and would not be prevented or detected by our internal control over financial reporting.

Segregation of Duties and User Access

Management concluded that it did not perform an adequate review of user access to the Company’s financial reporting system to adequately address segregation of duties. Specifically, management identified instances where various employees had excessive access to various financial applications. After further analysis, it was determined that certain of these employees were responsible for the initiating and/or recording of transactions, thereby creating segregation of duties weaknesses. In addition, we found that internal controls over granting and monitoring access to our financial reporting system were not adequate to ensure that access to employees was appropriate given the employee’s responsibilities. The lack of appropriate segregation of duties increases the risk that material misstatements to the Company’s financial statements may not be prevented or detected.

Accounting for Income Taxes

While preparing the annual provision for 2004 income taxes, we identified certain unreconciled differences in our deferred tax accounts dating back to calendar years before 2002. After further analysis, we determined that significant adjustments were required to prior and current year financial statements. In reaching this conclusion, our management noted that there was a lack of historic analysis and documentation, ineffective account reconciliation procedures, and insufficient understanding of tax accounting, which did not allow the timely or accurate calculation of the year-end tax provisions. Given the

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significance of the tax account balances and the absence of sufficient mitigating controls, these deficiencies that existed as of December 31, 2004 represent a material weakness in internal controls over financial reporting on the basis that there is more than a remote likelihood that a material misstatement in our interim or annual financial statements due to errors in accounting for income taxes could occur and would not be prevented or detected by our internal control over financial reporting.

Fixed Assets

Management concluded that it did not maintain adequate controls over processing fixed asset transactions to provide reasonable assurance that material misstatements would be prevented or detected. Specifically, management concluded that the Company did not have adequate controls in the following areas for the purposes of identifying, recording and disclosing the Company’s fixed assets: (i) formal review and reconciliation of fixed asset subledgers to the general ledger, (ii) appropriate tracking of fixed assets acquisitions/disposals, (iii) formal review of additions, deletions and other changes to the fixed asset master data file and (iv) formal asset management system in the EMEA and Asia Pacific regions to manage property and equipment. These deficiencies, when aggregated, result in a more than remote likelihood that a material misstatement could exist in the Company’s identification, recording and disclosure of property and equipment within the annual and interim financial statements and not be detected.

As a result of management’s incomplete assessment of the effectiveness of the Company’s internal control over financial reporting of December 31, 2004, Deloitte & Touché LLP, our independent registered public accounting firm, was unable to perform auditing procedures necessary to form an opinion on management’s assessment and did not express an opinion and expressed an adverse opinion on the effectiveness of internal control over financial reporting because of the material weaknesses identified.

Changes in Internal Control over Financial Reporting

Management undertook significant efforts in 2004 to establish a framework to improve internal controls over financial reporting, particularly as they related to the findings of the independent investigation conducted by our audit committee. We committed considerable resources to the design, implementation, documentation, and testing of our internal controls. Additional efforts were required to remediate and re-test certain internal control deficiencies. Our management believes that these efforts have improved our internal control over financial reporting. While management is dedicated to improving the Company’s internal controls over financial reporting, the nature and significance of the outstanding material weaknesses may prevent successful remediation for fiscal year 2005.

While these steps have helped address some of the internal control deficiencies noted above, they have not been sufficient to remedy all internal control issues that existed as of December 31, 2004. Management is taking the following steps to remediate these material weaknesses:

·Implementing more stringent policies and procedures regarding revenue accounting and oversight of contractual arrangements

·Conducting formal revenue recognition training sessions for key accounting and sales personnel

·Directing internal resource attention, including internal audit efforts, to sales order processing and revenue accounting activities

·Performing an upgrade of our internal Enterprise Resource Planning (ERP) financial system, including an enhancement of system interface and configuration internal controls

·Implementing a standard financial statement reporting package to be used by all foreign business units

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·Improving the documentation, communication, and periodic review of our accounting policies throughout our domestic and international locations for consistency with general accepted accounting principles

·Implementing a formalized global accounting policy that addresses the appropriate procedures for significant, non-routine, unusual, or complex events or transactions

·Increased management oversight by creating a new Disclosure Committee comprised of senior managers with responsibility for responding to issues raised during the financial reporting process

·Improving the interim and annual review and reconciliation process for certain key balance sheet accounts

·Enhancing the training and education for our international finance and accounting personnel and new hires to the worldwide finance team

·Increasing diligence regarding granting and monitoring user access to our network, databases, and applications

·Investigating the functionality of a segregation of duties software tool to assist in designing appropriate segregation of duties.

·Automating certain key internal controls that are currently performed manually

·Employing an outside accounting firm to perform, reconcile, and document the Company’s income tax transactions

Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
MSC Software Corporation
Santa Ana, California.

We were engaged to audit management's assessment regarding the effectiveness of internal control over financial reporting of MSC.Software Corporation and subsidiaries (the “Company”), as of December 31, 2004. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.

As described in Management's Report on Internal Control over Financial Reporting, the Company was unable to complete its assessment of the effectiveness of the Company's internal control over financial reporting. Accordingly, we were unable to perform auditing procedures necessary to form an opinion on management's assessment.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management's assessment:

Entity Level Controls

The Company did not maintain a control environment that fully emphasized the establishment of, adherence to, or adequate communication regarding appropriate internal control for all aspects of its operations. Specifically, management concluded that the Company did not have adequate controls in the following areas for the purposes of establishing, maintaining and communicating its control environment: (i) appropriate monitoring and review by the Audit Committee of the Board of Directors, (ii) effective and continuous communication of the Company’s commitment to ethical business practices and standards, (iii) identification, monitoring and disclosure of related party relationships, (iv) adequate segregation of duties and/or supervisory controls in certain departments. Each of these items represents a material weakness in entity level controls for one of the following components covered by Internal Control—

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Integrated Framework by the Committee of Sponsoring Organizations (“COSO”): Control Environment, Information and Communication and Monitoring. Based on the deficiencies noted in the design of the Company’s control environment and due to the lack of testing performed to validate the operating effectiveness of the existing entity-level internal controls, and inability to complete its assessment we determined that the Company had an ineffective control environment. Additionally, due to the deficiencies noted above it was determined that the monitoring function and dissemination of information and communication did not operate effectively. These deficiencies constitute material weaknesses in the control environment, monitoring, and information and communication components of COSO. These material weaknesses increase the likelihood of potential material errors in the Company’s interim and annual financial statements..

Revenue Accounting

The Company did not have adequate internal controls in the following areas for the purposes of recognizing, recording and disclosing the Company’s software revenue in accordance with generally accepted accounting principles specifically Statement of Position No. 97-2 (SOP 97-2), Software Revenue Recognition, and its related pronouncements: (i) management review of significant revenue transactions, (ii) evidence of executed and signed contractual agreements, (iii) proper accounting treatment of multiple element sales arrangements, and (iv) sufficient evidence of customer delivery and acceptance. Furthermore, the Company did not have adequate internal controls to properly and consistently recognize contracted services revenue in accordance with the percentage completion method as allowed under SOP 97-2 and SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.

Given the magnitude of the revenue adjustments recorded and the potential for misstatements to occur as a result of the internal control deficiencies in revenue accounting existing as of December 31, 2004, there is more than a remote likelihood that a material misstatement in the Company’s interim or annual financial statements could occur and would not be prevented or detected by the Company’s internal control over financial reporting.

Financial Closing and Reporting Process

The Company did not have adequate controls designed and implemented in the financial close and reporting process to provide reasonable assurance that material misstatements would be prevented or detected. Specifically, the Company did not have adequate controls in the following areas for the purposes of identifying, recording and disclosing the Company’s financial results of operations: (i) formalized global accounting policies & procedures that govern the summarization and resolution of significant non-routine, unusual or complex accounting matters, (ii) formalized global accounting policies & procedures that govern the identification and disclosure of related party transactions, (iii) adequate oversight and review of the Company’s implementation of accounting treatments in accordance with generally accepted accounting principles, (iv) adequate evaluation and review of significant estimates and judgments made by management, (v) adequate management review and monitoring of significant transactions at the Company’s foreign business units.

This material weakness resulted in the restatement of the Company’s consolidated financial statements for the year ended December 31, 2002, and adjustments to present the Company’s financial statements for the years ended December 31, 2003 and 2004 in accordance with generally accepted accounting principles. The nature and impact of the restatement adjustments on previously issued financial statements is fully described in Note 2 to the consolidated financial statements. Given the number of adjustments identified, the significance of the financial closing and reporting process to the preparation of reliable financial statements, and the potential for errors to significant account balances to occur as of December 31, 2004, there is more than a remote likelihood that a material misstatement in the Company’s

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interim or annual financial statements could occur and would not be prevented or detected by the Company’s internal control over financial reporting.

Segregation of Duties & User Access

The Company did not perform an adequate review of user access to the Company’s financial reporting system and did not appropriately address segregation of duties violations. Specifically, there were instances where various employees had inappropriate access to various financial applications. It was determined that certain of these employees were responsible for the initiating and/or recording of transactions, thereby creating segregation of duties weaknesses. In addition, the internal controls over granting and monitoring access to our financial reporting system were not adequate to ensure access to employees was appropriate given the employee’s responsibilities. The lack of appropriate segregation of duties results in a more than remote likelihood that material misstatements to the Company’s annual and interim financial statements may not be prevented or detected.

Accounting for Income Taxes

The Company did not design and implement adequate controls over the accounting for income taxes. Specifically, there was a lack of historic analysis and documentation, ineffective account reconciliation procedures, and insufficient understanding of tax accounting, which did not allow the timely or accurate preparation of the year-end tax provisions. While preparing the annual provision for 2004 income taxes, the Company identified certain unreconciled differences in their deferred tax accounts dating back to years before 2002. It was determined that significant adjustments were required to prior and current year financial statements. Given the significance of the tax account balances and the absence of sufficient mitigating controls, the deficiencies that existed as of December 31, 2004 represent a material weakness in internal controls over income taxes on the basis that there is more than a remote likelihood that a material misstatement in the Company’s interim or annual financial statements due to errors in accounting for income taxes could occur and would not be prevented or detected by the Company’s internal control over financial reporting.

Fixed Assets

The Company did not maintain adequate controls over processing fixed asset transactions to provide reasonable assurance that material misstatements would be prevented or detected. Specifically, the Company did not have adequate controls in the following areas for the purposes of identifying, recording and disclosing the Company’s fixed assets: (i) formal review and reconciliation of fixed asset subledgers to the general ledger, (ii) appropriate tracking of fixed assets acquisitions/disposals, (iii) formal review of additions, deletions and other changes to the fixed asset master data file and (iv) formal asset management system in the EMEA and Asia Pacific regions to manage property and equipment. These deficiencies, when aggregated, result in a more than remote likelihood that a material misstatement could exist in the Company’s identification, recording and disclosure of property and equipment within the annual and interim financial statements and not be detected.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2004, of the Company and this report does not affect our report on such financial statements and financial statement schedule.

Because of the limitation on the scope of our audit described in the second paragraph of this report, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on management's assessment referred to above. In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria and the effects of

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other material weaknesses, if any, that might have been identified if we had been able to perform sufficient auditing procedures relating to management's assessment regarding the effectiveness of internal control over financial reporting, the Company has not maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Commission of Sponsoring Organizations of the Treadway Commission.

We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2004, of the Company and have issued our report dated April 14, 2006 that expressed an unqualified opinion on those financial statements and financial statement schedule.

DELOITTE & TOUCHE LLP
Costa Mesa, California
April 14, 2006

ITEM 9B.OTHER INFORMATION

Not Applicable

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PART III

ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors of MSC

The following information with respect to the principal occupation or employment, recent employment history, age and directorships in other companies as of March 31, 2006, has been furnished or confirmed to us by the respective directors. The information provided also identifies the committees of the board of directors on which each director serves. Because we have not held elections for directors since 2003, all directors will hold office until the next Annual Meeting of Stockholders and until their successors are elected and qualify or until their earlier death, resignation or removal.

DONALD GLICKMAN has been the managing partner of J. F. Lehman & Company, a private equity investment firm, since 1993, and president of Donald Glickman & Company, a private investment firm since 1992. He serves as a director for Monro Muffler Brake, and as a Trustee for MassMutual Corporate Investors, and MassMutual Participation Investors. Mr. Glickman has been a member of the board of directors since 1998. Mr. Glickman serves as the lead director and is a member of the audit committee. Age 72.

WILLIAM F. GRUN is a private investor and consultant. In 2003, Mr. Grun served as the chief executive officer of RAS Innovations, a privately held company providing international outsourcing of research and development. He served as president and chief operating officer of Optium Software, a privately held firm that developed software for supply chain management from 1996 to 1999. Mr. Grun has been a member of the board of directors since 1997 and is a member of the audit committee. Age 59.

MASOOD A. JABBAR was employed in many positions with Sun Microsystems Computer Corporation, a provider of network computing infrastructure solutions, from 1986 to 2003, including executive vice president and advisor to the CEO from 2002 to 2003, and executive vice president of Global Sales Operations, responsible for worldwide sales and support for all the Company’s products, from 2000 to 2002. Mr. Jabbar served as the Chief Executive Officer of XDS Inc., a private network company, from November 2004 to the present. Mr. Jabbar is also a director of Openwave Systems, Inc. and Silicon Image Inc. Mr. Jabbar has been a member of the board of directors since July, 2005 and is a member of the compensation committee. Age 56.

PHILIP B. LIVINGSTON recently joined Duff & Phelps, a leading investment banking and financial advisory firm, on March 21, 2006, as its Chief Financial Officer. He has been vice chairman of Approva Corporation, a company that provides enterprise software for continuous controls management, since January 2005. From 2003 to 2004 Mr. Livingston served as chief financial officer of World Wrestling Entertainment Corporation, a television production and entertainment company. From 1999 to 2003 he was president and chief executive officer of Financial Executives International, a professional association for senior financial executives. In prior positions he was chief financial officer of Catalina Marketing Corporation, a marketing services company, and Celestial Seasoning, a consumer packaged goods company. He is a director of Cott Corporation. Mr. Livingston has been a member of the board of directors since May 2005 and serves as chairman of the audit committee. Age 49.

ASHFAQ A. MUNSHI recently joined Level5 Networks, a leading innovator of high-performance Ethernet network interface cards (NICs), as its Chief Executive Officer. He is the founder of and has served as the chief executive officer and chairman of Radiance Technologies, Inc., an enterprise software company since 2000. Prior to that date, he served as an advisor to Supply Base Inc., a supplier bid and supplier information company in 1998, and chief executive officer and chairman of Specialty MD.com, a medical e-marketplace company from 1998 to 2000, a company that he founded. He is also a director of both Radiance Technologies, Inc. and of Vivecon Corporation. Mr. Munshi has been a member of the

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board of directors since July, 2005 and serves as a member of the governance and nominating committee. Age 45.

GEORGE N. RIORDAN has served as our chairman of the board (February 1, 1997 to December 14, 1998). Mr. Riordan is a managing director of George Riordan Co., an investment banking firm from 1991 to date. Mr. Riordan has been a member of the board of directors since 1983. He currently serves as a member of the governance and nominating committee. Age 72.

GREGORY P. SPIVY has been a partner of ValueAct Capital since 2004. Prior to that date, Mr. Spivy served as a consultant for Gryphon Investors, a private equity firm, from September 2002 to August 2004. From January 2002 to August 2002, he was a part-time consultant for Farallon Capital Management, L.L.C., which manages equity capital. Mr. Spivy was a partner at Lamphere Capital Partners from July 2000 to December 2001. He has been a member of the board of directors since 2004 and serves as the chairman of the compensation committee. Mr. Spivy also serves as a member of the Board of Directors of Seitel, Inc., a leading provider of seismic data to the oil and gas industry, effective March 1, 2006. Age 37.

MARK A. STEVENS has been an employee of Fluor Corporation, an engineering and construction company, since 1975, most recently as group executive, commercial strategy and risk since 2003. He has been a member of the board of directors since 2004 and currently serves as the chairman of the governance and nominating committee and a member of the compensation committee. Age 53.

WILLIAM J. WEYAND became chairman of the board and chief executive officer, effective February 10, 2005. From 1997 to 2001 Mr. Weyand served as the chairman and chief executive officer of Structural Dynamics Research Corporation (“SDRC”), a product lifecycle management software company which was acquired by Electronic Data Systems Corporation in 2001. From January to June 2003, he served as the chief executive officer of Pavilion Technologies, an enterprise neural network software company for advanced process control. From late 2002 to the present, he continues to serve as a director, and from June 2003 to the present, continues to serve as vice chairman of this company. Mr. Weyand also serves as a director for Riverstone Networks, Inc. Age 61.

On November 4, 2004, ValueAct Capital Master Fund L.P., ValueAct Capital Partners Co.-Investors, L.P., VA Partners, L.L.C., Jeffrey W. Ubben, George F. Hamel, Jr. and Peter H. Kamin (collectively the “Stockholders”) brought an action against us in the Delaware Court of Chancery to compel us to hold a 2004 Annual Meeting of Stockholders to elect directors. Subsequently, we resolved this action on December 3, 2004, by entering into a Stockholders Agreement with the Stockholders as well as Gregory P. Spivy and William J. Weyand for certain limited purposes. Under the Stockholders Agreement, the Stockholders dismissed their action and we increased our number of directors to seven, Gregory Spivy and William J. Weyand were appointed to our board of directors and to our nominating and governance committee and Mr. Weyand was appointed to the audit committee. In addition, the Stockholders Agreement provided that we would support the election of one affiliated and one non-affiliated nominee of the Stockholders at each annual meeting during the period the Stockholders held ten percent or greater of the outstanding shares of our stock. At such time as the Stockholders held less than ten percent of the outstanding shares, the directors nominated by the Stockholders would resign.

Subsequently, in 2005, we increased the number of directors from seven to nine.

The Stockholders Agreement further provided that until 90 days after the company was current with respect to its filings of annual and quarterly reports with the SEC, the Stockholders would (i) refrain from a subsequent action to compel an annual meeting of stockholders and (ii) they would not directly or indirectly propose or participate in any transaction or activity involving a business combination or asset sale of the company absent a written request by the board for a proposal nor engage in a proxy contest. On February 10, 2005, the parties entered into Amendment No. 1 to the Stockholders Agreement. The

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Amendment provides that the Stockholders would no longer have the right to designate a non-affiliated nominee for the board of directors as long as Mr. Weyand is then a director of the Company. The Amendment further provides that Mr. Weyand is not required to tender his resignation from the board in the event the Stockholders no longer beneficially own in the aggregate 10% or more of the outstanding shares of the Company’s stock. Mr. Weyand resigned from all board committees upon his employment with us and his designation as chairman of the board. Subsequently in July 2005, Mr. Spivy resigned from the nominating and governance committee and was designated as the chairman of the compensation committee.

Larry S. Barels served as director of the Company from 1998 through July 2004 at which time he resigned. In addition through all of 2004, Mr. Perna served as chairman of the board and retired from the board in February 2005.

Executive Officers of MSC

Name	Age	Office
William J. Weyand(1)	62	Chairman of the Board and Chief Executive Officer
Glenn R. Wienkoop	59	President, Chief Operating Officer
John A. Mongelluzzo	47	Senior Vice President, General Counsel, and Secretary
John J. Laskey	56	Senior Vice President, Chief Financial Officer

(1)Also a Director

On February 10, 2005 William Weyand succeeded Frank Perna, Jr. as our chairman and chief executive officer of the company. For the employment history for the past five years for Mr. Weyand, see “Directors of MSC” above.

Mr. Wienkoop was hired in August, 2005 as our president and chief operating officer. Prior to joining us, he served as president and chief operating officer of BDNA Corporation, a software solution provider of IT asset management and governance from July 2004 to August 2005, and president and chief operating officer at Portal Software, Inc., a software solution provider of billing and revenue management solutions for telecommunications from 2001 to 2004. From 2000 to 2001 Mr. Wienkoop served as president and chief operating officer of SDRC. Age 59.

Mr. Mongelluzzo was hired in March 2005 as senior vice president, general counsel and secretary. Prior to joining us, Mr. Mongelluzzo served as of counsel for Vorys, Sater, Seymour and Pease LLP law firm from 2002 to 2005. From 1986 to 2001 Mr. Mongelluzzo was employed by SDRC where he served in many roles, most recently as senior vice president, general counsel, and secretary. Age 47.

Mr. Laskey was hired in 2004 as our senior vice president and chief financial officer. Prior to joining us, Mr. Laskey served as vice president and chief financial officer of Webplan, Inc., a provider of operational planning tools from April 2001 to March 2003. From October 1998 to February 2001, Mr. Laskey served as vice president and chief financial officer of Quest Software, Inc., a provider of application management software. Mr. Laskey also held financial management positions at Continuus Software Corporation, Starbase Corporation, File Net Corporation and MAI/Basic Four, Inc. Age 56.

There are no family relationships among any of the executive officers.

Audit Committee Information

The table below provides membership information for our Audit Committee:

Name	Audit Committee
Philip B. Livingston		Chair
Donald Glickman		Member
William F. Grun		Member

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The board of directors has determined that each member of the audit committee (i) qualifies as an “audit committee financial expert” within the meaning of the applicable SEC rules and (ii) is independent under the independence standards set forth in our Corporate Governance Guidelines and under the applicable rules of the Securities Exchange Act of 1934 (the Exchange Act).

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires that the directors and executive officers and persons who beneficially own more than 10 percent of a registered class of our equity securities, file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of our equity securities. Due to an administrative error, each of Donald Glickman, William Grun, George Riordan and Larry Barels were late in filing their Form 4 to report their grant of 5,000 options. This grant related to the annual grant they received on January 2, 2004. The Form 4’s were filed on January 8, 2004. In addition, on March 19, 2003, as a result of recent acquisitions and reorganizations, the board passed resolutions revising the list of “executive officers” of the Company for purposes of the Securities Exchange Act of 1934 (the Exchange Act”) or “officers” for purposes of Section 16 of the Exchange Act, to only include Frank Perna, Jr., Louis A. Greco, Nader Khoshniyati, Robert R. Ryan, and Kenneth Blakely. Subsequently, the Company determined that Richard Murphy, Christopher St. John, Amir Mobayen, Charles Davis, and John DiLullo, among others, should be designated as executive officers. During the interim period, several of these individuals had reportable transactions during 2004 that were not timely reported, relative to granting of bonus share awards on March 18, 2004, issued under the Company’s Executive Bonus Plan as follows: Charles Davis: 1,795 bonus shares; John DiLullo: 1,474 bonus shares; Richard Murphy: 1,859 bonus shares, Amir Mobayen: 3,654 bonus shares, and Christopher St. John: 2,372 bonus shares. Thereafter, on or about June 17, 2004, these five transactions were reported on Form 4.

Code of Ethics

We have adopted a Code of Ethics, known as the MSC Corporate Code of Business Conduct and Ethics, which applies to all of our employees, including all directors, officers, employees and agents. In addition, we have adopted a related policy, the MSC.Software Corporation Code of Business Conduct and Ethics that applies to our chief executive officer and senior financial officers (which includes the chief financial officer, controller and other persons performing similar functions). Both of these codes of conduct, including future amendments, are available free of charge on our website at, http://www.mscsoftware.com, or by writing to us at MSC.Software Corporation, 2 MacArthur Place, Santa Ana, California 92707, Attention: Corporate Secretary.

ITEM 11.EXECUTIVE COMPENSATION

Compensation of Executive Officers

The following table sets forth information concerning the compensation paid by us to (i) Frank Perna, Jr., who served as the chief executive officer during 2004, (ii) each of our four most highly compensated executive officers other than the chief executive officer (based on aggregate salary and bonus in 2004), who were serving as executive officers on December 31, 2004, and (iii) Mr. Greco who served as chief financial officer through September 23, 2004. In each instance, the compensation shown is for services rendered in all capacities for the three year period ended on December 31, 2004.

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Summary Compensation Table

	Annual Compensation						Long Term  Compensation(1)
Name and Principal Position	Fiscal Year		Salary/ ($)	Bonus/ ($)(2)	Other Annual Compensation ($)(3)		Securities Underlying Options(#)(4)		All other Compensation ($)(5)
Frank Perna, Jr.		2004	431,251	0		—		150,000		47,138
Chairman and Chief		2003	415,154	150,000		—		130,475		42,658
Executive Officer(6)		2002	400,000	0		—		200,000		22,728
Louis A. Greco		2004	228,832	0		—		25,000		396,322	(7)
Chief Financial Officer		2003	250,000	73,000		—		40,475		23,186
and Executive Vice		2002	250,000	60,500		—		35,000		23,270
President(7)
Robert R. Ryan		2004	276,669	9,000		—		75,000		149,507
Executive Vice		2003	250,004	61,000		—		90,475		389,222
President(8)		2002	249,325	69,000		—		80,000		268,093
Kenneth Blakely		2004	250,000	33,000		—		25,000		24,255
Executive Vice		2003	250,000	39,000		—		25,475		26,866
President, Software(9)		2002	250,000	40,700		—		35,000		19,590
Amir Mobayen,		2004	220,000	180,745		275,900		50,000		30,426
Senior Vice President,		2003	199,519	170,101		158,990		30,475		17,802
EMEA Sales(10)		2002	200,000	85,359		—		15,000		8,724
Christopher St. John,		2004	299,967	66,000		172,502		75,000		—
Senior Vice President,		2003	253,142	37,000		155,559		30,475		—
Asia-Pacific Sales(11)		2002	207,702	38,500		80,360		25,000		—

(1)We did not make any payments or awards to the identified individuals that would be classifiable under the “Restricted Stock Award” and “LTP Payout” columns otherwise required to be included in the Table by the applicable SEC disclosure rules.

(2)Except where noted, bonuses are paid 50% in cash and 50% in stock pursuant to the MSC.Software Corporation 2000 Executive Cash and Stock Bonus Plan (the “Bonus Plan”). The Bonus Plan provides that the stock portion of the bonus is valued at the opening of the market as of the first business day of the year for which the bonus is to be paid.

(3)This column includes amounts for Mr. Mobayen and Mr. St. John related to their assignments in foreign countries. Mr. Mobayen served as the European head of sales for 2003 and 2004. For Mr. Mobayen, amounts listed in 2004 include $165,984 related to tax equalization and $84,645 for housing. Amounts listed in 2003 include $82,904 related to tax equalization and $51,019 for housing. For Mr. St. John, amounts listed in 2004 include a living allowance of $66,929 and $53,321 for housing. For 2003, amounts include a living allowance of $60,887,and $93,103 for housing. For 2002 amounts listed include $79,050 for housing.

(4)Represents shares of stock underlying options granted under the Company's 1998 Plan and the 2001 Plan.

(5)Unless otherwise noted, the amounts shown constitute our contributions on behalf of the named individuals to (a) the MSC.Software Corporation Profit Sharing Plan (“PSP”), (b) the MSC Defined Contribution Plan which is a 401(k) match and replaced the PSP in 2004 (“DCP”), and (c) the MSC.Software Corporation Supplemental Retirement and Deferred Compensation Plan (“SERP”) in the following amounts: Frank Perna, Jr.: 2004: $10,250 to DCP and $36,888 to SERP; 2003: $12,520 to PSP and $30,138 to SERP; 2002: $12,604 to PSP and $10,124 to SERP; Louis A. Greco: 2004: $10,192

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to DCP and $0 to SERP; 2003: $12,520 to PSP and $10,666 to SERP; 2002: $12,604 to PSP and $10,666 to SERP; Robert R. Ryan: 2004: $10,250 to DCP and $17,245 to SERP; 2003: $12,520 to PSP and $10,666 to SERP; 2002: $12,604 to PSP and $11,465 to SERP; Kenneth Blakely: 2004: $10,250 to DCP and $14,005 to SERP; 2003: $12,520 to PSP and $14,346 to SERP; 2002: $11,782 to PSP and $7,808 to SERP; Amir Mobayen: 2004: $10,250 to DCP and $20,176 to SERP; 2003: $10,345 to PSP; and $7,457 to SERP; 2002: $2,687 to PSP and $6,037 to SERP.

(6)Mr. Perna terminated his employment with the Company on February 10, 2005. In addition, Mr. Perna earned $17,396 in 2002 that was not paid until 2003 because of an administrative error. This amount is included in his 2002 salary.

(7)Mr. Greco terminated his employment with the Company as of September 23, 2004. His “All Other Compensation” for 2004 includes our contribution of $10,192 to DCP, a cash severance payment of $300,000, $2,794 in reimbursed COBRA premiums and $83,336 for consulting services earned and paid in 2004 under the terms of a consulting agreement.

(8)Mr. Ryan terminated his employment with the Company on March 30, 2005. His “All Other Compensation” includes contractual amounts paid following the Company’s acquisition of Mechanical Dynamics, Inc. in 2002, such payments equaling $122,012 in 2004, $366,036 in 2003 and $244,024 in 2002.

(9)Mr. Blakely terminated his employment with the Company on June 30, 2005. In addition, Mr. Blakely earned $36,000 in 2002 that was not paid until 2003 because of an administrative error. This amount is included in his 2002 salary.

(10)Mr. Mobayen’s bonus includes amounts earned under a special quarterly bonus plan as well as amounts earned under the Bonus Plan. In 2004, Mr. Mobayen earned $103,745 under a quarterly bonus plan and $77,000 under the Bonus Plan. In 2003, Mr. Mobayen earned $113,101 under a quarterly bonus plan and $57,000 under the Bonus Plan. In 2002, Mr. Mobayen earned $74,359 in quarterly bonuses, and $11,000 under the Bonus Plan.

(11)Except for housing, Mr. St. John‘s compensation, which is paid in euros, is reported here in U.S. dollars at the annual conversion rates of .806 euros per dollar in 2004, .885 euros per dollar in 2003 and 1.064 euros per dollar in 2002. The Company directly pays for Mr. St. John’s housing at 900,000 yen per month and treats a portion of this rent as income to Mr. St. John. This portion is reflected as Other Annual Compensation as required. This portion of the housing cost that the Company attributed to Mr. St. John as compensation was paid in yen and is reported here in U.S. dollars at the annual conversion rates of 125.28 yen per dollar in 2004, 116 yen per dollar in 2003, and 108.17 yen per dollar in 2002.

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Option Grants in 2004

The following table presents additional information concerning the stock options shown in the Summary Compensation Table and granted to the named executive officers during 2004:

	INDIVIDUAL GRANTS									Potential Realizable
	Number of		Percent of Total							Value at assumed
	Securities		Options Granted							annual rates of
	Underlying		to Employees							appreciation for option
	Options		in Fiscal			Exercise Price			Expiration	term.(4)
Name	Granted (#)(1)		Year 2004(2)			($/Sh)(3)			Date	5%	10%
Frank Perna, Jr.		150,000		20.63	%		$	8.80	3/15/2014	830,141	2,103,740
Louis A. Greco		25,000		3.44	%		$	8.92	5/11/2014	140,244	355,405
Robert R. Ryan		75,000		10.32	%		$	8.92	5/11/2014	420,731	1,066,214
Kenneth Blakely		25,000		3.44	%		$	8.92	5/11/2014	140,244	355,405
Amir Mobayen		50,000		6.88	%		$	8.92	5/11/2014	280,487	710,809
Christopher St. John		75,000		10.32	%		$	8.92	5/11/2014	420,731	1,066,214

(1)During 2004, options were granted pursuant to the 1998 and 2001 Plans. These plans provide that vesting may be accelerated in certain events related to changes in control of the Company, unless the compensation committee, prior to such change in control, determines otherwise. The option plans are administered by the compensation committee of the board. All options granted are exercisable in installments, with 25% of the options becoming exercisable one year after the date of grant and with an additional 25% of the options becoming exercisable on each successive anniversary date. Full vesting will occur on the fourth anniversary date.

(2)Based on grants to employees of non-qualified stock options to purchase shares of common stock granted during the fiscal year ended December 31, 2004.

(3)Options were granted at an exercise price equal to or greater than the fair market value on the date of grant.

(4)The potential realizable value is calculated based on the term of the option at its time of grant. It is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate, compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. No gain to the option holder is possible unless the stock price increases over the option term. The 5% and 10% assumed rates of appreciation are derived from the rules of the SEC and do not represent our estimate or projection of the future common stock price.

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Aggregated Option Exercises in 2004 and Year-End Option Values

The following table shows information for the named executive officers, concerning:

(1)exercises of stock options during 2004; and

(2)the amount and values of unexercised stock options as of December 31, 2004

	Shares Acquired		Value Realized		Number of Securities Underlying Options at FY-End (#)				Value of Unexercised In-the-Money Options at FY-End ($)(1)
Name	on Exercise (#)		($)		Exercisable		Unexercisable		Exercisable	Unexercisable
Frank Perna, Jr.(3)		—		—	1,292,975			312,500	2,162,803		367,375
Louis A. Greco(4)		—		—	424,225	(2)		0	569,031		0
Robert R. Ryan		—		—	66,725			178,750	74,803		283,500
Kenneth Blakely(5)		—		—	275,475			72,500	365,603		94,250
Amir Mobayen		—		—	37,975			82,500	43,241		150,063
Christopher St. John		—		—	205,975			115,000	398,153		185,625

(1)Based on the closing price of our common stock on December 31, 2004 ($ 10.47 per share) minus the exercise price of “in-the-money” options.

(2)The vesting of all Mr. Greco’s outstanding stock options accelerated pursuant to the terms of an Employment Separation and Consulting Agreement entered into as of September 23, 2004

(3)Mr. Perna’s employment with us was terminated effective February 10, 2005. We extended the exercise period for his vested options three years (provided 425,000 of his vested options were terminated), subject to the earlier expiration for certain specific reasons unrelated to his termination of employment.

(4)Mr. Greco’s employment with us was terminated effective September 23, 2004. We accelerated the vesting of all of Mr. Greco’s outstanding and otherwise unvested shares and provided that all options would remain exercisable for a three year period, subject to the earlier expiration for certain specified reasons unrelated to his termination of employment.

(5)Mr. Blakely’s employment with us was terminated effective June 30, 2005. We extended the exercise period for his vested options through September 29, 2006, subject to the earlier expiration for certain specified reasons unrelated to his termination of employment.

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Pension Plan Table

The following table reflects estimated gross annual pension benefits relative to a German pension plan in which Mr. St.John participates, based on annual remuneration and years of service. Mr. St.John has completed 14 years of service with us. The pension obligations include a grant of retirement pension, disability and survivor’s pension. The amount of the pension is for each year of service (maximum 30 years) at 0.5% of salary up to the Social Security Contribution Ceiling (“SSCC”), and 1.5% of the exceeding part of the salary. The widow’s/widower’s pension amounts to 60% of the retirement pension. The normal retirement age is 65. The table assumes a 3% yearly salary increase and provides for an exchange rate of 1.3641, as well as an SSCC in EURO of 61,800, and SSCC in USD of 84,301. As an example, Mr. St.John could make $200,000 at year 1. At year 2, given the 3% salary increase, his pay would be $206,000, and would increase accordingly until at year 10, his pay would be $260,955, $60,955 greater than he earned in year 1. However, since we take into account the SSCC, the salary increase caps out at $25,692 at year 10.

	Annual Pension Benefit for Years of Service
	10	15	20	25	30
Remuneration—in $USD Beginning with Year 1
$200,000	25,962	43,152	63,751	88,303	117,436
$250,000	35,849	59,193	86,927	119,749	150,211
$300,000	46,299	76,147	111,420	152,983	181,350
$350,000	57,336	94,053	137,290	188,085	210,782
$400,000	68,986	112,954	164,597	225,136	238,432
$450,000	81,276	132,893	193,403	264,222	264,222
$500,000	94,233	153,915	223,775	288,070	288,070
$550,000	107,888	176,068	255,779	309,893	309,893

New Executive Team

We have a new executive management team. The executive officers as of December 31, 2005 are William J. Weyand, chairman and chief executive officer, Glenn R. Wienkoop, president and chief operating officer, John J. Laskey, senior vice president, chief financial officer and John A. Mongelluzzo, senior vice president, general counsel and secretary. Mr. Mobayen and Mr. St. John remain with us as senior vice presidents but are not members of the executive team.

Mr. Weyand joined us as a director on December 2, 2004 and became chairman and chief executive officer on February 10, 2005. At this time, we entered into a two-year employment agreement with Mr. Weyand. He receives an annual base salary of $485,000 and has a current annual target bonus opportunity of 100% of base salary, which bonus may exceed target as determined by the compensation committee of the board. Upon joining us, he purchased 50,000 restricted shares at $11.73 per share and in conjunction with this purchase was granted 200,000 restricted stock units that will be paid on a one-for-one basis, in shares of our common stock. Although these stock units vest in two equal installments, half on March 1, 2006 and the remaining half on March 1, 2007, Mr. Weyand will not be issued the 200,000 shares of restricted stock until March 1, 2007. He also received a grant of 450,000 options at an exercise price of $9.89 per share which vest in two equal installments on February 10, 2006 and February 10, 2007. Mr. Weyand was also granted a 100,000 share one for one performance stock unit award. The award vests if either (1) our stock price closes at $15.00 or more each trading day over a period of at least 30 consecutive trading days while listed on the NYSE or quoted on the NASDAQ National Market or (2) we are sold at a per share price of $15.00 or more. Mr. Weyand also holds 15,000 share options that were granted to Mr. Weyand in his capacity as a non-employee director prior to February 10, 2005 at an exercise price of $9.68 per share for 10,000 options and $10.27 per share for 5,000 options. In the event Mr. Weyand’s employment is terminated during the two-year employment term either by us without

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“Cause” or by Mr. Weyand for “Good Reason” (as those terms are defined in the Employment Agreement), he will be entitled to severance pay that includes (1) continued payment of his regular base salary for the duration of the two-year period, (2) if the termination of employment occurs before December 31, 2005, an amount equal to 175% of Mr. Weyand’s annualized base salary rate in effect immediately prior to the termination, and (3) if the termination of employment occurs on or after December 31, 2005, but before December 31, 2006, an amount equal to 100% of Mr. Weyand’s annualized base salary rate in effect immediately prior to the termination. In addition, the equity-based awards described above will also generally become fully vested, to the extent then outstanding and not otherwise vested, in connection with such a termination of employment.

Mr. Wienkoop joined us as president and chief operating officer on August 15, 2005. We entered into an employment agreement with Mr. Wienkoop pursuant to which he receives an annual base salary of $330,000 and has a current annual target bonus opportunity of 70% of base salary, which bonus may exceed target as determined by the compensation committee of the board. He also received a grant for 275,000 share options with an exercise price of $14.30 per share that vest annually in four equal installments beginning August 15, 2006. Mr. Wienkoop was also granted a 40,000 share one for one performance stock unit award. The award vests if either (1) our stock price closes at $20.00 or more each trading day over a period of at least 30 consecutive trading days while listed on the NYSE or quoted on the NASDAQ National Market or (2) we are sold at a per share price of $20.00. Our employment agreement with Mr. Wienkoop further provides that if during the first year of Mr. Wienkoop’s employment with us we terminate his employment for other than (i) cause or (ii) upon a change-in-control, then he is entitled to a severance payment equal to 100% of his then current salary. In addition, under this agreement we agreed to cover the expenses associated with the real estate fees and closing costs for the sale of his home in Saratoga, California (the “Premises”), plus relocation costs, in total up to a maximum of $300,000. We also agreed to cover a portion of any negative gap (the “Shortfall”), if any, that may result between the gross sale price (defined below) of the Premises and the appraisal value as follows: we will pay 25% of the first $250,000 of the Shortfall, 50% of the next $250,000 of any Shortfall, 75% of the next $500,000 Shortfall and 100% of any Shortfall to the extent exceeding $1 million. We agreed on the engagement of an independent appraiser to conduct an appraisal of the Premises. Gross sales price was defined as the actual purchase price without deduction for real estate commissions, taxes, prorations or other costs of sale. Our obligation to cover any Shortfall extends for one year from the date of agreement (provided the board may extend this term).

Mr. Laskey joined us as senior vice president and chief financial officer on October 18, 2004. He currently receives a base salary of $285,000 and has an annual target bonus opportunity of 60% of base salary, which bonus may exceed target as determined by the compensation committee of the board. He also exercised his right to purchase 25,000 shares of restricted stock under a restricted stock agreement with us at $7.00 per share, received a 39,000 share grant of restricted stock units which vest annually in four equal installments beginning on October 18, 2005, and received an option grant totaling 150,000 share options at an exercise price of $11.40 per share that vest annually in four equal parts beginning on October 18, 2005. Mr. Laskey was also granted a 50,000 share option on October 18, 2005 at an exercise price of $14.30 per share that vests annually in four equal installments beginning October 18, 2006. Mr. Laskey was granted a 30,000 share one for one performance stock unit award. The award vests if either (1) our stock price closes at $17.00 or more each trading day over a period of at least 30 consecutive trading days while listed on the NYSE or quoted on the NASDAQ National Market or (2) we are sold at a per share price of $17.00.

Mr. Mongelluzzo joined us as senior vice president, general counsel and secretary on March 3, 2005. He currently receives a base salary of $275,000, and has an annual target bonus opportunity of 60% of base salary, which bonus may exceed target as determined by the compensation committee of the board. He also received a signing bonus of $25,000 and a grant for 150,000 options at an exercise price of $11.56 per share and will receive a grant for an additional 50,000 options on the first anniversary of his employment.

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Mr. Mongelluzzo was also granted a 30,000 share one for one performance stock unit award. The award vests if either (1) our stock price closes at $17.00 or more each trading day over a period of at least 30 consecutive trading days while listed on the NYSE or quoted on the NASDAQ National Market or (2) we are sold at a per share price of $17.00.

We have entered into Severance Compensation Agreements with Messrs. Wienkoop, Laskey and Mongelluzzo that provide that if the executive’s employment is terminated by us for other than Cause (as defined) or by the executive for other than Good Reason (as defined), or retirement, death or disability (so defined) of the executive within two years following a change in control of the Company (as defined below) they are entitled to receive (i) full base salary through the date of termination plus credit for any unused vacation; (ii) pro rata share of annual bonus award for the year of termination; (iii) 2.5 times the sum of annualized base salary plus annual bonus; and (iv) a “gross-up payment” for any excise tax imposed by Section 4999 of the Internal Revenue Code and any taxes on such gross-up amount. In addition, all stock options held by the terminated executive would immediately vest and become exercisable and we would continue the terminated executive’s medical and dental benefits until the earlier of 21¤2 years after the date of termination and commencement of full-time employment by the terminated executive. The severance agreements are automatically renewed annually unless written notice of termination by a party is given 60 days prior to December 31 of each year. In addition, the Severance Compensation Agreements will continue in effect for two years following a change in control.

Change in control is deemed to occur under the Severance Compensation Agreements if: (i) there shall be consummated any consolidation or merger of the company and, as a result of such consolidation or merger (x) less than 50% of the outstanding common shares and 50% of the voting shares of the surviving or resulting corporation are owned, immediately after such consolidation or merger, by the owners of the company’s common shares immediately prior to such consolidation or merger, or (y) any person (as such term is used in Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 20% or more of the surviving or resulting corporation’s outstanding common shares; or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the company shall be consummated; or (iii) the shareholders of the Company shall approve any plan or proposal for the liquidation or dissolution of the Company; or (iv) any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act) shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 20% or more of the Company’s outstanding common shares; or (v) during any period of two consecutive years, individuals who, at the beginning of such period constitute the entire board of directors, shall cease for any reason to constitute a majority thereof unless the election or the nomination for election by the Company’s shareholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.

Employment and Severance Agreements

In addition to the Agreements for the new executive team above under “New Executive Team” we are a party to the following agreements:

·Mobayen Expatriate Agreement.   We are a party to an agreement with Amir Mobayen. This agreement sets his current base salary at $230,000. Mr.Mobayen participates in the EMEA incentive bonus plan and is eligible to receive quarterly incentive compensation of up to 50% of his quarterly base salary and, in addition, participates in the annual CEO bonus plan with a target bonus of 50%, which bonus may exceed target. Mr. Mobayen also receives a housing allowance of approximately $7,000 per month as well as a company car. Because Mr. Mobayen is on an expatriate assignment, we provide him a tax equalization benefit that limits his tax burden resulting from this assignment. Finally, this agreement provides Mr. Mobayen a severance benefit that includes a

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minimum six month advance notice in the event we wish to terminate Mr. Mobayen’s employment, and a lump sum payment equal to 50% of total remuneration earned in the prior calendar year. This lump sum payment is increased to 100% once he has been employed by us for 10 years (his original date of employment was October 1, 2001).

·Mr. St. John Managing Director Contract.   We are a party to an agreement with Mr. St. John. This agreement sets his current base salary at $250,000. Mr. St. John participates in an incentive bonus plan and he is currently eligible for a target bonus of 50%, which bonus may exceed target. He is also eligible to participate in a pension plan, receives a company car (which he currently does not utilize), and other standard benefits. Mr. St. John is currently situated in Japan at our request, and therefore we are providing him certain expatriate benefits including a housing allowance of approximately $7,500 per month and a cost of living allowance of 4,486.89 Euros (approximately $5,300). Finally, this agreement provides Mr. St. John a severance benefit that includes a minimum six month advance notice in the event we wish to terminate Mr. St. John’s employment and a lump sum payment equal to 100% of total remuneration earned in the prior calendar year.

·Mobayen and St. John Severance Compensation Agreements.   We are also a party to severance agreements with Amir Mobayen and Christopher St. John. These severance agreements provide that if the executive’s employment is terminated by us for other than Cause (as defined) or by the executive for other than Good Reason (as defined) or retirement, death or disability (as defined) of the executive within two years following a change in control of the Company (which term has the same meaning as set forth in the description of Severance Compensation Agreements described above under “New Executive Team”), the executive is entitled to receive (i) full base salary through the date of termination plus credit for any unused vacation; (ii) pro rata share of annual bonus award for the year of termination; and (iii) 2.0 times the sum of annualized base salary plus annual bonus. In addition, all stock options held by the terminated executive would immediately vest and become exercisable and we would continue the terminated executive’s medical and dental benefits until the earlier of two years after the date of termination and commencement of full-time employment by the terminated executive. The severance agreements are automatically renewed annually unless written notice of termination by a party is given 60 days prior to December 31. In addition, the agreements will continue in effect for two years following a change in control.

·Severance Compensation Agreements for Other Management.As of December 31, 2005, we were also a party to Severance Compensation Agreements with 17 other management employees. Two of these 17 employees have entered into agreements that are identical to the Mobayen and St. John Severance Compensation Agreements, and the other 15 have entered into agreements with us that are identical to the Mobayen and St. John Severance Compensation Agreements, except that the multiplier to be used to determine the severance benefit is 1.0 times sum of annualized base salary plus annual bonus in contrast to the 2.0 for Mobayen, St. John and the other two management employees.

·Greco Separation and Consulting Agreements.On September 23, 2004, we entered into an Employment Separation and General Release Agreement with Mr. Greco. We agreed, among other things, to pay Mr. Greco a cash severance payment of $300,000 and pay for Mr. Greco’s continued medical coverage for a period not to exceed 18 months. We also accelerated the vesting of Mr. Greco’s outstanding and otherwise unvested options to purchase shares of our common stock and confirmed that the termination of employment/services rules applicable to those options generally would not be triggered until expiration of the term of the Consulting Agreement described below.

On September 23, 2004, we also entered into a Consulting Agreement with Mr. Greco. Under this Consulting Agreement, Mr. Greco is engaged as a consultant for a three-year term to provide

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advice and consultation to us with respect to, among other things, business strategy, marketing, litigation, finance and administration. Minimal services have been provided by Mr. Greco. Mr. Greco is receiving a monthly consulting fee of $25,511 during the first 18 months of the term of the Consulting Agreement and $28,511 during the last 18 months of the term of the Consulting Agreement. Mr. Greco agreed, among other things, not to compete with us during the term of the Consulting Agreement.

·Perna Separation and Consulting Agreement.On February 10, 2005, we entered into an Employment Separation and General Release Agreement with Mr. Perna. Pursuant to that agreement, we paid to Mr. Perna a severance payment of $8,000, paid his costs and expenses associated with the negotiation of his separation from the Company and agreed to continue Mr. Perna’s medical coverage for 30 months at our cost. In addition, Mr. Perna was given up to three years to exercise his vested stock options previously granted by us (to the extent those options were not terminated as described in the following sentence.) In return, Mr. Perna released any claims that he had against us and our affiliates and 425,000 of Mr. Perna’s otherwise vested stock options previously granted by us were terminated.

We also entered into a Consulting Agreement, dated as of February 10, 2005 (the “Consulting Agreement”), with Mr. Perna. The Consulting Agreement has a maximum two-year term and generally provides that Mr. Perna will be available during the term to provide transition or other services that we may reasonably request. We are paying Mr. Perna a consulting fee of $14,000 for each month of his service to us during the term of the Consulting Agreement. Minimal services have been provided by Mr. Perna. We may terminate the Consulting Agreement at any time by payment to Mr. Perna of an amount equal to (1) $192,000 less (2) the aggregate amount of the monthly consulting fees previously paid to Mr. Perna pursuant to the Consulting Agreement. No such termination payment is required if the aggregate amount of such consulting fees previously paid to Mr. Perna at the time of termination equal or exceed $192,000.

·Blakely Separation and Consulting Agreements.   On June 30, 2005, we entered into an Employment Separation and General Release Agreement with Mr. Blakely. We agreed, among other things, to pay Mr. Blakely a cash severance payment of $114,000 over an initial six month period and to pay for Mr. Blakely’s continued medical coverage for a period of six months. In addition, Mr. Blakely was given through September 29, 2006 to exercise his vested stock options previously granted by us (to the extent they otherwise did not earlier terminate by reason other than the termination of employment). In return, Mr. Blakely released any claims he had against us and our affiliates. Effective as of December 14, 2005, we amended the Employment Separation and General Release Agreement to extend the term through March 31, 2006.

We also entered into a Consulting Agreement dated as of June 30, 2005 (the “Consulting Agreement) with Mr. Blakely. The Consulting Agreement is for a term of six months commencing June 30, 2005, provided either party can terminate this Consulting Agreement upon written notice. Mr. Blakely receives $125.00 per hour for providing consulting services and has been engaged on a full time (40 hours a week) basis since June 30, 2005, receiving approximately $5,000 per week.Effective as of March 8, 2006, we amended the Consulting Agreement to extend the term through June 30, 2006.

Compensation Committee Interlocks and Insider Participation

None of the compensation committee members were officers or employees for us or any of our subsidiaries or had any relationship requiring disclosure by us under Item 404 of the SEC’s Regulation S-K during 2004. In addition, no member of the compensation committee is employed by a company whose board of directors includes a member of our management.

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Directors’ Compensation

Directors who also serve as our employees or officers do not receive any additional compensation for their service on the board. Currently, directors who are not our officers or employees (“non-employee directors”) receive a $22,000 annual retainer. In addition, the committee chair of the governance and nominating committee and compensation committee each receives $7,500 per year and the chair of the audit committee receives $12,000 per year as additional compensation for serving as a committee chair. The lead director receives an additional $20,000 annual retainer. Directors also receive $3,500 for each board meeting they attend and $1,750 for each committee meeting they attend. In addition, non-employee directors are reimbursed for all expenses incurred in connection with attendance at meetings of the board and the performance of board duties.

Non-employee directors are eligible to participate in the Non-Employee Director Program. Under this program, non-employee directors receive a grant of options to purchase 10,000 shares of common stock upon election to the Board. In addition, non-employee directors receive an annual grant of 5,000 options to purchase shares of common stock on the first business day of each calendar year. In 2004, Messrs. Glickman, Grun and Riordan received an annual grant of 5,000 options at an exercise price per share of $9.46 and Messrs. Stevens, Spivy and Weyand each received a grant for 10,000 options upon their election to the board at exercise prices per share of $7.12, $9.68 and $9.68 respectively. All of the options granted under the program become exercisable 12 months after the date of grant and expire on the fifth anniversary of the grant date.

Lead Director

In March 2003, the board of directors created a new position of lead director. The independent directors appoint the lead director annually. The independent directors designated Donald Glickman to serve in the position for 2004 and again in 2005. The lead director’s compensation is an additional $20,000 annually.

The lead director’s primary responsibility is to:

·assist the board in assuring compliance with and implementation of our governance guidelines,

·act as the principal liaison between independent directors and the chief executive officer on certain issues, and

·coordinate the agenda for and chair meetings of the independent directors.

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ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT RELATED STOCKHOLDER MATTERS

The following table sets forth certain information regarding the ownership of our common stock as of December 31, 2005 by: (1) each director and nominee for director; (ii) each of the executive officers named in the Summary Compensation Table; (iii) all of our executive officers and directors as a group; and (iv) all those known by us to be beneficial owners of more than five percent (5%) of our common stock. Five percent (5%) or greater shareholder information is based on information received from 13D/13G filings made within the last twelve months. The information provided is to the best knowledge and belief of the Company. Unless otherwise indicated, the address of each of the beneficial owners listed in this table is: c/o MSC, 2 MacArthur Place, Santa Ana, California 92707.

Name and Address of Beneficial Owner	Common Stock Ownership(1)		Options Exercisable within 60 Days(2)		Percent of Class(3)
ValueAct Capital 435 Pacific Avenue, Fourth Floor San Francisco, CA 94133(4)		3,459,800		—		11.23	%
Morgan Stanley 1221 Avenue of the Americas New York, NY 10020(5)		2,587,261		—		8.40	%
MSD Capital L.P. 645 Fifth Avenue, 21st Floor New York, NY 10022(6)		3,685,700		—		11.97	%
Dimensional Fund Advisors Inc. 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 904017(7)		2,254,550		—		7.31	%
Rockbay Capital Management, L.P. 600 Fifth Avenue, 24th Floor New York, NY 10020(8)		2,158,000		—		7.0	%
Wells Fargo & Company 420 Montgomery Street, San Francisco, CA 94104(9)		1,888,429		—		6.13	%
Silver Point Capital, L.P. Two Greenwich Plaza, 1st Floor Greenwich, CT 06830(10)		3,338,900		—		10.83	%
UBS AG Bahnhofstrasse 45 PO Box CH-8021 Zurich, Switzerland(11)		1,839,957		—		5.97	%
National City Corp. 1900 East Ninth Street Cleveland, OH 44114(12)		1,732,670		—		5.62	%
Caxton International Limited c/o Prime Management Limited Mechanics Building 12 Church Street Hamilton, AM 11 (13) Bermuda		2,015,400		—		6.54	%
Donald Glickman(14)		13,000		21,000		*
William F. Grun(15)		13,285		21,000		*
Masood A. Jabbar(16)		0		0		*

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Philip B. Livingston(17)	14,225		0		*
Ashfaq A. Munshi(18)	0		0		*
George N. Riordan(19)	13,101		21,000		*
Gregory P. Spivy(20)	0		15,000		*
Mark A. Stevens(21)	0		15,000		*
William J. Weyand(22)	50,000		240,000		*
Glenn R. Wienkoop(23)	0		0		*
John A. Mongelluzzo(24)	0		0		*
John J. Laskey(25)	36,066		37,500		*
Frank Perna Jr.(26)	200,706		867,975		3.37	%
Louis A. Greco(27)	4,679		374,225		1.21	%
Robert Ryan(28)	75,066		0		*
Kenneth Blakely(29)	44,370		285,475		1.07	%
Amir Mobayen(30)	16,502		66,725		*
Christopher St.John(31)	14,600		245,475		*
All directors and current executive officers as a group (12 persons)	139,677	**	370,500	**	1.64	%

(1)This column lists unrestricted common stock that, except as provided with respect to certain shares held in trust with the person’s spouse and as otherwise provided under state community property laws, beneficial ownership is direct and the person indicated has sole voting and investment power over the shares of common stock indicated. This column also lists restricted common stock granted to certain Executives (as set out individually below).

(2)The amounts shown in this column include vested in plan stock options and in plan stock options that will vest within 60 days of December 31, 2005 (March 1, 2006) and certain out of plan stock options and out of plan stock options that will vest within the aforementioned 60 day period. If shares are acquired, the director or executive officer would have sole discretion as to voting and investment.

(3)All expressions of percent of class held assume that the options, if any, of the particular person or group in question, and no others, have been exercised or that such person’s restricted stock units or performance units have been settled in shares of common stock. Percent of class is based on 30,803,859 shares of the company’s common stock outstanding on December 31, 2005.

(4)Based upon information set forth in a Schedule 13D filed under the Securities Exchange Act of 1934 by ValueAct Capital dated November 4, 2004.

(5)Based upon information set forth in a Schedule 13G filed under the Securities Exchange Act of 1934 by Morgan Stanley dated December 31, 2005.

(6)Based upon information set forth in a Schedule 13G filed under the Securities Exchange Act of 1934 by MSD Capital L.P. and MSD Torchlight, L.P. dated November 2, 2005.

(7)Based upon information set forth in a Schedule 13G filed under the Securities Exchange Act of 1934 by Dimensional Fund Advisors, Inc. dated December 31, 2005.

(8)Based upon information set forth in a Schedule 13G filed under the Securities Exchange Act of 1934 by Rockbay Capital Management, L.P. and Rockbay Capital Advisors, Inc. dated March 24, 2005.

(9)Based upon information set forth in Amendment No. 1 to Schedule 13G filed under the Securities Exchange Act of 1934 by Wells Fargo & Company and Wells Capital Management Incorporated dated February 2, 2006.

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(10)Based upon information set forth in a Schedule 13G filed under the Securities Exchange Act of 1934 by Silver Point Capital, L.P. dated November 7, 2005.

(11)Based upon information set forth in Amendment No. 2 to a Schedule 13G filed under the Securities Exchange Act of 1934 by UBS AG dated December 31, 2005.

(12)Based upon information set forth in a Schedule 13G filed under the Securities Exchange Act of 1934 by National City Corp. dated February 14, 2005.

(13) Based upon information set forth in a Schedule 13G filed under the Securities Act of 1934 by Caxton International Limited dated December 31, 2005.

(14)Donald Glickman, director since 1998.

(15)William F. Grun, director since 1997.

(16)Masood A. Jabbar, director since July 2005. Mr. Jabbar holds 10,000 share options that are not exercisable within 60 days of December 31, 2005.

(17)Philip B. Livingston, director since May 2005. Of the 14,225 shares beneficially held as reflected in the Common Stock Ownership Table above, 3,225 shares are owned by family members. Mr. Livingston holds 10,000 share options that are not exercisable within 60 days of December 31, 2005.

(18)Ashfaq A. Munshi, director since July 2005. Mr. Munshi holds 10,000 share options that are not exercisable within 60 days of December 31, 2005.

(19)George N. Riordan, director since 1983. Of the 13,101 shares beneficially held in the Common Stock Ownership Table above, 6,601 shares are represented by debentures to MSC stock.

(20)Gregory P. Spivy, director since December 2004. Mr. Spivy is a partner of ValueAct Capital, a greater than 10% stockholder of the company (see Common Stock Ownership Table and footnote 4 above). In addition MSC has entered into a Stockholders Agreement dated December 3, 2004 with ValueAct Capital, which was subsequently amended on February 10, 2005.

(21)Mark A. Stevens, director since 2004.

(22)William J. Weyand, chairman and chief executive officer effective February 10, 2005. The 50,000 shares disclosed in the Common Stock Ownership Table above represent restricted stock purchased by Mr. Weyand under a restricted stock agreement. Mr. Weyand was also granted 200,000 restricted stock units. Although the restricted stock units vest in two installments, half on March 1, 2006 and the remaining half on March 1, 2007, Mr. Weyand will not be issued the 200,000 shares of restricted stock until March 1, 2007. On February 10, 2005 Mr. Weyand was granted a 450,000 out of plan option which vests in two equal annual installments on February 10, 2006 (as noted in chart above) and February 10, 2007. For additional information regarding Mr. Weyand’s equity compensation arrangement, see the discussion under the heading, “New Executive Team” in Item 11.

(23)Glenn R. Wienkoop, president and chief operating officer since August, 2005. On August 15, 2005 Mr. Wienkoop was granted a 275,000 share out of plan option that vests annually in four equal installments beginning August 15, 2006. For additional information regarding Mr. Wienkoop’s equity compensation arrangement, see the discussion under the heading, “New Executive Team” in Item 11.

(24)John A. Mongelluzzo, senior vice president, general counsel and secretary since March, 2005. On March 9, 2005 Mr. Mongelluzzo was granted a 150,000 share out of plan option that vests annually in four equal installments beginning March 9, 2006. For additional information regarding Mr. Mongelluzzo’s equity compensation arrangement, see the discussion under the heading, “New Executive Team” in Item 11.

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(25)John J. Laskey, senior vice president, chief financial officer, since October 2004. Of the 36,066 shares disclosed in the Common Stock Ownership Table above, 25,000 shares represent restricted stock purchased by Mr. Laskey under a restricted stock agreement; 9,750 shares represent the first vested shares of a 39,000 share restricted stock unit which vests annually over a 4 year period beginning October 18, 2005 (he holds an additional 29,250 remaining restricted stock units that are not vested) and 1,316 shares which were awarded under the 2000 Executive Bonus Plan. The 37,500 share options reflected above represent the portion of an in-plan option grant totaling 150,000 share options granted to Mr. Laskey as a result of his employment with us that vests annually in four equal parts beginning on October 18, 2005. Mr. Laskey was also granted a 50,000 share option on October 18, 2005 that vests annually in four equal installments beginning October 18, 2006. For additional information regarding Mr. Laskey’s equity compensation arrangement, see the discussion under the heading “New Executive Team” in Item 11.

(26)Frank Perna, Jr., former chairman of the board and chief executive officer. Of the 200,706 shares beneficially held as reflected in the Common Stock Ownership Table above, 452 are represented by convertible debentures.

(27)Louis A. Greco, former chief financial officer. Of the 76,089 shares beneficially held as reflected in the Common Stock Ownership Table above, 1,000 shares are owned by family members and 660 are represented by convertible debentures to our stock.

(28)Robert Ryan, former executive vice president.

(29)Kenneth D. Blakely, former executive vice president.

(30)Amir Mobayen, senior vice president of the Company. Mr. Mobayen holds 53,750 stock options that are not exercisable within 60 days of December 31, 2005. Mr. Mobayen was also granted a 25,000 share performance stock award. For additional information regarding Mr. Mobayen’s equity compensation arrangement, see the discussion under the heading “New Executive Team” in Item 11.

(31)Christopher M. St. John, senior vice president of the Company. Mr. St. John holds 74,000 stock options that are not exercisable within 60 days of December 31, 2005. Mr. St. John was also granted a 25,000 share performance stock award. For additional information regarding Mr. St. John’s equity compensation arrangement, see the discussion under the heading “New Executive Team” in Item 11.

*Holdings represent less than 1% of all shares outstanding.

**    Includes current directors and current executive officers only (William J. Weyand, John J. Laskey, Glenn R. Wienkoop, and John A. Mongelluzzo).

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Equity Plan Information

The following table provides information as of December 31, 2004 about the number of shares of our common stock that may be issued upon the exercise of outstanding stock awards under our existing equity compensation plans and the number of shares remaining available for future issuance. Our shareholder approved equity compensation plans consist of our 1991, 1998, 2001 and AES Stock Option Plans, our Employee Stock Purchase Plan and our 2000 Executive Cash or Stock Bonus Plan.

	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights			Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a))
Equity compensation plans approved by security holders		6,371,000		$	11.40		565,000
Equity compensation plans not approved by security holders(1)		15,000		15.00			—
Total		6,386,000		$	11.41		565,000

(1)Includes 15,000 warrants issued to the former President of MDI in exchange for consulting services.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In April 2003, we loaned Mr. St.John 8,500,000 Japanese Yen at a simple interest rate of 8.917% based on the Tokyo Interbank Offered Rate (ITBOR) as of such date. In April 2004, we loaned Mr. St.John 6,000,000 Japanese Yen with a simple interest rate of 6%, again based on the ITBOR as of such date. Both loans were made in conjunction with Mr. St.John’s expatriate status. Mr. St. John had to file and pay significant taxes in Japan while waiting for a significant tax refund from the German tax authorities. Mr. St. John has repaid both loans in full and no subsequent loans have been made.

During 2002, 2003 and 2004, we utilized the services of Geometric Software Solutions Co. Ltd. (“GSSL”), a public company headquartered in India that provides CAD/CAM/CAE/PDM software applications, component technology and development services. Frank Perna, Jr. was a director of GSSL through 2005. In 2002, 2003, and 2004 we paid GSSL $890,000, $631,000, and $749,000 respectively. As of December 31, 2004, we also own 1,040,000 shares of GSSL stock with an original cost of $68,000 and a fair market value of $8,692,000. We continue to utilize the services of GSSL.

Dassault Systemes is deemed a beneficial owner of more than five percent (5%) of our common stock. On or about April 20, 2001, the Company formed a strategic alliance with Dassault Systemes S.A. pursuant to which the Company was to develop our next generation of simulation software using Dassault Systemes’ Version 5 Architecture. The Company also acted as a strategic distribution channel for the joint Version 5 Analysis and Simulation portfolio.

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ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table shows the approximate fees billed to us for 2003 and 2004 by KPMG, our former independent registered public accounting firm:

	2003		2004
Audit Fees	$	540,000	$	281,000
Audit-Related Fees	26,000		92,000
Tax Fees	29,000		—
All Other Fees	—		—
Total	$	595,000	$	373,000

Audit Fees.   This category includes the audit of our annual financial statements, review of financial statements included in our Form 10-Q quarterly reports, and services that are normally provided by KPMG in connection with statutory and regulatory filings or engagements for those fiscal years, including the audit of our Profit Sharing Plan. This category also includes advice on accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, statutory audits required by non-U.S. jurisdictions and the preparation of an annual “management letter” on internal control matters.

Audit-Related Fees.   This category consists of assurance and related services provided by KPMG that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category primarily include due diligence, accounting consultations and audits in connection with acquisitions and internal control reviews related to our Sarbanes-Oxley compliance initiatives.

Tax Fees.   This category consists of professional services rendered by KPMG, primarily in connection with our tax compliance activities, including the preparation of tax returns in certain overseas jurisdictions and technical tax advice related to the preparation of tax returns.

All Other Fees.   No other fees were billed by KPMG during 2003 and 2004.

The Audit Committee, in its sole discretion, pre-approved and reviewed audit and non-audit services performed by KPMG as well as the fees charged for such services. Requests for approval are considered at each regularly scheduled Audit Committee meeting or, if necessary, are approved by the unanimous consent of all members of the Audit Committee. In its pre-approval and review of non-audit service fees, the Audit Committee considers, among other factors, the possible effect of the performance of such services on the auditors’ independence. The Audit Committee has considered and pre-approved all services rendered during 2004.

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PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Item 15(a)1.   Financial Statements

The following consolidated financial statements of MSC.Software Corporation, as included in this Report, are included in Item 8.

Item 15(a)2.   Financial Statement Schedules

Schedule II—Consolidated Valuation and Qualifying Accounts and Reserves

All other schedules have been omitted because the information either has been shown in the consolidated financial statements or notes thereto, or is not applicable or required under the instructions.

Item 15(b).     Exhibits

Exhibit Number
3.1	Certificate of Incorporation of MSC.Software Corporation, as amended (filed as Exhibit 3.1 of MSC.Software Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999, and incorporated herein by reference).
3.2	Certificate of Designations of Junior Participating Preferred Stock (filed as Exhibit 2.2 to The MacNeal-Schwendler Corporation’s Registration Statement on Form 8-A filed October 13, 1998, and incorporated herein by reference).
3.3**	Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on June 23, 1999 regarding the name change from The MacNeal-Schwendler Corporation to MSC.Software Corporation.
3.4**	Restated Bylaws of MSC.Software Corporation dated as of October 5, 2004.
3.5	Restated Bylaws of MSC.Software Corporation, as amended on December 3, 2004 to increase the exact number of directors from five (5) to seven (7), (filed as Exhibit 3.1 to a Current Report on Form 8-K filed December 9, 2004, and incorporated herein by reference).
4.1	Common Stock Purchase Warrants issued to Kubota Solid Technology Corporation (“KUSCO”) in 1998 and 1999 (filed as Exhibit 10.19 to MSC.Software Corporation’s Annual Report on Form 10-K filed for the year ended December 31, 2002, and incorporated herein by reference).
4.2	Common Stock Purchase Warrants issued to Michael Korybalski in 2002 (filed as Exhibit 10.20 to MSC.Software Corporation’s Annual Report on Form 10-K filed for the year ended December 31, 2002, and incorporated herein by reference).

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4.3	The MacNeal-Schwendler Corporation Warrant Agreement dated as of June 18, 1999 with The MacNeal-Schwendler Corporation acting in the capacity of Warrant Agent (filed as Exhibit 4.2 to a Current Report on Form 8-K filed July 1, 1999, and incorporated herein by reference).
4.4	Rights Agreement dated as of October 5, 1998 between The MacNeal-Schwendler Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, including the Form of Right Certificate (Exhibit A), the Summary of Rights to Purchase Junior Participating Preferred Stock (Exhibit B) and the Form of Certificate of Designations of Junior Participating Preferred Stock (Exhibit C) (filed as Exhibit 2.1 to The MacNeal-Schwendler Corporation’s Registration Statement on Form 8-A filed October 13, 1998 and incorporated herein by reference).
4.5	Amendment to Rights Agreement dated as of October 18, 2004, by and between MSC.Software Corporation and Mellon Investor Services LLC, as Rights Agent (filed as Exhibit 2.2 to MSC.Software Corporation’s Form 8-A/A, dated October 20, 2004, and incorporated herein by reference).
4.6	Indenture, dated as of August 18, 1994, between MSC.Software Corporation and Chemical Trust Company of California, as trustee (filed as part of MSC.Software Corporation’s Registration Statement on Form S-3 (No. 33-83174), and incorporated herein by reference).
4.7	First Supplemental Indenture, dated September 22, 1994, between MSC.Software Corporation and Chemical Trust Company of California, as trustee (filed as Exhibit 4.2 of MSC.Software Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1994, and incorporated herein by reference).
4.8	Second Supplemental Indenture, dated December 14, 1994, between MSC.Software Corporation and Chemical Trust Company of California, as trustee (filed as Exhibit 4.3 of MSC.Software Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1994, and incorporated herein by reference).
4.9	The MacNeal-Schwendler Corporation Indenture dated as of June 17, 1999 with Chase Manhattan Bank & Trust Company N.A. as Trustee (filed as Exhibit 4.1 to a Current Report on Form 8-K filed July 1, 1999, and incorporated herein by reference).
4.10	Indenture, dated as of May 5, 2003, between MSC.Software Corporation and J.P. Morgan Trust Company, National Association as Trustee (filed as Exhibit 4.1 of MSC.Software Corporation’s Registration Statement on Form S-3 (No. 333-106603), and incorporated herein by reference).
10.1	Agreement of Lease, dated August 25, 1999, between MSC.Software Corporation and Imperial Promenade Associates, LLC, a Delaware limited liability company (filed as Exhibit 10.1 to MSC.Software Corporation’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 1999, and incorporated herein by reference).
10.2**	First Amendment dated August 11, 2000, to Agreement of Lease, dated August 25, 1999, between MSC.Software Corporation and Imperial Promenade Associates, LLC, a Delaware limited liability company.
10.3**	Second Amendment dated January 19, 2001, to Agreement of Lease, dated August 25, 1999, between MSC.Software Corporation and Imperial Promenade Associates, LLC, a Delaware limited liability company.
10.4**	Third Amendment dated March 13, 2001, to Agreement of Lease, dated August 25, 1999, between MSC.Software Corporation and Imperial Promenade Associates, LLC, a Delaware limited liability company.

136

10.5**	Agreement of Lease, entered into August 5, 1999, between William C. Martin or his Assignee, and Mechanical Dynamics, Inc., predecessor by merger dated May 9, 2002 to MSC.Software Corporation.
10.6*	1991 Stock Option Plan (filed as Annex A to MSC.Software Corporation’s Annual Proxy Statement for the Annual Meeting of Shareholders held on June 10, 1992, and incorporated herein by reference).
10.7*	1991 Stock Option Plan Amendment (filed as part of MSC’s definitive Proxy Statement for the Annual Meeting of Shareholders on June 14, 1995, and incorporated herein by reference).
10.8*	1998 Incentive Stock Option Plan , as amended (filed as Annex A to The MacNeal-Schwendler Corporation’s Annual Proxy Statement for the Annual Meeting of Shareholders held on June 23, 1999, and incorporated herein by reference).
10.9*	2001 Stock Option Plan (filed as Appendix E to MSC.Software Corporation’s Definitive Proxy Statement on Schedule 14A filed on June 15, 2001, for the Annual Meeting of Shareholders held on July 18, 2001, and incorporated herein by reference).
10.10*	2001 Incentive Stock Option Plan Amendment (filed as Appendix B to MSC.Software Corporation’s definitive Proxy Statement for the Annual Meeting of Shareholders held on May 14, 2002, and incorporated herein by reference).
10.11*	1996 Stock Purchase Plan Amendment (filed as Appendix C to MSC.Software Corporation’s definitive Proxy Statement for the Annual Meeting of Shareholders held on May 14, 2002, and incorporated herein by reference).
10.12*	Employment Agreement Between MSC.Software Corporation and Frank Perna, Jr. (filed as Exhibit 3.1 of MSC.Software Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999, and incorporated herein by reference).
10.13*/**	Employment Letter Agreement between MSC.Software Corporation and John J. Laskey dated as of October 11, 2004.
10.14*/**	Employment Separation and General Release Agreement with Louis A. Greco, dated September 23, 2004
10.15*/**	Consulting Agreement between MSC.Software Corporation and Louis A. Greco, dated September 23, 2004.
10.16*/**	MSC.Software Corporation Defined Contribution Plan.
10.17*/**	Trust Agreement for the MSC.Software Corporation Defined Contribution Plan.
10.18*/**	MSC.Software Corporation Supplemental Retirement and Deferred Compensation Plan.
10.19	Form of Agreement for use of MSC.Nastran, as modified to September 1991 (filed as Exhibit 10.1 to MSC.Software Corporation’s Annual Report on Form 10-K filed for the fiscal year ended January 31, 1992, and incorporated herein by reference).
10.20	Agreement dated October 22, 1982, between MSC.Software Corporation and NASA (filed as Exhibit 10.2 to MSC.Software Corporation’s Registration Statement on Form S-1, File No. 2-82719, and incorporated herein by reference).
10.21*	Form of Indemnification Agreement between MSC.Software Corporation and directors, officers and agents thereof (filed as Exhibit 10.5 to MSC.Software Corporation’s Annual Report on Form 10-K filed for the year ended January 31, 1989, and incorporated herein by reference).

137

10.22*	Form of Severance Agreement between MSC.Software Corporation and executive officers thereof (filed as Exhibit 10.6(a) to The MacNeal-Schwendler Corporation’s Transition Report on Form 10-K filed for the fiscal year ended December 31, 1998, and incorporated herein by reference).
10.23*	Form of Severance Agreement between MSC.Software Corporation and key employees (filed as Exhibit 10.6(a) to The MacNeal-Schwendler Corporation’s Transition Report on Form 10-K filed for the fiscal year ended December 31, 1998, and incorporated herein by reference).
10.24	Registration Rights Agreement dated June 18, 1999 among The MacNeal-Schwendler Corporation, Dendron Technology B.V. and Fronos Technology B.V. (filed as Exhibit 4.3 to a Current Report on Form 8-K filed July 1, 1999 and incorporated herein by reference).
10.25	Registration Rights Agreement, dated as of May 5, 2003, between MSC.Software Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (filed as Exhibit 10.2 of MSC.Software Corporation’s Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference).
10.26*	Form of Director Change in Control Agreement (filed as Exhibit 10.15 to The MacNeal-Schwendler Corporation’s Transition Report on Form 10-K filed for the fiscal year ended December 31, 1998, and incorporated herein by reference).
10.27	Divestiture and Software License Agreement, dated April 7, 2003, between MSC.Software Corporation and Unigraphics Solutions, Inc. a wholly owned subsidiary of Electronic Data Systems, Inc. (filed as Exhibit 10.3 of MSC.Software Corporation’s Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference).
10.28	Stockholders’ Agreement dated as of December 4, 2004, by and among MSC.Software Corporation, ValueAct Capital Master Fund, L.P., ValueAct Capital Partners Co-Investors, L.P., VA Partners, L.L.C., Jeffrey W. Ubben, George F. Hamel, Jr. and Peter H. Kamin (collectively, the “Stockholders”), as well as Gregory P. Spivy and William J. Weyand (filed as Exhibit 10.1 to a Current Report on Form 8-K filed December 9, 2004, and incorporated herein by reference).
14**	MSC.Software Corporation Code of Business Conduct and Ethics.
21**	Material Subsidiaries of the Registrant.
23**	Independent Registered Public Accounting Firms’ Consent.
31.1**	Certification of Chief Executive Officer.
31.2**	Certification of Chief Financial Officer.
32.1**	Section 1350 Certification of Chief Executive Officer.
32.2**	Section 1350 Certification of Chief Financial Officer.

*Denotes management contract or compensatory plan.

**Indicates filed herewith.

138

SIGNATURES

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

		MSC.SOFTWARE CORPORATION
		(Registrant)
Dated: April 14, 2006	By:	/s/ WILLIAM J. WEYAND
		Chairman of the Board and Chief Executive Officer

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

Dated: April 14, 2006	By:	/s/ WILLIAM J. WEYAND
		Chairman of the Board and Chief Executive Officer
Dated: April 14, 2006	By:	/s/ JOHN J. LASKEY
		Chief Financial Officer (Principal Financial and Accounting Officer)
Dated: April 14, 2006	By:	/s/ MASOOD A. JABBAR
		Director
Dated: April 14, 2006	By:	/s/ DONALD GLICKMAN
		Director
Dated: April 14, 2006	By:	/s/ WILLIAM F. GRUN
		Director
Dated: April 14, 2006	By:	/s/ PHILIP B. LIVINGSTON
		Director
Dated: April 14, 2006	By:	/s/ ASHFAQ A. MUNSHI
		Director
Dated: April 14, 2006	By:	/s/ GEORGE N. RIORDAN
		Director
Dated: April 14, 2006	By:	/s/ GREGORY P. SPIVY
		Director
Dated: April 14, 2006	By:	/s/ MARK A. STEVENS
		Director

139

Schedule II—Consolidated Valuation and Qualifying Accounts and Reserves

For the Years Ended December 31, 2002, 2003 and 2004

	2002				2003			2004
	(in thousands)
Allowance for Doubtful Accounts
Beginning Balance		$	(2,038	)	$	(2,363	)	$	(2,425	)
Addition due to acquisition		(379		)	—			—
(Charge) credit to operations		23			173			(1,006		)
Write off and other adjustments		31			(235		)	91
Ending Balance		$	(2,363	)	$	(2,425	)	$	(3,340	)

140

EX-3.3

Exhibit 3.3

STATE OF DELAWARE

SECRETARY OF STATE

DIVISION OF CORPORATIONS

FILED 01:00 PM 06/23/1999

991234215 – 2416248

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

The undersigned, being the Secretary and Chief Financial Officer of The MacNeal-Schwendler Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware.

DOES HEREBY CERTIFY:

FIRST:  That at a meeting of the Board of Directors of The MacNeal-Schwendler Corporation, resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof.  The resolution setting forth the proposed amendment is as follows:

RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing “Article I. Name” so that, as amended, said Article shall be and read as follows:

“The name of the corporation is MSC.Software Corporation (hereinafter referred to as the “Corporation”).”

SECOND:  That thereafter, pursuant to resolution of its Board of Directors an annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation law of the State of Delaware as which meeting the necessary number of shares as required by same were voted in favor of the amendment.

THIRD:  That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, I hereunto sign my name and affirm that the statements made herein are true under penalties of perjury, this 23rd day of June, 1999.

THE MACNEAL-SCHWENDLER CORPORATION
By:	/s/ Louis A. Greco
Name:	Louis A. Greco
Title:	Secretary and Chief Financial Officer

EX-3.4

Exhibit 3.4

RESTATED BYLAWS

of

MSC.SOFTWARE CORPORATION

(a Delaware corporation)

INDEX

		Page
ARTICLE I.	OFFICES	1
Section 1.	Registered Office	1
Section 2.	Principal Executive Office	1
Section 3.	Other Offices	1
ARTICLE II.	STOCKHOLDERS	1
Section 1.	Place of Meetings	1
Section 2.	Annual Meetings	1
Section 3.	Special Meetings	1
Section 4.	Notice of Annual or Special Meeting	1
Section 5.	Notice of Business	2
Section 6.	Notice of Board Candidate	2
Section 7.	Quorum and Adjournment	3
Section 8.	Voting	3
Section 9.	Record Date	4
Section 10.	Proxies	4
Section 11.	Inspectors of Election	4
Section 12.	Stockholder Lists	4
ARTICLE III.	DIRECTORS	5
Section 1.	Powers	5
Section 2.	Number of Directors	5
Section 3.	Election and Term of Office	5
Section 4.	Board Reclassification	5
Section 5.	Vacancies	7
Section 6.	Place of Meeting	7
Section 7.	Regular Meetings	8
Section 8.	Special Meetings	8
Section 9.	Quorum	8
Section 10.	Participation in Meeting by Conference Telephone	8
Section 11.	Waiver of Notice	8
Section 12.	Adjournment	9

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Section 13.	Fees and Compensation	9
Section 14.	Action Without Meeting	9
Section 15.	Committees	9
Section 16.	Rights of Inspection	10
Section 17.	Advisory Directors	10
ARTICLE IV.	OFFICERS	10
Section 1.	Officers	10
Section 2.	Election	10
Section 3.	Appointment of Officers	10
Section 4.	Removal and Resignation	11
Section 5.	Vacancies	11
Section 6.	Chairman of the Board	11
Section 7.	Chief Executive Officer	11
Section 8.	President	11
Section 9.	Vice Presidents	11
Section 10.	Corporate Secretary	12
Section 11.	Assistant Secretaries	12
Section 12.	Chief Financial Officer	12
Section 13.	Assistant Financial Officers	12
ARTICLE V.	STOCK	13
Section 1.	Form of Stock Certificate	13
Section 2.	Transfers of Stock	13
Section 3.	Lost, Stolen or Destroyed Certificates	13
Section 4.	Registered Stockholders	13
ARTICLE VI.	OTHER PROVISIONS	14
Section 1.	Endorsement of Documents; Contracts	14
Section 2.	Representation of Shares of Other Corporations	14
Section 3.	Seal	14
Section 4.	Fiscal Year	14
Section 5.	Dividends	14

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ARTICLE VII.	INDEMNIFICATION	15
Section 1.	Right to Indemnification	15
Section 2.	Right of Claimant to Bring Suit	15
Section 3.	Non-Exclusivity of Rights	16
Section 4.	Insurance	16
Section 5.	Expenses as a Witness	16
Section 6.	Indemnity Agreements	16
Section 7.	Effect of Amendment	16
ARTICLE VIII.	EMERGENCY PROVISIONS	16
Section 1.	General	16
Section 2.	Unavailable Directors	17
Section 3.	Authorized Number of Directors	17
Section 4.	Quorum	17
Section 5.	Creation of Emergency Committee	17
Section 6.	Constitution of Emergency Committee	17

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RESTATED BYLAWS
of
MSC.SOFTWARE CORPORATION
(a Delaware corporation)

ARTICLE I.  OFFICES.

Section 1.              Registered Office.  The registered office of MSC.Software Corporation (the “Corporation”) in the State of Delaware shall be at Incorporating Services, Ltd., 15 East North Street, Dover, County of Kent and the name of the registered agent at that address shall be Incorporating Services, Ltd.

Section 2.              Principal Executive Office.  The principal executive office of the Corporation shall be fixed and located at 2 MacArthur Place, Santa Ana, County of Orange, State of California.  The Board of Directors of the Corporation (the “Board”) is granted full power and authority to change said principal executive office from one location to another within or without the State of California.  Any such change shall be noted in the Bylaws of the Corporation opposite this Section 2 or this Section 2 may be amended to state the new location.

Section 3.              Other Offices.  Branch or subordinate offices may be established at any time by the Board at any place or places.

ARTICLE II.  STOCKHOLDERS.

Section 1.              Place of Meetings.  Meetings of stockholders shall be held either at the principal executive office of the Corporation or at any other place within or without the State of Delaware which may be designated by the Board.

Section 2.              Annual Meetings.  The annual meetings of stockholders shall be held on such date and at such time as may be fixed by the Board.  At such meetings, directors shall be elected and any other proper business may be transacted.

Section 3.              Special Meetings.  Special meetings of the stockholders may be called at any time by a majority of the entire Board, the Chairman of the Board or the President.  Special meetings may not be called by any other person or persons.  Upon request in writing to the Chairman of the Board, the President, any Vice President or the Corporate Secretary by any person (other than the Board) entitled to call a special meeting of stockholders, the officer forthwith shall cause notice to be given to the stockholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request.  If the notice is not given within twenty (20) days after receipt of the request, the persons entitled to call the meeting may give the notice.

Section 4.              Notice of Annual or Special Meeting.  Except as otherwise required by law, written notice of each annual or special meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote thereat.  Such notice shall state the place, date and hour of the

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meeting and, in the case of a special meeting, shall also state the purpose or purposes for which the meeting is called.  Except as otherwise expressly required by law, notice of any adjourned meeting of the stockholders need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken.

Notice of a stockholders’ meeting shall be given either personally or by mail or by other means of written communication, addressed to the stockholder at the address of such stockholder appearing on the books of the Corporation or given by the stockholder to the Corporation for the purpose of notice.  Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mail, postage prepaid.  Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient.

Section 5.              Notice of Business.  At any meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board, (b) in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, or (c) by a stockholder of record entitled to vote at such meeting who complies with the notice procedures set forth in this Section 5.  For business to be properly brought before a meeting by such a stockholder, the stockholder shall have given timely notice thereof in writing to the Corporate Secretary.  To be timely, such notice shall be delivered to or mailed and received at the principal executive office of the Corporation not less than thirty (30) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than forty (40) days’ notice of the date of the meeting is given by the Corporation, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or otherwise given.  Such stockholder’s notice to the Corporate Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting, and in the event that such business includes a proposal to amend either the Certificate of Incorporation (the “Certificate of Incorporation”) or the Bylaws (the “Bylaws”) of the Corporation, the languageof the proposed amendment, (b) the name and address of the stockholder proposing such business, (c) the class and number of shares of stock of the Corporation which are owned by such stockholder and (d) any material personal interest of such stockholder in such business.  If notice has not been given pursuant to this Section 5, the Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that the proposed business was not properly brought before the meeting, and such business may not be transacted at the meeting.  The foregoing provisions of this Section 5 do not relieve any stockholder of any obligation to comply with all applicable requirements of the Securities Exchange Act of 1934 and rules and regulations thereunder.

Section 6.              Notice of Board Candidate.  At any meeting of stockholders, a person may be a candidate for election to the Board only if such person is nominated (a) by or at the direction of the Board, (b) by any nominating committee or person appointed by the Board or (c) by a stockholder of record entitled to vote at such meeting who complies with the notice procedures set forth in this Section 6.  To properly nominate a candidate, a stockholder shall give timely notice of such nomination in writing to the Corporate Secretary.  To be timely, such notice shall be delivered to or mailed and received at the principal executive office of the

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Corporation not less than thirty (30) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than forty (40) days’ notice of the date of the meeting is given by the Corporation, notice of such nomination to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or otherwise given.  Such stockholder’s notice to the Corporate Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of stock of the Corporation which are owned by the person and (iv) any other information relating to the person that would be required to be disclosed in a solicitation of proxies for election of directors pursuant to Rule 14a under the Securities Exchange Act of 1934; and (b) as to the stockholder giving the notice (i) the name and address of such stockholder and (ii) the class and number of shares of stock of the Corporation owned by such stockholder.  The Corporation may require such other information to be furnished respecting any proposed nominee as may be reasonably necessary to determine the eligibility of such proposed nominee to serve as a director of the Corporation.  No person shall be eligible for election by the stockholders as a director at any meeting unless nominated in accordance with this Section 6.

Section 7.              Quorum and Adjournment.  The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for holding all meetings of stockholders except as otherwise provided by applicable law or by the Certificate of Incorporation; provided, however, that the stockholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.  If it shall appear that such quorum is not present or represented at any meeting of stockholders, the Chairman of the meeting shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented.  At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed.  If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.  The Chairman of the meeting may determine that a quorum is present based upon any reasonable evidence of the presence in person or by proxy of stockholders holding a majority of the outstanding votes, including without limitation, evidence from any record of stockholders who have signed a register indicating their presence at the meeting.

Section 8.              Voting.  In all matters, when a quorum is present at any meeting, the vote of the holders of a majority of the capital stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of applicable law or of the Certificate of Incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question.  Such vote may be by voice vote or by written ballot; provided, however, that the Board may, in its discretion, require a written ballot for any vote.

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Unless otherwise provided in or pursuant to the Certificate of Incorporation each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder.

Section 9.              Record Date.  The Board may fix, in advance, a record date for the determination of the stockholders entitled to notice of any meeting or to vote at such meeting, entitled to vote by written consent on matters approved by the Board or entitled to receive payment of any dividend or other distribution, or any allotment of rights, or to exercise rights in respect of any other lawful actions.  The record date so fixed shall be not more than sixty (60) days nor less than ten (10) days prior to the date of the meeting, not prior to nor more than ten (10) days after the date of the resolution fixing the record date for votes by written consent and not more than sixty (60) days prior to any other action.

Section 10.            Proxies.  Every person entitled to vote shares has the right to do so either in person or by one or more persons authorized by a proxy, in any form which constitutes a valid means of authorization under the Delaware General Corporation Law, which proxy shall be filed with the Corporate Secretary.  Any proxy duly authorized shall continue in full force and effect until revoked by the person authorizing it prior to the vote pursuant thereto by a writing delivered to the Corporation stating that the proxy is revoked,by the authorization of a subsequent proxy or by attendance at the meeting; provided, however, that no proxy shall be valid after expiration of three (3) years from the date of its execution unless otherwise provided in the proxy.

Section 11.            Inspectors of Election.  The Board shall appoint one or more inspectors of election for any meeting of stockholders.  The inspectors shall, in accordance with the provisions of the Delaware General Corporation Law, (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination by the number of shares represented at the meeting, and their count of all votes and ballots.  The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors.  The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting.  No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery of the State of Delaware upon application by a stockholder shall determine otherwise.

Section 12.            Stockholder Lists.  The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder.  Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or at the place

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of the meeting, and the list shall also be available at the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

ARTICLE III.  DIRECTORS.

Section 1.              Powers.  Subject to the limitations of the Certificate of Incorporation or the Bylaws or the Delaware General Corporation Law relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board.  The Board may delegate the management of the day-to-day operation of the business of the Corporation to management or other persons provided that the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board.  Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the Board shall have the following powers in addition to the other powers enumerated in the Bylaws:

(a)           To select and remove all the officers, agents and employees of the Corporation, to prescribe the powers and duties for them as may not be inconsistent with law, with the Certificate of Incorporation or the Bylaws and to fix their compensation.

(b)           To conduct, manage and control the affairs and business of the Corporation and to make such rules and regulations therefor not inconsistent with law or with the Certificate of Incorporation or the Bylaws, as they may deem best.

(c)           To adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and such certificates from time to time as in their judgment they may deem best.

(d)           To authorize the issuance of shares of stock of the Corporation from time to time, upon such terms and for such consideration as may be lawful.

(e)           To borrow money and incur indebtedness for the purposes of the Corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor.

Section 2.              Number of Directors.  The authorized number of directors of the Corporation shall not be less than five (5) nor more than fifteen (15) until changed by amendment of the Certificate of Incorporation.  The exact number of directors shall be seven (7) until changed by an amendment hereto duly adopted by the Board amending this Section 2.

Section 3.              Election and Term of Office.  The directors shall be elected in accordance with the Certificate of Incorporation.

Section 4.              Board Reclassification.  At such time as there is any change in the number of directors of the Corporation, the determination of the selection of directors in each class shall be determined in accordance with the provisions of this Section 4, unless otherwise agreed to by a two-thirds majority of the existing directors.

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(a)           Increase in Number of Classes.  At such time (the “Board Reclassification Time”) as the number of classes of directors of the Corporation increases from two classes to three classes pursuant to the Certificate of Incorporation, the directors of Class III shall be those directors of Class A or Class B whose term, immediately prior to the Board Reclassification Time, was to expire at the second annual meeting of stockholders, the directors of Class II shall be those directors of Class A or Class B whose term, immediately prior to the Board Reclassification Time, was to expire at the next annual meeting of stockholders, and the directors of Class I shall be those directors appointed or elected, as the case may be, at the Board Reclassification Time.  To the extent that the division of the directors of the Corporation into three classes as nearly equal in number as possible requires a reduction of the number of directors in Class II or Class III, such reduction shall be accomplished by reclassifying, pursuant to the criteria set forth in clause (d) of this Section 4, one director at a time, first such directors of Class III to directors of Class II and then such directors of Class II to directors of Class I, as shall be required until the class being transferred from shall contain the maximum number of directors possible while being at the same time as nearly equal in number as possible, provided, however, that no director shall be reclassified from Class III to Class I.  To the extent that the division of such directors into three classes as nearly equal in number as possible requires an increase of the number of directors in Class II or Class III, such increase shall be accomplished by reclassifying, pursuant to the criteria set forth in clause (e) of this Section 4, one director at a time, first such directors of Class II to directors of Class III and then such directors of Class I to directors of Class II, as shall be required until the class being transferred to shall contain the maximum number of directors possible while being at the same time as nearly equal in number as possible, provided, however, that no director shall be reclassified from Class I to Class III.

(b)           Increase in Number of Directors.  At such time as there is an increase in the number of directors of the Corporation, other than an increase covered under clause (a) of this Section 4, such increase shall be accomplished by adding directors, one director at a time, as follows:

(i)            to such class of directors as may add a director consistent with the requirement that each class of directors be as nearly equal in number as possible;

(ii)           to the extent that two or more classes of directors are eligible to add such director under the immediately preceding clause, to the class of directors among such classes, the terms of the directors of which is to expire sooner than the terms of the directors of any other such class.

(c)           Decrease in Number of Directors.  To the extent that the division of the directors of the Corporation into classes as nearly equal in number as possible requires a reduction of the number of directors any class, such reduction shall be accomplished by reclassifying, pursuant to the criteria set forth in clause (d) of this Section 4, one director at a time, such directors of the class, the terms of the directors of which is to expire later than the term of the directors of any other class, to the class of directors, the directors of which whose term is to expire one year earlier than the term of the directors being reclassified, as shall be required until the class being transferred from shall contain the

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maximum number of directors possible while being at the same time as nearly equal in number as possible, provided, however, that no director shall be reclassified from Class III to Class I.

(d)           Reduction of Number of Directors in Class.  Whenever reclassification of directors is required under this clause (d) to accomplish a reduction in the number of directors in a class, the directors shall be reclassified, one director at a time, as follows:

(i)            such director within a class as has been a director of the Corporation for the fewest number of continuous days immediately preceding such reclassification shall be the next director to be reclassified;

(ii)           to the extent that two or more directors would be the next director to be reclassified under the immediately preceding clause, such director as has been a director of the Corporation for the fewest number of days, whether or not such days have been continuous, shall be the next director to be reclassified; and

(iii)          to the extent that two or more directors would be the next director to be reclassified under the immediately preceding clause, such director as is the youngest in age shall be the next director to be reclassified.

(e)           Increase in Number of Directors in Class.  Whenever reclassification of directors is required under this clause (e) to accomplish an increase in the number of directors in a class, the directors shall be reclassified, one director at a time, as follows:

(i)            such director within a class as has been a director of the Corporation for the greatest number of continuous days immediately preceding such reclassification shall be the next director to be reclassified;

(ii)           to the extent that two or more directors would be the next director to be reclassified under the immediately preceding clause, such director as has been a director of the Corporation for the greatest number of days, whether or not such days have been continuous, shall be the next director to be reclassified; and

(iii)          to the extent that two or more directors would be the next director to be reclassified under the immediately preceding clause, such director as is the oldest in age shall be the next director to be reclassified.

Section 5.              Vacancies.  Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Corporate Secretary or the Board, unless the notice specifies a later time for the effectiveness of such resignation.  Vacancies in the Board shall be filled in accordance with the Certificate of Incorporation.

Section 6.              Place of Meeting.  Regular or special meetings of the Board shall be held at any place designated from time to time by the Board.  In the absence of such designation, regular meetings shall be held at the principal executive office of the Corporation.

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Section 7.              Regular Meetings.  Regular meetings of the Board shall be held without call at such dates, times and places as the Board may establish from time to time.  Call and notice of all regular meetings of the Board are hereby dispensed with.

Section 8.              Special Meetings.  Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman of the Board, the President, the Corporate Secretary or by any two (2) directors.

Special meetings of the Board shall be held upon four (4) days’ written notice or forty-eight (48) hours’ notice given personally or by telephone, telegraph, telex, telecopier or other similar means of communication.  Any such notice shall be addressed or delivered to each director at such director’s address as it is shown upon the records of the Corporation or as may have been given to the Corporation by the director for purposes of notice or, if such address is not shown on such records or is not readily ascertainable, at the place in which the meetings of the directors are regularly held.

Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid.  Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission or actually transmitted by the person giving the notice by electronic means, to the recipient.  Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient.

Section 9.              Quorum.  A majority of the whole Board shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided that such majority shall constitute at least one-third of the whole Board.  Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number be required by law or by Certificate of Incorporation.A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action is approved by at least a majority of the required quorum for such meeting.

Section 10.            Participation in Meeting by Conference Telephone.  Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another.

Section 11.            Waiver of Notice.  The transactions of any meeting of the Board, however called and noticed, and wherever held, are as valid as though a meeting had been duly held after regular call and notice if a quorum be present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding such meeting or an approval of the minutes thereof.  All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

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Section 12.            Adjournment.  A majority of the directors present, whether or not a quorum is present, may adjourn any directors’ meeting to another time and place.  Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned.  If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment.

Section 13.            Fees and Compensation.  Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board.

Section 14.            Action Without Meeting.  Any action required or permitted to be taken by the Board or committee thereof may be taken without a meeting if all members of the Board or committee shall individually or collectively consent in writing to such action.  Such consent or consents shall have the same effect as a unanimous vote of the Board or committee and shall be filed with the minutes of the proceedings of the Board or committee.

Section 15.            Committees.  The Board may appoint one (1) or more committees, each consisting of one (1) or more directors, and delegate to such committees any of the authority of the Board except with respect to:

(i)            the approval of any action for which the Delaware General Corporation Law also requires stockholders’ approval or approval of the outstanding shares, including but not limited to amending the Certificate of Incorporation (except as otherwise permitted by the Delaware General Corporation Law with respect to shares of stock) and adopting an agreement of merger or consolidation under Section 251 or 252 of the Delaware General Corporation Law;

(ii)           The recommending to the Corporation’s stockholders of the sale, lease or exchange of all or substantially all of the Corporation’s property and assets or a dissolution of the Corporation or a revocation of a dissolution;

(iii)          The filling of vacancies on the Board or on any committee;

(iv)          The fixing of compensation of the directors for serving on the Board or on any committee;

(v)           The amendment or repeal of Bylaws or the adoption of new Bylaws;

(vi)          The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; or

(vii)         The appointment of other committees of the Board or the members thereof.

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Any such committee must be appointed by resolution adopted by a majority of the whole Board and may be designated an Executive Committee or by such other name as the Board shall specify.  The Board shall have the power to prescribe the manner in which the proceedings of any such committee shall be conducted.  In the absence of any such prescription such committee shall have the power to prescribe the manner in which its proceedings shall be conducted.  Unless the Board or such committee shall otherwise provide, the regular and special meetings and other actions of any such committee shall be governed by the provisions of this Article III applicable to meetings and actions of the Board.  Minutes shall be kept of each meeting of each committee.

Section 16.            Rights of Inspection.  Every director shall have the absolute right at any reasonable time to inspect and copy all the books, records and documents of every kind and to inspect physical properties of the Corporation and also of its subsidiary corporations, domestic or foreign.  Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and obtain extracts.

Section 17.            Advisory Directors.  The Board may appoint such additional advisory directors (by whatever name designated) to advise the Board on such matters and in such fashion as the Board may from time to time request.  Such advisory directors shall be entitled to notice of, and to attend, regular and special meetings of the Board, but shall not be entitled to vote at such meetings and may be appointed or removed at the pleasure of the Board.  Such advisory directors shall not be deemed to be regular members of the Board or employees of the Corporation for any purpose whatsoever.

ARTICLE IV.  OFFICERS.

Section 1.              Officers.  The officers of the Corporation shall be a Chief Executive Officer, a President, a Corporate Secretary, and a Chief Financial Officer.  The Corporation may also have, at the discretion of the Board, one ^.or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Financial Officers, and such other officers as may be elected or appointed in accordance with the provisions of Section 3 of this Article IV.  Any number of offices may be held by the same person.

Section 2.              Election.  The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 3 of this Article IV, shall be chosen annually by, and shall serve at the pleasure of, the Board, and shall hold their respective offices until their resignation, removal, or other disqualification from service, or until their respective successors shall be elected.

Section 3.              Appointment of Officers.

(a)           Corporate Officers.  The Chief Executive Officer may appoint such corporate officers as the Chief Executive Officer deems expedient.  Each of these officers shall hold his or her title for such period, and shall have such authority and perform such duties as the Board or the Chief Executive Officer may determine.

(b)           Divisional Officers. The Chief Executive Officer may appoint such divisional officers as the Chief Executive Officer deems expedient.  Each of these

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officers shall hold his or her title for such period, and shall have such authority and perform such duties as the Board or the Chief Executive Officer or the President of the respective division may determine.

Section 4.              Removal and Resignation.  Any officer may be removed, with or without cause, by the Board at any time and, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board.  Any such removal shall be without prejudice to the rights, if any, of the officer under any contract of employment of the officer.

Any officer may resign at any time by giving written notice to the Corporation, but without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party.  Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 5.              Vacancies.  A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the Bylaws for regular election or appointment to such office.

Section 6.              Chairman of the Board.  The Chairman of the Board, if present, shall preside at all meetings of the stockholders and at all meetings of the Board.  The Chairman of the Board shall have the general powers usually vested in the office of chairman of the board and such other powers and duties as may be prescribed by the Board.

Section 7.              Chief Executive Officer.  The Chief Executive Officer shall be the general manager and chief executive officer of the Corporation and has, subject to the control of the Board, general supervision, direction and control of the business and officers of the Corporation.  The Chief Executive Officer shall have the general powers and duties of management usually vested in the offices of general manager and chief executive officer of a corporation and such other powers and duties as may be prescribed by the Board.

Section 8.              President.  The President shall be the Chief Operating Officer of the Corporation and shall have, subject to the control of the Board and Chief Executive Officer, general supervision, direction, and control of the operations of the Corporation.  In the absence of the Chairman of the Board, the President shall preside at all meetings of the stockholders and at all meetings of the Board.  The President shall have the general powers and duties of management usually vested in the offices of president and chief operating officer of a corporation and such other powers and duties as may be prescribed by the Board.

Section 9.              Vice Presidents.  In the absence or disability of the President, the Vice President or Vice Presidents, if any, in order of their rank as fixed by the Board or, if not ranked, the Vice President designed by the Board, shall perform all duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President.  The Vice President or Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board.

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Section 10.            Corporate Secretary.  The Corporate Secretary shall keep or cause to be kept, at the principal executive office and such other place as the Board may order, a book of minutes of all meetings of stockholders, the Board and its committees, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at Board and committee meetings, and the number of shares present or represented at stockholders meetings, and the proceedings thereof.  The Corporate Secretary shall keep, or cause to be kept, a copy of the Bylaws at the principal executive office.  or business office.

The Corporate Secretary shall keep, or cause to be kept, at the principal executive office a share register, or a duplicate share register, showing the name of the stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation.

The Corporate Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board and of any committees thereof required by the Bylaws or by law to be given, shall keep the seal of the Corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board.

Section 11.            Assistant Secretaries.  The Assistant Secretary or Assistant Secretaries, if any, shall, in the absence or disability of the Corporate Secretary, or at his or her request, perform his or her duties and exercise his or her powers and authority, and shall perform such other duties and have such other powers as the Board may from time to time prescribe.

Section 12.            Chief Financial Officer.  The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the Corporation, and shall send or cause to be sent to the stockholders of the Corporation such financial statements and reports as are by law or the Bylaws required to be sent to them.  The books of account shall at all times be open to inspection by any director.

The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositaries as may be designated by the Board.  The Chief Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board, shall render to the Chairman of the Board, the Chief Executive Officer, the President or any of the directors, whenever they request it, an account of all transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have such powers and duties usually vested in the offices of chief financial officer and chief accounting officer and such other powers and duties as may be prescribed by the Board.

Section 13.            Assistant Financial Officers.  The Assistant Financial Officer or Assistant Financial Officers, if any, shall, in the absence or disability of the Chief Financial Officer, or at his or her request, perform his or her duties and exercise his or her powers and authority, and shall perform such other duties and have such other powers as the Board may from time to time prescribe.

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ARTICLE V.  STOCK.

Section 1.              Form of Stock Certificate.  Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of, the Corporation by the Chairman of the Board, the President or a Vice President, and by the Chief Financial Officer or an Assistant Financial Officer or the Corporate Secretary or an Assistant Secretary certifying the number of shares owned in the Corporation.  Any or all of the signatures on the certificate may be a facsimile signature.  If any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of the issuance.

If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preference and/or rights shall be set forth in full or summarized on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock.  Except as otherwise provided in Section 202 of the Delaware General Corporation Law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

Section 2.              Transfers of Stock.  Upon surrender of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

Section 3.              Lost, Stolen or Destroyed Certificates.  The Board may direct a new certificate or certificates be issued in place of any certificate theretofore issued alleged to have been lost, stolen or destroyed, upon the making of an affidavit of the fact by the person claiming the certificate to be lost, stolen or destroyed.  When authorizing such issue of a new certificate, the Board may, in its discretion and as a condition precedent to the issuance, require the owner of such certificate or certificates, or such person’s legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the lost, stolen or destroyed certificate.

Section 4.              Registered Stockholders.  The Corporation shall be entitled to treat the holder of record of any share or shares of stock of the Corporation as the holder in fact thereof and shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by applicable law.

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ARTICLE VI.  OTHER PROVISIONS.

Section 1.              Endorsement of Documents; Contracts.  Subject to the provisions of applicable law, any note, mortgage, evidence of indebtedness, contract, share certificate, conveyance or other instrument in writing and any assignment or endorsements thereof executed or entered into between the Corporation and any other person, when signed by the Chief Executive Officer, the President or any Vice President and the Corporate Secretary, any Assistant Secretary, the Chief Financial Officer or any Assistant Financial Officers of the Corporation shall be valid and binding on the Corporation in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same.  Any such instruments may be signed by any other person or persons and in such manner as from time to time shall be determined by the Board, and, unless so authorized by the Board, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or amount.

Section 2.              Representation of Shares of Other Corporations.  The Chairman of the Board, the Chief Executive Officer, the President, any Vice President, Corporate Secretary or any other officer or officers authorized by the Board or the Chairman of the Board are each authorized to vote, represent and exercise on behalf of the Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the Corporation.  The authority herein granted may be exercised either by any such officer or by any other person authorized so to do by proxy or power of attorney duly executed by said officer.

Section 3.              Seal.  It shall not be necessary to the validity of any instrument executed by any authorized officer or officers of the Corporation that the execution of such instrument be evidenced by the corporate seal, and all documents, instruments, contracts and writings of all kinds signed on behalf of the Corporation by any authorized officer or officers shall be as effectual and binding on the Corporation with the corporate seal, as if the execution of the same had been evidenced by affixing the corporate seal thereto.  The Board may give general authority to any officer to affix the seal of the Corporation and to attest the affixing by signature.

Section 4.              Fiscal Year.  The fiscal year of the Corporation shall be fixed by resolution of the Board.

Section 5.              Dividends.  Dividends on the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board at any regular or special meeting, pursuant to law, and may be paid in cash, in property or in shares of capital stock.

Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall determine to be in the best interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.

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ARTICLE VII.  INDEMNIFICATION.

Section 1.              Right to Indemnification.  Each person who was or is a party or is threatened to be made a party or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the laws of Delaware as the same exist or may hereafter be amended (but in the case of such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said laws permitted the Corporation to provide prior to such amendment) against all costs, charges, expenses, liabilities and losses (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement and amounts expended in seeking indemnification granted to such person under applicable law, this bylaw or any agreement with the Corporation) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that except as provided in Section 2 of this Article VII, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was initiated or authorized by one or more members of the Board.  The right to indemnification conferred in this Section 1 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that if the Delaware General Corporation Law so requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director of officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section 1 or otherwise.  The Corporation may, by action of the Board, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers.

Section 2.              Right of Claimant to Bring Suit.  If a claim under Section 1 of this Article VII is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim.  It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has failed to meet a standard of conduct which makes it permissible under Delaware law for the Corporation to

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indemnify the claimant for the amount claimed.  Neither the failure of the Corporation (including the Board, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he or she has met such standard of conduct, nor an actual determination by the Corporation (including the Board, independent legal counsel or its stockholders) that the claimant has not met such standard of conduct, shall be a defense to the action or create a presumption that the claimant has failed to meet such standard of conduct.

Section 3.              Non-Exclusivity of Rights.  The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article VII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaw, agreement, vote of stockholders or disinterested directors or otherwise.

Section 4.              Insurance.  The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under Delaware law.

Section 5.              Expenses as a Witness.  To the extent that any director, officer, employee or agent of the Corporation is by reason of such position, or a position with another entity at the request of the Corporation, a witness in any action, suit or proceeding, he or she shall be indemnified against all costs and expenses actually and reasonably incurred by him or her or on his or her behalf in connection therewith.

Section 6.              Indemnity Agreements.  The Corporation may enter into indemnity agreements with the persons who are members of the Board from time to time, and with such officers, employees and agents as the Board may designate, such indemnity agreements to provide in substance that the Corporation will indemnify such persons to the full extent contemplated by this Article VII.

Section 7.              Effect of Amendment.  Any amendment, repeal or modification of any provision of this Article VII by the stockholders and the directors of the Corporation shall not adversely affect any right or protection of a director or other of the Corporation existing at the time of the amendment, repeal or modification.

ARTICLE VIII.  EMERGENCY PROVISIONS.

Section 1.              General.  The provisions of this Article VIII shall be operative only during a national emergency declared by the President of the United States or the person performing the President’s functions, or in the event of a nuclear, atomic or other attack on the United States or a disaster making it impossible or impracticable for the Corporation to conduct its business without recourse to the provisions of this Article VIII.  Said provisions in such event shall override all other Bylaws in conflict with any provisions of this Article VIII, and shall remain operative so long as it remains impossible or impracticable to continue the business of the Corporation otherwise, but thereafter shall be inoperative; provided, however, that all actions

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taken in good faith pursuant to such provisions shall thereafter remain in full force and effect unless and until revoked by action taken pursuant to the provisions of the Bylaws other than those contained in this Article VIII.

Section 2.              Unavailable Directors.  All directors of the Corporation who are not available to perform their duties as directors by reason of physical or mental incapacity or for any other reason or who are unwilling to perform their duties or whose whereabouts are unknown shall automatically cease to be directors, with like effect as if such persons had resigned as directors, so long as such unavailability continues.

Section 3.              Authorized Number of Directors.  The authorized number of directors shall be the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 2 of this Article VIII, or the minimum number required by law, whichever number is greater.

Section 4.              Quorum.  The number of directors necessary to constitute a quorum shall be one-third (1/3) of the authorized number of directors as specified in the foregoing Section 3, or such other minimum number as, pursuant to the law or lawful decree then in force, it is possible for the bylaws of a corporation to specify.

Section 5.              Creation of Emergency Committee.  In the event the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 2 of this Article VIII is less than the minimum number of authorized directors required by law, then until the appointment of additional directors to make up such required minimum, all the powers and authorities which the Board could by law delegate, including all powers and authorities which the Board could delegate to a committee, shall be delegated to an emergency committee, and the emergency committee shall thereafter manage the affairs of the Corporation pursuant to such powers and authorities as may by law or lawful decrees be conferred on any person or body of persons during a period of emergency.

Section 6.              Constitution of Emergency Committee.  The emergency committee shall consist of all the directors remaining after eliminating those who have ceased to be directors pursuant to Section 2 of this Article VIII, provided that such remaining directors are not less than three (3) in number.  In the event such remaining directors are less than three (3) in number, the emergency committee shall consist of three (3) persons, who shall be the remaining director or directors and either one (1) or two (2) officers or employees of the Corporation, as the remaining director or directors may in writing designate.  If there is no remaining director, the emergency committee shall consist of the three (3) most senior officers of the Corporation who are available to serve, and if and to the extent that officers are not available, the most senior employees of the Corporation.  Seniority shall be determined in accordance with any designation of seniority in the minutes of the proceedings of the Board, and in the absence of such designation, shall be determined by rate of remuneration.  In event that there are no remaining directors and no officers or employees of the Corporation available, the emergency committee shall consist of three (3) persons designated in writing by the stockholder owning the largest number of shares of record as of the date of the last record date.

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CERTIFICATE OF CORPORATE SECRETARY

Of

MSC.SOFTWARE CORPORATION

(a Delaware corporation)

I hereby certify that I am the duly elected and acting Corporate Secretary of said corporation and that the foregoing Bylaws, comprising 20 pages, constitute the Bylaws of said corporation as duly adopted by unanimous written consent of the Board of Directors thereof effective on         , 2004.

/s/ Charles Davis

Name: Charles Davis

Title: Assistant Secretary

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EX-10.2

Exhibit 10.2

FIRST AMENDMENT TO LEASE

this first amendment TO lease (this “Amendment”) dated August 11, 2000 is intended to amend, and by this reference be incorporated into, that certain Office Lease dated June 28, 1999; by and between Imperial promenade associates, LLC, a Delaware limited liability company, as Landlord, and MSC. SOFTWARE CORPORATION, a Delaware corporation, as Tenant (the “Lease”).

Where, and to the extent that, any of the provisions contained in this Amendment are contrary to or inconsistent with any provision contained in the Lease, the provisions contained in this Amendment shall control. All terms not otherwise defined herein but defined in the Lease shall have the same meaning in this Amendment as in the Lease.

The Lease shall be amended in the following respects:

1.Amends Basic Lease Provisions Item 2:

Address: “2” MacArthur Place

2.Amends Basic Lease Provisions Item 3:

Description of Premises: Floor(s) 2-7, and approximately 17,784 square feet on Floor 1. Suites 100, 200, 300,400, 500, 600, 700

Rentable Area: approximately 156,663 square feet (see Exhibit “A-4”)

3.Amends Basic Lease Provisions Item 4:

Tenant’s Proportionate Share of Operating Costs: 38.5%

4.Amends Basic Lease Provisions Item 5:

The Basic Annual Rent shall be twelve (12) times the following monthly amounts:

Partial Lease Month:	$    7,780.92 per day ($1.49/rentable sq. ft./mo NNN)
Mos. 6-65:	$233,427.87 per month ($1.49/rentable sq. ft/mo NNN)

The remainder of Item 5 shall remain unchanged

5.Supplements Basic Lease Provisions Item 6:

Initial Monthly Installment of Basic Annual Rent Payable Upon Execution of this Amendment: $47,113.80

6.Amends Basic Lease Provisions Item 14:

Addresses for Notices:

Landlord’s Address for notices is:

3 Imperial Promenade, Ste. 410

South Cost Metro, CA 92707

MSC.Software’s address after occupancy of the Premises will be:

2 MacArthur Place, Ste. 700

South Coast Metro, CA 92707

7.Replaces Lease Section 20(a):

Rental Abatement. As consideration for Tenant’s performance of all of its obligations under the Lease, Landlord hereby conditionally (i) grants Tenant a rent free fixturization period during months one (1) and two (2) of the Lease Term in the amount of $466,855.74 (i.e., $233,427.87 per month) (“Fixturization Period”), and (ii) excuses Tenant from the payment of the monthly installment of Basic Annual Rent during Months three (3) through five (5) of the term of this Lease in the amount of $700,283.61 (i.e., $233,427.87 per month) (“Deferred Rent Period”), together with Tenant’s Proportionate Share of Operating Costs during such period, provided that Tenant shall not be in an uncured material default in its obligations under this Lease during months 1-144 of the Lease term only. Should Tenant at any time during months 1-144 of the Lease term be in default under this Lease and not cure such default within the cure periods provided in this Lease, then the total sum of such Rent so conditionally excused shall become immediately due and payable by Tenant to Landlord.  If at the expiration of the 144th month of the term, Tenant has not so defaulted, Landlord shall waive any payment of all such Rent so conditionally excused.

8.Tenant has requested and Landlord has agreed to move the current sixth (6^th) floor executive floor plan to the seventh (7^th) floor of the Building and to work with Landlord and Gensler to determine the most appropriate floor plan for floor six. The changes contemplated for floors six and seven (the “Revised Floors”) shall cause a Tenant Delay as defined in the Work Letter.

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Attached as Exhibit “A” is a schedule, representing the milestones for the design and construction of the Revised Floors. The Commencement Date, as set forth in the Lease, for the Premises (as modified by this Amendment) shall be based on Substantial Completion of Floors 1 thru 5, and notwithstanding the actual date of Substantial Completion for the Revised Floors. All other terms and conditions of the Work Letter shall remain in full force and effect.

IN WITNESS WHEREOF, the parties have executed this Amendment as of the date stated above.

LANDLORD		TENANT
IMPERIAL PROMENADE ASSOCIATES, LLC, a Delaware limited liablity company		MSC.SOFTWARE CORPORATION, a Delaware corporation
By:		By:	/s/ Louis A Greco
	Curtis R. Olson, Managing Member
		Its:		LOUIS A. GRECO CHIEF FINANCIAL OFFICER
Date:
		Date:			August 11, 2000

By:

Its:

Date:

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Exhibit “A”

Revised Floors

Design and Construction Milestones

Milestone	Scheduled Completion Date
Tenant Approval of Space Plan	08/16/00
Preliminary Budget Approval	08/24/00
Issue Construction Documents	10/04/00
Tenant Approval of Construction Documents	10/18/00
Issue Final Budget Estimate	10/27/00
Final Budget Estimate Approval	11/01/00
Building Permit	11/09/00
Tenant Improvements	03/01/01
Floor 6	03/14/01
Floor 7	03/28/01

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EX-10.3

Exhibit 10.3

SECOND AMENDMENT TO LEASE

THIS SECOND AMENDMENT TO LEASE (this “Amendment”), dated January 19, 2001 is intended to amend, and by this reference be incorporated into, that certain Office Lease dated June 28, 1999 by and between IMPERIAL PROMENADE ASSOCIATES, LLC, a Delaware limited liability company, as “Landlord”, and MSC.SOFTWARE CORPORATION, a Delaware corporation, as “Tenant”, as previously amended by that certain First Amendment to Lease dated August 11, 2000 by and between Landlord and Tenant (collectively, the “Lease”).

Where, and to the extent that, any of the provisions contained in this Amendment are contrary to or inconsistent with any provision contained in the Lease, the provisions contained in this Amendment shall control. All terms not otherwise defined herein but defined in the Lease shall have the same meaning in this Amendment as in the Lease.

The Lease shall be amended in the following respects:

1.Amends Basic Lease Provisions Item 3:

Description of Premises: Floors 1-7, approximately 13,547 square feet of Floor 8, and Floor 9. Suites 100, 200, 300, 400, 500, 600, 700, 800 and 900

Rentable Area: approximately 194,005 square feet (see Exhibit “A-4”)

2.Amends Basic Lease Provisions Item 4:

Tenant’s Proportionate Share of Operating Costs:  47.7%

3.Amends Basic Lease Provisions Item 5:

Basic Annual Rent (see Paragraphs 2 and 20) shall be twelve (12) times the following monthly amounts:

Months During Term	Floors 1-7				Floors 8 & 9	Total
Partial Lease Month:	$	7,821.31		per day ($1.49/rentable sq. ft./mo NNN)	$2,732.82 per day ($2.15/rentable sq. ft/mo NNN for Floor 8; $2.30/rentable sq. ft./mo NNN for Floor 9)	$10,554.13 per day
Month 1	$	1,254.58		($1.49/rentable sq. ft./mo NNN on  balance of Floor 1 leased under this Amendment) (but see Paragraph 20(a))	$0.00 (unless Floors 8 & 9 Commencement Date [hereafter defined] occurs during such month)	$1,254.58
Months 2-5	$	1,254.58		($1.49/rentable sq. ft./mo NNN on balance of Floor 1 leased under this Amendment) (but see Paragraph 20(a))	$81,984.65 ($2.15/rentable sq. ft./mo NNN for Floor 8; $2.30/rentable sq. ft./mo NNN for Floor 9 - commencing on Floors 8 & 9 Commencement Date [hereafter defined])	$83,239.23 per month
Months 6-65:	$	234,639.24		($1.49/rentable sq. ft./mo NNN)	$81,984.65 ($2.15/rentable sq. ft./mo NNN for Floor 8; $2.30/rentable sq. ft./mo NNN for Floor 9)	$316,623.89 per month
Months 66-125:	$		*		$114,713.26 (12% increase over monthly rent during Months 6-65)	*plus $114,713.26 per month
Months 126-149:	$		**		$128,478.85 (12% increase over monthly rent during Months 66-125)	**plus $128,478.85 per month

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*Commencing on the first day of the sixty-sixth (66th) month of the term, Basic Annual Rent for Floors 1-7 shall be increased by the percentage increase, if any, in the Consumer Price Index, Urban Wage Earners and Clerical Workers (Los Angeles-Anaheim-Riverside region; “All Items”; Reference Base Year 1982-1984=100), as published by the United States Department of Labor, Bureau of Labor Statistics or its successor (the “Index”), as follows: The Index for the second month preceding the first day of the sixty-sixth (66th) month of the term shall be compared with the Index for the second month preceding the Commencement Date, and the Basic Annual Rent for Floors 1-7 then in effect shall be increased by the lesser of (i) the amount of the percentage increase, if any, between them, or (ii) ten percent (10%); provided however, in no event shall the Basic Annual Rent for Floors 1-7 be reduced by reason of such computation. If the Index ceases to be published, is published less frequently or is altered in any material respect, then Landlord shall adopt, at its reasonable discretion, a substitute index or substitute procedure which reasonably reflects and monitors changes in consumer prices. 

**Commencing on the first day of the one hundred twenty-sixth (126th) month of the term, Basic Annual Rent for Floors 1-7 shall be increased by the percentage increase, if any, in the Index, as follows: The Index for the second month preceding the first day of the one hundred twenty-sixth (126th) month of the term shall be compared with the Index for the second month preceding the sixty-sixth (66th) month of the term, and the Basic Annual Rent for Floors 1-7 then in effect shall be increased by the lesser of (i) the amount of the percentage increase, if any, between them, or (ii) ten percent (10%); provided however, in no event shall the Basic Annual Rent for Floors 1-7 be reduced by reason of such computation. If the Index ceases to be published, is published less frequently or is altered in any material respect, then Landlord shall adopt, at its reasonable discretion, a substitute index or substitute procedure which reasonably reflects and monitors changes in consumer prices.

***Amount includes monthly installments of Basic Annual Rent on the Floor 8 Remainder Space (hereafter defined) pursuant to Paragraph 6 of this Amendment.

4.Supplements Basic Lease Provisions Item No. 6:

Initial Monthly Installment of Basic Annual Rent Payable Upon Execution of this Amendment:

$ 83,239.23

5.Amends Basic Lease Provisions Item 10:

Target Commencement Date for Floors 1-7: March 1, 2001

Target Commencement Date for Floors 8 & 9:  May 1, 2001

6.Replaces Lease Paragraph 20(d):

Expansion Obligation.  Landlord and Tenant acknowledge and agree that a portion of Floor 8 having a square footage of approximately 9,506 rentable square feet is currently occupied by another tenant, and that such space shall not be available for occupancy by Tenant until approximately June, 2006 (the “Floor 8 Remainder Space”). Notwithstanding the estimated availability date, Tenant shall be obligated to lease the Floor 8 Remainder Space upon the first date it becomes available. Tenant shall be obligated to lease the Floor 8 Remainder Space the later of (i) thirty days after Landlord’s delivery of written notice to Tenant specifying that such space will be available, and (ii) the actual date that Landlord makes the space available in accordance with this Amendment.  Landlord shall use commercially reasonable efforts to make the space available as soon as practical after the existing tenant vacates the Floor 8 Remainder Space. Tenant shall be obligated to commence paying Basic Annual Rent on the Floor 8 Remainder Space on the date that Landlord makes such space available to Tenant with all debris and personal property of the existing tenant removed therefrom (such date being hereinafter the “Floor 8 Remainder Space Commencement Date”). From and after the Floor 8 Remainder Space Commencement Date, monthly installments of Basic Annual Rent shall be increased by the amount of $20,437.90 per month, subject to adjustment in accordance with Item 5 of the Basic Lease Provisions; provided,

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however, that if the Floor 8 Remainder Space Commencement Date occurs on a date other than the first (1^st) day of a calendar month, then Tenant shall pay rent on the Floor 8 Remainder Space for such Partial Lease Month in the amount of $681.26 per day for each day of such partial month from and after the Floor 8 Remainder Space Commencement Date. In addition, from and after the Floor 8 Remainder Space Commencement Date:

(i)Basic Lease Provisions Item 3 shall be deemed amended as follows:

Description of Premises: Floors 1-9. Suites 100, 200, 300, 400, 500, 600, 700, 800, and 900.

Rentable Area: Approximately 203,511 square feet (see Exhibit “A-4”)

(ii)Item 4 of the Basic Lease Provisions shall be deemed amended as follows:

Tenant’s Proportionate Share of Operating Costs: 50%

7.In connection with the tenant improvements for Floor 8 (other than the Floor 8 Remainder Space) and Floor 9 only (the “Floors 8 & 9 Tenant Work”), Landlord shall provide Tenant with an allowance in the amount of up to Thirty Dollars ($30.00) per usable square foot of Floor 8 (other than the Floor 8 Remainder Space) and Floor 9 to be used towards the cost of the design, purchase and construction of the Floors 8 & 9 Tenant Work, including without limitation all permits and fees, contractors’ charges and general conditions, performance bond premiums, and construction management fees. Tenant shall pay the excess of all costs to complete the Floors 8 & 9 Tenant Work over the amount of such allowance available to defray such costs. Prior to commencement of such Floors 8 & 9 Tenant Work, Landlord shall prepare and submit to Tenant a written estimate of the costs incurred to date on such work, the estimated remaining cost to complete such work, and any amount of such costs in excess of the allowance. Within five (5) days after receipt of such notice, Tenant shall deliver to Landlord the full amount of such excess. In addition, within sixty (60) days after completion of the Floors 8 & 9 Tenant Work, Landlord shall determine the actual final costs therefore and shall submit a written statement of such amount to Tenant. If any estimate previously paid by Tenant exceeds the amount due hereunder from Tenant for such work, such excess shall be refunded to Tenant; if any amount is still due from Tenant for such work, then Tenant shall pay such amount in full within ten (10) days of receipt of Landlord’s statement. All other terms and conditions of the existing Work Letter to the Lease, where applicable, shall apply to the Floors 8 & 9 Tenant Work. With respect to the Floor 8 Remainder Space, if Tenant timely and validly meets its Expansion Obligation as outlined herein, and such Floor 8 Remainder Space has been previously built-out, Landlord shall provide Tenant with an improvement allowance of Ten Dollars ($10.00) per Usable Square Foot of the Floor 8 Remainder Space. If such portion of the Floor 8 Remainder Space has not been previously built-out, Landlord shall provide Tenant with an improvement allowance of Thirty Dollars ($30.00) per Usable Square Foot of the Floor 8 Remainder Space. Notwithstanding the foregoing, (i) Landlord shall, at Landlord’s expense, provide bathrooms on Floors 8 and 9 meeting the same standards as previously agreed between Landlord and Tenant for Floors 1-7, and (ii) Landlord shall at Landlord’s expense install Fiber MPOE Room in an area to be designated by Landlord in the portion of Floor 1 being leased by Tenant under this Amendment, and such area shall be designated as a part of the Common Areas of the Building.  The square footage and the rent associated with such MPOE room, if necessary, shall be deducted from Tenant’s Premises and shall be confirmed by Lease amendment.

8.Notwithstanding the Target Commencement Dates set forth in Item 10 of the Basic Lease Provisions, Paragraph 1(b) of the Lease or Paragraph 7 of the Work Letter, (i) the Commencement Date, as set forth in the Lease, for the Premises (as modified by this Amendment) shall be based on substantial completion (as defined in Paragraph 7 of the Work Letter) of Floors 1 (excluding that portion of Floor 1 leased under this Amendment) through 5 only, and notwithstanding the actual date of substantial completion for the balance of Floor 1 or Floors 6 through 9, and (ii) Tenant’s obligation

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to commence the payment of monthly installments of Basic Annual Rent on Floors 8 and 9 shall commence on the earlier to occur of substantial completion of the Floors 8 & 9 Tenant Work or May 1, 2001 (such earlier date being hereafter the “Floor 8 & 9 Commencement Date”), and if such Floors 8 & 9 Commencement Date occurs on a date other than the first (1^st) day of the calendar month, then Tenant shall pay rent on Floors 8 and 9 for such Partial Lease Month in the amount set forth in Item 5 of the Basic Lease Provisions for each day of such partial month from and after the Floors 8 & 9 Commencement Date. Notwithstanding the foregoing, subject to Tenant Delays and delays outside of the reasonable control of Landlord, commonly considered force majeure, Landlord shall use commercially reasonable efforts to substantially complete the Floors 8 & 9 Tenant Work as soon as possible.

IN WITNESS WHEREOF, the parties have executed this Amendment as of the date stated above.

LANDLORD		TENANT
IMPERIAL PROMENADE ASSOCIATES, LLC, a Delaware limited liability company		MSC SOFTWARE CORPORATION, a Delaware corporation
By:	/s/ Curtis R. Olson	By:	/s/ Frank Perna
	Curtis R. Olson, Managing Member					Its:
Date:	1-22-01	Date:
		By:	/s/ Louis A. Greco
					Its:
		Date:		1-17-01

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EX-10.4

Exhibit 10.4

THIRD AMENDMENT TO LEASE

THIS THIRD AMENDMENT TO LEASE (this “Amendment”), dated March l3, 2001 is intended to amend, and by this reference be incorporated into, that certain Office Lease dated June 28, 1999 by and between IMPERIAL PROMENADE ASSOCIATES, LLC, a Delaware limited liability company, as “Landlord”, and MSC.SOFTWARE CORPORATION, a Delaware corporation, as “Tenant”, as previously amended by that certain First Amendment to Lease dated August 11, 2000 by and between Landlord and Tenant and that certain Second Amendment to Lease dated January 19, 2001 by and between Landlord and Tenant (collectively, the “Lease”). 

Where, and to the extent that, any of the provisions contained in this Amendment are contrary to or inconsistent with any provision contained in the Lease, the provisions contained in this Amendment shall control. All terms not otherwise defined herein but defined in the Lease shall have the same meaning in this Amendment as in the Lease.

The Lease shall be amended in the following respects: 

1.Amends Basic Lease Provisions Item 3

Description of Premises: Floors 1-9. Suites 100, 200, 300, 400, 500, 600, 700, 800 and 900

Rentable Area: approximately 203,511 square feet (see Exhibit “A-4”)

2.Amends Basic Lease Provisions Item 4:

Tenant’s Proportionate Share of Operating Costs:   50.0 %

3.Amends Basic Lease Provisions Item 5:

Basic Annual Rent (see Paragraphs 2 and 20) shall be twelve (12) times the following monthly amounts:

Months During Term	Floors 1-7			Floors 8 & 9	Total
Partial Lease Month:	$	7,821.31 per day ($1.49/rentable sq. ft./mo NNN)		$3,414.09 per day ($2.15/ rentable sq. ft/mo NNN for Floor 8; $2.30/rentable sq. ft./mo NNN for Floor 9)	$11,235.04 per day
Month 1	$	1,254.58 ($1.49/rentable sq. ft./mo NNN on balance of Floor 1 leased under this Amendment) (but see Paragraph 20(a))		$0.00 (unless Floors 8 & 9 Commencement Date [hereafter defined] occurs during such month)	$1,254.58
Months 2-5	$	1,254.58 ($1.49/rentable sq. ft./mo NNN on balance of Floor 1 leased under Second Amendment) (but see Paragraph 20(a))		$102,422.55 ($2.15/rentable sq. ft./mo NNN for Floor 8; $2.30/rentable sq. ft./mo NNN for Floor 9 - commencing on Floors 8 & 9 Commencement Date [hereafter defined])	$103,677.13 per month
Months 6-65:	$	234,639.24 ($1.49/rentable sq. ft./mo NNN)		$102,422.55 ($2.15/rentable sq. ft./mo NNN for Floor 8; $2.30/rentable sq. ft./mo NNN for Floor 9)	$337,061.79 per month
Months 66-125:	$		*	$114,713.26 (12% increase over monthly rent during Months 6-65)	*plus $114,713.26 per month
Months 126-149:	$		**	$128,478.85 (12% increase over monthly rent during Months 66-125)	**plus $128,478.85 per month

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*Commencing on the first day of the sixty-sixth (66th) month of the term, Basic Annual Rent for Floors 1-7 shall be increased by the percentage increase, if any, in the Consumer Price Index, Urban Wage Earners and Clerical Workers (Los Angeles-Anaheim-Riverside region; “All Items”; Reference Base Year 1982-1984=100), as published by the United States Department of Labor, Bureau of Labor Statistics or its successor (the “Index”), as follows: The Index for the second month preceding the first day of the sixty-sixth (66th) month of the term shall be compared with the Index for the second month preceding the Commencement Date, and the Basic Annual Rent for Floors 1-7 then in effect shall be increased by the lesser of (i) the amount of the percentage increase, if any, between them, or (ii) ten percent (10%); provided however, in no event shall the Basic Annual Rent for Floors 1-7 be reduced by reason of such computation. If the Index ceases to be published, is published less frequently or is altered in any material respect, then Landlord shall adopt, at its reasonable discretion, a substitute index or substitute procedure which reasonably reflects and monitors changes in consumer prices.

**Commencing on the first day of the one hundred twenty-sixth (126th) month of the term, Basic Annual Rent for Floors 1-7 shall be increased by the percentage increase, if any, in the Index, as follows: The Index for the second month preceding the first day of the one hundred twenty-sixth (126th) month of the term shall be compared with the Index for the second month preceding the sixty-sixth (66th) month of the term, and the Basic Annual Rent for Floors 1-7 then in effect shall be increased by the lesser of (i) the amount of the percentage increase, if any, between them, or (ii) ten percent (10%); provided however, in no event shall the Basic Annual Rent for Floors 1-7 be reduced by reason of such computation. If the Index ceases to be published, is published less frequently or is altered in any material respect, then Landlord shall adopt, at its reasonable discretion, a substitute index or substitute procedure which reasonably reflects and monitors changes in consumer prices.

4.Supplements Basic Lease Provisions Item No. 6:

Initial Monthly Installment of Basic Annual Rent Payable Upon Execution of this Amendment:
$20,437.90

5.Amends Basic Lease Provisions Item 10:

Target Commencement Date for Floors 1-7: March 1, 2001

Target Commencement Date for Floors 8 & 9 (including the Floor 8 Remainder Space):
May 1, 2001

6.Paragraph 20(d) shall be of no further force and effect.

7.In connection with the tenant improvements for the Floor 8 Remainder Space (the “Floor 8 Remainder Space Tenant Work”), Landlord shall provide Tenant with an allowance in the amount of up to Thirty Dollars ($30.00) per usable square foot of the Floor 8 Remainder Space to be used towards the cost of the design, purchase and construction of the Floor 8 Remainder Space Tenant Work, including without limitation all permits and fees, contractors’ charges and general conditions, performance bond premiums, and construction management fees. Tenant shall pay the excess of all costs to complete the Floor 8 Remainder Space Tenant Work over the amount of such allowance available to defray such costs. Prior to commencement of such Floor 8 Remainder Space Tenant Work, Landlord shall prepare and submit to Tenant a written estimate of the costs incurred to date on such work, the estimated remaining cost to complete such work, and any amount of such costs in excess of the allowance. Within five (5) days after receipt of such notice, Tenant shall deliver to Landlord the full amount of such excess. In addition, within sixty (60) days after completion of the Floor 8 Remainder Space Tenant Work, Landlord shall determine the actual final costs therefore and shall submit a written statement of such amount to Tenant. If any estimate previously paid by Tenant exceeds the amount due hereunder from Tenant

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for such work, such excess shall be refunded to Tenant; if any amount is still due from Tenant for such work, then Tenant shall paysuch amount in full within ten (10) days of receipt of Landlord’s statement. All other terms and conditions of the existing Work Letter to the Lease, where applicable, shall apply to the Floor 8 Remainder Space Tenant Work.

8. Notwithstanding the actual date of substantial completion for the Floor 8 Remainder Space, Tenant’s obligation to commence the payment of monthly installments of Basic Annual Rent on the Floor 8 Remainder Space shall commence on the earlier to occur of substantial completion of the Floor 8 Remainder Space Tenant Work or May 1, 2001 (such earlier date being hereinafter the “Floor 8 Remainder Space Commencement Date”), and if such Floor 8 Remainder Space Commencement Date occurs on a date other than the first (1^st) day of the calendar month, then Tenant shall pay rent on the Floor 8 Remainder Space for such Partial Lease Month in the amount set forth in Item 5 of the Basic Lease Provisions for each day of such partial month from and after the Floor 8 Remainder Space Commencement Date. Notwithstanding the foregoing, subject to Tenant Delays and delays outside of the reasonable control of Landlord, commonly considered force majeure, Landlord shall use commercially reasonable efforts to substantially complete the Floor 8 Remainder Space Tenant Work as soon as possible.

9.This Third Amendment to Lease Agreement shall be effective only upon (1) an executed Lease Termination Agreement for the Floor 8 Remainder Space by and between Landlord and United Advanced Lumber, Inc., a Nevada corporation and (2) a check from Tenant in the amount of $ 67,500.00 payable to Landlord as Tenant’s portion of the Termination Fee payable by Landlord to United Advanced Lumber as an inducement to terminate their existing lease covering the Floor 8 Remainder Space.

IN WITNESS WHEREOF, the parties have executed this Amendment as of the date stated above.

LANDLORD		TENANT
IMPERIAL PROMENADE ASSOCIATES, LLC, a Delaware limited liability company		MSC SOFTWARE CORPORATION a Delaware corporation
By:	/s/ Curtis R. Olson	By:	/s/ Frank Perna Jr.
	Curtis R. Olson, Managing Member			Its:			Frank Perna, Jr.
							Chairman and CEO
Date:	3/13/01	Date:		3/19/01
		By:	/s/ Louis A. Greco
						Its:		CFO
		Date:			3-9-01

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EX-10.5

Exhibit 10.5

LEASE

THIS LEASE AGREEMENT “Lease”, entered into August 5, 1999 between William C. Martin or his Assignee (hereinafter referred to as “Host”) whose address is c/o First Martin Corporation, 115 Depot Street, Ann Arbor, Michigan 48104 and MECHANICAL DYNAMICS, INC., a Michigan corporation (hereinafter referred to as “Guest”) whose address is 2391 Commonwealth Boulevard, Ann Arbor, Michigan 48105 until commencement of the term hereof and thereafter the Premises, by which the parties agree as follows:

1.Leased Premises.    Subject to and upon the terms hereinafter set forth, and in consideration of the sum of Ten Dollars ($10.00), the premises, and the mutual covenants set forth herein, the receipt and sufficiency of which are hereby acknowledged, Host does hereby lease to Guest certain premises (hereinafter referred to as the “Premises”) consisting of a building (hereinafter referred to as the (“Building”) in the Traverwood Business Center located in Ann Arbor, Michigan, on the site described in Exhibit A-1 attached hereto (hereinafter referred to as the “Site”), such leased Premises being approximately 66,878 square feet of Gross Building Area as generally described in Paragraph 3 hereof; the preliminary site plan for the Building is attached hereto as Exhibit A-2.  Together the Building and Site are sometimes referred to herein as the “Project”.  As used herein, “Gross Building Area” or “GBA” shall refer to the total square footage of all floor area (including floor area which is below grade) measured to the predominant outside surface of the Building exterior walls (or in the case of floor area below grade, the inside face of the foundation walls).

2.Term.

(a)Initial Term.  The term of this Lease shall commence fifteen (15) days after the date of Substantial Completion of the improvements to be made by Host (“Host’s Improvements”, as defined in Paragraph 3 of this Lease), and shall continue for a period of ten (10) years from the first of the month coincident with or next following such date of commencement (hereinafter referred to as the “Commencement Date”).  Guest and Host mutually agree that in the event Substantial Completion is achieved between December 1, 2000 and January 2, 2001, Guest may delay the Commencement Date of the Lease until January 15, 2001.  As used herein, “Substantial Completion” shall mean the completion of Host’s Improvements in substantial compliance with the plans, specifications and other contract documents for such Improvements except for punchlist items which in the aggregate do not materially interfere with the use and occupancy of the subject space for its intended purposes and which can be completed without interfering with the use of such space.  Guest acknowledges that a certificate of occupancy cannot be secured until Guest’s cubicles are installed and wired.  Guest shall be allowed access to install the same as soon as reasonably possible. Should Substantial Completion of Host’s Improvements be delayed due to either (i) Guest’s failure to approve the plans and specifications for said Improvements

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in a timely manner (as set forth in Paragraph 3), or (ii) change orders initiated by Guest, then the Commencement Date shall be that date on which Host’s Improvements would have otherwise been substantially completed but for such delays.  Change orders shall state the delay which will result thereby, if any, in the Substantial Completion of Host’s Improvements.  As used herein, the term “Lease Year” shall mean a period of twelve (12) consecutive months.  The first Lease Year shall begin on the date of commencement of the term of this Lease if such Commencement Date shall occur on the first day of a month, or, if not, then on the first day of the following month.

(b)Renewal Option.    Provided Guest is not then in default, Guest shall have the right to renew the term of this Lease for two (2) additional successive periods of five (5) years each (the “Option Periods”) on the same terms and conditions with the exception that (i) Guest shall have no further implied right to renew beyond the properly exercised Option Periods, (ii) Guest shall not have the right to assign said rights to any sublessee of the Premises or assignee of the Lease, nor may any such sublessee or assignee exercise such renewal rights, and (iii) the leasehold improvements shall be provided in their then-existing condition (on an “as is” basis) at the time the Option Periods commence.  If Guest elects to exercise any expansion options as provided in Paragraph 36 hereof, then the Option Periods shall commence at the expiration of the term of the Lease as extended pursuant to the provisions of such expansion options.  Guest shall give Host notice that it is exercising any such right not less than eighteen (18) months prior to the expiration date of the then current term of the Lease.

(c)Completion Date.    Host shall use its best efforts to obtain Substantial Completion on or before November 1, 2000.  In the event that Substantial Completion of Host’s Improvements has not been attained on or before May 1, 2001, Guest shall have the right to terminate this Lease by delivery of fifteen (15) days’ prior written notice of termination to Host, unless during such fifteen (15) day period, Host agrees in writing to extend (i) the lease between First Properties Associates Limited Partnership and Guest, as lessee, date July 12, 1989, covering certain premises located at 2301 Commonwealth Boulevard, Ann Arbor, Michigan (the “Old Lease”), and (ii) the Rent Credit as defined in an amendment to the Old Lease described as the Third Amendment to Lease dated as of August 5, 1999, in both cases, for a period thirty (30) days beyond the date of actual Substantial Completion of Host’s Improvements.  Guest agrees to act promptly in all matters requiring Guest’s approval, including but not limited to approval of plans and specifications so as not to delay the project commencement and completion.

3.Improvements.

(a)Host’s Improvements.    Host shall cause to be constructed on the Land a Building with a Gross Building Area of approximately 66,878 square feet including site work, building shell, mechanical systems, and interior partitions and finishes but

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excluding the installation of cubicles (including electrical wiring) and computer and communications cabling (herein sometimes referred to as “Host’s Improvements”).  Guest shall be responsible for the layout, design and installation of all cubicles (including electrical wiring) and computer and communications cabling; said design and Guest’s contractors most be approved by Host in writing in advance.

(b)Plans and Specifications.    Host’s Improvements shall be constructed in accordance with plans and specifications mutually approved and agreed upon by Host and Guest as provided hereinafter.  The architect forHost’s improvements shall be Jickling, Lyman and Powell.  The maximum number of parking spaces allowed by the City of Ann Arbor shall be provided not to exceed five spaces per 1,000 square feet of Gross Building Area, subject to receiving site plan approval from the City of Ann Arbor for the amount of parking.  Host shall submit to Guest for its approval the site plan and the final plans and specifications for Host’s Improvements; said plans and specifications shall be deemed approved unless rejected in writing within five (5) business days of receipt.  A working set of site plans and building plans and specifications which are approximately 75% complete will be made available for review at least two weeks prior to submission of final plans.  Any denial of such approval shall be fair and reasonable.

(c)Building Construction.    The general contractor for Host’s Improvements shall be O’Neal Construction, Inc. (“O’Neal”).  Host and Guest shall jointly negotiate a contract with O’Neal, which contract shall provide a guaranteed maximum price which includes a 3% construction contingency.  Host shall provide an allowance (the “Hard Construction Cost Allowance”) of up to $100.00 per square foot of Gross Building Area for the direct construction costs for Host’s Improvements; “direct construction costs” includes bonding and permits but excludes extraordinary costs relating to poor soil conditions, which costs shall be the sole responsibility of Host, and soft costs such as base building architectural and design services, legal services, construction financing, permanent financing origination, title insurance, builder’s risk insurance, brokerage commissions, development fees, real estate taxes and other carrying costs for the Site.  Upon Guest’s written request received on or before the date of commencement of said Improvements, Host shall increase said Allowance to up to $110.00 per square foot of Gross Building Area, subject to Host securing additional financing acceptable to Host within thirty (30) days of notice from Guest that it wishes to increase said Allowance.  Any direct construction costs for Host’s Improvements in excess of said Allowance shall be paid to Host by Guest within 30 days of date of invoice.  O’Neal shall provide a warranty of one year on all work with the exception of the roof, which shall have a ten year warranty; said warranties shall commence as of the date of Substantial Completion of Host’s Improvements.  The additional cost of any change order requested by Guest shall be paid to Host within ten (10) days of date of invoice and shall include an administrative fee of 10%.

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4.Rent.

(a)Base Rent.    Guest shall pay to Host as annual base rent for the Premises for the term hereof an amount which shall be determined by multiplying the Rent Factor by the Total Development Cost for the Project, as further defined below:

(i)“Rent Factor” is the sum of the Rental Rate Constant and the Debt Service Constant.

(ii)“Rental Rate Constant” is 200 basis points.

(iii)“Debt Service Constant” is the percentage calculated by dividing the annual payment of principal and interest required for the Permanent Mortgage Loan by the original principal amount of said Loan.  The Debt Service Constant shall not change if Host refinances the Permanent Mortgage Loan or pays off said Loan subsequent to the Commencement Date of the Lease.

(iv)“Permanent Mortgage Loan” is the loan which is secured by Host to finance the Total Development Cost. Said loan shall (a) have a minimum term of ten (10) years, (b) be non-recourse to Host, (c) have a twenty-five year amortization schedule which provides for level annual payments, and (d) be otherwise acceptable to Host.  If said loan has not been closed as of the Commencement Date, then the terms set forth in the commitment for said Loan shall be used.

(v)“Total Development Cost” is the sum of:

•“Land Cost”, which is deemed to be $1,050,000.00;

•“Hard Construction Cost”, which is the portion of the Hard Construction Cost Allowance which is used; and

•“Soft Cost”, which is deemed to be One Million Five Hundred Eighty-Three Thousand Four Hundred ($1,583,400) Dollars.

The manner in which the annual rent is to be calculated is illustrated using estimated costs in Exhibit B attached hereto.

(b)Payment Schedule.    Said annual rent shall be due and payable in equal monthly installments in advance on the first day of each calendar month during the term hereof.  Rent for partial months shall be prorated based on a 365 day year.  If any rent payment due hereunder is more than six (6) days late, Guest shall pay Host a service fee equal to two percent (2%) of said rent payment.  The payment of this late payment service fee will not constitute a waiver by Host of any default by Guest under this Lease.  The rent to be paid by Guest hereunder shall not be

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diminished by the additional payments to be made by Guest as provided in Paragraphs 5,6,7,8 and 16 or elsewhere in this Lease.

(c)Escalation.     The annual base rent payable under this Lease shall be adjusted annually at the beginning of the second Lease Year and each succeeding Lease Year during the term of this Lease and any renewals thereof by 2.69%.  Commencing with the seventh Lease Year, in the event the Consumer Price Index (as hereinafter defined and referred to as “CPI”) increases more than 7.0% in the twelve month period immediately proceding the third month prior to the month in which such adjustment is to take effect, then the annual increase in the rent will be 80% of the percentage increase in the CPI during such period.  Adjusted monthly installments of rent shall be rounded to the nearest whole dollar.  As used herein, “Consumer Price Index” means the Consumer Price Index for All Urban Consumers, U.S. City Average, All Items, 1982-84 = 100, as issued by the Bureau of Labor Statistics, United States Department of Labor.  If at any time during the term hereof the Bureau of Labor Statistics should modify the methodology used in computing the CPI and should said Bureau determine that, as a result, the CPI is likely to be different in the future than would otherwise be the case, then in calculating rent increases hereunder the CPI shall be adjusted as follows.  Commencing with the first rent adjustment date after the new methodology becomes effective, the percentage increase in the CPI during the relevant twelve month period shall be multiplied by an adjustment factor, which shall be the quotient of a) the increase in the CPI using the old methodology during the twelve month period prior to the date the new methodology becomes effective, divided by the increase in the CPI during said twelve month period using the new methodology (as estimated by the Bureau of Labor Statistics).  If at any time during the term hereof the United States Bureau of Labor Statistics shall discontinue the issuance of the CPI, then the parties agree to use any other standard, nationally recognized cost of living index then issued and available, which is published by the United States Government, and if no governmental index is then published, then by any generally recognized privately published index of the cost of living.

5.Net Features.    The rent during the term of this Lease shall be on a net-net-net basis.  That is to say, Guest, and not Host, shall be responsible for and pay all costs connected with the Premises and the grounds and parking facilities subject to the limitations contained in section 37 hereof appurtenant thereto, including but not limited to: real estate taxes as hereinafter defined (or any other tax or charge imposed by any governmental authority expressly designated and identifiable as a substitute for such taxes), personal property taxes, special assessments, utilities, service charges, janitorial service, maintenance (including: (i) maintenance repair and replacement, as necessary, of all plumbing, electrical, heating/cooling and other mechanical systems; (ii) the building doors, windows, roof and structure; and (iii) the grounds and parking facilities), insurance and management.  Such items shall be paid before they become overdue or delinquent.  Failure to do so shall be a default of the Lease.  There shall be no deduction from the rent

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on account of Guest’s payment of such costs.  Latent defects in the roof, windows, or structure discovered subsequent tothe one year warranty period and prior to the seventh anniversary of the lease Commencement Date shall be the Host’s responsibility to repair or replace as necessary.

6.Real Estate Taxes.    From and after the Commencement Date, Guest shall pay all real estate taxes connected with the Premises and one-half of real estate taxes connected with the Site (or a greater portion should Guest exercise its expansion options as provided in Paragraph 36 (“Expansion Options”)).  As used herein, “real estate taxes” shall mean: (i) all real estate, ad valorem or personal property taxes levied with respect to the Premises, the Site, any fixtures, equipment or other property, real or personal, located on or about the Premises or the Site; (ii) any other tax, general or special assessment or other governmental charge of any description imposed upon or in respect to the Premises or Site, including, without limitation, a tax upon any rent therefrom, or any occupancy or use thereof; (ill) any water and sewer general or special assessments, charges, excises, levies, license and permit fees, transfer taxes, and all other similar charges, if any, which are levied, assessed, or imposed upon or become due and payable in connection with, or liens upon, the Premises, Site or facilities used in connection therewith, and rentals or receipts therefrom; and (iv) all taxes of whatsoever nature that are imposed in substitution for or in lieu of any taxes, assessments or other charges included in this definition.  Host shall obtain from the taxing authority a separate tax parcel for the Site.  Guest’s liability for real estate taxes hereunder shall be paid to Host in the manner set forth in Paragraph 8 hereof.  In the event Host is required under any mortgage covering the Building to escrow real estate taxes, Host may, but shall not be obligated to, use the amount required to be so escrowed as a basis for its estimate of such monthly installments. Provided Guest is the sole occupant of the Building, Guest shall have the right to contest the assessed value of the Premises after first consulting with Host.  If the building becomes multi-tenant, Host and Guest may mutually agree to contest the assessed value.  In such case, Host will negotiate or contest the assessed value with the City of Ann Arbor.  Real estate taxes for the first and last years of this Lease shall be prorated between Host and Guest using the due date method.

7.Utilities.    From and after the Commencement Date, Guest shall be responsible for the cost of all utilities for the Project including, but not limited to, the cost of electricity, gas, water, sewer, stormwater discharge and power for heating, lighting, air-conditioning and ventilating the Project.  Such costs shall be paid by Guest directly to the providers of such utilities.

8.Operating Expenses; Maintenance and Repair.

(a)Operating Expenses Defined.  From and after the Commencement Date, Guest shall pay Host the Operating Expenses for the Project as additional rent.  As used herein, “Operating Expenses’” shall include all costs of maintaining, repairing, replacing, decorating, cleaning, operating, servicing and protecting the Project together with a management fee equal to 5% of the sum of all other Operating

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Expenses and the base rent as set forth in Paragraph 4 hereof.  Such costs shall include but not be limited to:

(i) wages and salaries, including taxes, insurance and benefits, of all on-site employees engaged in operations and maintenance, as reasonably allocated by Host.

(ii) cost of all supplies, tools, equipment materials and professional fees to the extent used in operations and maintenance, as reasonably allocated by Host;

(iii) cost of all maintenance and service agreements and the equipment therein, including, but not limited to, parking lot and facility maintenance, repair and snow removal, window cleaning, elevator maintenance, janitorial service, landscaping and irrigation maintenance, hvac systems, roof, carpet, windows, doors, etc.;

(iv) cost of repairs, replacements and general maintenance (excluding repairs, replacements, alterations and general maintenance paid by proceeds of insurance);

(v) cost of any system, apparatus, device, or equipment which is installed for the principal purpose of (a) reducing Operating Expenses, (b) promoting safety or (c) complying with governmental requirements which become effective after the Commencement Date;

(vi) the cost of all insurance, including, but not limited to, the cost of casualty, rent loss and liability insurance, and insurance on Host’s personal property, plus the cost of all deductible payments made by Host in connection therewith, as more specifically provided in Paragraph 16 hereof; and

(vii) the cost of real estate taxes, as such term is defined in Paragraph 6.

(b)Method of Payment.    At the Commencement Date and prior to the beginning of each calendar year thereafter, Host shall have the right to estimate the Operating Expenses for such calendar year or portion thereof and notify Guest of its liability for such Operating Expenses, which amount shall then be due and payable in monthly installments in advance in accordance with the provisions of Paragraph 4(b) hereof for the payment of rent.  Host may adjust the estimated monthly installment at the end of any calendar quarter on the basis of Host’s experience and anticipated costs.  Within ninety (90) days following the end of such calendar year (or in the case of the last calendar year of the Lease term, the termination date), Host shall furnish Guest with a statement covering the calendar year just expired showing the total Operating Expenses for such calendar year and payments made by Guest during such year.  If Guest’s liability exceeds Guest’s payments for estimated Operating Expenses during such year, then Guest shall pay Host the deficiency within fifteen (15) days after receipt of such statement

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without the necessity of additional demand or notice thereof.  If Guest’s payments exceed Guest’s liability, Guest shall be entitled to offset such excess payments against payments next thereafter to come due Host under this Paragraph 8; provided, that upon the expiration or earlier termination of this Lease, Host shall refined to Guest such excess payments so long as Guest is not in default hereunder.

(c)Guest Oversight.    In as much as Guest will be reimbursing Host for Operating Expenses pursuant to this Section 8, Host hereby agrees that Guest shall have the right to annually review with Host all contracts which are to be let for the provision of services included in Operating Expenses for the ensuing Lease Year to insure that (i) the Project is maintained in good order and repair and in a first class condition and (ii) Operating Expenses are minimized to the greatest extent possible, consistent with such standard of maintenance and repair.  Host and Guest agree to cooperate with each other in minimizing Operating Expenses and contracting with such service providers as will provide good quality services at the best possible cost.

9.Security Deposit.   As security for Guest’s faithful performance of its obligations hereunder.  Guest shall (a) deposit with Host upon execution hereof the amount of thirty-one thousand, seven hundred and forty-three ($31,743) Dollars, and (b) deliver a letter to First Properties Associates Limited Partnership (“FPALP”) instructing FPALP to pay to Host the security deposit in the amount of fifty-two thousand, five hundred ($52,500) Dollars currently held by FPALP pursuant to a lease between FPALP and Guest for certain premises at 2301 Commonwealth Blvd., Ann Arbor, Michigan at the time said lease is terminated; together such amounts are hereinafter referred to as the “deposit”.  If Guest fails to pay the rent or otherwise defaults with respect to any provision of this Lease, Host may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default, or for the payment of any other sum to which Host may become obligated by reason of Guest’s default or to compensate Host for any loss or damage which Host may suffer thereby.  Said deposit shall not be a limitation on Host’s damages or other rights under this Lease, or a payment of liquidated damages or an advance payment of the rent.  If Host so uses or applies all or any portion of said deposit, Guest shall, within five (5) days after written demand thereof, deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount hereinabove stated and Guest’s failure to do so shall be a material breach of this Lease.  Host shall not be required to keep said deposit separate from its general accounts.  If Guest performs all of Guest’s obligations hereunder, said deposit, or so much thereof as has not theretofore been applied by Host, shall be returned, without payment of interest or other increment for its use, to Guest at the expiration of the term hereof and after Guest has vacated the Premises.  No trust relationship is created herein between Host and Guest with respect to said security deposit.

10.Place and Form for Payment of Rent.   All payments of rent shall be delivered to Host at First Martin Corporation, 115 Depot Street, Ann Arbor, Michigan 48104 or at such other

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place as Host shall designate from time to time in writing.  Rent payments shall be made payable to Host.

11.Financing.    (a) If in connection with obtaining by Host of any financing or refinancing for the Building, the lender shall request reasonable modifications in this Lease as a condition to such financing or refinancing.  Guest will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Guest hereunder or in a material manner adversely affect the leasehold interest hereby created.

(b)  Guest agrees that this Lease shall be subordinate to any mortgages that may hereafter be placed or made upon the Building, provided the mortgagee named in any such mortgages shall agree to recognize the lease of Guest in the event of foreclosure if Guest is not in default.

(c)  Guest agrees within ten (10) days after request by Host to execute in recordable form and deliver to Host (i) a subordination agreement as required by any such mortgagee provided that such an agreement contains recognition/nondisturbance provisions satisfactory to Guest, and (ii) an estoppel certificate certifying (a) that this Lease is in full force and effect, (b) the date of commencement of the term of this Lease, (c) that rent is paid currently without any off-set or defense thereto, (d) the amount of rent, if any, paid in advance, (e) that there are no uncured defaults by Host or stating those claimed by Guest (provided that, in fact, such facts are accurate and ascertainable), and (f) such other information pertaining to the Lease as may be required by any such mortgagee.

(d)  If proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage made by Host covering the leased Premises, Guest shall become the tenant of, and attorn to, the purchaser upon any such foreclosure or sale and recognize such purchaser as the Host under this Lease.  The obligation of Guest hereunder to attorn to the purchaser shall be conditioned upon the agreement of such purchaser to recognize the rights of Guest under this Lease.  Guest agrees within ten (10) days after request by Host to execute in recordable form and deliver to Host an attornment agreement evidencing the provisions of this subparagraph.

12.Use of Premises.    (a) Guest shall use and occupy the Premises only for office use consistent with the zoning of the Land.

(b)  Guest will keep the Premises clean and shall not create any nuisance, noises, vibrations, electrical discharges, radiation or other disturbances that shall in any way unreasonably impair the peace, quietness, comfort, or security of the building wherein the Premises are situated nor do anything that will cause any extra hazard, impair the validity of any policy of insurance now or hereafter placed on the Building, or any of its contents, or that will increase the rate of premium on any such policy or that will violate any prohibitions in any such policy.

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(c)  Guest, shall, at its own cost and expense, comply with all of the requirements of all valid laws and regulations, municipal, state and federal, now in force, or which may hereafter be in force, pertaining to the Premises, and the use and occupancy thereof.

(d)  Guest shall not sell, rent or keep drug paraphernalia, pornographic materials or sexually explicit materials in or from the Premises; Guest shall not use the Premises for any activity included in the definition of “adult entertainment business” in the City of Ann Arbor Zoning Ordinance, regardless of whether an activity is a “principal” activity.

13.Acceptance of Premises.    Except as Host and Guest may otherwise agree in writing at such time, the taking of possession by Guest shall be conclusive evidence that Guest has examined the Premises, has found them to be in satisfactory condition and accepts the Premises “as-is” subject to completion of punch list items, and that Host up to such time had performed all of its obligations hereunder.

14.Host’s Repairs.    (a) Subject to the provisions of Paragraph 5, 8 and 34 hereof, Host shall maintain and repair the Premises, the Common Areas and the structural and public areas of the Building such as lobbies, stairs, corridors, common restrooms, roof, elevators, and structural elements; provided, however, should Guest elect to self-manage the Project (as provided in Paragraph 34) then Guest, and not Host, shall be responsible for all such maintenance and repair.  Notwithstanding anything herein to the contrary, Guest shall be solely responsible for locking and unlocking Building entry doors, security alarms and services.

(b)  Except as otherwise provided in the Paragraph hereof relating to Destruction and in the Paragraph hereof relating to Eminent Domain, there shall be no allowance, abatement of rental, or liability to Guest for diminution of rental value or interference with Guest’s business and no claim by Guest for eviction from said Premises by reason of inconvenience, annoyance or injury to Guest arising from any repairs, alterations, replacements or improvements made to said Premises, Building, Common Areas or any portion thereof by Host, its agents, employees or contractors, or by Host’s mortgagee.  To the extent Host may be responsible for repairs under this Lease, Host shall not be liable to Guest for failure to make repairs to the Premises, Building, Common Areas or any portion thereof, unless Host has received from Guest written notice of the need for such repairs and has failed to commence and diligently complete such repairs within thirty (30) days of such notice or such greater length of time as is reasonably required by Host to make such repairs.

(c)  The Guest covenants and agrees that if the demised Premises consists of only a part of a structure owned or controlled by the Host, the Host may enter the demised Premises at reasonable times and upon reasonable notice and install or repair pipes, wires and other appliances or make any repairs deemed by the Host essential to the use and occupancy of other parts of the Host’s building.

(d)    Guest acknowledges that the Building cooling system is designed for a maximum

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internally generated heat load per zone or room of 1 person per 220 square feet and 4.5 watts of lighting and equipment per square foot in the aggregate.  Should the host load in the Premises exceed the aforesaid maximum, Guest shall be responsible forthe cost of any consequent modification to the cooling system.

15.Alterations by Guest.    Guest shall not make anyalterations, additions and improvements to the Premises without the Host’s written consent, and all alterations, additions and improvements made by either of the parties hereto upon the Premises, except movable office furniture and trade fixtures put in at the expense of the Guest, shall be the property of the Host, and shall remain upon and be surrendered with the Premises at the termination of this Lease; provided, however, that the Guest shall have the option of removing additions made by it if the Premises are restored to good condition following such removal and any damages to the Premises resulting from such removal are repaired.  Host may, at its option, require Guest to remove, at Guest’s sole expense, improvements made for or by Guest and repair any damage resulting therefrom, upon the expiration or earlier termination of this Lease.  Should Guest make any alterations to the Premises, Guest shall have the plans for the Premises revised to reflect such alterations and shall provide Host with a set of the revised plans.

16.Insurance.    (a) During the term hereof Host shall maintain insurance coverage asfollows:

(i) Host shall keep the Building covered by a policy of fire and extended coverage insurance equal to 100% for the replacement cost of the Building with an “agreed amount” endorsement so as to prevent Host from becoming a co-insurer of any loss.  Such policy of insurance shall name Host as the loss payee.  During any reconstruction, alteration or material remodeling of the Premises such policy shall be in “builder’s risk” form if there would be an exclusion under Host’s fire and extended coverage policy as a result of such construction, reconstruction, alteration or material remodeling.

(ii) Host shall maintain an owner/lessor’s policy of commercial general liability and property damage insurance with limits which are secured for other comparable buildings owned and/or managed by First Martin Corporation; however, in no event shall said limit ever be less than $3 million.

(iii) Host shall maintain a policy of insurance covering loss of rents resulting from the interruption of Guest’s business due to fire or other casualty for a period of not less than twelve (12) months.  Such policy shall name Host as the loss payee.

(b)   Guest shall pay Host the cost of the insurance to be maintained by Host hereunder as provided in Paragraph 8.

(c)   Guest shall maintain, at Guest’s expense, a policy of commercial general liability and property damage insurance with a combined single occurrence limit of not less than $3 million insuring Host and Guest against any liability arising out of the ownership, use,

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occupancy or maintenance of the Premises.  Host, although named as an additional insured party under said policy, shall nonetheless be entitled to recover under said policy for any less sustained by it as the result of the acts or omissions of Guest. Said single limit shall be adjusted at the beginning of the sixth Lease year and every fifth year thereafter to the amount then typically being required by new leases for comparable facilities in southeastern Michigan as mutually agreed upon by Host and Guest; but in no event shall said limit ever be less than $3 million.  Guest shall cause the issuer of such policy of insurance to deliver to Host a copy of or Certificate of Insurance for such policy naming Host as an additional insured party prior to the Commencement Date hereof and with respect to the renewal or replacement policies, not less than thirty (30) days prior to the expiration of the policy being renewed or replaced.  No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days’ prior written notice to Lessor.  In addition, Guest shall maintain a policy of fire and extended coverage insurance on its personal property.

(d) All insurance required under this paragraph shall be written by companies acceptable to Host, shall be reasonably satisfactory to Host in all respects and shall provide an effective waiver by the insurer of all rights of subrogation against any named insured and against such insured’s interest in the Premises and any income derived therefrom.  Host and Guest and all other parties claiming under them hereby mutually release and discharge each other from all claims and liability to the extent covered by insurance, regardless of the cause of any damage, loss or injury to person or property to the extent such waiver of liability is permitted by any applicable policies of insurance maintained by Host and/or Guest, as the case may be.  Provided other tenants of Host waive subrogation against Guest, Guest waives any and all rights Guest may have against said other tenants for damage to or destruction of the demised Premises due to any casualty insurable by the customary form of fire and extended coverage insurance, whether such damage or destruction be due to said tenants’ negligence or otherwise.

17.Guest’s Personal Property.  All personal property of Guest kept on the Premises shall be at Guest’s sole risk, and Guest hereby waives all right of recovery which it might otherwise have against Host for any loss, theft or damage to Guest’s personal property.

18.Destruction - Fire or Other Cause.  If the Premises shall be rendered untenantable by fire or other casualty, then Host shall make the Premises tenantable as speedily as possible, and the rent shall be abated in whole or in part, according to the portion of the Premises which is rendered untenantable, during the period of untenantability, except that there shall be no such abatement if such fire or other casualty shall be caused by the gross negligence of Guest or its agents, employees, invitees or licensees, and further, there shall be no abatement for the time required for the replacement or repair of any property of Guest, in excess of the time required to make the Premises tenantable.  In the event that the Premises cannot be made tenantable within ninety (90) days, then either Host or Guest may terminate this Lease by notification to the other of such termination within ten (10) days after Host shall have notified Guest of the time required to make them tenantable.  Host shall, in its sole judgment, reasonably exercised, determine the length of

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time required to make the Premises tenantable, and shall notify Guest of such determination within ten (10) days after the occurrence of the fire or other casualty.  Notwithstanding the foregoing, in the event that the Premises shall be so damaged by fire or other casualty that demolition or substantial reconstruction is required, then Hostor Guest may terminate this Lease by notifying the Guest or Host of such termination within thirty (30) days after the date of such damage.

19.Eminent Domain.   In the event that all or a substantial portion of the Premises be lawfully condemned or taken in any manner forany public or quasipublic use, this Lease shall terminate as of the date of actual taking.  In the event that any insubstantial part of the Premises be so condemned or taken, Host or Guest shall have the right to terminate this Lease as of the date of actual taking by giving Guest or Host written notice of such termination; but should Host or Guest not so terminate this Lease, this Lease shall cease as to the part taken and the rent adjusted so that Guest shall pay a pro rata portion of the rent determined by the amount of space (and rate therefor) remaining after the taking.  Host shall be entitled to receive the entire award from any such condemnation or taking of the Premises or any part thereof, without deduction therefrom for any estate or interest granted to Guest by this Lease, provided, that nothing herein contained shall be deemed to prevent Guest from claiming compensation for relocation costs or loss for interruption of business in the event an award with respect thereto is provided for by law or is fixed in the proceeding in which such taking shall occur.  In the event of a partial taking insufficient in size to cause termination of the Lease, Host shall build, repair or replace any outer walls, floor, or roof necessary to make the Premises tenantable.

20.Assignment and Subletting.   Guest shall not assign this Lease or sublet the Premises or any part thereof without the written consent of Host, which consent shall not be unreasonably withheld.  Under no circumstances shall Guest have the right to sublease the Premises to more than three (3) sublessees.  Any other provision of this Paragraph to the contrary notwithstanding, Host shall not be required to give its consent to an assignment or subletting of the leased Premises, or any part thereof, if the effect of such assignment or subletting would be to create a profit for the Guest. In such cases, any profit from the assignment or subletting shall be paid to the Host. Guest agrees that it shall not be unreasonable forHost to withhold its consent to a proposed assignment or subletting if: (i) Host believes that the proposed assignee or sublessee of 35,000 square feet or more in the premises is not as financially responsible as Guest on the date hereof; (ii) Host believes that the proposed assignee or sublessee will not conduct on the Premises a business of a quality equal to that conducted by Guest; or (iii) Host believes that the business of the proposed assignee or sublessee, conducted on the Premises, will have an impact upon the common facilities dissimilar to that of Guest’s business or will require services of Host dissimilar to those required by Guest. Host’s consent to one assignment or sublease shall not waive the requirement of its consent to any subsequent assignment or sublease.  In the event Host consents to Guest’s subletting, Guest shall include in such sublease all of the pertinent terms contained herein, and Guest shall furnish Host with a certified copy of any and all subleases affecting the demised Premises prior to such consent; and in case of default by Guest giving Host right of entry for breach of condition

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subsequent, Guest, at Host’s option, shall assign all of Guest’s right, title and interest in any subleases to Host, and Guest shall incorporate such provision in any and all subleases made by Guest.  Host’s consent to an assignment shall not be effective until Host has reserved a written document in which the assignee has assumed and agreed to perform all of Guest’s obligations in the Lease.  Host’s consent to an assignment or sublease shall not release the Guest from the payment and performance of its obligations in the Lease, but rather the Guest and its assignee shall be jointly and severally primarily liable for such payment and performance.

21.Default, Eviction, Termination and Damages.  If Guest shall fail to pay any rent or other charges due hereunder within ten (10) days of the date said charges are due, or if Guest shall fail to comply with any details, provisions, or covenants of this Lease other than the payment of rent and shall not cure such failure within thirty (30) days after written notice thereof, or if Guest shall be adjudged bankrupt by a court of competent jurisdiction, or if a receiver or trustee shall be appointed for all or substantially all of the assets of Guest, then in any such event, Guest shall be deemed in default. When Guest is in default, Host, besides other rights or remedies it may have, shall have the right to declare this Lease terminated and the term ended, shall have the right to evict Guest under Summary Proceeding law, and shall have the additional and immediate right of reentry and may remove all persons and properly from the leased Premises and such property may be removed and stored in a public warehouse or elsewhere at the cost of, and for the account of Guest, without evidence of notice or resort to legal process and without being deemed guilty of trespass, or becoming liable for any loss or damage which may be occasioned thereby.  Should Host elect to reenter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Lease or it may from time to time, without terminating this Lease, make such alterations and repairs as it may deem appropriate in order to re-rent the Premises, and re-rent said Premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rental or rentals and upon such other terms and conditions as Host in its sole discretion may deem advisable.  If Host has other unoccupied apace similar to the Premises, Host shall be under no duty to attempt to re-rent these Premises (and Guest shall be entitled to no reduction in its indebtedness to Host as a result of any such failure by Host) until such other space has been rented.  Upon each such re-renting, all rentals and other sums received in any month by Host from such re-renting shall be applied, first to the payment of any indebtedness other than rent due hereunder from Guest to Host; second, to the payments of any costs and expenses of such re-renting, including reasonable brokerage fees and attorneys’ fees and of costs of such alterations and repairs; third, to the payment of rent and other charges due and unpaid hereunder, and the residue, if any, shall be held by Host and applied in payment of future rent as the same may become due and payable hereunder.  If such rentals and other sums received from such re-renting during any month be less than that to be paid during that month by Guest hereunder, Guest shall pay such deficiency to Host. Such deficiency shall be calculated and paid monthly.  No such re-entry or taking possession of said Premises by Host shall be construed as an election on its part to terminate this Lease unless a written notice of such intention is given to Guest or unless the termination

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thereof is decreed by a court of competent jurisdiction.  Notwithstanding any such re-renting without termination, Host may at any time hereafter elect to terminate this Lease for such previous default.  Should Host at any time terminate this Lease for any default, in addition to any offer remedies it may have, it may recover from Guest all damages it may incur by reason of such default, including the cost of recovering the leased Premises, reasonable attorneys’ fees, and including the worth at the time of such termination of the excess, if any, of the amount of rent and charges equivalent to the rent reserved in this Lease for the remainder of the stated term over the then reasonable rental value of the leased Premises for the remainder of the stated term, all of which amounts shall be immediately due and payable from Guest to Host.  In case suit shall be brought for recovery of possession of the leased Premises, for the recovery of rent or any other amount due under the provisions of this Lease, or because of the failure by Guest to abide by any other detail, provision, or covenant herein contained, Guest shall pay to Host all expenses incurred therefore, including reasonable attorneys’ fees.  Guest and Host hereby waive their rights to jury trial in any litigation that may arise relating to this Lease.

22.Surrender of Premises.   Upon the expiration or the termination of the term of this Lease, Guest shall quit and surrender the Premises to Host in good order and condition, ordinary wear, damage by the elements, and damage which is the responsibility of Host excepted; and Guest shall remove all of its property and shall repair any damage to the Premises caused by such removal.  Any personal property of Guest or of anyone claiming under Guest which shall remain on the Premises after the expiration or termination of the Lease term shall be deemed to have been abandoned by Guest, and either may be removed by Host as its property or may be disposed of in such manner as Host may see fit, and Host shall not be responsible for the same.

23.Access to Premises.    Host shall have the right to enter upon the Premises at all reasonable hours upon reasonable notice for the purpose of inspecting the same, preventing waste, loss, or destruction, removing obstructions, making such repairs or alterations as it is obligated to make under the terms of this Lease, or to enforce any of Host’s rights or powers under this instrument, and Host shall not be liable nor responsible for any loss that may accrue to Guest’s business by reason thereof. The Host may show the Premises to prospective tenants at any time during the last eighteen (18) months of the term of this Lease and display a “for rent”  sign subject to Guest’s approval of design and location.

24.Heirs and Assigns.    The covenants, conditions, and agreements contained in this Lease shall bind and inure to the benefit of Host and Guest and their respective heirs, distributees, executors, administrators, successors, and, except as otherwise provided in this Lease, their assigns.

25.Confidentiality.    Guest shall not disclose the terms and conditions of this Lease to third parties, except to professional advisors of Guest and as required by securities laws affecting Guest, without the advance written consent of Host.

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26.Quiet Enjoyment.    So long as Guest pays the rent and performs all of its obligations in this Lease, Guest’s possession of the Premises will not be disturbed by Host, its successors or designs.

27.Signs.    Other than the signage shown on the Project plans and specifications mutually agreed upon by Host and Guest (as provided in Paragraph 3), Guest or Host shall not fasten to or paint upon any part of the Site or Building any sign, advertisement, notices or handbill without the prior written consent of the Host or Guest.  Host may, without notice to Guest, remove any such sign, advertisement, notice or handbill painted or affixed in violation of this clause without any liability whatsoever for damagesor otherwise to Guest, and Guest shall be responsible for the cost of such removal.  Host reserves the right to place other signage on the Site or Building in the event the Building becomes multi-tenanted.

28.Holding Over.    In the event that Guest shall hold over after the term of the Lease, it is agreed that thereafter the tenancy shall be from month to month in the absence of a written agreement to the contrary on the same terms and conditions contained herein, with the exception that the rent shall increase to 120% of the rent in effect at the termination of the term of the Lease for the first three months and 150% thereafter.

29.Parking.    Subject to the provisions of Paragraph 36 (h), Guest shall have an exclusive license for the use of its agents, employees, suppliers, and customers over the driveways and parking lots on the Site.  Guest shall not allow its employees, agents or invitees to park on Traverwood Drive or in lots of other buildings in Traverwood Business Park.

30.Notices.    Whenever any notice is required hereunder it shall be made in writing and served personally or by certified mail, return receipt requested, at the following addresses (or at such other addresses as the parties may hereafter designate in writing):

Host:	William C. Martin
	c/o First Martin Corporation
	115 Depot Street
	Ann Arbor, Michigan 48104
Guest:	Mechanical Dynamics, Inc.
	2301 Commonwealth Boulevard
	Ann Arbor, Michigan 48105

until the commencement date of the Lease and thereafter the Premises.  If served personally, service shall be conclusively deemed made at the time of such service.  If served by certified mail, service shall be conclusively deemed made forty-eight (48) hours after the deposit thereof in the United States Mail.

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31.Host’s Liability.    (a) Guest and Host shall mutually indemnify, defend and hold harmless each other and their respective officers, employees, agents and invitees from all losses, damage, claims or liability arising out of anyand all injuries to or death of any person or damage to any property arising out of any occurrence in or about the Premises, or arising out of any occurrence in or about the Building arising from the act or neglect of Guest or Host or their respective agents or invitees. Notwithstanding the foregoing, neither party shall have any obligation to indemnify the other party against the sole negligence of that party.

(b)  The Host shall not be responsible or liable to the Guest for any loss or damage that may be occasioned by or through the acts or omissions of persons occupying adjoining premises or any part of the premises adjacent to or connected with the Premises hereby leased or any part of the Building of which the leased Premises are a part or for any loss or damage resulting to the Guest or his property from bursting, stoppage or leaking of water, gas, sewer or steam pipes.

(c)  If Host shall fail to perform any provision of this Lease and if as a consequence of such default Guest shall recover a money judgement against Host, such judgement shall be satisfied only out of the proceeds of sale received upon execution of such judgement and levied against the interest of Host in the Building or the consideration received by Host from the sale of Host’s interest.

32.Rules and Regulations.    Guest and its employees and invitees, shall faithfully observe and comply with the Rules and Regulations attached to this Lease, and all reasonable modifications of and additions thereto may be from time to time put into effect by Host.  Host shall not be responsible to Guest for the nonperformance of any of said Rules and Regulations by any other Guest or occupant of the Building.  In the event of a conflict between the terms and provisions of this Lease and the referenced Rules and Regulations, this Lease shall control.  Prior to the effective date of any intended modifications of or additions to the Rules and Regulations annexed hereto, Host shall furnish Guest with a written copy of same.

33.Environmental Law Compliance.     The parties acknowledge that there are certain federal, state and local laws, regulations and guidelines now in effect, and that additional laws, regulations and guidelines may hereafter be enacted, concerning the impact on the environment of land use, the maintenance and operation of structures, and the conduct of business.  Guest will not cause, or permit to be caused, any act or practice on or about the premises which would adversely affect the environment or violate any of such laws, regulations, or guidelines.  In particular, without limiting the generality of the foregoing, Guest will not use the premises to produce, store, process or transport any hazardous waste or hazardous substance, as those terms are defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”), or in the Resource Conservation Recovery Act of 1980, as amended (“RCRA”).  Any violation of this covenant shall be an event of default under this Lease.  In the event that a governmental authority deems the Premises, Building or underlying

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land unsafe for occupancy due to Guest’s tenancy, or the operation of its business at the Premises, then Guest shall be liable and shall fully compensate Host for the resulting loss sustained by Host.  Such liability shall extend to any and all of Guest’s officers, principals, general partners and guarantors under the Lease.  Guest agrees to indemnify and hold Host harmless against all losses, costs, expense and liability whatsoever, including Host’s costs of defending against the foregoing, which will include reasonable attorney’s fees, and against any costs necessary in connection with the cleanup or removal of any hazardous waste or hazardous substance from the premises, caused, or permitted to be caused, by any act, practice or neglect of Guest with respect to the use of the premises.  Guest shall have no claim against Host by reason of any changes which Host may be required to make to the premises pursuant to such laws, regulations, or guidelines.  Host hereby represents to Guest that, to the best of Host’s knowledge, no condition currently exists on the Site which constitutes a violation of any environmental law described in this Section 33 or otherwise, and Host hereby agrees to indemnify, defend and hold harmless Guest from any liability, claim, damage or expense arising out of any environmental condition associated with the Site in existence prior to the Commencement Date.

34.Management by Guest.     Provided Guest is the sole Lessee of the initial Building or after expansions, Guest shall have the right to assume responsibility for the management, maintenance and repair (including replacement, as necessary) of the Project by giving Host written notice of its intentions to assume management of the Project on the date specified in such notice (which date must be on the first day of a Lease Year): (a) within six (6) months of Lease execution; or (b) six (6) months prior to the fifth anniversary of the Commencement Date; or (c) six (6) months prior to the tenth anniversary of the Commencement Date; or (d) six (6) months prior to the commencement of the First Option Term hereunder, provided Guest has properly exercised such Option; or (e) six (6) months prior to the commencement of the Second Option Term hereunder, provided Guest has properly exercise such Option.  Performance of such responsibility by Quest shall be on the terms and conditions which are as follows.  Host shall be relieved of its obligation to maintain and repair the Project (as set forth in Paragraph 14).  Guest shall maintain the Project in good order and repair and in a first-class condition.  Guest shall pay the Operating Expenses for maintenance and repair set forth in Paragraph 8 directly to the providers of maintenance and repair services.  Guest shall enter into and keep in force maintenance contracts for the services which are follows: (a) parking facility sweeping, snow removal and salting; (b) comprehensive landscaping maintenance, including mowing, fertilization, pruning and the planting of spring and summer annual flowers; (c) elevator maintenance (full maintenance contract, inducting replacements); and (d) heating/cooling systems preventive maintenance (4 times per year).  Guest shall police the grounds and the parking facilities of the Project each day so that said grounds and parking facilities are as free of litter and debris as is reasonably possible.  Should Guest fail to perform any of its maintenance obligations hereunder within thirty (30) days of notice from Host, Host shall have the right to enter the Premises, perform such maintenance and bill Guest the reasonable cost thereof.  Guest shall not engage a third party to manage such maintenance and repair without the advance written approval of

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Host.  Upon assumption of Project management by Guest hereunder, Host shall have all of the rights provided to Guest under Section 8 (c) hereof with respect to oversight of Project management.  In the event Host expands the Building pursuant to the terms of Paragraph 36 (h), Guest shall cease to be responsible for the maintenance and repair of the Project and Host shall assume such responsibility as of the date construction of such expansion commences in accordance with the terms of this Lease.  Host represents to the best of its knowledge that the premises prior to and during the construction process does not violate any such laws and indemnifies Guest against any loss caused by a condition existing prior to lease commencement.

35.Michigan House Lease.     A default by Guest under the lease between First Properties Associates Limited Partnership (as Assignee of Plymouth Square) and Guest dated July 12, 1989 for certain premises at 2301 Commonwealth Boulevard, Ann Arbor, Michigan shall be a default under this Lease.

36.Expansion Options.     At the option of Guest, Host shall expand the Building as hereinafter provided.

(a)Building Additions.     The expansion of the Building shall be in the form of two, two-story additions containing, in the aggregate, a Gross Building Area of approximately 60,000 square feet; the approximate overall footprint of said additions is depicted on Exhibit C attached hereto.  The first such addition is hereinafter referred to as the “Phase I Expansion Space”; the second such addition, the “Phase D Expansion Space”.

(b)Guest’s Expansion Options.     Guest shall have the option to lease the Phase I Expansion Space as an addition to the Premises.  The Phase I Expansion Space shall have a Gross Building Area between 20,000 and 30,000 square feet. Guest shall determine the exact size of the Phase I Expansion Space; the bay sizing shall govern the increments to the area.  Said option shall terminate on the date (the “Option Termination Date”) two years from the Commencement Date of this Lease.  Guest shall exercise said option by giving Host notice thirty (30) days prior to the Option Termination Date.  Guest shall have the right to extend the Option Termination Date by a period of two years (i.e., to that date four years from the Commencement Date) by giving Host notice thirty (30) days prior to the then current Option Termination Date and paying all carrying costs for the land required for the Phase I Expansion Space for said two year period, which land is deemed to be 25% of the Site.  As used herein, “carrying costs” shall mean real estate taxes and assessments (prorated on a due date basis) and interest on the value of said land at the then prime rate minus 200 basis points.  The value of said land is deemed to be $4.00 per square foot of land area. As used herein, “prime rate” shall mean the prime rate reported in the Wall Street Journal as such rate may change from time to time.  Carrying costs shall be paid in monthly installments.  If Guest exercises its option for the Phase I Expansion Space, Guest shall have an option to lease the Phase II Expansion Space as an addition to the

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Premises.  The Gross Building Area of the Phase II Expansion Space shall be approximately the difference between 60,000 square feet and theGross Building Area of the Phase I Expansion Space.  Said Phase II option shall terminate on the date (the “Phase II Option Termination Date) two years from the date the Phase I Expansion Space becomes part of the leased Premises.  Guest shall exercise [ILLEGIBLE] Phase II option by giving Host notice not later than thirty (30) days prior to the Phase II Option Termination Date.  Guest shall have the right to extend the Phase II Option Termination Date by a period of one year by giving Host notice thirty (30) days prior to the then current Termination Date and paying all carrying costs (as described above) for the land required for the Phase II Expansion Space for said one year period, which land is deemed to be 25% of the Site.  Exercise by Guest of either of the aforesaid expansion options shall be subject to Guest not having been in default under this Lease.  Host and Guest acknowledge that while Host shall secure site plan approval for the entire 120,000 square foot Building forthwith, each expansion option and Host’s ability to perform same, are subject to securing all necessary governmental approvals.  Within thirty days of the date Guest exercises either of the aforesaid expansion options, Host and Guest shall execute an amendment to the Lease which adds the expansion space to the Premises and includes the other pertinent provisions of this Paragraph 36.  Exercise of either expansion option by Guest shall be subject to a determination by Host in its reasonable judgement that Guest’s financial condition and financial prospects as of the date Guest gives Host notice of such exercise are as strong as Guest’s financial condition and financial prospects as of the date hereof.  Host shall make such determination within fifteen (15) days of the date such notice is given; Guest shall provide Host with such financial data and other information as is reasonably required by Host to make such determination.

(c)Term.  Should Guest exercise the Phase I option, the term of this Lease shall be extended for a period of ten years from the date of occupancy of the Phase I expansion space.  Should Guest exercise the Phase II option, the term of the Lease will not change.  The Phase I and Phase II Expansion Spaces shall become part of the leased Premises (and rent shall become due) as of the date of Substantial Completion of Host’s Expansion Improvements (as hereinafter defined) with respect to each phase.

(d)Improvements.  From the date an amendment for an expansion space is executed, Host and Guest shall diligently prosecute the completion of the Expansion Space.  Host shall cause the construction of the expansion space, including site work, building shell, mechanical systems, and interior partitions and finishes but excluding the installation of cubicles (including electrical wiring) and computer and communications cabling (herein sometimes referred to as “Host’s Expansion Improvements”).  Guest shall be responsible for the layout, design and installation of all cubicles (including electrical wiring) and computer and communications cabling; said design and Guest’s contractors must be approved by Host in writing in advance.  Host’s Expansion Improvements shall be constructed in accordance

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with plans and specifications mutually determined and agreed upon by Host and Guest as provided hereinafter.  The architect for Host’s improvements shall be Jickling, Lyman and Powell, or, at Host’s option, another qualified architect.  The maximum number of parking spaces allowed by the City of Ann Arbor shall be provided not to exceed five spaces per 1,000 square feet of Gross Building Area. Host shall submit to Guest for its approval the site plan and final plans and specifications for Host’s Expansion Improvements; said plans and specifications shall be deemed approved unless rejected in writing within five (5) business days of receipt. A working set of site plans and building plans and specifications which are approximately 75% complete will be made available forreview at least two weeks prior to submission of final plans.  Any denial of such approval shall be fair and reasonable.  The general contractor for Host’s Expansion Improvements shall be O’Neal Construction or, at Host’s option, another qualified contractor selected by Host (“Contractor”).  Host and Guest shall jointly negotiate a contract with the Contractor, which contract shall provide a guaranteed maximum price which includes a 3%design and construction contingency.  Host shall provide an allowance (the “Expansion Hard Construction Cost Allowance”) negotiated by Host and Guest for the direct construction costs for Host’s Expansion Improvements; “direct construction costs” includes bonding and permits but excludes extraordinary costs relating to poor soil conditions, which costs shall be the sole responsibility of Host, and soft costs such as architectural and design services, legal services, construction financing, permanent financing origination, title insurance, builder’s risk insurance, brokerage commissions, development fees, real estate taxes and other carrying costs for the Site.  Any direct construction costs for Host’s Expansion Improvements in excess of said improvement allowance shall be paid to Host by Guest within ten (10) days of date of invoice.  Contractor shall provide a warranty of one year on all work with the exception of the roof, which shall have a ten year warranty; said warranties shall commence as of the date of Substantial Completion of Host’s Expansion Improvements.  The additional cost of any change orders requested by Guest shall be paid to Host within ten (10) days of invoice and shall include an administrative fee of 10%.  Host shall not be liable for failure to give possession of the Expansion Space or any part thereof by reason of Governmental interference, act of God, labor disputes, fire, unavoidable casualties orother causes beyond Host’s control.

(e)Rent.   Guest shall pay to Host as annual base rent for each Expansion Space for the term hereof an amount which shall be determined by multiplying the Rent Factor by the Expansion Total Development Cost, as further defined below:

(i)    “Rent Factor” is the sum of the Rental Rate Constant and the Debt Service Constant

(ii)   “Rental Rate Constant” is 200 basis points.

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(iii)  “Debt Service Constant” is the percentage calculated by dividing the annual payment of principal and interest required for the Expansion Permanent Mortgage Loan by the original principal amount of said Loan.

(iv)  “Expansion Permanent Mortgage Loan” is the loan which is secured by Host to finance the Expansion Total Development Cost.  Said loan shall (a) have a minimum term of ten (10) years, (b) be non-recourse, (c) have a twenty-five year amortization schedule which provides forlevel annual payments, and (d) be otherwise acceptable to Host.  If said loan has not been closed as of the date the Expansion Space becomes part of the leased Premises, then the terms set forth in the commitment for said Loan shall be used.

(v)   “Expansion Total Development Cost” is the sum of :

•“Expansion Land Cost” which is deemed to be $17.50 per square foot of Gross Building Area on the first and second floors of the Expansion plus $4.00 per square foot of additional land required in order to provide necessary supplemental parking should Guest elect finish-off the lower plaza level for office occupancy;

•“Expansion Hard Construction Cost” which is the portion of the Expansion Hard Construction Cost Allowance which is used;

•“Expansion Soft Cost”, which shall be negotiated by the Host and Guest and shall include but not be limited to the cost for the Expansion of interim financing, permanent financing origination, architectural and engineering, real estate taxes during construction, builder’s risk, insurance, appraisals legal, accounting, and a contingency of 2%, but shall exclude the developer’s fee and overhead; and

•“Developer’s Fee and Overhead” which shall be 3.0% of the sum of: (a) Expansion Land Cost; (b) Expansion Hard Construction Cost; and (c) Expansion Soft Cost.

(f)Additional Space.  Should Guest require additional space after exercising both Expansion Options, Host shall use its best efforts to find additional space at similar terms and conditions coterminous with the Lease.

(g)Assignment.  Guest shall not have the right to assign either Expansion Option to third parties.  Should Guest assign its interest in the Lease, the Expansion Options shall be terminated.

(h)Host’s Right to Expand.  Should Guest not exercise either of the aforesaid options for Expansion Space, Host shall have the right to construct the Expansion Space and lease such space to third parties.  Should Host exercise said right, upon the

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substantial completion of the Expansion Space, the Building entry lobby, and elevators, hallways and stairwells which do not exclusively serve the leased Premises shall cease to be part of the leased Premises and shall become common area over which Guest shall have a non-exclusive easement in common with the other tenants of the Building.  In such an event, the rent payable to Host by Guest hereunder shall be ratably reduced; such reduction shall be computed based on the rentable area of the Premises (as hereinafter defined) before and after the common area conversion.  As used herein, “rentable area” shall mean the sum of the Gross Building Area of the leased Premises (after deduction of the Gross Building Area of the common areas) and a pro rata share of the Gross Building Area of the common areas.  Where the leased Premises abuts the common area, Gross Building Area shall be determined by measuring to the midpoint of common walls.  Guest shall pay its pro rata share of the Project Real Estate Taxes and Operating Expenses for the common areas, grounds and parking lots of the Project.  Said share shall be the proportion which the rentable area of the Premises after expansion bears to the total Gross Building Area after expansion.  Guest acknowledges inconveniences may arise during the expansion of the Building.  Host shall not cause any unreasonable inconveniences such as limiting Guest’s access to the Premises or curtailing the services which Host is obligated to provide hereunder.  Should Guest exercise its option for the Phase I Expansion Space, Guest shall, in the design process for the Phase I Expansion Space, cooperate with Host in incorporating into the plans for the Phase I Expansion Space possible future means of access from the Building entry lobby and elevator(s) to the Phase II Expansion Space.  Should Guest not exercise its option for the Phase II Expansion Space, then, should Host exercise its right to construct the Phase II Expansion Space, Guest shall agree to relinquish, at Host’s option, the portion of the Premises required for such means of egress at the time of such construction; and the rent and expenses payable hereunder shall be ratably reduced.  If Host should exercise its rights to expand the Building, then (i) Guest’s right to manage the Project shall terminate as of the date Hosts commences construction of such expansion, and (ii) Guest’s license to use the parking lots on the Site shall be restated as follows.  Guest shall have an exclusive license for parking for its visitors in a portion of the parking lot to the west of the Building, and Guest shall have a non-exclusive license for parking for its employees and agents in the parking lot to the northeast of the Building as depicted in Exhibit D attached hereto.

37.Parking Structure.  Host shall have the right to construct a parking structure on the Site in substitution, in whole or in part, for the Project parking lots and Guest shall have a non-exclusive license for the use of said structure in common with others.  The total number of spaces which Guest is entitled to use in the structure and remaining parking lots shall be the same as the number of spaces Guest was entitled to use prior to the construction of the parking structure.  Guest shall be responsible for its pro rata share of the cost of maintaining and repairing such structure, which cost shall be included in Operating Expenses but shall not be higher than the costs to maintain surface parking.

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38.Miscellaneous.  (a) The failure of either party to enforce any covenant or condition of this Lease shall not be deemed a waiver thereof or of the right of either party to enforce each and every covenantand condition of this Lease. No provision of this Lease shall be deemed to have been waived unless such waiver is in writing.

(b)This Lease and the Exhibits attached hereto and financing a part hereof, set forth the entire agreements between Host and Guest concerning the leased Premises.  Any amendment shall be in writing and signed by each party.

(c)Each party represents and warrants that there are no claims for brokerage commissions or finder’s fees in connection with the execution of this Lease with the exception of a commission due to Guest’s broker, GVA Strategis, and each party agrees to indemnify the other against, and hold it harmless from, all liability arising from any such claim.  Guest shall be liable for the payment of a commission in the amount of Two Hundred Ninety-Three Thousand Five Hundred ($293,500) Dollars to GVA Strategis; Host shall reimburse Guest the amount of said commission within ten (10) days of the date Guest takes occupancy of the Premises.

(d)Guest shall not record this Lease without the written consent of Host.   Uponthe request of either party the other party shall join in the execution of a memorandum of this Lease for recording which shall describe the parties, the leased Premises, the term and any special provisions.

(e)In the event of any transfer of Host’s interest in the Premises, the transferor shall be automatically relieved of all obligations and liabilities on the part of Host accruing from and after the date of such transfer.   The release of Host from such obligations and liabilities shall be expressly conditioned upon an assumption by any transferee of all of the unperformed terms, covenants and conditions of this Lease arising after the date of such transfer, including the application of Guest’s security deposit in accordance with the provisions of Paragraph 9 hereof.

(f)Any amount due from Guest to Host which is not paid when due shall bear interest at the highest legal rate from the date due until paid, unless otherwise specifically provided herein, but the payment of such interest shall not excuse or cure any default by Guest.

(g)No payment by Guest of a lesser amount than the monthly rent shall be deemed to be other than on account of the earliest rent, nor shall any endorsement or statement on any check or any letter accompanying any payment be deemed an accord and satisfaction, and Host shall accept such payment without prejudice to Host’s right to recover the balance of such rent or pursue any other remedy.

(h)Guest agrees to furnish to Host the financial statements of Guest in a form acceptable to Host at least annually and within thirty days after Host’s request.

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(i)This Lease shall be governed by, and construed to accordance with, the laws of the State of Michigan.  If any provision of this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease shall not be affected and each provision shall be valid and enforceable to the fullest extent permitted by law.

(j)In the event that during the term of this Lease, Host is afforded the opportunity to rent space on the roof of Phase I or subsequent phases of the Building solely occupied by Guest for the location of one or move antennae, Guest agrees to such rental; provided, that nosuch antenna shall interfere with any antenna, satellite dish or other communications or similar device that Guest has installed on the roof with Host’s approval and; further provided, that Host shall negotiate any such rental agreement and, after reimbursement of all of Host’s expenses related to such negotiations, shall share such rental amounts, 50% to Host and 50% to Guest, provide an accounting of expenses and rent collections to Guest and remit Guest’s share as such rents are collected.

Intentional page break.

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This agreement is hereby signed on behalf of the parties effective as of the date first written above.

Host:
William C. Martin
/s/ William C. Martin
Guest:
MECHANICAL DYNAMICS, INC., A Michigan corporation
By:	/s/ [ILLEGIBLE]
Its:	VP & CFO

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ACKNOWLEDGEMENT OF CORPORATE GUEST

STATE OF
	ss.
COUNTY OF
The foregoing instrument was acknowledged before me this 5th day of August, 1999 by
		the	of
		,
a		corporation, on behalf of the corporation.

/s/ Shawn L. Siddall-Benoit
Notary Public,		County
My commission expires:
	Shawn L. Siddall-BENOIT
Notary Public, Livingston County, MI
My Commission Expires May 17, 2002
Acting in Washtenaw County, MI

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EXHIBIT A-1

LEGAL DESCRIPTION OF THE LAND

Commencing at the South 1/4 corner of Section 15, T2s, R&E, City of Ann Arbor, Washtenaw County, Michigan; thence
N 01°10’27” W 1000.01 feet along the North-South 1/4 of said Section 15 for a PLACE OF BEGINNING; thence N 71°15’31” W 325.00 feet; thence N 30^o29’46” W 215.77 feet; thence S 53^o14’25” W 482.04 feet; thence the following four courses along the Easterly right-of-way line of Traverwood Drive (70 feet wide): 418.79 feet along the arc of a 672.98-foot radius nontangential circular curve to the right, with a central angle of 35^o39’18”, having a chord which bears N 05^o57’27” E 412.06 feet, N 23^o47’10” E 347.36 feet, 129.14 feet along the arc of a 538.00-foot radius circular curve to the right, with a central angle of 13^o45’10”, having a chord which bears N 30°39’46” E 128.83 feet, and N 37^o32’08” E 307.25 feet; thence S 51°49’25” E 446.69 feet along the Southerly right-of-way line of Huron Parkway (variable width); thence S 01°10’27” E 808.10 feet to the Place of Beginning, being a part of the Southwest 1/4 of said Section 15, containing 13.19 acres of land, more or less, being subject to easements and restrictions of record, if any.

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EXHIBIT B

ILLUSTRATION OF HYPOTHETICAL RENTAL PAYMENT CALCULATION

(Using Estimated Costs)

Hard costs (66,878 sq. ft. @ $100.00)	$	6,687,800
Soft costs (60,000 sq. ft. @ $26.39)*	1,583,400
Land Cost (60,000 sq. ft. @ $17.50)	1,050,000
Est. Total Development Cost	$	9,321,200
x Est. Rent Factor (Rental Rate Constant + Debt Service Constant) (2.00% + 8.75% = 10.75%)	x 10.75		%
Estimated Annual Base Rental	$	1,002,029

*Note: Soft Costs are based on first two floors only, and not the approximate 6,878 sq. ft. on the lower plaza level.

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EXHIBIT E

RULES AND REGULATIONS

1.The sidewalks and grounds of the Building are not for the use of the general public, and Host shall in all cases retain theright to control andprevent access thereto of all persons whose presence in the judgment of Host shall be prejudicial to the safety, character, reputation and interests of the Building and its Guests, provided that nothing herein contained shall be construed to prevent such access to employees or other persons with whom any Guest normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities.  No Guests and no employee, agent or invitee of any Guest shall go upon the roof of the Building.

2.No awnings or other projection shall be attached to the outside walls of the Building.  No curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises without prior written consent of Host. All electric ceiling fixtures hung in offices or spaces along the perimeter of the Building must be fluorescent, of a quality, type, design and bulb color approved by Host.  Neither the interior nor exterior of any windows shall be coated or otherwise unscreened without the written consent of the Host.

3.No bicycles, vehicles, birds or animals of any kind shall be brought into or kept in or about the Premises.  Any preparation of food or beverages in the Premises shall be done only with equipment approved by Host which does not overload the electrical wiring of the Premises.  No Guest shall cause or permit any unusual or objectionable odors to be produced or permeate the Premises.

4.Except with the prior written consent of Host, no Guest shall occupy or permit any portion of his Premises to be occupied as an office for a public stenographer or typist, or for the manufacture or sale of liquor, narcotics or tobacco in any form, or as a barber or manicure shop, in or on the Premises.  No Guest shall engage or pay any employees on the Premises, except those actually working for Guest on the Premises, nor advertise for laborers giving an address at the Premises.  The Premises shall not be used for lodging or sleeping or for any illegal purposes.

5.No Guest shall make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of this or neighboring buildings or premises or those having business with them, whether by the use of any musical instrument, radio, phonograph, unusual noise, or any other way.  No Guest shall throw anything out of door, windows or skylights or down the passageways.

6.Guest shall provide Host with a key for any exterior doors installed by Guest in the Premises.  Each Guest must, upon the termination of its tenancy, restore to the Host all keys of stores, offices, and toilet rooms, either furnished to, or otherwise procured by, such Guest and in the event of the loss of any keys so furnished, such Guest shall pay to the Host the cost of

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replacing the same or of changing the lock or locks opened by such lost key if Host shall deem it necessary to make such change.

7.Host shall have the right to prohibit any advertising by anyGuest which, in Host’s opinion tends to impair the reputation of the Building or its desirability as an office research building and upon written notice from Host any Guest shall refrain from or discontinue such advertising.

8.Each guest shall see that the doors of its Premises are closed and securely locked and must observe strict care and caution that all water faucets, water apparatus and utilities are shut off before employees leave the Premises, so as to prevent waste or damage, and for any default or carelessness Guest shall make good all injuries sustained by other tenants or occupants of the Building or Host. On multiple-tenancy floors, all Guests shall keep all doors to the Building corridors closed at all times except for ingress and egress.

9.The requirements of Guest will be attended to only upon application to Host. Employees and agents of Host shall not perform any work or do anything outside of their regular duties unless under special instruction from Host.

10.Canvassing, soliciting and peddling in the Building are prohibited and each Guest shall cooperate to prevent the same.

11.Guest shall not cause any noise, odor, vibration or light disturbing or annoying to other tenants of the Building or to tenants of neighboring buildings.

12.No air conditioning unit or other similar apparatus shall be installed or used by any Guest without the written consent of Host.

13.No Guest shall install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building without Host’s consent which consent will not be unreasonably withheld.

14.Each Guest shall store all its trash and garbage within its Premises.  No material shall be placed in the trash boxes or receptacles if such materials is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the City of Ann Arbor without being in violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only through entryways provided for such purposes and at such times as Host shall designate.  Should the amount of trash generated by Guest exceed the amount typically generated by users of office space, Guest shall be responsible for the cost of disposing of such excess.  All boxes shall be broken down before being placed in the Building trash boxes or receptacles.

15.Host may waive any one or more of these Rules and Regulations for the benefit of any particular Guest or Guests, but no such waiver by Host shall be construed as a waiver of such Rules and Regulations in favor of any other Guest or Guests, nor prevent Host from

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thereafter enforcing any such Rules and Regulations against any or all of the Guests of the Building.

16.These Rules and Regulations are in addition to and shall not be construed to in any way modify, alter or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Building.

17.Guest shall not operate any equipment that sends out radio frequencies or otherwise distorts electric power to the building.

18.Smoking is prohibited in the Building restrooms, hallways, lobbies, lunchrooms and other common areas and on the Building grounds except in those areas designated by Host. Host shall not be obligated to designate any such areas.

19.   Guest shall place chair mats under all chairs with casters with the exception of conference room chairs; if Guest does not, Host shall have the right to provide such chair mats and Guest shall reimburse Host for the cost of such mats.

20.The moving into or out of the Building of any safes, freight, furniture, or other bulky matter of any description may only take place during the hours determined by Host in its absolute discretion.  The moving of such bulky matter may only be made after notice to Host and the persons employed by any Guest for such work must be acceptable to Host.

21.Host reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building, and for the preservation of good order therein.

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EX-10.13

Exhibit 10.13

October 11, 2004

John Laskey

11 Vista Lesina

Newport Coast, CA 92657

Dear John:

On behalf of MSC.Software Corporation, I am pleased to offer you the position of Senior Vice President, CFO.  This position reports to Frank Perna, Chairman and CEO, and is located in Santa Ana, CA.

We are offering you a base salary of $250,000.00 annually, paid semi-monthly.  In addition to your base salary, you will be eligible to participate in the Executive Bonus Program that is targeted at 50% of your base salary.

As part of your overall compensation package, you will receive stock options covering 150,000 shares of MSC.Software common stock, granted upon Board approval (such options to have a per share exercise price equal to the fair market value of a share of our stock on that date). Additionally, as a continuing MSC executive, you will receive a grant of stock options covering 50,000 shares of MSC.Software common stock upon the 1^st anniversary of your start date (such options to have a per share exercise price equal  to the fair market value of a share of our stock on that date).

You will also be granted, upon Board approval, a one-time special right to purchase 100,000 shares of restricted MSC.Software common stock at a per share price of $7.00, such right exercisable only for 10 business days after your start date.  As Frank mentioned, we hope you would purchase at least half of the special grant during that period.  The options will be subject to the terms and conditions of the MSC.Software Corporation 2001 Stock Option Plan and the terms and conditions of a stock option agreement to be prepared by MSC.Software (which will be in substantially the form of stock option agreement currently used by MSC.Software with respect to employee stock

option grants under such plan).  (Such terms and conditions include, without limitation, vesting requirements, termination provisions, and adjustment provisions with respect to stock splits and similar events).  Your restricted stock purchase right will be subject to the terms and conditions of a restricted stock purchase agreement to be prepared by MSC.Software (which will include customary investment representations and a 1-year cliff vesting requirement pursuant to which MSC.Software will have the right to repurchase (at the lower of the price you pay for the shares or the then fair market value of the shares) the shares if your employment terminates for any reason before the first anniversary of your hire date.

You are eligible to receive Executive Company Benefits, (including medical, deferred compensation, and participation in our Auto allowance program) as in effect from time to time.  Your monthly auto allowance will be $1080.00 per month.

The proposed start date for this position is Monday, October 18, 2004. Please signify your acceptance of our offer by signing the enclosed copy of this letter and faxing it to me at 714-784-4289.  Please also mail a copy of the signed originals to me. This offer is valid until the close of business Wednesday, October 13, 2004.

By accepting this position with MSC.Software, you represent MSC.Software that: (1) the execution and delivery of this letter agreement by you and MSC.Software and the performance by you of your duties for MSC.Software will not constitute a breach of, or otherwise contravene, the terms of any other agreement or policy to which you are a party or otherwise bound; (2) that you have no information (including, without limitation, confidential information and trade secrets) of any other person or entity which you are not legally and contractually free disclose to MSC.Software; (3) that you are not bound by any confidentially, trade secret or similar agreement with any other person or entity.

The United States Government requires MSC.Software Corporation to verify your eligibility for U. S. employment and identity.  Proof of citizenship or immigration status and a valid Social Security card will be required upon commencement of employment.  You will also be required to sign and abide by a confidentiality and inventions agreement in the form provided to you by MSC.Software.

Although we hope that our relationship will be mutually rewarding, your employment with MSC.Software is “at-will”, which means that either you or MSC.Software can terminate the employment relationship at any time, with or without cause.  The “at-will” nature of your employment cannot be changed or modified except in writing signed by the Chief Executive Officer of MSC.Software. This letter agreement contains all of the terms of your employment and supercedes all prior and contemporaneous negotiations

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and agreements with respect thereto.  There are no representations, warranties, or other agreements with respect to your employment except as expressly set forth herein.

We are looking forward to welcoming you to the MSC.Software team.  Please feel free to contact me at (714) 444-5152 if you have any questions.

Sincerely,
Rich Lander
Vice President, Human Resources
Enclosures:		Benefits Summary
Offer Accepted:
/s/ John J. Laskey			10/12/04
Signature			Date Signed
Start Date:	10/18/04
Cc: Frank Perna

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EX-10.14

Exhibit 10.14

EMPLOYMENT SEPARATION AND GENERAL RELEASE AGREEMENT

This Employment Separation and General Release Agreement (this “Separation Agreement”), is entered into this 23rd day of September 2004 (the “Separation Date”), by and between Louis A. Greco, an individual (“Greco”), and MSC.Software Corporation, a Delaware corporation (“MSC”).

WHEREAS, Greco has been employed as an Executive Vice President and the Chief Financial Officer and Corporate Secretary of MSC; and

WHEREAS, Greco and MSC have mutually agreed to terminate Greco’s employment relationship with MSC upon the terms set forth herein;

NOW, THEREFORE, in consideration of the covenants undertaken and the releases contained in this Separation Agreement and the Consulting Agreement attached as Exhibit B hereto (the “Consulting Agreement”), Greco and MSC agree as follows:

I.Resignation.  Greco hereby resigns as an officer, director, employee, member, manager and in any other capacity with MSC and each of its affiliates, effective immediately as of the Separation Date first set forth above.  Concurrently with the execution of this Separation Agreement, Greco shall execute the letter attached as Exhibit A hereto and promptly deliver such letter to MSC.  MSC and its affiliates hereby accept such resignation.  Greco acknowledges and agrees that he has received all amounts owed for his regular and usual salary (including, but not limited to, any severance, overtime, bonus, commissions, or other wages), usual benefits and accrued but unused vacation through the Separation Date and that all payments due to Greco from MSC after the Separation Date shall be determined under this Separation Agreement and the Consulting Agreement.

II.Consulting Agreement.  Concurrently with the execution of this Separation Agreement, and in consideration of the promises given and payments made hereunder, Greco shall execute the Consulting Agreement attached as Exhibit B hereto.

III.Severance Pay.  MSC shall pay as severance pay to Greco a lump sum amount of Three Hundred Thousand Dollars ($300,000.00), less standard withholding and authorized deductions (the “Cash Severance Payment”).  Such severance shall be paid within thirty (30) days following Greco’s delivery of this fully executed Separation Agreement to MSC.  In addition, during the period (not to exceed eighteen (18) months) following the Separation Date which MSC is required to provide continued medical coverage to Greco pursuant to the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), MSC shall either pay or reimburse Greco for one hundred percent (100%) of Greco’s COBRA premiums to continue for such period the same or reasonably equivalent medical coverage for Greco (and, if applicable, Greco’s eligible dependents) as in effect immediately prior to the Separation Date.  For each such month, Greco shall also be entitled to continued supplemental medical benefit coverage under MSC’s executive medical benefit program.  Such severance payment and benefits are for and in lieu of any other payments or benefits (and, except as specifically provided herein, none shall accrue) beyond the Separation Date.  Greco specifically acknowledges and agrees that he is

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entitled to receive no severance pay or other benefits pursuant to any severance plan or policy of MSC or any of its affiliates.

IV.Non-Disparagement.  Greco agrees that he shall not (1) directly or indirectly, make or ratify any statement, public or private, oral or written, to any person that disparages, either professionally or personally, MSC or any of its affiliates, past and present, and each of them, as well as its and their trustees, directors, officers, members, managers, partners, agents, attorneys, insurers, employees, stockholders, representatives, assigns, and successors, past and present, and each of them, or (2) make any statement or engage in any conduct that has the purpose or effect of disrupting the business of MSC or any of its affiliates.  MSC, and its officers and directors, shall not, directly or indirectly, make or ratify any statement, public or private, oral or written, to any person that disparages, either professionally or personally, Greco.  Nothing in the preceding two sentences, however, shall in any way prohibit Greco or MSC from disclosing such information as may be required by law, or by judicial or administrative process or order or the rules of any securities exchange or similar self-regulatory organization applicable to such person.

V.Release.  Greco on behalf of himself, his descendants, dependents, heirs, executors, administrators, assigns, and successors, and each of them, hereby covenants not to sue and fully releases and discharges MSC and each of its parents, subsidiaries and affiliates, past and present, as well as its and their trustees, directors, officers, members, managers, partners, agents, attorneys, insurers, employees, stockholders, representatives, assigns, and successors, past and present, and each of them, hereinafter together and collectively referred to as the “Releasees,” with respect to and from any and all claims, wages, demands, rights, liens, agreements, contracts, covenants, actions, suits, causes of action, obligations, debts, costs, expenses, attorneys’ fees, damages, judgments, orders and liabilities of whatever kind or nature in law, equity or otherwise, whether now known or unknown, suspected or unsuspected, and whether or not concealed or hidden, which he now owns or holds or he has at any time heretofore owned or held or may in the future hold as against any of said Releasees, arising out of or in any way connected with his service as an officer, director, employee, member or manager of any Releasee, his separation from his position as an officer, director, employee, manager and/or member, as applicable, of any Releasee, or any other transactions, occurrences, acts or omissions or any loss, damage or injury whatever, known or unknown, suspected or unsuspected, resulting from any act or omission by or on the part of said Releasees, or any of them, committed or omitted prior to the date of this Separation Agreement including, without limiting the generality of the foregoing, any claim under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Family and Medical Leave Act of 1993, the California Fair Employment and Housing Act, the California Family Rights Act, or any claim for severance pay, bonus, sick leave, holiday pay, vacation pay, life insurance, health or medical insurance or any other fringe benefit, workers’ compensation or disability; provided that such release shall not apply to (1) any obligation created by or arising out of this Separation Agreement or the Consulting Agreement for which receipt or satisfaction has not been acknowledged, (2) any right to indemnification that Greco may have pursuant to MSC’s Bylaws with respect to any losses that Greco may in the future incur with respect to his past service as an officer of MSC, and (3) with respect to any such losses, any rights that Greco may have to insurance coverage for such losses under any MSC directors and officers liability insurance policy.

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VI.1542 Waiver.  It is the intention of Greco in executing this instrument that the same shall be effective as a bar to each and every claim, demand and cause of action hereinabove specified.  In furtherance of this intention, Greco hereby expressly waives any and all rights and benefits conferred upon him by the provisions of SECTION 1542 OF THE CALIFORNIA CIVIL CODE and expressly consents that this Separation Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those related to unknown and unsuspected claims, demands and causes of action, if any, as well as those relating to any other claims, demands and causes of action hereinabove specified. SECTION 1542 provides:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.”

Greco acknowledges that he may hereafter discover claims or facts in addition to or different from those which Greco now knows or believes to exist with respect to the subject matter of this Separation Agreement and which, if known or suspected at the time of executing this Separation Agreement, may have materially affected this settlement.  Nevertheless, Greco hereby waives any right, claim or cause of action that might arise as a result of such different or additional claims or facts.  Greco acknowledges that he understands the significance and consequences of such release and such specific waiver of SECTION 1542.

VII.ADEA Waiver.  Greco expressly acknowledges and agrees that by entering into this Agreement, he is waiving any and all rights or claims that he may have arising under the Age Discrimination in Employment Act of 1967, as amended, which have arisen on or before the date of execution of this Separation Agreement.  Greco further expressly acknowledges and agrees that:

A.In return for this Separation Agreement, he will receive consideration beyond that which he was already entitled to receive before entering into this Separation Agreement;

B.He is hereby advised in writing by this Separation Agreement to consult with an attorney before signing this Separation Agreement;

C.He was given a copy of this Separation Agreement on [September 23, 2004] and informed that he had twenty-one (21) days within which to consider this Separation Agreement; and

D.He was informed that he had seven (7) days following the date of execution of this Separation Agreement in which to revoke this Separation Agreement.

VIII.No Transferred Claims.  Greco warrants and represents that he has not heretofore assigned or transferred to any person not a party to this Separation Agreement any released matter or any part or portion thereof and he shall defend, indemnify and hold MSC and each of its affiliates harmless from and against any claim (including the payment of attorneys’ fees and

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costs actually incurred whether or not litigation is commenced) based on or in connection with or arising out of any such assignment or transfer made, purported or claimed.

IX.Confidential Information.

A.Greco, in the performance of Greco’s services on behalf of MSC and its affiliates, has had access to, received and been entrusted with confidential information, including but in no way limited to development, marketing, organizational, financial, management, administrative, production, distribution and sales information, data, specifications and processes presently owned or at any time in the future developed, by MSC, its affiliates, or its or their agents or consultants, or used presently or at any time in the future in the course of its or their business that is not otherwise part of the public domain (collectively, the “Confidential Material”).  All such Confidential Material is considered secret and was made available to Greco in confidence.  Greco represents that he has held all such information confidential and will continue to do so.

B.Except in the performance of services on behalf of MSC and its affiliates, Greco shall not, directly or indirectly for any reason whatsoever, disclose or use any such Confidential Material, unless such Confidential Material ceases (through no fault of Greco’s) to be confidential because it has become part of the public domain or he is otherwise obligated to disclose such information by the lawful order of any competent jurisdiction.  All records, files, drawings, documents, equipment and other tangible items, wherever located, relating in any way to the Confidential Material or otherwise to the business of MSC or any of its affiliates, which Greco prepares, uses or encounters, shall be and remain the sole and exclusive property of the appropriate entity or entities and shall be included in the Confidential Material.  Upon the termination or expiration, as applicable, of the Consulting Term as set forth in the Consulting Agreement, or whenever requested by MSC, Greco shall promptly deliver to MSC any and all of the Confidential Material, not previously delivered to MSC, that may be or at any previous time has been in Greco’s possession or under Greco’s control.

C.Greco hereby acknowledges that the sale or unauthorized use or disclosure of any of the Confidential Material by any means whatsoever and any time before, during or after Greco’s engagement with MSC shall constitute “Unfair Competition.”  Greco agrees that Greco shall not engage in Unfair Competition either during the time engaged by MSC or any time thereafter.

D.Soliciting Customers.  Greco promises and agrees that he will not, during his engagement pursuant to the Consulting Agreement and for a period of one year following termination or expiration, as applicable, of the Consulting Term thereunder, influence or attempt to influence any customers of MSC or any of its affiliates, either directly or indirectly, to divert their business to any individual, partnership, firm, corporation or other entity which is currently or at that particular point in time in competition with (or has plans to engage in business which would be in competition with) the business of MSC or any of its affiliates.  (For purposes of this Separation Agreement, a business in competition with MSC or its affiliates will be deemed to include (without limiting any other business in competition with MSC or its affiliates) any business which is engaged in the development, marketing and/or support of virtual product development tools for the computer-aided engineering marketplace (including, without

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limitation, simulation software and/or professional services).)  Greco acknowledges that during his employment with MSC, he was given access to Confidential Material of MSC and its affiliates, and that such Confidential Material constitutes MSC’s trade secrets.  Greco acknowledges and agrees that this restriction is necessary in order for MSC to preserve and protect its legitimate proprietary interest in its Confidential Material and trade secrets.

X.Soliciting Employees.  Greco promises and agrees that he will not, during his engagement pursuant to the Consulting Agreement and for a period of one year following the termination or expiration, as applicable, of the Consulting Term thereunder, directly or indirectly solicit any employee of MSC or any of its affiliates who earned annually $25,000 or more as an employee of such entity during the last six months of his or her own employment to work for any business, individual, partnership, firm, or corporation.

XI.Stock Options.  MSC has previously granted options on shares of MSC common stock to Greco.  As of the Separation Date, such options (to the extent not previously expired, terminated, or exercised) remain outstanding as to an aggregate of 424,225 shares of MSC common stock.  This confirms that MSC has previously accelerated the vesting of such options.  This also confirms that the termination of employment/service rules applicable to such options shall not be deemed triggered (1) except as provided in clause (2), until the expiration or earlier termination of the Consulting Term under and as determined in accordance with the Consulting Agreement, or (2) in the event that such Consulting Term is terminated by MSC without Cause (as determined under and in accordance with the Consulting Agreement), until [specify last day of intended Consulting Term September 22, 2007].  Except for such accelerated vesting and clarification of the application of the termination of employment/service rules with respect to Greco’s outstanding MSC options, the options otherwise shall remain outstanding in accordance with their respective terms and conditions.

XII.Miscellaneous

A.Successors.

1.This Separation Agreement is personal to Greco and shall not, without the prior written consent of MSC, be assignable by Greco.

2.This Separation Agreement shall inure to the benefit of and be binding upon MSC and its respective successors and assigns and any such successor or assignee shall be deemed substituted for MSC under the terms of this Separation Agreement for all purposes.  As used herein, “successor” and “assignee” shall include any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires the ownership of MSC or to which MSC assigns this Separation Agreement by operation of law or otherwise.

B.Waiver.  No waiver of any breach of any term or provision of this Separation Agreement shall be construed to be, nor shall be, a waiver of any other breach of this Separation Agreement.  No waiver shall be binding unless in writing and signed by the party waiving the breach.

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C.Modification.  This Separation Agreement may not be amended or modified other than by a written agreement executed by Greco and the Chief Executive Officer of MSC or his designee.

D.Complete Agreement.  This Separation Agreement and the Consulting Agreement constitute and contain the entire agreement and final understanding concerning Greco’s relationship with MSC and its affiliates and the other subject matters addressed herein between the parties, and supersedes and replaces all prior negotiations and all agreements proposed or otherwise, whether written or oral, concerning the subject matters hereof.  The Employee Confidentiality and Inventions Agreement by and between Greco and MSC and entered into on or about February 20, 2004 (the “Confidentiality Agreement”) is outside of the scope of the preceding sentence and shall continue in effect in accordance with its terms.  Any representation, promise or agreement not specifically included in this Separation Agreement, the Consulting Agreement or the Confidentiality Agreement shall not be binding upon or enforceable against either party.  This Separation Agreement, along with the Consulting Agreement and the Confidentiality Agreement, constitute an integrated agreement.

E.Litigation and Investigation Assistance.  Greco agrees to cooperate in the defense of MSC or any of its affiliates against any threatened or pending litigation or in any investigation or proceeding by any governmental agency or body that relates to any events or actions which occurred during or prior to the term of Greco’s employment or the Consulting Term (as defined in the Consulting Agreement).  Furthermore, Greco agrees to cooperate in the prosecution of any claims and lawsuits brought by MSC or any of its affiliates that are currently outstanding or that may in the future be brought relating to matters which occurred during or prior to the term of Greco’s employment or the Consulting Term.  From and after the Separation Date, except as requested by MSC or as required by law, Greco shall not comment upon any (i) threatened or pending claim or litigation (including investigations or arbitrations) involving MSC or any of its affiliates or (ii) threatened or pending government investigation involving MSC or any of its affiliates.

F.Severability.  If any provision of this Separation Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or applications of the Separation Agreement which can be given effect without the invalid provisions or applications and to this end the provisions of this Separation Agreement are declared to be severable.

G.Choice of Law.  This Separation Agreement shall be deemed to have been executed and delivered within the State of California, and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with, and governed by, the laws of the State of California without regard to principles of conflict of laws.

H.Cooperation in Drafting.  Each party has cooperated in the drafting and preparation of this Separation Agreement.  Hence, in any construction to be made of this Separation Agreement, the same shall not be construed against any party on the basis that the party was the drafter.

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I.Counterparts.  This Separation Agreement may be executed in counterparts, and each counterpart, when executed, shall have the efficacy of a signed original.  Photographic copies of such signed counterparts may be used in lieu of the originals for any purpose.

J.Arbitration.  Any dispute, claim or controversy arising out of or relating to this Separation Agreement, its enforcement or interpretation, or because of an alleged breach, default, or misrepresentation in connection with any of its provisions, including the determination of the scope or applicability of this agreement to arbitrate, shall be submitted to final and binding arbitration, to be held in Orange County, California before a sole arbitrator; provided, however, that provisional injunctive relief may, but need not, be sought in a court of law while arbitration proceedings are pending, and any provisional injunctive relief granted by such court shall remain effective until the matter is finally determined by the arbitrator.   The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures.  Judgment on the award may be entered in any court having jurisdiction.  In the event either party institutes arbitration under this Separation Agreement, the party prevailing in any such proceeding, as determined by the arbitrator, shall be entitled, in addition to all other relief, to reasonable attorneys’ fees relating to such arbitration.  The nonprevailing party shall be responsible for all costs of the arbitration, including but not limited to, the arbitration fees, court reporter fees, etc.  Any dispute as to the reasonableness of costs and expenses shall be determined by the arbitrator.

K.Advice of Counsel.  In entering this Separation Agreement, the parties represent that they have relied upon the advice of their attorneys, who are attorneys of their own choice, and that the terms of this Separation Agreement have been completely read and explained to them by their attorneys, and that those terms are fully understood and voluntarily accepted by them.

L.Supplementary Documents.  All parties agree to cooperate fully and to execute any and all supplementary documents and to take all additional actions that may be necessary or appropriate to give full force to the basic terms and intent of this Separation Agreement and which are not inconsistent with its terms.

M.Headings.  The section headings contained in this Separation Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Separation Agreement.

N.Taxes.  Other than MSC’s right to reduce the Cash Severance Payment for standard withholding, Greco shall be solely responsible for any taxes due as a result of the payment of the Cash Severance Payment and other benefits to be provided to Greco pursuant to Section III.  Greco will defend and indemnify MSC and each of its affiliates from and against any tax liability that any of them may have with respect to any such payment and against any and all losses or liabilities, including defense costs, arising out of Greco’s failure to pay any taxes due with respect to any such payment.

[Remainder of page intentionally left blank.]

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I have read the foregoing Separation Agreement and I accept and agree to the provisions it contains and hereby execute it voluntarily with full understanding of its consequences.

EXECUTED this 23rd day of September 2004, at Orange County, California.

“Greco”

/s/ Louis A. Greco

Louis A. Greco

EXECUTED this 23rd day of September 2004, at Orange County, California.

“MSC”
MSC.Software Corporation,
a Delaware corporation
/s/ Frank Perna, Jr.
By:	Frank Perna, Jr.
Its:	Chief Executive Officer

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EXHIBIT A

RESIGNATION LETTER

To:The Board of Directors of MSC.Software Corporation

From:Louis A. Greco

I hereby resign as an employee, officer, director, member, manager and in any other capacity with MSC.Software Corporation and each of its affiliates, effective [September 23], 2004.

/s/ Louis A. Greco

Louis A. Greco

September 23, 2004

Date

A-1

EXHIBIT B

CONSULTING AGREEMENT

B-1

EXHIBIT C

ENDORSEMENT

I, Louis A. Greco, hereby acknowledge that I was given 21 days to consider the foregoing Employment Separation and General Release Agreement and voluntarily chose to sign the Employment Separation and General Release Agreement prior to the expiration of the 21-day period.

I declare under penalty of perjury under the laws of the state of California, that the foregoing is true and correct.

EXECUTED this 23rd day of September, 2004, at Orange County, California.

/s/ Louis A. Greco

Louis A. Greco

C-1

EX-10.15

Exhibit 10.15

CONSULTING AGREEMENT

This Consulting Agreement (“Consulting Agreement”) is entered into this 23rd day of September, 2004 (the “Effective Date”), by and between Louis A. Greco, an individual (“Consultant”), and MSC.Software Corporation, a Delaware corporation (“MSC”).

WHEREAS, Consultant has been employed as an Executive Vice President and the Chief Financial Officer and Corporate Secretary of MSC;

WHEREAS, Consultant and MSC have mutually agreed to terminate Consultant’s employment relationship with MSC pursuant to an Employment Separation and General Release Agreement dated on or about the date hereof (the “Separation Agreement”); and

WHEREAS, Consultant is willing to provide advice to and consult with MSC, on an exclusive basis, as MSC may reasonably request from time to time on matters with which Consultant was familiar and/or about which Consultant acquired knowledge, expertise and/or experience during the time that Consultant was employed by MSC.

NOW, THEREFORE, Consultant and MSC agree as follows:

I.Engagement.  MSC hereby engages Consultant and Consultant hereby accepts such engagement, upon the terms and conditions hereinafter set forth, for the period commencing [September 23,], 2004 and ending on [September 22, 2007] unless earlier terminated by mutual agreement of the parties or as provided in Section IV herein (such period is referred to as the “Consulting Term”).  Notwithstanding anything else contained herein to the contrary, this Consulting Agreement shall be null and void if Consultant revokes the Separation Agreement during the seven (7) day period following the execution of that agreement.

II.Service.

A.Consultant shall perform consulting services during the Consulting Term which shall include providing advice to and consultation with MSC and such of its affiliates as MSC may reasonably request from time to time on matters with which Consultant was familiar and/or about which Consultant acquired knowledge, expertise and/or experience during the time that Consultant was employed by MSC.

B.Consultant shall report exclusively to the Chief Executive Officer of MSC or his designee (the “CEO”) and, except as expressly authorized by the CEO from time to time, shall not have contact with any other employee of MSC or its affiliates.  Consultant shall provide in writing to and as requested by the CEO a detailed summary of all business contacts involved in any consulting activity performed hereunder and report on services performed.

C.The consulting services that Consultant may be required to perform during the Consulting Term may include, without limiting other consulting services that the CEO may request from time to time, advice, research, planning and similar services as to business strategy, marketing, litigation, finance, and administration.

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D.Consultant agrees to devote sufficient time and energy to the business of MSC and its affiliates to accomplish the projects assigned by MSC.

E.Consultant agrees to honestly and faithfully present and conduct himself at all times during the performance of services for MSC.  Consultant agrees to perform the responsibilities in a diligent, timely, and competent manner.  Consultant agrees to truthfully and faithfully account for and deliver to MSC all property (including, without limitation, monies, materials, securities, etc.) belonging to MSC or any of its affiliates which Consultant may receive from or on account of MSC or any of its affiliates, and that upon Consultant’s termination or MSC’s demand Consultant will immediately deliver to MSC all such property belonging to MSC or any of its affiliates.

III.Compensation.

A.Monthly Consulting Fee.  As consideration for Consultant’s services each month during the Consulting Term, MSC shall pay Consultant a consulting fee (the “Monthly Consulting Fee”).  The Monthly Consulting Fee for any given month during the Consulting Term shall be paid no later than the fifteenth (15^th) business day of the month following the month in question.  As to any month during the first eighteen (18) months during the Consulting Term, the Monthly Consulting Fee shall be $25,511.00 for such month.  As to any month during the Consulting Term after the eighteenth (18^th) month of the Consulting Term, the Monthly Consulting Fee shall be $28,511.00 for such month.  The Monthly Consulting Fee shall be proportionately adjusted as to any partial calendar month that occurs during the Consulting Term.  (For purposes of clarity, assuming that the entire intended thirty-six month Consulting Term is completed, the aggregate of the Monthly Consulting Fee payments to Consultant pursuant to the foregoing shall equal $972,396.00 ((18 x $25,511.00) + (18 x $28,511.00).)

B.Benefits.  Consultant shall not be entitled to participate in any vacation, medical, retirement, or other fringe benefit of MSC and shall not make claim of entitlement to any such employee program or benefit.  For purposes of clarity, the preceding sentence does not limit or supersede any express rights that Consultant may have under and pursuant to Section III of the Separation Agreement.

IV.Termination.

A.Termination. MSC may terminate Consultant’s engagement at any time, with or without cause, upon fourteen (14) days’ written notice.

B.Obligations of MSC Upon Termination.

1.Termination for Cause.  If Consultant’s engagement is terminated by MSC for Cause, this Consulting Agreement, save and except Sections VI, VII, VIII, IX, X, XI and XII, shall terminate without further obligations to Consultant under this Consulting Agreement, other than for payment of Consultant’s Monthly Consulting Fee through the date of termination to the extent not theretofore paid (with the Monthly Consulting Fee for the month of such termination pro-rated for the number of days in the month completed prior to such termination).

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For purposes of this Consulting Agreement and except as provided in the next sentence, “Cause” shall mean any time the MSC Board of Directors determines, based on its reasonable belief at the time based on the information then known to it, that any of the following events or contingencies exists or has occurred: (i) Consultant has been negligent in the discharge of Consultant’s responsibilities and obligations hereunder; (ii) Consultant has refused to perform Consultant’s responsibilities and obligations hereunder; (iii) Consultant has failed to perform his responsibilities and obligations hereunder in a reasonably satisfactory manner; (iv) Consultant has been dishonest or committed or engaged in an act of moral turpitude, theft, embezzlement or fraud, a breach of confidentiality, an unauthorized disclosure or use of inside information, customer lists, trade secrets or other confidential information; or (v) Consultant has breached any of the provisions of any agreement with MSC or any of its affiliates (including, without limitation, a breach by Consultant of any provision of this Consulting Agreement or the Separation Agreement).  For purposes of this Consulting Agreement upon and after the occurrence of a Change in Control Event (as such term is defined in the MSC.Software Corporation 2001 Stock Option Plan, as amended) of MSC that occurs after the Effective Date, “Cause” shall mean any time the MSC Board of Directors determines, based on its reasonable belief at the time based on the information then known to it, that any of the following events or contingencies exists or has occurred: (i) Consultant has willfully refused to perform Consultant’s responsibilities and obligations hereunder; (ii) Consultant has willfully been dishonest or committed or engaged in an act of moral turpitude, theft, embezzlement or fraud, a breach of confidentiality, an unauthorized disclosure or use of inside information, customer lists, trade secrets or other confidential information that, in any event either alone or together, has (or have) a material adverse effect on MSC; or (iii) Consultant has willfully breached any of the provisions of any agreement with MSC or any of its affiliates (including, without limitation, a breach by Consultant of any provision of this Consulting Agreement or the Separation Agreement) that (alone or together with any other such breaches) has a material adverse effect on MSC.  Notwithstanding anything in the preceding two sentences to the contrary, if Consultant’s conduct or actions (or lack thereof) would otherwise constitute Cause and a cure by Consultant is reasonable in the circumstances, Cause shall not exist for purposes of this Consulting Agreement unless MSC gives notice to Consultant of the conduct or actions (or lack thereof) at issue and, after a reasonable period of time not to exceed thirty (30) days after the date of such notice, Consultant has failed to remedy the situation to the reasonable satisfaction of MSC; provided that in the case of any reoccurring conduct or actions (or lack thereof), MSC shall be required to provide only one notice to Consultant of the reoccurring conduct or actions (or lack thereof) at issue during any six-month period of time.

2.Termination without Cause.  If Consultant’s engagement is terminated by MSC without Cause (and other than due to Consultant’s death), this Consulting Agreement, save and except paragraphs VI, VII, VIII, IX, X, XI and XII, shall terminate without further obligations to Consultant under this Consulting Agreement, other than for continued payment of Consultant’s Monthly Consulting

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Fee through the Consulting Term.  Such payments, if any, shall be payable at the time they would have become due if Consultant’s engagement had continued under this Consulting Agreement for the balance of the Consulting Term.

C.Exclusive Remedy.  Consultant agrees that the payments contemplated by this Consulting Agreement shall constitute the exclusive and sole remedy for any termination of his engagement and Consultant covenants not to assert or pursue any other remedies, at law or in equity, with respect to any termination of the engagement.

V.Relationship.  Consultant shall operate at all times as an independent contractor of MSC.  This Consulting Agreement does not authorize Consultant to act as an agent of MSC or any of its affiliates or to make commitments on behalf of MSC or any of its affiliates.  Consultant and MSC intend that an independent contractor relationship be created by this Consulting Agreement, and nothing herein shall be construed as creating an employer/employee relationship, partnership, joint venture, or other business group or concerted action.  Consultant at no time shall hold himself out as an agent of MSC or any of its affiliates for any purpose, including reporting to any governmental authority or agency, and shall have no authority to bind MSC or any of its affiliates to any obligation whatsoever.

A.Right to Control.  Consultant shall have the right to control and determine the method and means of performing the above services; MSC shall not have the right to control or determine such method or means, being interested only in the results obtained, and having the general right of inspection and supervision in order to secure the satisfactory completion of such services.

B.Taxes.  Consultant and MSC agree that Consultant is not an employee for state or federal tax purposes.  Consultant shall be solely responsible for any taxes due as a result of the payment of the Monthly Consulting Fee, and Consultant will defend and indemnify MSC and each of its affiliates from and against any tax liability that any of them may have with respect to any such payment and against any and all losses or liabilities, including defense costs, arising out of Consultant’s failure to pay any taxes due with respect to any such payment.  If MSC reasonably determines that applicable law requires that taxes should be withheld from any payment of the Monthly Consulting Fee, MSC reserves the right to withhold, as legally required, and to notify Consultant accordingly.

C.Workers’ Compensation and Unemployment Insurance.  Consultant is not entitled to worker’s compensation benefits or unemployment compensation benefits provided by MSC.  Consultant shall be solely responsible for the payment of his worker’s compensation, unemployment compensation, and other such payments.  MSC will not pay for worker’s compensation for Consultant.  MSC will not contribute to a state unemployment fund for Consultant.  MSC will not pay the federal unemployment tax for Consultant.

D.Employment Policies Not Applicable.  Consultant and MSC agree that Consultant shall not be subject to the provisions of any personnel policy or rules and regulations applicable to employees, and Consultant shall fulfill his duties independent of and without supervisory control by MSC.

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VI.Noncompetition.

A.Consultant agrees that, during the Consulting Term and any period thereafter when he continues to receive payment under this Consulting Agreement, he will not, directly or indirectly, without the prior written consent of the CEO, provide consultative service with or without pay, own, manage, operate, join, control, participate in, or be connected as a stockholder, general partner, employee or otherwise with, any business, individual, partner, firm, corporation, or other entity which is currently or at that particular point in time in competition with (or has plans to engage in business which would be in competition with) the business of MSC or any of its affiliates.  Nothing in this section is intended to prevent Consultant from owning up to one percent (1%) of the publicly traded stock of any company.

B.It is expressly agreed that MSC and its affiliates will or would suffer irreparable injury if Consultant were to compete with the business of any of such entities in violation of this Consulting Agreement and that any such entity would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction.  Consultant consents and stipulates to the entry of such injunctive relief in such a court prohibiting him from competing with MSC or any of its affiliates in violation of this Consulting Agreement.

C.For purposes of this Consulting Agreement, a business in competition with MSC or its affiliates will be deemed to include (without limiting any other business in competition with MSC or its affiliates) any business which is engaged in the development, marketing and/or support of virtual product development tools for the computer-aided engineering marketplace (including, without limitation, simulation software and/o professional services).

VII.Confidential Information.

A.Consultant, in the performance of Consultant’s services on behalf of MSC, may have access to, receive and be entrusted with (and in the past has, in fact, had access to, received and been entrusted with) confidential information, including but in no way limited to development, marketing, organizational, financial, management, administrative, production, distribution and sales information, data, specifications and processes presently owned or at any time in the future developed, by MSC or any of its affiliates or its or their agents or consultants, or used presently or at any time in the future in the course of its or their business that is not otherwise part of the public domain (collectively, the “Confidential Material”).  All such Confidential Material is considered secret and, to the extent made available to Consultant, will be available to Consultant in confidence.  Except in the performance of services on behalf of MSC and its affiliates, Consultant shall not, directly or indirectly for any reason whatsoever, disclose or use any such Confidential Material, unless such Confidential Material ceases (through no fault of Consultant’s) to be confidential because it has become part of the public domain or he is otherwise obligated to disclose such information by the lawful order of any competent jurisdiction.  All records, files, drawings, documents, equipment and other tangible items, wherever located, relating in any way to the Confidential Material or otherwise to the business of MSC or any of its affiliates, which Consultant prepares, uses or encounters, shall be and remain the sole and exclusive property of such entity or entities and shall be included in the Confidential Material.  Upon the termination or expiration, as applicable, of the Consulting Term, or

5

whenever requested by MSC, Consultant shall promptly deliver to MSC any and all of the Confidential Material, not previously delivered to MSC, that may be or at any previous time has been in Consultant’s possession or under Consultant’s control.

B.Consultant hereby acknowledges that the sale or unauthorized use or disclosure of any of the Confidential Material by any means whatsoever and any time before, during or after Consultant’s engagement with MSC shall constitute “Unfair Competition.”  Consultant agrees that Consultant shall not engage in Unfair Competition either during the time engaged by MSC or any time thereafter.

VIII.Soliciting Customers.  Consultant promises and agrees that he will not, during the Consulting Term and for a period of one year following the termination or expiration, as applicable, of the Consulting Term, influence or attempt to influence any customers of MSC or any of its affiliates, either directly or indirectly, to divert their business to any individual, partnership, firm, corporation or other entity which is currently or at that particular point in time in competition with (or has plans to engage in business which would be in competition with) the business of MSC or any of its affiliates.  Consultant acknowledges that during his engagement with MSC, he will be given access to Confidential Material of MSC and its affiliates (and in the past has, in fact, had access to, received and been entrusted with Confidential Material), and that such Confidential Material constitutes MSC’s trade secrets.   Consultant acknowledges and agrees that this restriction is necessary in order for MSC and its affiliates to preserve and protect their legitimate proprietary interest in the Confidential Material and trade secrets.

IX.Soliciting Employees.  Consultant promises and agrees that he will not, during the Consulting Term and for a period of one year following the termination or expiration, as applicable, of the Consulting Term, directly or indirectly solicit any employee of any MSC or any of its affiliates who earned annually $25,000 or more as an employee of such entity during the last six months of his or her own employment to work for any business, individual, partnership, firm, or corporation.

X.Ownership.  Consultant agrees that any software, hardware, equipment, or records, including all copies or extracts of them which Consultant prepares, uses or sees during the Consulting Term in relation to the performance of services hereunder shall be and remain the sole property of MSC (or, if applicable, any affiliate of MSC).

A.Ownership of Copyrights. Consultant agrees that any work product, documentation, and improvements made by Consultant during the term of this Consulting Agreement that relate to the business activities of MSC belong exclusively to MSC as works made for hire under the U.S. Copyright Law when such work is within the scope of the services to be performed under this Consulting Agreement or if they were created using any of MSC’s facilities or resources.

B.Invention Assignment.  Consultant agrees, without further compensation or consideration, to disclose promptly to MSC any and all inventions, improvements, data, processes, products, and computer software (hereafter “matters subject to disclosure”) which, during the term of this Consulting Agreement, Consultant may conceive, make, develop, or work on, in whole or in part, solely or jointly with others, whether or not during regular working

6

hours, and which relate to the actual or anticipated business, research, and/or development of MSC or any of its affiliates, or which result from tasks assigned to Consultant by MSC or its affiliates.

1.Consultant agrees that all matters subject to disclosure, together with all related rights (such as patents, trademarks, copyrights, designs, and trade secrets), shall be the property of MSC.

2.Consultant will, without further compensation or consideration, assign any and all worldwide rights in and to the matters subject to disclosure to MSC and assist MSC in every proper way including, without limitation.

a.The execution of any and all papers, applications for patents, and assignments to MSC.

b.The making and keeping of proper records.

c.The giving of evidence and testimony.

3.Consultant will do all of the above, and whatever else is necessary, to assist MSC in obtaining patent, copyright, trademark, or trade secret protection in all countries, and to perfect MSC’s ownership of the matters subject to disclosure.  MSC agrees to pay all reasonable expenses incurred by Consultant in providing this assistance.

4.Consultant’s obligation to assign inventions shall not apply to inventions, improvements, or discoveries listed below, patented or unpatented, which Consultant developed and owned prior to the Effective Date of this Consulting Agreement (if “None,” so state in Consultant’s handwriting):

None

XI.Freedom to Enter Agreement.  Consultant represents and warrants that Consultant is free to enter into this Consulting Agreement and to perform each of its terms and covenants.  Consultant’s execution and performance of this Consulting Agreement is not a violation or breach of any other agreement between Consultant and any other person or entity.

XII.Miscellaneous.

A.Successors.

1.This Consulting Agreement is personal to Consultant and shall not, without the prior written consent of MSC, be assignable by Consultant.

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2.This Consulting Agreement shall inure to the benefit of and be binding upon MSC and its respective successors and assigns and any such successor or assignee shall be deemed substituted for MSC under the terms of this Consulting Agreement for all purposes.  As used herein, “successor” and “assignee” shall include any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires the ownership of MSC or to which MSC assigns this Consulting Agreement by operation of law or otherwise.

B.Waiver.  No waiver of any breach of any term or provision of this Consulting Agreement shall be construed to be, nor shall be, a waiver of any other breach of this Consulting Agreement.  No waiver shall be binding unless in writing and signed by the party waiving the breach.

C.Modification.  This Consulting Agreement may not be amended or modified other than by a written agreement executed by Consultant and the CEO.

D.Complete Agreement.  This Consulting Agreement and the Separation Agreement constitute and contain the entire agreement and final understanding concerning Consultant’s relationship with MSC and its affiliates and the other subject matters addressed herein between the parties, and supersedes and replaces all prior negotiations and all agreements proposed or otherwise, whether written or oral, concerning the subject matters hereof.  The Employee Confidentiality and Inventions Agreement by and between Consultant and MSC and entered into on or about February 20, 2004 (the “Confidentiality Agreement”) is outside of the scope of the preceding sentence and shall continue in effect in accordance with its terms.  Any representation, promise or agreement not specifically included in this Consulting Agreement, the Separation Agreement or the Confidentiality Agreement shall not be binding upon or enforceable against either party.  This Consulting Agreement, along with the Separation Agreement and the Confidentiality Agreement, constitute an integrated agreement.

E.Litigation and Investigation Assistance.  In addition to the consulting services described in Section II, Consultant agrees to cooperate in the defense of MSC or any of its affiliates against any threatened or pending litigation or in any investigation or proceeding by any governmental agency or body that relates to any events or actions which occurred during or prior to the term of Consultant’s employment or which relate to any events or actions which occur during the Consulting Term.  Furthermore, Consultant agrees to cooperate in the prosecution of any claims and lawsuits brought by MSC or any of its affiliates that are currently outstanding or that may in the future be brought relating to matters which occurred during or prior to the term of Consultant’s employment or which relate to any events or actions which occur during the Consulting Term.  Except as requested by MSC or as required by law, Consultant shall not comment upon any (i) threatened or pending claim or litigation (including investigations or arbitrations) involving MSC or any of its affiliates, or (ii) threatened or pending government investigation involving MSC or any of its affiliates.

F.Severability.  If any provision of this Consulting Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or

8

applications of the Consulting Agreement which can be given effect without the invalid provisions or applications and to this end the provisions of this Consulting Agreement are declared to be severable.

G.Choice of Law.  This Consulting Agreement shall be deemed to have been executed and delivered within the State of California, and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with, and governed by, the laws of the State of California without regard to principles of conflict of laws.

H.Cooperation in Drafting.  Each party has cooperated in the drafting and preparation of this Consulting Agreement.  Hence, in any construction to be made of this Consulting Agreement, the same shall not be construed against any party on the basis that the party was the drafter.

I.Counterparts.  This Consulting Agreement may be executed in counterparts, and each counterpart, when executed, shall have the efficacy of a signed original.  Photographic copies of such signed counterparts may be used in lieu of the originals for any purpose.

J.Arbitration.  Any dispute, claim or controversy arising out of or relating to this Consulting Agreement, its enforcement or interpretation, or because of an alleged breach, default, or misrepresentation in connection with any of its provisions, including the determination of the scope or applicability of this agreement to arbitrate, shall be submitted to final and binding arbitration, to be held in Orange County, California before a sole arbitrator; provided, however, that provisional injunctive relief may, but need not, be sought in a court of law while arbitration proceedings are pending, and any provisional injunctive relief granted by such court shall remain effective until the matter is finally determined by the arbitrator.   The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures.  Judgment on the award may be entered in any court having jurisdiction.  In the event either party institutes arbitration under this Consulting Agreement, the party prevailing in any such proceeding, as determined by the arbitrator, shall be entitled, in addition to all other relief, to reasonable attorneys’ fees relating to such arbitration.  The nonprevailing party shall be responsible for all costs of the arbitration, including but not limited to, the arbitration fees, court reporter fees, etc.  Any dispute as to the reasonableness of costs and expenses shall be determined by the arbitrator.

K.Advice of Counsel.  In entering this Consulting Agreement, the parties represent that they have relied upon the advice of their attorneys, who are attorneys of their own choice, and that the terms of this Consulting Agreement have been completely read and explained to them by their attorneys, and that those terms are fully understood and voluntarily accepted by them.

L.Supplementary Documents.  All parties agree to cooperate fully and to execute any and all supplementary documents and to take all additional actions that may be necessary or appropriate to give full force to the basic terms and intent of this Consulting Agreement and which are not inconsistent with its terms.

9

M.Headings.  The section headings contained in this Consulting Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Consulting Agreement.

[Remainder of page intentionally left blank.]

10

I have read the foregoing Consulting Agreement and I accept and agree to the provisions it contains and hereby execute it voluntarily with full understanding of its consequences.

EXECUTED this 23rd day of September 2004, at Orange County, California.

“Consultant”

/s/ Louis A. Greco

Louis A. Greco

EXECUTED this 23rd day of September 2004, at Orange County, California.

“MSC”
MSC.Software Corporation,
a Delaware corporation
/s/ Frank Perna, Jr.
By:	Frank Perna, Jr.
Its:	Chief Executive Officer

11

EX-10.16

Exhibit 10.16

Defined Contribution Prototype Plan

BRYAN, PENDLETON, SWATS & MCALLISTER, LLC
DEFINED CONTRIBUTION PROTOTYPE PLAN AND TRUST

TABLE OF CONTENTS

ARTICLE I, DEFINITIONS
1.01	Account	1
1.02	Account Balance or Accrued Benefit	1
1.03	Accounting Date	1
1.04	Adoption Agreement	1
1.05	Beneficiary	1
1.06	Code	1
1.07	Compensation	1
1.08	Disability	2
1.09	Earned Income	2
1.10	Effective Date	3
1.11	Employee	3
1.12	Employer	3
1.13	ERISA	3
1.14	Highly Compensated Employee	3
1.15	Hour of Service	3
1.16	Leased Employee	4
1.17	Nonhighly Compensated Employee	5
1.18	Nontransferable Annuity	5
1.19	Paired Plans	5
1.20	Participant	5
1.21	Plan	5
1.22	Plan Administrator	5
1.23	Plan Entry Date	5
1.24	Plan Year	5
1.25	Protected Benefit	5
1.26	Related Group / Related Employer	5
1.27	Self-Employed Individual / Owner Employee / Shareholder Employee	6
1.28	Separation from Service	6
1.29	Service	6
1.30	Service with a Predecessor Employer	6
1.31	Trust	6
1.32	Trust Fund	6
1.33	Trustee	6
1.34	Vested	6
ARTICLE II, ELIGIBILITY AND PARTICIPATION
2.01	Eligibility	7
2.02	Age and Service Conditions	7
2.03	Break in Service - Participation	7
2.04	Participation upon Re-employment	8
2.05	Change in Employment Status	8
2.06	Election Not to Participate	8
ARTICLE III, EMPLOYER CONTRIBUTIONS AND FORFEITURES
3.01	Employer Contributions	9
3.02	Deferral Contributions	9
3.03	Matching Contributions	9
3.04	Employer Contribution Allocation	9
3.05	Forfeiture Allocation	11
3.06	Allocation Conditions	12
3.07	Annual Additions Limitation	13
3.08	Estimating Compensation	13
3.09	Determination Based on Actual Compensation	13
3.10	Disposition of Allocated Excess Amount	13
3.11	Combined Plans Annual Additions Limitation	14
3.12	Estimating Compensation	14
3.13	Determination Based on Actual Compensation	14
3.14	Ordering of Annual Addition Allocations	14
3.15	Disposition of Allocated Excess Amount Attributable to Plan	14
3.16	Other Defined Contribution Plans Limitation	14
3.17	Defined Benefit Plan Limitation	14
3.18	Definitions – Article III	15
ARTICLE IV, PARTICIPANT CONTRIBUTIONS
4.01	Participant Contributions	17
4.02	Employee Contributions	17
4.03	DECs	17
4.04	Rollover Contributions	17
4.05	Participant Contributions - Vesting	17
4.06	Participant Contributions - Distribution	17
4.07	Participant Contributions – Investment and Accounting	17
ARTICLE V, VESTING
5.01	Normal/Early Retirement Age	18
5.02	Participant Death or Disability	18
5.03	Vesting Schedule	18
5.04	Cash-Out Distributions to Partially-Vested Participants/Restoration of Forfeited Account Balance	18
5.05	Accounting for Cash-Out Repayment	19
5.06	Year of Service - Vesting	19
5.07	Break in Service and Forfeiture Break in Service - Vesting	19
5.08	Included Years of Service - Vesting	20
5.09	Forfeiture Occurs	20
5.10	Rule of Parity - Vesting	20
5.11	Amendment to Vesting Schedule	20
5.12	Deferral Contributions Taken into Account	20
ARTICLE VI, DISTRIBUTIONS
6.01	Timing of Distribution	21
6.02	Required Minimum Distributions	22
6.03	Method of Distribution	24
6.04	Annuity Distributions to Participants and to Surviving Spouses	25
6.05	Waiver Election - QJSA	26
6.06	Waiver Election - QPSA	26
6.07	Distributions Under Qualified Domestic Relations Orders (QDRO)	26
6.08	Defaulted Loan – Timing of Offset	27
6.09	Hardship Distribution	27
6.10	Direct Rollover of Eligible Rollover Distributions	27
6.11	TEFRA Elections	28
ARTICLE VII, EMPLOYER ADMINISTRATIVE PROVISIONS
7.01	Information to Plan Administrator	29
7.02	No Responsibility for Others	29
7.03	Indemnity of Certain Fiduciaries	29
7.04	Employer Direction of Investment	29
7.05	Evidence	29
7.06	Plan Contributions	29
7.07	Employer Action	29
7.08	Fiduciaries Not Insurers	29
7.09	Plan Terms Binding	29
7.10	Word Usage	29
7.11	State Law	29
7.12	Prototype Plan Status	29
7.13	Employment Not Guaranteed	29
ARTICLE VIII, PARTICIPANT ADMINISTRATIVE PROVISIONS
8.01	Beneficiary Designation	31
8.02	No Beneficiary Designation/Death of Beneficiary	31
8.03	Assignment or Alienation	31
8.04	Information Available	31
8.05	Claims Procedure for Denial of Benefits	32

i

8.06	Participant Direction of Investment	32
ARTICLE IX, PLAN ADMINISTRATOR
9.01	Compensation and Expenses	33
9.02	Resignation and Removal	33
9.03	General Powers and Duties	33
9.04	Plan Loans	33
9.05	Funding Policy	33
9.06	Individual Accounts	33
9.07	Value of Participant’s Account Balance	34
9.08	Allocation and Distribution of Net Income, Gain or Loss	34
9.09	Individual Statement	35
9.10	Account Charged	35
9.11	Lost Participants	35
9.12	Plan Correction	35
9.13	No Responsibility for Others	36
9.14	Notice, Designation, Election, Consent and Waiver	36
ARTICLE X, TRUSTEE AND CUSTODIAN, POWERS AND DUTIES
10.01	Acceptance	37
10.02	Receipt of Contributions	37
10.03	Investment Powers	37
10.04	Records and Statements	40
10.05	Fees and Expenses from Fund	40
10.06	Parties to Litigation	40
10.07	Professional Agents	41
10.08	Distribution of Cash or Property	41
10.09	Participant or Beneficiary Incapacitated	41
10.10	Distribution Directions	41
10.11	Third Party Reliance	41
10.12	Multiple Trustee	41
10.13	Resignation and Removal	41
10.14	Successor Trustee Acceptance	41
10.15	Valuation of Trust	42
10.16	Limitation on Liability - If Investment Manager, Ancillary Trustee or Independent Fiduciary Appointed	42
10.17	Investment in Group Trust Fund	42
10.18	Appointment of Ancillary Trustee or Independent Fiduciary	42
ARTICLE XI, PROVISIONS RELATING TO INSURANCE AND INSURANCE COMPANY
11.01	Insurance Benefit	44
11.02	Limitation on Life Insurance Protection	44
11.03	Definitions	45
11.04	Dividend Plan	45
11.05	Insurance Company Not a Party to Agreement	45
11.06	No Responsibility for Others	45
11.07	Duties of Insurance Company	45
ARTICLE XII, TOP-HEAVY PROVISIONS
12.01	Determination of Top-Heavy Status	46
12.02	Definitions	46
12.03	Top-Heavy Minimum Allocation	47
12.04	Determining Top-Heavy Contribution Rates	47
12.05	Plan Which Will Satisfy Top-Heavy	47
12.06	Top-Heavy Vesting	47
ARTICLE XIII, EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION
13.01	Exclusive Benefit	48
13.02	Amendment by Employer	48
13.03	Amendment by Prototype Plan Sponsor	48
13.04	Plan Termination or Suspension	49
13.05	Full Vesting on Termination	49
13.06	Post Termination Procedure and Distribution	49
13.07	Merger/Direct Transfer	49
ARTICLE XIV, CODE SECTION 401(k) AND CODE SECTION 401(m) ARRANGEMENTS
14.01	Application	51
14.02	401(k) Arrangement	51
14.03	Definitions	54
14.04	Matching Contributions/Employee Contributions	55
14.05	Deferral Deposit Timing/Employer Contribution Status	55
14.06	Special Accounting and Allocation Provisions	56
14.07	Annual Elective Deferral Limitation	57
14.08	Actual Deferral Percentage (ADP) Test	57
14.09	Actual Contribution Percentage (ACP) Test	58
14.10	Multiple Use Limitation	60
14.11	Distribution Restrictions	60
14.12	Special Allocation and Valuation Rules	61

ii

ALPHABETICAL LISTING OF DEFINITIONS

Plan Definition Section Reference 100% Limitation	3.19(l)
Account	1.01
Account Balance or Accrued Benefit	1.02
Accounting Date.	1.02
Actual Deferral Percentage (“ADP”) Test	14.08
Adoption Agreement	1.04
Annual Addition	3.19(a)
Average Contribution Percentage Test	14.09
Beneficiary	1.05
Break in Service for Eligibility Purposes	2.03
Break in Service for Vesting Purposes	5.07
Cash-out Distribution	5.04
Code	1.06
Code §411(d)(6) Protected Benefits	13.02(A)
Compensation	1.07
Compensation for Code §401(k) Purposes	14.03(f)
Compensation for Code §415 Purposes	3.19(b)
Compensation for Top Heavy Purposes	12.02(d)
Contract(s)	11.03(c)
Custodian Designation	10.03[B]
Deemed Cash-out Rule	5.04(C)
Deferral Contributions	14.03(g)
Deferral Contributions Account	14.06(A)
Defined Benefit Plan	3.19(i)
Defined Benefit Plan Fraction	3.19(j)
Defined Contribution Plan	3.19(h)
Defined Contribution Plan Fraction	3.19(k)
Determination Date	12.02(h)
Disability	1.08
Distribution Date	6.01
Distribution Restrictions	14.03(m)
Earned Income	1.09
Effective Date	1.10
Elective Deferrals	14.03(h)
Elective Transfer	13.06(A)
Eligible Employee	14.03(c)
Employee	1.11
Employee Contributions	14.03(n)
Employer	1.12
Employer Contribution Account	14.06
Employer for Code §415 Purposes	3.19(c)
Employer for Top Heavy Purposes	12.02(g)
Employment Commencement Date	2.02
ERISA	1.13
Excess Aggregate Contributions	14.09(D)
Excess Amount	3.19(d)
Excess Contributions	14.08
Exempt Participant	8.01(B)
Forfeiture Break in Service	5.08
Group Trust Fund	10.17
Hardship	6.09
Hardship for Code §401(k) Purposes	14.11(A)
Highly Compensated Employee	1.14
Highly Compensated Group	14.03(d)
Hour of Service	1.15
Plan Definition Section Reference
Incidental Insurance Benefits	11.01(A)
Insurable Participant	11.03(d)
Investment Manager	9.04(i)
Issuing Insurance Company	11.03(b)
Joint and Survivor Annuity	6.04(A)
Key Employee	12.02(a) (12.01
Leased Employees	1.16
Limitation Year	3.19(e)
Loan Policy	9.04(A)
Mandatory Contributions	14.04(A)
Mandatory Contributions Account	14.04(A)
Prototype Plan	3.19(f)
Matching Contributions	14.03(i)
Maximum Permissible Amount	3.19(g)
Minimum Distribution Incidental Benefit	6.03(A)
Multiple Use Limitation	14.10
Named Fiduciary	10.03[D]
Nonelective Contributions	14.03(j)
Nonhighly Compensated Employee	14.03(b)
Nonhighly Compensated Group	14.03(e)
Non-Key Employee	12.02(b)
Nontransferable Annuity	1.17
Normal Retirement Age	5.01
Paired Plans	1.18
Participant	1.19
Participant Deductible Contributions	4.02
Participant Forfeiture	3.05
Participant Loans	10.03[E]
Participant Nondeductible Contributions	4.01
Permissive Aggregation Group	12.02 (f)
Plan	1.20
Plan Administrator	1.21
Plan Entry Date	1.22
Plan Year	1.23
Policy	11.03(a)
Preretirement Survivor Annuity	6.04(B)
Qualified Domestic Relations Order	6.07
Qualified Matching Contributions	14.03(k)
Qualified Nonelective Contributions	14.03(l)
Qualifying Employer Real Property	10.03[F]
Qualifying Employer Securities	10.03[F]
Related Employer	1.25
Required Beginning Date	6.02
Rollover Contributions	4.03
Self-Employed Individual	1.26
Service	1.28
Term Life Insurance Contract	11.03
Top Heavy Minimum Allocation	12.03
Trust	1.30
Trustee	1.32
Trustee Designation	10.03[A]
Trust Fund	1.31
Weighted Average Allocation Method	14.12
Year of Service for Eligibility Purposes	2.02
Year of Service for Vesting Purposes	5.06

BRYAN, PENDLETON, SWATS & MCALLISTER, LLC

DEFINED CONTRIBUTION PROTOTYPE PLAN AND TRUST

DEFINED CONTRIBUTION PROTOTYPE PLAN AND TRUST AGREEMENT

BASIC PLAN DOCUMENT #01

Bryan, Pendleton, Swats & McAllister, LLC, in its capacity as Prototype Plan Sponsor, establishes this Prototype Plan intended to conform to and qualify under §401 and §501 of the Internal Revenue Code of 1986, as amended. An Employer establishes a Plan and Trust under this Prototype Plan by executing an Adoption Agreement. If the Employer adopts this Plan as a restated Plan in substitution for, and in amendment of, an existing plan, the provisions of this Plan, as a restated Plan, apply solely to an Employee whose employment with the Employer terminates on or after the restated Effective Date of the Plan. If an Employee’s employment with the Employer terminates prior to the restated Effective Date, that Employee is entitled to benefits under the Plan as the Plan existed on the date of the Employee’s termination of employment.

ARTICLE I
DEFINITIONS

1.01 “Account” means the separate Account(s) which the Plan Administrator or the Trustee maintains under the Plan for a Participant.

1.02 “Account Balance” or “Accrued Benefit” means the amount standing in a Participant’s Account(s) as of any date derived from Employer contributions and from Participant contributions, if any.

1.03 “Accounting Date” means the last day of the Plan Year. The Plan Administrator will allocate Employer contributions and forfeitures for a particular Plan Year as of the Accounting Date of that Plan Year, and on such other dates, if any, as the Plan Administrator determines, consistent with the Plan’s allocation conditions and other provisions.

1.04 “Adoption Agreement” means the document executed by each Employer adopting this Plan. References to Adoption Agreement within this basic plan document are to the Adoption Agreement as completed and executed by a particular Employer unless the context clearly indicates otherwise. An adopting Employer’s Adoption Agreement and this basic plan document together constitute a single Plan and Trust of the Employer. Each elective provision of the Adoption Agreement corresponds (by its parenthetical section reference) to the section of the Plan which grants the election. Each Adoption Agreement offered under this Plan is either a Nonstandardized Plan or a Standardized Plan, as identified in that Adoption Agreement. The provisions of this Plan apply in the same manner to Nonstandardized Plans and to Standardized Plans unless otherwise specified. All section references within an Adoption Agreement are Adoption Agreement section references unless the context clearly indicates otherwise.

1.05 “Beneficiary” means a person designated by a Participant or by the Plan who is or may become entitled to a benefit under the Plan. A Beneficiary who becomes entitled to a benefit under the Plan remains a Beneficiary under the Plan until the Trustee has fully distributed to the Beneficiary his/her Plan benefit. A Beneficiary’s right to (and the Plan Administrator’s or a Trustee’s duty to provide to the Beneficiary) information or data concerning the Plan does not arise until the Beneficiary first becomes entitled to receive a benefit under the Plan.

1.06 “Code” means the Internal Revenue Code of 1986, as amended and includes applicable Treasury regulations.

1.07 “Compensation” means a Participant’s W-2 wages, Code §3401(a) wages, or 415 compensation except, in the case of a Self-Employed Individual, Compensation means Earned Income as defined in Section 1.09. The Employer in its Adoption Agreement must specify which definition of Compensation (Section 1.07(A), (B) or (C)) applies under the Plan and any modifications thereto, for purposes of contribution allocations under Article III.

Any reference in the Plan to Compensation is a reference to the definition in this Section 1.07, unless the Plan reference, or the Employer in its Adoption Agreement, modifies this definition. The Plan Administrator will take into account only Compensation actually paid during (or as permitted under the Code, paid for) the relevant period. A Compensation payment includes Compensation paid by the Employer through another person under the common paymaster provisions in Code §§3121 and 3306. Compensation, unless otherwise specified in the Adoption Agreement, does not include any form of remuneration (including severance pay and vacation pay) paid to the Participant after the Participant incurs a Separation from Service.

(A) W-2 Wages. W-2 wages means wages for federal income tax withholding purposes, as defined under Code §3401(a), plus all other payments to an Employee in the course of the Employer’s trade or business, for which the Employer must furnish the Employee a written statement under Code §§6041, 6051 and 6052, but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in Code §3401(a)(2)).

(B)  Code §3401(a) Wages. Code §3401(a) wages means wages within the meaning of Code §3401(a) for the purposes of income tax withholding at the source, but determined without regard to any rules that limit the remuneration included in wages based on the nature or the location of the employment or the services performed (such

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as the exception for agricultural labor in Code §3401(a)(2)).

(C)  Code §415 Compensation (current income definition). Code §415 compensation means the Employee’s wages, salaries, fees for professional service and other amounts received for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits and reimbursements or other expense allowances under a nonaccountable plan as described in Treas. Reg. §1.62-2(c)).

Code §415 compensation does not include:

(a)  Employer contributions to a plan of deferred compensation to the extent the contributions are not included in the gross income of the Employee for the taxable year in which contributed, Employer contributions on behalf of an Employee to a Simplified Employee Pension Plan to the extent such contributions are excludible from the Employee’s gross income, and any distributions from a plan of deferred compensation, regardless of whether such amounts are includible in the gross income of the Employee when distributed.

(b)  Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture.

(c)  Amounts realized from the sale, exchange or other disposition of stock acquired under a stock option described in Part II, Subchapter D, Chapter 1, Subtitle A of the Code.

(d)  Other amounts which receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by an Employer (whether or not under a salary reduction agreement) toward the purchase of an annuity contract described in Code §403(b) (whether or not the contributions are excludible from the gross income of the Employee).

(D)  Elective Contributions. Compensation under Sections 1.07(A), 1.07(B) and 1.07(C) includes Elective Contributions unless the Employer in its Adoption Agreement elects to exclude Elective Contributions. “Elective Contributions” are amounts excludible from the Employee’s gross income under Code §§125, 132(f)(4), 402(e)(3), 402(h)(2), 403(b), 408(p) or 457, and contributed by the Employer, at the Employee’s election, to a cafeteria plan, a qualified transportation fringe benefit plan, a 401(k) arrangement, a SARSEP, a tax-sheltered annuity, a SIMPLE plan or a Code §457 plan. Notwithstanding the preceding sentence, amounts described in §132(f)(4) are not Elective Contributions until Plan Years beginning on or after January 1, 2001, unless the Plan Administrator operationally has included such amounts effective as of an earlier Plan Year beginning no earlier than January 1, 1998.

(E)  Compensation Dollar Limitation. For any Plan Year, the Plan Administrator in allocating contributions under Article III or in testing the Plan for nondiscrimination, cannot take into account more than $150,000 (or such larger or smaller amount as the Commissioner of Internal Revenue may prescribe) of any Participant’s Compensation. Notwithstanding the foregoing, an Employee under a 401(k) arrangement may make elective deferrals with respect to Compensation which exceeds the Plan Year Compensation limitation, provided such deferrals otherwise satisfy Code §402(g) and other applicable limitations.

(F)  Nondiscrimination. For purposes of determining whether the Plan discriminates in favor of Highly Compensated Employees, Compensation means Compensation as defined in this Section 1.07, except: (1) the Employer annually may elect operationally to include or to exclude Elective Contributions, irrespective of the Employer’s election in its Adoption Agreement regarding Elective Contributions; and (2) the Plan Administrator will disregard any elections made in the “modifications to Compensation definition” section of Adoption Agreement Section 1.07. The Employer’s election described in clause (1) must be consistent and uniform with respect to all Employees and all plans of the Employer for any particular Plan Year. The Employer, irrespective of clause (2), may elect to exclude from this nondiscrimination definition of Compensation any items of Compensation excludible under Code §414(s) and the applicable Treasury regulations, provided such adjusted definition conforms to the nondiscrimination requirements of those regulations. Furthermore, for nondiscrimination purposes, including the computation of an Employee’s actual deferral percentage (“ADP”) or actual contribution percentage (“ACP”), the Plan Administrator may limit Compensation taken into account to Compensation received only for the portion of the Plan Year in which the Employee was a Participant and only for the portion of the Plan Year in which the Plan or the 401(k) arrangement was in effect.

1.08 “Disability” means the Participant, because of a physical or mental disability, will be unable to perform the duties of his/her customary position of employment (or is unable to engage in any substantial gainful activity) for an indefinite period which the Plan Administrator considers will be of long continued duration. A Participant also is disabled if he/she incurs the permanent loss or loss of use of a member or function of the body, or is permanently disfigured, and incurs a Separation from Service. A Participant is disabled on the date the Plan Administrator determines the Participant satisfies the definition of Disability. The Plan Administrator may require a Participant to submit to a physical examination in order to confirm Disability. The Plan Administrator will apply the provisions of this Section 1.08 in a nondiscriminatory, consistent and uniform manner. The Employer may provide an alternative definition of Disability in an Addendum to its Adoption Agreement.

1.09 “Earned Income” means net earnings from self-employment in the trade or business with respect to which the Employer has established the Plan, provided personal services of the Self-Employed Individual are a material income producing factor. The Plan Administrator will

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determine net earnings without regard to items excluded from gross income and the deductions allocable to those items. The Plan Administrator will determine net earnings after the deduction allowed to the Self-Employed Individual for all contributions made by the Employer to a qualified plan and after the deduction allowed to the Self-Employed Individual under Code §164(f) for self-employment taxes.

1.10 “Effective Date” of this Plan is the date specified in the Adoption Agreement unless otherwise for a specified purpose provided within this basic plan document or within (as part of the Adoption Agreement ) a Participation Agreement, an Addendum, or within Appendices A or B.

1.11 “Employee” means any common law employee, Self-Employed Individual, leased employee or other person the Code treats as an employee of the Employer for purposes of the Employer’s qualified plan. The Employer in its Adoption Agreement must elect or specify any Employee, or class of Employees, not eligible to participate in the Plan (an “excluded Employee”).

(A)  Collective Bargaining Employees. If the Employer elects in its Adoption Agreement to exclude collective bargaining Employees from eligibility to participate, the exclusion applies to any Employee included in a unit of Employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers if: (1) retirement benefits were the subject of good faith bargaining; and (2) two percent or less of the employees covered by the agreement are “professionals” as defined in Treas. Reg. §1.410(b)-9, unless the collective bargaining agreement requires the Employee to be included within the Plan. The term “employee representatives” does not include any organization more than half the members of which are owners, officers, or executives of the Employer.

(B)  Nonresident Aliens. If the Employer elects in its Adoption Agreement to exclude nonresident aliens from eligibility to participate, the exclusion applies to any nonresident alien Employee who does not receive any earned income, as defined in Code §911(d)(2), from the Employer which constitutes United States source income, as defined in Code §861(a)(3).

(C)  Reclassified Employees. If the Employer elects in its Adoption Agreement to exclude reclassified Employees from eligibility to participate, the exclusion applies to any person the Employer does not treat as an Employee (including, but not limited to, independent contractors, persons the Employer pays outside of its payroll system and out-sourced workers) for federal income tax withholding purposes under Code §3401(a), but for whom there is a binding determination the individual is an Employee or a Leased Employee of the Employer.

1.12 “Employer” means each employer who establishes a Plan under this Prototype Plan by executing an Adoption Agreement and includes to the extent described in Section 1.26 a Related Employer and a Participating Employer. The Employer for purposes of acting as Plan Administrator, including Plan amendments, terminating the Plan or performing other ERISA settlor functions, means the signatory Employer to the Adoption Agreement Execution Page and does not include any related Employer or Participating Employer.

1.13 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and includes applicable Department of Labor regulations.

1.14 “Highly Compensated Employee” means an Employee who:

(a)  during the Plan Year or during the preceding Plan Year, is a more than 5% owner of the Employer (applying the constructive ownership rules of Code §318, and applying the principles of Code §318, for an unincorporated entity); or

(b)  during the preceding Plan Year had Compensation in excess of $80,000 (as adjusted by the Commissioner of Internal Revenue for the relevant year) and, if the Employer under its Adoption Agreement Appendices A or B, makes the top-paid group election, was part of the top-paid 20% group of Employees (based on Compensation for the preceding Plan Year).

For purposes of this Section 1.14, “Compensation” means Compensation as defined in Section 1.07, except any exclusions from Compensation the Employer elects in Adoption Agreement Section 1.07 do not apply, and Compensation specifically includes Elective Contributions. The Plan Administrator must make the determination of who is a Highly Compensated Employee, including the determinations of the number and identity of the top-paid 20% group, consistent with Code §414(q) and regulations issued under that Code section. The Employer in its Adoption Agreement Appendices A or B may make a calendar year data election to determine the Highly Compensated Employees for the Plan Year, as prescribed by Treasury regulations or by other guidance published in the Internal Revenue Bulletin. A calendar year data election must apply to all plans of the Employer which reference the highly compensated employee definition in Code §414(q). For purposes of this Section 1.14, if the current Plan Year is the first year of the Plan, then the term “preceding Plan Year” means the 12-consecutive month period immediately preceding the current Plan Year.

1.15 “Hour of Service” means:

(a)  Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment, for the performance of duties. The Plan Administrator credits Hours of Service under this Paragraph (a) to the Employee for the computation period in which the Employee performs the duties, irrespective of when paid;

(b)  Each Hour of Service for back pay, irrespective of mitigation of damages, to which the Employer has agreed or for which the Employee has received an award. The Plan Administrator credits Hours of Service under this Paragraph (b) to the Employee for the computation period(s) to which the award or the agreement pertains rather than for the computation period in which the award, agreement or payment is made; and

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(c)  Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment (irrespective of whether the employment relationship is terminated), for reasons other than for the performance of duties during a computation period, such as leave of absence, vacation, holiday, sick leave, illness, incapacity (including disability), layoff, jury duty or military duty. The Plan Administrator will credit no more than 501 Hours of Service under this Paragraph (c) to an Employee on account of any single continuous period during which the Employee does not perform any duties (whether or not such period occurs during a single computation period). The Plan Administrator credits Hours of Service under this Paragraph (c) in accordance with the rules of paragraphs (b) and (c) of Labor Reg. §2530.200b-2, which the Plan, by this reference, specifically incorporates in full within this Paragraph (c).

The Plan Administrator will not credit an Hour of Service under more than one of the above Paragraphs (a), (b) or (c). A computation period for purposes of this Section 1.15 is the Plan Year, Year of Service period, Break in Service period or other period, as determined under the Plan provision for which the Plan Administrator is measuring an Employee’s Hours of Service. The Plan Administrator will resolve any ambiguity with respect to the crediting of an Hour of Service in favor of the Employee.

(A)  Method of Crediting Hours of Service. The Employer must elect in its Adoption Agreement the method the Plan Administrator will use in crediting an Employee with Hours of Service and the purpose for which the elected method will apply.

(B)  Actual Method. Under the Actual Method as determined from records, an Employee receives credit for Hours of Service for hours worked and hours for which the Employer makes payment or for which payment is due from the Employer.

(C)  Equivalency Method. Under an Equivalency Method, for each equivalency period for which the Plan Administrator would credit the Employee with at least one Hour of Service, the Plan Administrator will credit the Employee with: (i) 10 Hours of Service for a daily equivalency; (ii) 45 Hours of Service for a weekly equivalency; (iii) 95 Hours of Service for a semimonthly payroll period equivalency; and (iv) 190 Hours of Service for a monthly equivalency.

(D)  Elapsed Time Method. Under the Elapsed Time Method, an Employee receives credit for Service for the aggregate of all time periods (regardless of the Employee’s actual Hours of Service) commencing with the Employee’s Employment Commencement Date, or with his/her Re-employment Commencement Date, and ending on the date a Break in Service begins. An Employee’s Employment Commencement Date or his/her Re-employment Commencement Date begins on the first day he/she performs an Hour of Service following employment or re-employment. In applying the Elapsed Time Method, the Plan Administrator will credit an Employee’s Service for any Period of Severance of less than 12-consecutive months and will express fractional periods of Service in days.

Under the Elapsed Time Method, a Break in Service is a Period of Severance of at least 12 consecutive months. A Period of Severance is a continuous period of time during which the Employee is not employed by the Employer. The continuous period begins on the date the Employee retires, quits, is discharged, or dies or if earlier, the first 12-month anniversary of the date on which the Employee otherwise is absent from Service for any other reason (including disability, vacation, leave of absence, layoff, etc.). In the case of an Employee who is absent from work for maternity or paternity reasons, the 12-consecutive month period beginning on the first anniversary of the first date the Employee is otherwise absent from Service does not constitute a Break in Service.

(E)  Maternity/Paternity Leave/Family and Medical Leave Act. Solely for purposes of determining whether an Employee incurs a Break in Service under any provision of this Plan, the Plan Administrator must credit Hours of Service during the Employee’s unpaid absence period: (i) due to maternity or paternity leave; or (ii) as required under the Family and Medical Leave Act. An Employee is on maternity or paternity leave if the Employee’s absence is due to the Employee’s pregnancy, the birth of the Employee’s child, the placement with the Employee of an adopted child, or the care of the Employee’s child immediately following the child’s birth or placement. The Plan Administrator credits Hours of Service under this Section 1.15(E) on the basis of the number of Hours of Service for which the Employee normally would receive credit or, if the Plan Administrator cannot determine the number of Hours of Service the Employee would receive credit for, on the basis of 8 hours per day during the absence period. The Plan Administrator will credit only the number (not exceeding 501) of Hours of Service necessary to prevent an Employee’s Break in Service. The Plan Administrator credits all Hours of Service described in this Section 1.15(E) to the computation period in which the absence period begins or, if the Employee does not need these Hours of Service to prevent a Break in Service in the computation period in which his/her absence period begins, the Plan Administrator credits these Hours of Service to the immediately following computation period.

(F)  Qualified Military Service. Hour of Service also includes any Service the Plan must credit for contributions and benefits in order to satisfy the crediting of Service requirements of Code §414(u). The provisions of this Section 1.15(F) apply beginning December 12, 1994, or if the Employer’s Plan is effective after that date, as of the Plan’s Effective Date.

1.16 “Leased Employee” means an individual (who otherwise is not an Employee of the Employer) who, pursuant to an agreement between the Employer and any other person, has performed services for the Employer (or for the Employer and any persons related to the Employer within the meaning of Code §144(a)(3)) on a substantially full time basis for at least one year and who performs such services under primary direction or control of the Employer within the meaning of Code §414(n)(2). Except as described in Section 1.16(A), a Leased Employee is an Employee for purposes of the Plan. If a Leased Employee is an Employee, “Compensation” includes Compensation

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from the leasing organization which is attributable to services performed for the Employer.

(A)  Safe Harbor Plan Exception. A Leased Employee is not an Employee if the leasing organization covers the employee in a safe harbor plan and, prior to application of this safe harbor plan exception, 20% or less of the Employer’s Employees (other than Highly Compensated Employees) are Leased Employees. A safe harbor plan is a money purchase pension plan providing immediate participation, full and immediate vesting, and a nonintegrated contribution formula equal to at least 10% of the employee’s compensation, without regard to employment by the leasing organization on a specified date. The safe harbor plan must determine the 10% contribution on the basis of compensation as defined in Code §415(c)(3) including Elective Contributions.

(B)  Other Requirements. The Plan Administrator must apply this Section 1.16 in a manner consistent with Code §§414(n) and 414(o) and the regulations issued under those Code sections. If a Participant is a Leased Employee covered by a plan maintained by the leasing organization, the Plan Administrator will determine the allocation of Employer contributions and Participant forfeitures on behalf of the Participant under the Employer’s Plan without taking into account the Leased Employee’s allocation, if any, under the leasing organization’s plan.

1.17 “Nonhighly Compensated Employee” means any Employee who is not a Highly Compensated Employee.

1.18 “Nontransferable Annuity” means an annuity contract which by its terms provides that it may not be sold, assigned, discounted, pledged as collateral for a loan or security for the performance of an obligation or for any purpose to any person other than the insurance company. If the Plan distributes an annuity contract, the contract must be a Nontransferable Annuity.

1.19 “Paired Plans” means the Employer has adopted two Standardized Plan Adoption Agreements offered with this Prototype Plan, one Adoption Agreement being a Paired Profit Sharing Plan and one Adoption Agreement being a Paired Pension Plan. A Paired Profit Sharing Plan may include a 401(k) arrangement. A Paired Pension Plan must be a money purchase pension plan, defined benefit plan or a target benefit pension plan. Paired Plans must be the subject of a favorable opinion letter issued by the National Office of the Internal Revenue Service. If an Employer adopts paired plans, only one of the plans may provide for permitted disparity.

1.20 “Participant” means an eligible Employee who becomes a Participant in accordance with the provisions of Section 2.01. An eligible Employee means an Employee who is not an excluded Employee under Adoption Agreement Section 1.11.

1.21 “Plan” means the retirement plan established or continued by the Employer in the form of this Prototype Plan, including the Adoption Agreement under which the Employer has elected to establish this Plan. The Employer must designate the name of the Plan in its Adoption Agreement. An Employer may execute more than one Adoption Agreement offered under this Plan, each of which will constitute a separate Plan and Trust established or continued by that Employer. The Plan and the Trust created by each adopting Employer is a separate Plan and a separate Trust, independent from the plan and the trust of any other employer adopting this Prototype Plan. All section references within this basic plan document are Plan section references unless the context clearly indicates otherwise. The Plan includes any Addendum or Appendix permitted by the basic plan document or by the Employer’s Adoption Agreement and which the Employer attaches to its Adoption Agreement. An Addendum must correspond by section reference to the section of the basic plan document or Adoption Agreement permitting the Addendum.

1.22 “Plan Administrator” means the Employer unless the Employer designates another person or persons to hold the position of Plan Administrator. Any person(s) the Employer appoints as Plan Administrator may or may not be Participants in the Plan. In addition to its other duties, the Plan Administrator has full responsibility for the Plan’s compliance with the reporting and disclosure rules under ERISA.

1.23 “Plan Entry Date” means the date(s) the Employer elects in Adoption Agreement Section 2.01.

1.24 “Plan Year” means the consecutive month period the Employer specifies in its Adoption Agreement. The Employer also must specify in its Adoption Agreement the “Limitation Year” applicable to the limitations on allocations described in Article III. If the Employer maintains Paired Plans, each Plan must have the same Plan Year.

1.25 “Protected Benefit” means any accrued benefit described in Treas. Reg. §1.411(d)-4, including any optional form of benefit provided under the Plan which may not (except in accordance with such Regulations) be reduced, eliminated or made subject to Employer discretion.

1.26 “Related Group”/”Related Employer.” A Related Group is a controlled group of corporations (as defined in Code §414(b)), trades or businesses (whether or not incorporated) which are under common control (as defined in Code §414(c)), an affiliated service group (as defined in Code §414(m)) or an arrangement otherwise described in Code §414(o). Each Employer/member of the Related Group is a Related Employer. The term “Employer” includes every Related Employer for purposes of crediting Service and Hours of Service, determining Years of Service and Breaks in Service under Articles II and V, determining Separation from Service, applying the Coverage Test under Section 3.06(E), applying the limitations on allocations in Part 2 of Article III, applying the top-heavy rules and the minimum allocation requirements of Article XII, applying the definitions of Employee, Highly Compensated Employee, Compensation and Leased Employee, applying the safe harbor 401(k) provisions of Section 14.02(D), applying the SIMPLE 401(k) provisions of Section 14.02(E) and for any other purpose the Code or the Plan require.

(A)  Participating Employer. An Employer may contribute to the Plan only by being a signatory to the Execution Page of the Adoption Agreement or to a

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Participation Agreement to the Adoption Agreement. If a Related Employer executes a Participation Agreement to the Adoption Agreement, the Related Employer is a Participating Employer. A Participating Employer is an Employer for all purposes of the Plan except as provided in Section 1.12.

(B)  Standardized/Nonstandardized Plan. If the Employer’s Plan is a Standardized Plan, all Employees of the Employer or of any Related Employer, are eligible to participate in the Plan, irrespective of whether the Related Employer directly employing the Employee is a Participating Employer. Notwithstanding the immediately preceding sentence, individuals who become Employees of a Related Employer as a result of a transaction described in Code §410(b)(6)(C) are not eligible to participate in the Plan during the Plan Year in which such transaction occurs nor in the following Plan Year, unless the Related Employer which employs such Employees becomes during such period a Participating Employer, by executing a Participation Agreement to the Adoption Agreement. If the Plan is a Nonstandardized Plan, the Employees of a Related Employer are not eligible to participate in the Plan unless the Related Employer is a Participating Employer.

1.27 “Self-Employed Individual”/”Owner-Employee”/ “Shareholder-Employee.” “Self-Employed Individual” means an individual who has Earned Income (or who would have had Earned Income but for the fact that the trade or business did not have net profits) for the taxable year from the trade or business for which the Plan is established. “Owner-Employee” means a Self-Employed Individual who is the sole proprietor in the case of a sole proprietorship. If the Employer is a partnership, or a limited liability company taxed for federal income tax purposes as a partnership, “Owner-Employee” means a Self-Employed Individual who is a partner or member and owns more than 10% of either the capital or the profits interest of the partnership or of the limited liability company. “Shareholder-Employee” means an employee or officer of an “S” corporation who owns (or is considered as owning under Code §318(a)(1)) more than 5% of the outstanding stock of the corporation on any day of the corporation’s taxable year.

1.28 “Separation from Service” means an event after which the Employee no longer has an employment relationship with the Employer maintaining this Plan or with a Related Employer.

1.29 “Service” means any period of time the Employee is in the employ of the Employer, including any period the Employee is on an unpaid leave of absence authorized by the Employer under a uniform, nondiscriminatory policy applicable to all Employees.

1.30 “Service with a Predecessor Employer.” If the Employer maintains the plan of a predecessor employer, service of the Employee with the predecessor employer is Service with the Employer. If the Employer does not maintain the plan of a predecessor employer, the Plan does not credit service with the predecessor employer, unless the Employer in its Adoption Agreement (or in a Participation Agreement, if applicable) elects to credit designated predecessor employer service and specifies the purposes for which the Plan will credit service with that predecessor employer.

Unless the Employer under its Adoption Agreement Section 2.01 provides for this purpose specific Plan Entry Dates, an Employee who satisfies the Plan’s eligibility condition(s) by reason of the crediting of predecessor service will enter the Plan in accordance with the provisions of Section 2.04 as if the Employee were a re-employed Employee on the first day the Plan credits predecessor service.

1.31 “Trust” means the separate Trust created under the Plan.

1.32 “Trust Fund” means all property of every kind acquired by the Plan and held by the Trust, other than incidental benefit insurance contracts.

1.33 “Trustee” means the person or persons who as Trustee execute the Adoption Agreement, or any successor in office who in writing accepts the position of Trustee. The Employer must designate in its Adoption Agreement whether the Trustee will administer the Trust as a discretionary Trustee or as a nondiscretionary Trustee. If a person acts as a discretionary Trustee, the Employer also may appoint a Custodian. See Article X. If the Prototype Plan Sponsor is a bank, savings and loan association, credit union, mutual fund, insurance company, or other institution qualified to serve as Trustee, a person other than the Prototype Plan Sponsor (or its affiliate) may not serve as Trustee or as Custodian of the Plan without the written consent of the Prototype Plan Sponsor.

1.34 “Vested” means a Participant or a Beneficiary has an unconditional claim, legally enforceable against the Plan, to the Participant’s Account Balance or Accrued Benefit.

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ARTICLE II
ELIGIBILITY AND PARTICIPATION

2.01 ELIGIBILITY. Each eligible Employee becomes a Participant in the Plan in accordance with the eligibility provisions the Employer elects in its Adoption Agreement. If this Plan is a restated Plan, each Employee who was a Participant in the Plan on the day before the restated Effective Date continues as a Participant in the restated Plan, irrespective of whether he/she satisfies the eligibility conditions of the restated Plan, unless the Employer provides otherwise in its Adoption Agreement. If the Employer contributes to the Plan under a Davis-Bacon contract, except as the contract provides, the Employer’s Adoption Agreement elections imposing age and service eligibility conditions do not apply with respect to an Employee performing Davis-Bacon contract Service.

2.02 AGE AND SERVICE CONDITIONS. For purposes of an Employee’s participation in the Plan, the Plan: (1) may not impose an age condition exceeding age 21; and (2) takes into account all of the Employee’s Years of Service with the Employer, except as provided in Section 2.03. “Year of Service” for purposes of an Employee’s participation in the Plan, means a 12-consecutive month eligibility computation period during which the Employee completes the number of Hours of Service (not exceeding 1,000) the Employer specifies in its Adoption Agreement.

The initial eligibility computation period is the first 12-consecutive month period measured from the Employee’s Employment Commencement Date. The Plan measures succeeding 12-consecutive month eligibility computation periods in accordance with the Employer’s election in its Adoption Agreement. If the Employer elects to measure subsequent periods on a Plan Year basis, an Employee who receives credit for the required number of Hours of Service during the initial eligibility computation period and also during the first applicable Plan Year receives credit for two Years of Service under Article II. “Employment Commencement Date” means the date on which the Employee first performs an Hour of Service for the Employer.

If the Employer under Adoption Agreement Section 2.01 elects an alternative Service condition to one Year of Service or two Years of Service, the Employer must elect in the Adoption Agreement the Hour of Service and any other requirement(s), if any, after the Employee completes one Hour of Service. Under any alternative Service condition election, the Plan may not require an Employee to complete more than one Year of Service (1,000 Hours of Service in 12-consecutive months) or two Years of Service if applicable.

If the Employer in its Adoption Agreement elects to apply the Equivalency Method or the Elapsed Time Method in applying the Plan’s eligibility Service condition, the Plan Administrator will credit Service in accordance with Sections 1.15(C) and (D).

2.03 BREAK IN SERVICE - PARTICIPATION. An Employee incurs a “Break in Service” if during any applicable 12-consecutive month period he/she does not complete more than 500 Hours of Service with the Employer. The “12-consecutive month period” under this Section 2.03 is the same 12-consecutive month period for which the Plan measures a “Year of Service” under Section 2.02. If the Plan applies the Elapsed Time Method of crediting Service under Section 1.15(D), a Participant incurs a “Break in Service” if the Participant has a Period of Severance of at least 12 consecutive months.

(A)  Two Year Eligibility. If the Employer under Adoption Agreement Section 2.01 elects a two Years of Service condition for eligibility purposes, an Employee who incurs a one year Break in Service prior to completing two Years of Service is a new Employee on the date he/she first performs an Hour of Service for the Employer after the Break in Service, and the Employee establishes a new Employment Commencement Date for purposes of the initial eligibility computation period under Section 2.02.

(B)  One Year Hold-Out Rule. The Employer must elect in its Adoption Agreement whether to apply the one year hold-out rule under Code §410(a)(5)(C). Under this rule, a Participant will incur a suspension of participation in the Plan after incurring a one year Break in Service and the Plan disregards a Participant’s Service completed prior to a Break in Service until the Participant completes one Year of Service following the Break in Service. The Plan suspends the Participant’s participation in the Plan as of the first day of the Plan Year following the Plan Year in which the Participant incurs the Break in Service. If the Participant completes one Year of Service following his/her Break in Service, the Plan restores that Participant’s pre-Break Service (and the Participant resumes active participation in the Plan) retroactively to the first day of the computation period in which the Participant first completes one Year of Service following his/her Break in Service. The initial computation period under this Section 2.03(B) is the 12-consecutive month period measured from the date the Participant first receives credit for an Hour of Service following the one year Break in Service. The Plan measures any subsequent computation periods, if necessary, in a manner consistent with the Employer’s eligibility computation period election in Adoption Agreement Section 2.02. If the Employer elects to apply the one year hold-out rule, the Employer also must elect in its Adoption Agreement whether to limit application of the rule only to a Participant who has incurred a Separation from Service.

The Plan Administrator also will apply the one-year hold out rule, if applicable, to an Employee who satisfies the Plan’s eligibility conditions but who incurs a Separation from Service and a one year Break in Service prior to becoming a Participant.

This Section 2.03(B) does not affect a Participant’s vesting credit under Article V and, during a suspension period, the Participant’s Account continues to share fully in Trust Fund allocations under Article IX. Furthermore, the Plan Administrator in applying this Section 2.03(B) does not restore any Service disregarded under the Break in Service rule of Section 2.03(A).

(C)  No Application to 401(k) Arrangement. If the Plan includes a 401(k) arrangement and the Employer in its Adoption Agreement elects to apply the Section 2.03(B)

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one year hold-out rule, the Plan Administrator will apply the provisions of Section 2.04 to the deferral contributions portion of the Plan without regard to Section 2.03(B).

(D)  No Rule of Parity – Participation. For purposes of Plan participation, the Plan does not apply the “rule of parity” under Code §410(a)(5)(D).

2.04 PARTICIPATION UPON RE-EMPLOYMENT.  A Participant who incurs a Separation from Service will re-enter the Plan as a Participant on the date of his/her re-employment with the Employer, subject to the one year hold-out rule, if applicable, under Section 2.03(B). An Employee who satisfies the Plan’s eligibility conditions but who incurs a Separation from Service prior to becoming a Participant will become a Participant on the later of the Plan Entry Date on which he/she would have entered the Plan had he/she not incurred a Separation from Service or the date of his/her re-employment, subject to the one year hold-out rule, if applicable, under Section 2.03(B). Any Employee who incurs a Separation from Service prior to satisfying the Plan’s eligibility conditions becomes a Participant in accordance with Adoption Agreement Section 2.01.

2.05 CHANGE IN EMPLOYMENT STATUS. The Employer in its Adoption Agreement Section 1.11 may elect to exclude certain Employees from Plan participation (“excluded Employees”). If a Participant has not incurred a Separation from Service but becomes an excluded Employee, during the period of exclusion the excluded Employee will not share in the allocation of any Employer contributions or Participant forfeitures, and may not make deferral contributions if the Plan includes a 401(k) arrangement, with respect to Compensation paid to the excluded Employee during the period of exclusion. However, during such period of exclusion, the Participant, without regard to employment classification, continues to receive credit for vesting under Article V for each included Year of Service and the Participant’s Account continues to share fully in Trust Fund allocations under Article IX. If a Participant who becomes an excluded Employee subsequently resumes status as an eligible Employee, the Participant will participate in the Plan immediately upon resuming eligible status, subject to the one year hold-out rule, if applicable, under Section 2.03(B).

If an excluded Employee who is not a Participant becomes an eligible Employee, he/she will participate immediately in the Plan if he/she has satisfied the eligibility conditions of Adoption Agreement Section 2.01 and would have been a Participant had he/she not been an excluded Employee during his/her period of Service. Furthermore, the excluded Employee receives credit for vesting under Article V for each included vesting Year of Service notwithstanding the Employee’s excluded Employee status.

2.06 ELECTION NOT TO PARTICIPATE. If the Plan is a Standardized Plan, the Plan does not permit an otherwise eligible Employee nor any Participant to elect not to participate in the Plan (“opt-out”). If the Plan is a Nonstandardized Plan, the Employer in its Adoption Agreement must elect whether any eligible Employee may elect irrevocably to opt-out. The Employee prior to his/her Plan Entry Date must file an opt-out election in writing with the Plan Administrator on a form provided by the Plan Administrator for this purpose.

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ARTICLE III
EMPLOYER CONTRIBUTIONS AND FORFEITURES

Part 1. Amount of Employer Contributions and Plan Allocations: Sections 3.01 through 3.06

3.01 EMPLOYER CONTRIBUTIONS.

(A)  Amount and Types of Contribution. The Employer in its Adoption Agreement will elect the amount and type(s) of Employer Plan contribution(s). The Employer will not make a contribution to the Trust for any Plan Year to the extent the contribution would exceed the Participants’ Maximum Permissible Amounts. Unless otherwise provided in an Addendum to its Adoption Agreement, the Employer need not have net profits to make a contribution under the Plan. If the Employer’s Plan is a money purchase pension plan and the Employer also maintains a defined benefit pension plan, notwithstanding the money purchase pension plan formula in the Employer’s Adoption Agreement, the Employer’s required contribution to its money purchase pension plan for a Plan Year is limited to the amount which the Employer may deduct under Code §404(a)(7). If the Employer under Code §404(a)(7) must reduce its money purchase pension plan contribution, the Plan Administrator will reduce each Participant’s allocation in the same ratio as the reduced total Employer contribution bears to the original (unreduced) Employer contribution.

(B)  Form of Contribution/Related Employer. Subject to the consent of the Trustee, the Employer may make its contribution in property instead of cash, provided the contribution of property is not a prohibited transaction under the Code or under ERISA. Unless the Employer in its Adoption Agreement makes a contrary election, the Plan Administrator will allocate all Employer contributions and forfeitures without regard to which contributing Related Employer directly employs the affected Participants.

(C)  Time of Payment of Contribution. The Employer may pay its contribution for any Plan Year in one or more installments without interest. Unless otherwise required by contract, by the Code or by ERISA, the Employer may make its contribution to the Plan for a particular Plan Year at such time(s) as the Employer in its sole discretion determines. If the Employer makes a contribution for a particular Plan Year after the close of that Plan Year, the Employer will designate in writing to the Trustee the Plan Year for which the Employer is making its contribution.

(D)  Return of Employer Contribution. The Employer contributes to the Plan on the condition its contribution is not due to a mistake of fact and the Internal Revenue Service will not disallow the deduction of the Employer’s contribution. The Trustee, upon written request from the Employer, must return to the Employer the amount of the Employer’s contribution made by the Employer by mistake of fact or the amount of the Employer’s contribution disallowed as a deduction under Code §404. The Trustee will not return any portion of the Employer’s contribution under the provisions of this Section 3.01(D) more than one year after:

(1)  The Employer made the contribution by mistake of fact; or

(2)  The disallowance of the contribution as a deduction, and then, only to the extent of the disallowance.

The Trustee will not increase the amount of the Employer contribution returnable under this Section 3.01(D) for any earnings attributable to the contribution, but the Trustee will decrease the Employer contribution returnable for any losses attributable to the contribution.  The Trustee may require the Employer to furnish the Trustee whatever evidence the Trustee deems necessary to enable the Trustee to confirm the amount the Employer has requested be returned is properly returnable under ERISA.

3.02 DEFERRAL CONTRIBUTIONS. If the Plan includes a 401(k) arrangement, the Employer in its Adoption Agreement must elect the Plan limitations and restrictions, if any, which apply to deferral contributions or to cash or deferred contributions, if applicable. Under Adoption Agreement Section 3.02, for purposes of applying any Plan limit the Employer has elected on deferral contributions, the Employer must elect to take into account the Employee’s entire Plan Year Compensation or to limit Compensation to the portion of the Plan Year in which the Employee actually is a Participant.

3.03 MATCHING CONTRIBUTIONS. If the Plan includes a 401(k) arrangement, the Employer in its Adoption Agreement must elect the type(s) of matching contributions, the time period applicable to any matching contribution formula, and as applicable, the amount of matching contributions and the Plan limitations and restrictions, if any, which apply to matching contributions.

3.04 EMPLOYER CONTRIBUTION ALLOCATION.

(A)  Method of Allocation. The Employer in its Adoption Agreement must specify, subject to this Section 3.04, the manner of allocating Employer contributions to the Trust. For purposes of this Section 3.04, Employer contributions include as applicable, the Employer’s nonelective contributions, money purchase pension and target benefit contributions, but do not include deferral contributions or, except under Section 3.04(B), matching contributions.

(B)  Compensation Taken into Account. The Employer in its Adoption Agreement Section 1.07 must specify the Compensation the Plan Administrator is to take into account in allocating an Employer contribution to a Participant’s Account. For the Plan Year in which the Employee first becomes a Participant in the Plan (or in any portion of the Plan), the Employer may elect to take into account the Employee’s entire Plan Year Compensation or to limit Compensation to the portion of the Plan Year in which the Employee actually is a Participant. For all other Plan Years, the Plan Administrator will take into account only the Compensation determined for the portion of the Plan Year in which the Employee actually is a Participant. The Plan Administrator must take into account the Employee’s entire Compensation for the Plan Year to determine whether the Plan satisfies the top-heavy minimum allocation requirements of Article XII. The

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Employer, in its Adoption Agreement, may elect to measure Compensation for allocating its Employer contribution for a Plan Year on the basis of a specified period other than the Plan Year.

(C)  Top-Heavy Minimum Allocation. Unless the Employer in an Addendum to its Adoption Agreement elects to satisfy any top-heavy minimum allocation requirement in another plan (not maintained under this basic plan document), the Employer in this Plan must satisfy the top-heavy requirements of Article XII.

(D)  Allocation Conditions. Subject to any restoration allocation required under the Plan, the Plan Administrator will allocate and credit Employer contributions to the Account of each Participant who satisfies the allocation conditions of Section 3.06.

(E)  Alternative Allocation Formulas. The Plan Administrator will allocate Employer contributions for the Plan Year or other applicable period in accordance with the allocation formula the Employer elects in its Adoption Agreement. The Plan Administrator, in allocating under any allocation formula which is based in whole or in part on Compensation, only will take into account Compensation of those Participants entitled to an allocation.

The Employer in its Adoption Agreement must elect, one or more as applicable of the following allocation formulas:

(1)  Nonintegrated (pro rata) allocation formula. The Plan Administrator will allocate the Employer contributions for a Plan Year in the same ratio that each Participant’s Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year.

(2)  Two-tiered permitted disparity allocation formula. Under the first tier, the Plan Administrator will allocate the Employer contributions for a Plan Year in the same ratio that each Participant’s Compensation plus Excess Compensation (as defined in Adoption Agreement Section 3.04) for the Plan Year bears to the total Compensation plus Excess Compensation of all Participants for the Plan Year. The allocation under this first tier, as a percentage of each Participant’s Compensation plus Excess Compensation, must not exceed the applicable percentage (5.7%, 5.4% or 4.3%) listed under Section 3.04(D)(4).

Under the second tier, the Plan Administrator will allocate any remaining Employer contributions for a Plan Year in the same ratio that each Participant’s Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year.

(3)  Four-tiered permitted disparity allocation formula. Under the first tier, the Plan Administrator will allocate the Employer contributions for a Plan Year in the same ratio that each Participant’s Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year, but not exceeding 3% of each Participant’s Compensation. Solely for purposes of this first tier allocation, a “Participant” means, in addition to any Participant who satisfies the allocation conditions of Section 3.06 for the Plan Year, any other Participant entitled to a top-heavy minimum allocation under the Plan.

Under the second tier, the Plan Administrator will allocate the Employer contributions for a Plan Year in the same ratio that each Participant’s Excess Compensation (as defined in Adoption Agreement Section 3.04) for the Plan Year bears to the total Excess Compensation of all Participants for the Plan Year, but not exceeding 3% of each Participant’s Excess Compensation.

Under the third tier, the Plan Administrator will allocate the Employer contributions for a Plan Year in the same ratio that each Participant’s Compensation plus Excess Compensation for the Plan Year bears to the total Compensation plus Excess Compensation of all Participants for the Plan Year. The allocation under this third tier, as a percentage of each Participant’s Compensation plus Excess Compensation, must not exceed the applicable percentage (2.7%, 2.4% or 1.3%) listed under Section 3.04(D)(4).

Under the fourth tier, the Plan Administrator will allocate any remaining Employer contributions for a Plan Year, in the same ratio that each Participant’s Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year.

(4)  Maximum disparity table. For purposes of the permitted disparity allocation formulas under this Section 3.04, the applicable percentage is:

Integration level % of taxable wage base	Applicable % for 2-tiered formula		Applicable % for 4-tiered formula
100%	5.7	%	2.7	%
More than 80% but less than 100%	5.4	%	2.4	%
More than 20% (but not less than $10,001) and not more than 80%	4.3	%	1.3	%
20% (or $10,000, if greater) or less	5.7	%	2.7	%

(5)  Overall permitted disparity limits.

(i)  Annual overall permitted disparity limit. Notwithstanding Sections 3.04(D)(2) and (3), for any Plan Year the Plan benefits any Participant who benefits under another qualified plan or under a simplified employee pension plan (as defined in Code §408(k)) maintained by the Employer that provides for permitted disparity (or imputes disparity), the Plan Administrator will allocate Employer contributions to the Account of each Participant in the same ratio that each Participant’s Compensation bears to the total Compensation of all Participants for the Plan Year.

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(ii)  Cumulative permitted disparity limit. Effective for Plan Years beginning after December 31, 1994, the cumulative permitted disparity limit for a Participant is 35 total cumulative permitted disparity years. “Total cumulative permitted disparity years” means the number of years credited to the Participant for allocation or accrual purposes under the Plan, any other qualified plan or simplified employee pension plan (whether or not terminated) ever maintained by the Employer. For purposes of determining the Participant’s cumulative permitted disparity limit, the Plan Administrator will treat all years ending in the same calendar year as the same year. If the Participant has not benefited under a defined benefit plan or under a target benefit plan of the Employer for any year beginning after December 31, 1993, the Participant does not have a cumulative permitted disparity limit.

For purposes of this Section 3.04(D)(5), a Participant “benefits” under the Plan for any Plan Year during which the Participant receives, or is deemed to receive, a contribution allocation in accordance with Treas. Reg. §1.410(b)-3(a).

(6)  Uniform points allocation formula. The Plan Administrator will allocate the Employer contributions for a Plan Year in the same ratio that each Participant’s points (as elected in Adoption Agreement Section 3.04) bear to the total points of all Participants for the Plan Year.

(7)  Incorporation of contribution formula. The Plan Administrator will allocate the Employer’s contributions for a Plan Year in accordance with the contribution formula the Employer has elected under Section 3.01.

(8)  Target benefit allocation formula. The Plan Administrator will allocate the Employer contributions for a Plan Year as provided in the Employer’s target benefit Adoption Agreement.

(9)  Davis-Bacon contract allocation formula. The Plan Administrator will allocate the Employer contributions for a Plan Year in accordance with the applicable Davis-Bacon contract pursuant to which the Employer has made its contributions for the Plan Year. The Employer’s contributions will take into account each Participant’s hourly rate, employment category, employment classification and such other factors the Davis-Bacon contract may specify. For purposes of the Plan, “Davis-Bacon contract” includes a contract under any state prevailing wage law.

(F)  Qualified Nonelective Contributions. The Employer operationally may designate all or any portion of its nonelective contributions as a qualified nonelective contribution. The Employer, to facilitate the Plan Administrator’s correction of test failures under Sections 14.08, 14.09 and 14.10, also may make qualified nonelective contributions to the Plan irrespective of whether the Employer in its Adoption Agreement has elected to provide nonelective contributions. The Employer in its Adoption Agreement must elect whether the Plan Administrator will allocate the Employer contributions designated as a qualified nonelective contribution to all Participants or solely to Nonhighly Compensated Employee Participants. The Employer operationally must elect whether the Plan Administrator will allocate qualified nonelective contributions: (1) to eligible Participants pro rata in relation to Compensation; (2) to eligible Participants in the same amount without regard to Compensation (flat dollar); or (3) under the reverse allocation or other similar method. Under the reverse allocation method, the Plan Administrator, subject to Section 3.06, will allocate a qualified nonelective contribution first to the Nonhighly Compensated Employee Participant(s) with the lowest Compensation for the Plan Year not exceeding the Maximum Permissible Amount for each Participant, with any remaining amounts allocated to the next highest paid Nonhighly Compensated Employee Participant(s) not exceeding his/her Maximum Permissible Amount and continuing in this manner until the Plan Administrator has fully allocated the qualified nonelective contribution.

(G)  Qualified Replacement Plan. The Employer may establish or maintain this Plan as a qualified replacement plan as described in Code §4980 under which the Plan may receive a transfer from a terminating qualified plan the Employer also maintains. The Plan Administrator will credit the transferred amounts to a suspense account under the Plan and thereafter the Plan Administrator will allocate the transferred amounts under this Section 3.04(G) in the same manner as the Plan Administrator allocates Employer nonelective contributions, unless the Employer specifies in an Addendum to its Adoption Agreement: (1) to apply such transferred amounts to the Plan’s administrative expenses; or (2) if the Plan includes a 401(k) arrangement, the Employer in its Addendum designates such transferred amounts as matching contributions.

3.05 FORFEITURE ALLOCATION. The amount of a Participant’s Account forfeited under the Plan is a Participant forfeiture. The Plan Administrator, subject to Section 3.06, will allocate Participant forfeitures at the time and in the manner the Employer specifies in its Adoption Agreement. The Plan Administrator will continue to hold the undistributed, non-Vested portion of the Account of a Participant who has separated from Service solely for his/her benefit until a forfeiture occurs at the time specified in Section 5.09 or if applicable, until the time specified in Section 9.11. Except as provided under Section 5.04, a Participant will not share in the allocation of a forfeiture of any portion of his/her Account. If the Plan includes a 401(k) arrangement, the Plan Administrator first will determine if a Participant’s forfeitures are attributable to nonelective or to matching contributions, and the Plan Administrator then will allocate the forfeitures in the manner the Employer has elected in its Adoption Agreement. If the Employer elects to allocate forfeitures to reduce nonelective or matching contributions and the forfeitures exceed the amount of the contribution to which the Plan Administrator will apply the forfeitures, the Plan Administrator will allocate the remaining forfeitures as an additional discretionary nonelective or discretionary matching contribution or the Plan Administrator will apply the forfeitures to the Employer’s nonelective or matching contribution in the succeeding Plan Year. A Participant’s forfeiture is attributable to matching contributions if the forfeiture is: (1) a non-Vested matching Account forfeited in accordance with Section 5.09 or, if applicable, Section

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9.11; (2) a non-Vested excess aggregate contribution (adjusted for earnings) forfeited in correcting for nondiscrimination failures under Section 14.09 or Section 14.10; or (3) an “associated matching contribution,” which includes any Vested or non-Vested matching contribution (adjusted for earnings) made with respect to elective deferrals or Employee contributions the Plan Administrator distributes in correction of Code §402(g), Code §415 or nondiscrimination failures under Sections 14.07, 14.08, 14.09 or 14.10. An Employee forfeits an associated matching contribution unless the matching contribution is a Vested excess aggregate contribution distributed in accordance with Sections 14.09 or 14.10.

3.06 ALLOCATION CONDITIONS. The Plan Administrator will determine the allocation conditions which apply to Employer contributions (including matching contributions) and Participant forfeitures on the basis of the Plan Year (or on any other basis representing a reasonable division of the Plan Year) in accordance with the Employer’s elections in its Adoption Agreement. A Participant does not accrue an Employer contribution with respect to a Plan Year or other applicable period until the Participant satisfies the allocation conditions described in this Section 3.06. The Plan under a 401(k) arrangement may not impose any allocation conditions with respect to deferral contributions, safe harbor contributions or SIMPLE contributions.

(A)  Hours of Service Requirement. Except as required to satisfy the top-heavy minimum allocation requirement of Article XII, the Plan Administrator will not allocate any portion of an Employer contribution for a Plan Year to any Participant’s Account if the Participant does not complete the applicable minimum Hours of Service or consecutive calendar days of employment requirement the Employer specifies in its Adoption Agreement for the relevant period. The Employer in its Standardized Adoption Agreement must elect whether to require a Participant to complete during a Plan Year 501 Hours of Service or to be employed for at least 91 consecutive calendar days under the Elapsed Time Method, to share in the allocation of Employer contributions for that Plan Year where the Participant is not employed by the Employer on the Accounting Date of that Plan Year, including the Plan Year in which the Employer terminates the Plan.

(B)  “Last Day” Employment Requirement. If the Plan is a Standardized Plan, a Participant who is employed by the Employer on the Accounting Date of a Plan Year will share in the allocation of Employer contributions for that Plan Year without regard to the Participant’s Hours of Service completed during that Plan Year. If the Plan is a Nonstandardized Plan, the Employer must specify in its Adoption Agreement whether the Participant will benefit under the Plan if the Participant is not employed by the Employer on the Accounting Date of the Plan Year or other specified date. If the Plan is a Nonstandardized money purchase Plan or target benefit Plan, the Plan conditions Employer contribution allocations on a Participant’s employment with the Employer on the last day of the Plan Year for the Plan Year in which the Employer terminates the Plan.

(C)  Death, Disability or Normal Retirement Age. Unless the Employer otherwise elects in its Adoption Agreement, any allocation condition elected under Adoption Agreement Section 3.06 does not apply for a Plan Year if a Participant incurs a Separation from Service during the Plan Year on account of the Participant’s death, Disability or attainment of Normal Retirement Age in the current Plan Year or on account of the Participant’s Disability or attainment of Normal Retirement Age in a prior Plan Year.

(D)  Other Conditions. In allocating Employer contributions under the Plan, the Plan Administrator will not apply any other conditions except those the Employer elects in its Adoption Agreement or otherwise as the Plan may require.

(E)  Suspension of Allocation Conditions Under a Nonstandardized Plan. The suspension provisions of this Section 3.06(E) do not apply unless the Employer elects in its Nonstandardized Adoption Agreement to apply them. If Section 3.06(E) applies, the Plan suspends for a Plan Year the Adoption Agreement Section 3.06 allocation conditions if the Plan fails in that Plan Year to satisfy coverage under the Ratio Percentage Test, unless in an Addendum to its Adoption Agreement, the Employer specifies the Plan Administrator will apply this Section 3.06(E) using the Average Benefit Percentage Test described in Code §410(b)(2). A Plan satisfies coverage under the Ratio Percentage Test if, on the last day of the Plan Year, the Plan’s benefiting ratio of the Nonhighly Compensated Includible Employees is at least 70% of the benefiting ratio of the Highly Compensated Includible Employees.

The benefiting ratio of the Nonhighly Compensated Includible Employees is the number of Nonhighly Compensated Includible Employees benefiting under the Plan over the number of the Includible Employees who are Nonhighly Compensated Employees. “Includible” Employees are all Employees other than: (1) those Employees excluded from participating in the Plan for the entire Plan Year by reason of the collective bargaining unit or the nonresident alien exclusions under Code §410(b)(3) or by reason of the age and service requirements of Article II; and (2) those Employees who incur a Separation from Service during the Plan Year and for the Plan Year fail to complete more than 500 Hours of Service or at least 91 consecutive calendar days under the Elapsed Time Method.

For purposes of coverage, an Employee is benefiting under the Plan on a particular date if, under Section 3.04 of the Plan, he/she is entitled to an Employer contribution or to a Participant forfeiture allocation for the Plan Year.

If this Section 3.06(E) applies for a Plan Year, the Plan Administrator will suspend the allocation conditions for the Nonhighly Compensated Includible Employees who are Participants, beginning first with the Includible Employee(s) employed by the Employer on the last day of the Plan Year, then the Includible Employee(s) who have the latest Separation from Service during the Plan Year, and continuing to suspend the allocation conditions for each Includible Employee who incurred an earlier Separation from Service, from the latest to the earliest Separation from Service date, until the Plan satisfies coverage for the Plan Year. If two or more Includible Employees have a Separation from Service on the same day, the Plan Administrator will suspend the allocation conditions for all such Includible Employees, irrespective of whether the Plan can satisfy coverage by accruing

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benefits for fewer than all such Includible Employees. If the Plan for any Plan Year suspends the allocation conditions for an Includible Employee, that Employee will share in the allocation for that Plan Year of the Employer contribution and Participant forfeitures, if any, without regard to whether he/she has satisfied the allocation conditions of this Section 3.06.

If the Plan includes Employer matching contributions subject to ACP testing, this Section 3.06(E) applies separately to the Code §401(m) portion of the Plan.

Part 2. Limitations On Allocations: Sections 3.07 through 3.18

[Note: Sections 3.07 through 3.10 apply only to Participants in this Plan who do not participate, and who have never participated, in another qualified plan, individual medical account (as defined in Code §415(l)(2)), simplified employee pension plan (as defined in Code §408(k)) or welfare benefit fund (as defined in Code §419(e)) maintained by the Employer, which provides an Annual Addition.]

3.07 ANNUAL ADDITIONS LIMITATION. The amount of Annual Additions which the Plan Administrator may allocate under this Plan to a Participant’s Account for a Limitation Year may not exceed the Maximum Permissible Amount. If the Annual Additions the Plan Administrator otherwise would allocate under the Plan to a Participant’s Account would for the Limitation Year exceed the Maximum Permissible Amount, the Plan Administrator will not allocate the Excess Amount, but will instead take any reasonable, uniform and nondiscriminatory action the Plan Administrator determines necessary to avoid allocation of an Excess Amount. Such actions include, but are not limited to, those described in this Section 3.07. If the Plan includes a 401(k) arrangement, the Plan Administrator may apply this Section 3.07 in a manner which maximizes the allocation to a Participant of Employer contributions (exclusive of the Participant’s deferral contributions). Notwithstanding any contrary Plan provision, the Plan Administrator, for the Limitation Year, may: (1) suspend or limit a Participant’s additional Employee contributions or deferral contributions; (2) notify the Employer to reduce the Employer’s future Plan contribution(s) as necessary to avoid allocation to a Participant of an Excess Amount; or (3) suspend or limit the allocation to a Participant of any Employer contribution previously made to the Plan (exclusive of deferral contributions) or of any Participant forfeiture. If an allocation of Employer contributions previously made (excluding a Participant’s deferral contributions) or of Participant forfeitures would result in an Excess Amount to a Participant’s Account, the Plan Administrator will allocate the Excess Amount to the remaining Participants who are eligible for an allocation of Employer contributions for the Plan Year in which the Limitation Year ends. The Plan Administrator will make this allocation in accordance with the Plan’s allocation method as if the Participant whose Account otherwise would receive the Excess Amount, is not eligible for an allocation of Employer contributions. If the Plan Administrator allocates to a Participant an Excess Amount, Plan Administrator must dispose of the Excess Amount in accordance with Section 3.10 (relating to certain “reasonable errors” and allocation of forfeitures) or, if Section 3.10 does not apply, the Plan Administrator will dispose of the Excess Amount under Section 9.12.

3.08 ESTIMATING COMPENSATION. Prior to the determination of the Participant’s actual Compensation for a Limitation Year, the Plan Administrator may determine the Maximum Permissible Amount on the basis of the Participant’s estimated annual Compensation for such Limitation Year. The Plan Administrator must make this determination on a reasonable and uniform basis for all Participants similarly situated. The Plan Administrator must reduce the allocation of any Employer contributions (including any allocation of forfeitures) based on estimated annual Compensation by any Excess Amounts carried over from prior Limitation Years.

3.09 DETERMINATION BASED ON ACTUAL COMPENSATION. As soon as is administratively feasible after the end of the Limitation Year, the Plan Administrator will determine the Maximum Permissible Amount for the Limitation Year on the basis of the Participant’s actual Compensation for such Limitation Year.

3.10 DISPOSITION OF ALLOCATED EXCESS AMOUNT.  If, because of a reasonable error in estimating a Participant’s actual Limitation Year Compensation, because of the allocation of forfeitures, because of a reasonable error in determining a Participant’s deferral contributions or because of any other facts and circumstances the Internal Revenue Service (“Revenue Service”) considers to constitute reasonable error, a Participant receives an allocation of an Excess Amount for a Limitation Year, the Plan Administrator will dispose of such Excess Amount as follows:

(a)  The Plan Administrator first will return to the Participant any Employee contributions (adjusted for earnings) and then any Participant deferral contributions (adjusted for earnings) to the extent necessary to reduce or eliminate the Excess Amount.

(b)  If, after the application of Paragraph (a), an Excess Amount still exists and the Plan covers the Participant at the end of the Limitation Year, the Plan Administrator then will use the Excess Amount(s) to reduce future Employer contributions (including any allocation of forfeitures) under the Plan for the next Limitation Year and for each succeeding Limitation Year, as is necessary, for the Participant. If the Employer’s Plan is a profit sharing plan, a Participant who is a Highly Compensated Employee may elect to limit his/her Compensation for allocation purposes to the extent necessary to reduce his/her allocation for the Limitation Year to the Maximum Permissible Amount and to eliminate the Excess Amount.

(c)  If, after the application of Paragraph (a), an Excess Amount still exists and the Plan does not cover the Participant at the end of the Limitation Year, the Plan Administrator then will hold the Excess Amount unallocated in a suspense account. The Plan Administrator will apply the suspense account to reduce Employer Contributions (including the allocation of forfeitures) for all remaining Participants in the next Limitation Year, and in each succeeding Limitation Year if necessary. Neither the Employer nor any Employee may contribute to the Plan for any

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Limitation Year in which the Plan is unable to allocate fully a suspense account maintained pursuant to this Paragraph (c). Amounts held unallocated in a suspense account will not share in any allocation of Trust Fund net income, gain or loss.

(d)  The Plan Administrator under Paragraphs (b) or (c) will not distribute any Excess Amount(s) to Participants or to former Participants.

[Note: Sections 3.11 through 3.15 apply only to Participants who, in addition to this Plan, participate in one or more M&P defined contribution plans (including Paired Plans), welfare benefit funds (as defined in Code §419(e)), individual medical accounts (as defined in Code §415(l)(2), or simplified employee pension plans (as defined in Code §408(k)) maintained by the Employer and which provide an Annual Addition during the Limitation Year (collectively “Code §415 aggregated plans”).]

3.11  COMBINED PLANS ANNUAL ADDITIONS LIMITATION. The amount of Annual Additions which the Plan Administrator may allocate under this Plan to a Participant’s Account for a Limitation Year may not exceed the Maximum Permissible Amount, reduced by the sum of any Annual Additions allocated to the Participant’s accounts for the same Limitation Year under the Code §415 aggregated plans. If the amount the Employer otherwise would allocate to the Participant’s Account under this Plan would cause the Annual Additions for the Limitation Year to exceed this Section 3.11 combined plans limitation, the Employer will reduce the amount of its allocation to that Participant’s Account in the manner described in Section 3.07, so the Annual Additions under all of the Code §415 aggregated plans for the Limitation Year will equal the Maximum Permissible Amount. If the Plan Administrator allocates to a Participant an amount attributed to this Plan under Section 3.14 which exceeds this Section 3.11 combined plans limitation, the Plan Administrator must dispose of the Excess Amount in accordance with Section 3.15 (relating to certain “reasonable errors” and allocation of forfeitures) or, if Section 3.15 does not apply, the Plan Administrator will dispose of the Excess Amount under Section 9.12.

3.12  ESTIMATING COMPENSATION. Prior to the determination of the Participant’s actual Compensation for the Limitation Year, the Plan Administrator may determine the Section 3.11 combined plans limitation on the basis of the Participant’s estimated annual Compensation for such Limitation Year. The Plan Administrator will make this determination on a reasonable and uniform basis for all Participants similarly situated. The Plan Administrator must reduce the allocation of any Employer contribution (including the allocation of Participant forfeitures) based on estimated annual Compensation by any Excess Amounts carried over from prior years.

3.13  DETERMINATION BASED ON ACTUAL COMPENSATION. As soon as is administratively feasible after the end of the Limitation Year, the Plan Administrator will determine the Section 3.11 combined plans limitation on the basis of the Participant’s actual Compensation for such Limitation Year.

3.14  ORDERING OF ANNUAL ADDITION ALLOCATIONS. If, because of a reasonable error in estimating a Participant’s actual Limitation Year Compensation, because of the allocation of forfeitures, because of a reasonable error in determining a Participant’s deferral contributions or because of any other facts and circumstances the Revenue Service considers to constitute reasonable error, a Participant’s Annual Additions under this Plan and the Code §415 aggregated plans result in an Excess Amount, such Excess Amount will consist of the Amounts last allocated. The Plan Administrator will determine the Amounts last allocated by treating the Annual Additions attributable to a simplified employee pension as allocated first, followed by allocation to a welfare benefit fund or individual medical account, irrespective of the actual allocation date. If the Plan Administrator allocates an Excess Amount to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, unless the Employer specifies otherwise in an Addendum to its Adoption Agreement, the Excess Amount attributed to this Plan will equal the product of:

(a)  the total Excess Amount allocated as of such date, multiplied by

(b)  the ratio of (i) the Annual Additions allocated to the Participant as of such date for the Limitation Year under the Plan to (ii) the total Annual Additions allocated to the Participant as of such date for the Limitation Year under this Plan and the Code §415 aggregated plans.

3.15  DISPOSITION OF ALLOCATED EXCESS AMOUNT ATTRIBUTABLE TO PLAN. The Plan Administrator will dispose of any allocated Excess Amounts described in and attributed to this Plan under Section 3.14 as provided in Section 3.10 or, as applicable under Section 9.12.

[Note: Section 3.16 applies only to Participants who, in addition to this Plan, participate in one or more qualified defined contribution plans maintained by the Employer during the Limitation Year, but which are not M&P plans described in Sections 3.11 through 3.15.]

3.16 OTHER DEFINED CONTRIBUTION PLANS LIMITATION. If a Participant is a participant in another defined contribution plan maintained by the Employer, but which plan is not an M&P plan described in Sections 3.11 through 3.15, the Plan Administrator must limit the allocation to the Participant of Annual Additions under this Plan as provided in Sections 3.11 through 3.15, as though the other defined contribution plan were an M&P plan, unless the Employer specifies otherwise in an Addendum to its Adoption Agreement.

3.17 DEFINED BENEFIT PLAN LIMITATION. If the Employer maintains a defined benefit plan, or has ever maintained a defined benefit plan which the Employer has terminated, then the sum of the defined benefit plan fraction and the defined contribution plan fraction for any Participant for any Limitation Year beginning before January 1, 2000, must not exceed 1.0. The 1.0 limitation of the immediately preceding sentence does not apply for Limitation Years beginning after December 31, 1999, unless the Employer in Appendix B to its Adoption Agreement specifies a later effective date. To the extent necessary to satisfy the 1.0 limitation, if the Employer still

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maintains the defined benefit plan as an active plan, the Employer in its Adoption Agreement Appendix B will elect whether to reduce the Participant’s projected annual benefit under the defined benefit plan under which the Participant participates, or to reduce its contribution or allocation on behalf of the Participant to the defined contribution plan(s) under which the Participant participates. If the Employer has frozen or terminated the defined benefit plan, the Employer will reduce its contribution or allocation on behalf of the Participant to the defined contribution plan(s) under which the Participant participates. The Employer must provide in Appendix B to its Adoption Agreement the manner in which the Plan will satisfy the top-heavy requirements of Code §416 after taking into account the existence (or prior maintenance) of the defined benefit plan.

3.18 DEFINITIONS - ARTICLE III.  For purposes of Article III:

(a)  “Annual Additions” means the sum of the following amounts allocated to a Participant’s Account for a Limitation Year: (i) all Employer contributions (including Participant deferral contributions); (ii) all forfeitures; (iii) all Employee contributions; (iv) Excess Amounts reapplied to reduce Employer contributions under Section 3.10 or Section 3.15; (v) amounts allocated after March 31, 1984, to an individual medical account (as defined in Code §415(l)(2)) included as part of a pension or annuity plan maintained by the Employer; (vi) contributions paid or accrued after December 31, 1985, for taxable years ending after December 31, 1985, attributable to post-retirement medical benefits allocated to the separate account of a key-employee (as defined in Code §419A(d)(3)) under a welfare benefit fund (as defined in Code §419(e)) maintained by the Employer; (vii) amounts allocated under a Simplified Employee Pension Plan; and (viii) corrected excess contributions described in Code §401(k) and corrected excess aggregate contributions described in Code §401(m). Excess deferrals described in Code §402(g), which the Plan Administrator corrects by distribution by April 15 of the following calendar year, are not Annual Additions.

(b)  “Compensation” for purposes of applying the limitations of Part 2 of this Article III, means Compensation as defined in Section 1.07, except, for Limitation Years beginning after December 31, 1997, Compensation includes Elective Contributions, irrespective of whether the Employer has elected to include these amounts as Compensation under Section 1.07 of its Adoption Agreement and any exclusion the Employer has elected in Section 1.07 of the Adoption Agreement does not apply.

(c)  “Employer” means the Employer and any Related Employer. Solely for purposes of applying the limitations of Part 2 of this Article III, the Plan Administrator will determine Related Employer by modifying Code §§414(b) and (c) in accordance with Code §415(h).

(d)  “Excess Amount” means the excess of the Participant’s Annual Additions for the Limitation Year over the Maximum Permissible Amount.

(e)  “Limitation Year” means the period the Employer elects in its Adoption Agreement Section 1.24. All qualified plans of the Employer must use the same Limitation Year. If the Employer amends the Limitation Year to a different 12-consecutive month period, the new Limitation Year must begin on a date within the Limitation Year for which the Employer makes the amendment, creating a short Limitation Year.

(f)  “M&P Plan” means a prototype plan the form of which is the subject of a favorable opinion letter (or prior to Revenue Procedure 2000-20, a favorable notification or favorable opinion letter) from the Revenue Service.

(g)  “Maximum Permissible Amount” means the lesser of: (i) $30,000 (or, if greater, the $30,000 amount as adjusted under Code §415(d)), or (ii) 25% of the Participant’s Compensation for the Limitation Year. If there is a short Limitation Year because of a change in Limitation Year, the Plan Administrator will multiply the $30,000 (or adjusted) limitation by the following fraction:

Number of months in the short Limitation Year

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The 25% limitation does not apply to any contribution for medical benefits within the meaning of Code §401(h) or Code §419A(f)(2) which otherwise is an Annual Addition.

(h)  “Defined contribution plan” means a retirement plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which the plan may allocate to such participant’s account. The Plan Administrator must treat all defined contribution plans (whether or not terminated) maintained by the Employer as a single plan. Solely for purposes of the limitations of Part 2 of this Article III, employee contributions made to a defined benefit plan maintained by the Employer is a separate defined contribution plan. The Plan Administrator also will treat as a defined contribution plan an individual medical account (as defined in Code §415(l)(2)) included as part of a defined benefit plan maintained by the Employer and, for taxable years ending after December 31, 1985, a welfare benefit fund under Code §419(e) maintained by the Employer to the extent there are post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code §419A(d)(3)).

(i)  “Defined benefit plan” means a retirement plan which does not provide for individual accounts for Employer contributions. All defined benefit plans (whether or not terminated) maintained by the Employer are a single plan.

[Note: The definitions in Paragraphs (j), (k) and (l) apply only if the limitation described in Section 3.17 applies to the Plan.]

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(j)  “Defined benefit plan fraction” means the following fraction:

Projected annual benefit of the Participant under the
defined benefit plan(s)

The lesser of: (i) 125% (subject to the “100%
limitation” in Paragraph (l)) of the dollar limitation in
effect under Code §415(b)(1)(A) for the Limitation
Year, or (ii) 140% of the Participant’s average
Compensation for his/her high three (3) consecutive
Years of Service

To determine the denominator of this fraction, the Plan Administrator will make any adjustment required under Code §415(b) and will determine a Year of Service, unless the Employer provides otherwise in an Addendum to its Adoption Agreement, as a Plan Year in which the Employee completed at least 1,000 Hours of Service. The “projected annual benefit” is the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if the defined benefit plan expresses such benefit in a form other than a straight life annuity or qualified joint and survivor annuity) of the Participant under the terms of the defined benefit plan on the assumptions he/she continues employment until his/her normal retirement age (or current age, if later) as stated in the defined benefit plan, his/her compensation continues at the same rate as in effect in the Limitation Year under consideration until the date of his/her normal retirement age and all other relevant factors used to determine benefits under the defined benefit plan remain constant as of the current Limitation Year for all future Limitation Years.

Current Accrued Benefit. If the Participant accrued benefits in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the dollar limitation used in the denominator of this fraction will not be less than the Participant’s Current Accrued Benefit. A Participant’s Current Accrued Benefit is the sum of the annual benefits under such defined benefit plans which the Participant had accrued as of the end of the 1986 Limitation Year (the last Limitation Year beginning before January 1, 1987), determined without regard to any change in the terms or conditions of the defined benefit plan made after May 5, 1986, and without regard to any cost of living adjustment occurring after May 5, 1986. This Current Accrued Benefit rule applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Code §415 as in effect at the end of the 1986 Limitation Year.

(k)  “Defined contribution plan fraction” means the following fraction:

The sum, as of the close of the Limitation Year, of the
Annual Additions for all Limitation Years
to the Participant’s Account under
the defined contribution plan(s)

The sum of the lesser of the following amounts
determined for the Limitation Year and for each prior
Limitation Year of service with the Employer: (i)
125% (subject to the “100% limitation” in Paragraph
(l)) of the dollar limitation in effect under Code
§415(c)(1)(A) for the Limitation Year (determined
without regard to the special dollar limitations for
employee stock ownership plans), or (ii) 35% of the
Participant’s Compensation for the Limitation Year

For purposes of determining the defined contribution plan fraction, the Plan Administrator will not recompute Annual Additions in Limitation Years beginning prior to January 1, 1987, to treat all Employee contributions as Annual Additions. If the Plan satisfied Code §415 for Limitation Years beginning prior to January 1, 1987, the Plan Administrator will redetermine the defined contribution plan fraction and the defined benefit plan fraction as of the end of the 1986 Limitation Year, in accordance with this Section 3.18. If the sum of the redetermined fractions exceeds 1.0, the Plan Administrator will subtract permanently from the numerator of the defined contribution plan fraction an amount equal to the product of: (1) the excess of the sum of the fractions over 1.0, times (2) the denominator of the defined contribution plan fraction. In making the adjustment, the Plan Administrator must disregard any accrued benefit under the defined benefit plan which is in excess of the Current Accrued Benefit. This Plan continues any transitional rules applicable to the determination of the defined contribution plan fraction under the Plan as of the end of the 1986 Limitation Year.

(l)  “100% limitation” means the limitation in Code §416(h) which applies if the plan is top-heavy. If the 100% limitation applies, the Plan Administrator must determine the denominator of the defined benefit plan fraction and the denominator of the defined contribution plan fraction by substituting 100% for 125%. If this Plan is a Standardized Plan, the 100% limitation applies in all Limitation Years, unless the Employer specifies otherwise in an Addendum to its Adoption Agreement. If the Employer overrides the 100% limitation under a Standardized Plan, the Employer must specify in its Addendum the manner in which the Plan satisfies the extra minimum benefit requirement of Code §416(h) and the 100% limitation must continue to apply if the Plan’s top-heavy ratio exceeds 90%. If this Plan is a Nonstandardized Plan, the 100% limitation applies only if: (i) the Plan’s top-heavy ratio exceeds 90%; or (ii) the Plan’s top-heavy ratio is greater than 60%, and the Employer does not specify in its Adoption Agreement to provide extra minimum benefits which satisfy Code §416(h)(2).

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ARTICLE IV
PARTICIPANT CONTRIBUTIONS

4.01  PARTICIPANT CONTRIBUTIONS. For purposes of this Article IV, Participant contributions means all Employee contributions described in Section 4.02, deductible Participant contributions described in Section 4.03 (“DECs”) and rollover contributions described Section 4.04.

4.02  EMPLOYEE CONTRIBUTIONS. An Employee contribution is a nondeductible contribution which a Participant makes to the Trust as permitted under this Section 4.02. A deferral contribution made by a Participant under a 401(k) arrangement is not an Employee contribution. Employee contributions must satisfy the nondiscrimination requirements of Code §401(m). See Section 14.09. An Employer must elect in its Adoption Agreement whether to permit Employee contributions. If the Employer elects to permit Employee contributions, the Employer also must specify in its Adoption Agreement any conditions or limitations which may apply to Employee contributions. If the Employer permits Employee contributions, the Employer operationally will determine if a Participant will make Employee contributions through payroll deduction or by other means.

The Employer must elect in its Adoption Agreement whether the Employer will make matching contributions with respect to any Employee contributions and any conditions or limitations which may apply to those matching contributions. Any matching contribution must satisfy the nondiscrimination requirements of Code §401(m). See Section 14.09.

4.03  DECs. A DEC is a deductible Participant contribution made to the Plan for a taxable year commencing prior to 1987. If a Participant has made DECs to the Plan, the Plan Administrator must maintain a separate Account for the Participant’s DECs as adjusted for earnings, including DECs which are part of a rollover contribution described in Section 4.04. The DECs Account is part of the Participant’s Account for all purposes of the Plan, except for purposes of determining the top-heavy ratio under Article XII. The Plan Administrator may not use a Participant’s DECs Account to purchase life insurance on the Participant’s behalf.

4.04  ROLLOVER CONTRIBUTIONS. A rollover contribution is an amount of cash or property which the Code permits an eligible Employee or Participant to transfer directly or indirectly to this Plan from another qualified plan. A rollover contribution excludes Employee contributions, as adjusted for earnings. An Employer operationally and on a nondiscriminatory basis, may elect to permit or not to permit rollover contributions to this Plan or may elect to limit an eligible Employee’s right or a Participant’s right to make a rollover contribution. If an Employer permits rollover contributions, any Participant (or as applicable, any eligible Employee), with the Employer’s written consent and after filing with the Trustee the form prescribed by the Plan Administrator, may make a rollover contribution to the Trust. Before accepting a rollover contribution, the Trustee may require a Participant (or eligible Employee) to furnish satisfactory evidence the proposed transfer is in fact a “rollover contribution” which the Code permits an employee to make to a qualified plan. The Trustee, in its sole discretion, may decline to accept a rollover contribution of property which could: (1) generate unrelated business taxable income; (2) create difficulty or undue expense in storage, safekeeping or valuation; or (3) create other practical problems for the Trust. A rollover contribution is not an Annual Addition under Part 2 of Article III.

If an eligible Employee makes a rollover contribution to the Trust prior to satisfying the Plan’s eligibility conditions, the Plan Administrator and Trustee must treat the Employee as a limited Participant (as described in Rev. Rul. 96-48 or in any successor ruling). A limited Participant does not share in the Plan’s allocation of Employer contributions nor Participant forfeitures and may not make deferral contributions if the Plan includes a 401(k) arrangement until he/she actually becomes a Participant in the Plan. If a limited Participant has a Separation from Service prior to becoming a Participant in the Plan, the Trustee will distribute his/her rollover contributions Account to him/her in accordance with Article VI as if it were an Employer contributions Account.

4.05  PARTICIPANT CONTRIBUTIONS – VESTING. A Participant’s Participant contributions Account is, at all times, 100% Vested.

4.06  PARTICIPANT CONTRIBUTIONS – DISTRIBUTION. Subject to any contrary Employer election in its Adoption Agreement Appendix A, an Employee, after attaining age 70½ may elect to receive distribution prior to Separation from Service (“in-service distribution”) of all or any part of his/her Participant contributions Account. The Employer in its Adoption Agreement Section 6.01 must elect the additional in-service distribution election rights, if any, a Participant has with respect to his/her Participant contributions Account. For purposes of the Employer’s Adoption Agreement elections regarding in-service distribution of Participant contributions, a Participant’s Employee contributions also includes DECs. A Participant will not incur a forfeiture of any Account under the Plan solely as a result of the distribution of his/her Participant contributions.

The Trustee, following a Participant’s Separation from Service, will distribute to the Participant his/her Participant contributions Account in accordance with Article VI in the same manner as the Trustee distributes the Participant’s Employer contributions Account.

4.07  PARTICIPANT CONTRIBUTIONS- INVESTMENT AND ACCOUNTING. The Plan Administrator must maintain a separate Account in the name of each Participant to reflect his/her Participant contributions (including, if applicable, the different types of Participant contributions), as adjusted for earnings. The Trustee will invest all Participant contributions as part of the Trust Fund.

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ARTICLE V
VESTING

5.01  NORMAL/EARLY RETIREMENT AGE. The Employer in its Adoption Agreement must specify the Plan’s Normal Retirement Age. An Employer in its Adoption Agreement may specify an Early Retirement Age. A Participant’s Account Balance derived from Employer contributions is 100% Vested upon and after his/her attaining Normal Retirement Age (or if applicable, Early Retirement Age) if the Participant is employed by the Employer on or after that date.

5.02  PARTICIPANT DEATH OR DISABILITY. Unless the Employer elects otherwise in its Adoption Agreement, a Participant’s Account Balance derived from Employer contributions is 100% Vested if the Participant’s Separation from Service is a result of his/her death or his/her Disability.

5.03  VESTING SCHEDULE. Except as provided in Sections 5.01 and 5.02, for each Year of Service as described in Section 5.06, a Participant’s Vested percentage of his/her Account Balance derived from Employer contributions equals the percentage under the vesting schedule the Employer has elected in its Adoption Agreement.

For purposes of Adoption Agreement Section 5.03, “6-year graded,” “3-year cliff,” “7-year graded” or “5-year cliff” means an Employee’s Vested percentage, based on each included Year of Service, under the following applicable schedule:

6-year graded	7-year graded
0-1 year / 0%	0-2 years / 0%
2 years / 20%	3 years / 20%
3 years / 40%	4 years / 40%
4 years / 60%	5 years / 60%
5 years / 80%	6 years / 80%
6 years / 100%	7 years / 100%
3-year cliff	5-year cliff
0-2 years / 0%	0-4 years/ 0%
3 years / 100%	5 years / 100%

(A)  “Grossed-Up” Vesting Formula. If the Trustee makes a distribution (other than a cash-out distribution described in Section 5.04) to a partially-Vested Participant, and the Participant has not incurred a Forfeiture Break in Service at the relevant time, the provisions of this Section 5.03(A) apply to the Participant’s Account Balance. At any relevant time following the distribution, the Plan Administrator will determine the Participant’s Vested Account Balance derived from Employer contributions in accordance with the following formula: P(AB + D) - D.

To apply this formula, “P” is the Participant’s current vesting percentage at the relevant time, “AB” is the Participant’s Employer-derived Account Balance at the relevant time and “D” is the amount of the earlier distribution. If, under a restated Plan, the Plan has made distribution to a partially-Vested Participant prior to its restated Effective Date and is unable to apply the cash-out provisions of Section 5.04 to that prior distribution, this special vesting formula also applies to that Participant’s remaining Account Balance. The Employer, in an Addendum to its Adoption Agreement, may elect to modify this formula to read as follows: P(AB + (R x D)) - (R x D). For purposes of this alternative formula, “R” is the ratio of “AB” to the Participant’s Employer-derived Account Balance immediately following the earlier distribution.

(B)  Special Vesting Elections. The Employer in its Adoption Agreement may elect other specified vesting provisions which are consistent with Code §411 and applicable Treasury regulations.

5.04  CASH-OUT DISTRIBUTIONS TO PARTIALLY- VESTED PARTICIPANTS/ RESTORATION OF FORFEITED ACCOUNT BALANCE. If, pursuant to Article VI, a partially-Vested Participant receives a cash-out distribution before he/she incurs a Forfeiture Break in Service, the Participant will incur an immediate forfeiture of the non-Vested portion of his/her Account Balance. If a partially-Vested Participant’s Account is entitled to an allocation of Employer contributions or Participant forfeitures for the Plan Year in which he/she otherwise would incur a forfeiture by reason of a cash-out distribution, the Plan Administrator will apply the cash-out forfeiture rule as if the partially-Vested Participant received a cash-out distribution on the first day of the immediately following Plan Year. A partially-Vested Participant is a Participant whose Vested percentage determined under Section 5.03 is more than 0% but is less than 100%. A cash-out distribution is a distribution to the Participant (whether involuntary or with required consent as described in Article VI), of his/her entire Vested Account Balance due to the Participant’s Separation from Service.

(A)  Forfeiture Restoration and Conditions for Restoration. A partially-Vested Participant re-employed by the Employer after receiving a cash-out distribution of the Vested percentage of his/her Account Balance may repay to the Trust the entire amount of the cash-out distribution attributable to Employer contributions without any adjustment for gains and losses, unless the Participant no longer has a right to restoration under this Section 5.04(A). If a re-employed Participant repays his/her cash-out distribution, the Plan Administrator, subject to the conditions of this Section 5.04(A), must restore the Participant’s Account Balance attributable to Employer contributions to the same dollar amount as the dollar amount of his/her Account Balance on the Accounting Date, or other valuation date, immediately preceding the date of the cash-out distribution, unadjusted for any gains or losses occurring subsequent to that Accounting Date, or other valuation date. Restoration of the Participant’s Account Balance includes restoration of all Protected Benefits with respect to that restored Account Balance, in accordance with applicable Treasury regulations. The Plan Administrator will not restore a re-employed Participant’s Account Balance under this Section 5.04 (A) if:

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(1)  5 years have elapsed since the Participant’s first re-employment date with the Employer following the cash-out distribution;

(2)  The Participant is not in the Employer’s Service on the date the Participant repays his/her cash-out distribution; or

(3)  The Participant has incurred a Forfeiture Break in Service. This condition also applies if the Participant makes repayment within the Plan Year in which he/she incurs the Forfeiture Break in Service and that Forfeiture Break in Service would result in a complete forfeiture of the amount the Plan Administrator otherwise would restore.

(B)  Time and Method of Forfeiture Restoration. If none of the conditions in Section 5.04(A) preventing restoration of the Participant’s Account Balance applies, the Plan Administrator will restore the Participant’s Account Balance as of the Plan Year Accounting Date coincident with or immediately following the repayment. To restore the Participant’s Account Balance, the Plan Administrator, to the extent necessary, will allocate to the Participant’s Account:

(1)  First, the amount, if any, of Participant forfeitures the Plan Administrator otherwise would allocate under Section 3.05;

(2)  Second, the amount, if any, of the Trust Fund net income or gain for the Plan Year; and

(3)  Third, the Employer contribution for the Plan Year to the extent made under a discretionary formula.

In an Addendum to its Adoption Agreement, the Employer may eliminate as a means of restoration any of the amounts described in clauses (1), (2) and (3) or may change the order of priority of these amounts. To the extent the amounts described in clauses (1), (2) and (3) are insufficient to enable the Plan Administrator to make the required restoration, the Employer must contribute, without regard to any requirement or condition of Article III, the additional amount necessary to enable the Plan Administrator to make the required restoration. If, for a particular Plan Year, the Plan Administrator must restore the Account Balance of more than one re-employed Participant, the Plan Administrator will make the restoration allocations from the amounts described in clauses (1), (2) and (3) to each such Participant’s Account in the same proportion that a Participant’s restored amount for the Plan Year bears to the restored amount for the Plan Year of all re-employed Participants. A cash-out restoration allocation is not an Annual Addition under Part 2 of Article III.

(C)  Deemed Cash-out of 0% Vested Participant. Except as the Employer may provide in an Addendum to its Adoption Agreement, the deemed cash-out rule of this Section 5.04(C) applies to any 0% Vested Participant. A “0% Vested Participant” is a Participant whose Account Balance derived from Employer contributions is entirely forfeitable at the time of his/her Separation from Service. If a 0% Vested Participant’s Account is not entitled to an allocation of Employer contributions for the Plan Year in which the Participant has a Separation from Service, the Plan Administrator will apply the deemed cash-out rule as if the 0% Vested Participant received a cash-out distribution on the date of the Participant’s Separation from Service. If a 0% Vested Participant’s Account is entitled to an allocation of Employer contributions or Participant forfeitures for the Plan Year in which the Participant has a Separation from Service, the Plan Administrator will apply the deemed cash-out rule as if the 0% Vested Participant received a cash-out distribution on the first day of the first Plan Year beginning after his/her Separation from Service. For purposes of applying the restoration provisions of this Section 5.04, the Plan Administrator will treat a re-employed 0% Vested Participant as repaying his/her cash-out “distribution” on the date of the Participant’s re-employment with the Employer.

5.05  ACCOUNTING FOR CASH-OUT REPAYMENT. As soon as is administratively practicable, the Plan Administrator will credit to the Participant’s Account the cash-out amount a Participant has repaid to the Plan. Pending the restoration of the Participant’s Account Balance, the Plan Administrator under Section 9.08(B) may direct the Trustee to place the Participant’s cash-out repayment in a temporary segregated investment Account. Unless the cash-out repayment qualifies as a Participant rollover contribution, the Plan Administrator will direct the Trustee to repay to the Participant as soon as is administratively practicable, the full amount of the Participant’s cash-out repayment if the Plan Administrator determines any of the conditions of Section 5.04(A) prevents restoration as of the applicable Accounting Date, notwithstanding the Participant’s repayment.

5.06  YEAR OF SERVICE - VESTING. For purposes of determining a Participant’s vesting under Section 5.03, “Year of Service” means the 12-consecutive month vesting computation period the Employer elects in its Adoption Agreement during which an Employee completes the number of Hours of Service (not exceeding 1,000) specified in the Adoption Agreement or, if the Plan applies the Elapsed Time Method of crediting Vesting Service, the vesting computation period for which the Employee receives credit for a Year of Service under the Service crediting rules of Section 1.15(D). A Year of Service includes any Year of Service completed prior to the Effective Date of the Plan, except as provided in Section 5.08.

5.07  BREAK IN SERVICE AND FORFEITURE BREAK IN SERVICE - VESTING. For purposes of this Article V, a Participant incurs a “Break in Service” if during any vesting computation period he/she does not complete more than 500 Hours of Service or, if the Plan applies the Elapsed Time Method of crediting Service, the Participant has a Period of Severance of at least 12 consecutive months. If, pursuant to Section 5.06, the Plan does not require more than 500 Hours of Service to receive credit for a Year of Service, a Participant incurs a Break in Service in a vesting computation period in which he/she fails to complete a Year of Service. A Participant incurs a Forfeiture Break in Service when he/she incurs 5 consecutive Breaks in Service. The Plan does not apply the Break in Service (one year hold-out) rule for vesting under Code §411(a)(6)(B). Therefore, an Employee need not complete a Year of Service after a Break in Service before

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the Plan takes into account the Employee’s otherwise includible pre-Break Years of Service under this Article V.

5.08  INCLUDED YEARS OF SERVICE - VESTING. For purposes of determining “Years of Service” under Section 5.06, the Plan takes into account all Years of Service an Employee completes with the Employer except:

(a)  For the sole purpose of determining a Participant’s Vested percentage of his/her Account Balance derived from Employer contributions which accrued for his/her benefit prior to a Forfeiture Break in Service or receipt of a cash-out distribution, the Plan disregards any Year of Service after the Participant first incurs a Forfeiture Break in Service or receives a cash-out distribution (except where the Plan Administrator restores the Participant’s Account under Section 5.04(A)).

(b)  Consistent with Code §411(a)(4), any Year of Service the Employer elects to exclude under its Adoption Agreement.

5.09  FORFEITURE OCCURS. A Participant’s forfeiture of his/her non-Vested Account Balance derived from Employer contributions occurs under the Plan on the earlier of:

(a)  The last day of the vesting computation period in which the Participant first incurs a Forfeiture Break in Service; or

(b)  The date the Participant receives a cash-out distribution.

The Plan Administrator determines the percentage of a Participant’s Account Balance forfeiture, if any, under this Section 5.09 solely by reference to the vesting schedule the Employer elected in its Adoption Agreement. A Participant does not forfeit any portion of his/her Account Balance for any other reason or cause except as expressly provided by this Section 5.09 or as provided under Section 9.11.

5.10  RULE OF PARITY - VESTING. The Employer may elect in its Adoption Agreement to apply the “rule of parity” under Code §411(a)(6)(D) for purposes of determining vesting Years of Service. Under the rule of parity, the Plan Administrator excludes a Participant’s Years of Service before a Break in Service if: (a) the number of the Participant’s consecutive Breaks in Service equals or exceeds 5; and (b) the Participant is 0% Vested in his/her Account Balance derived from Employer contributions at the time he/she has the Breaks in Service.

5.11  AMENDMENT TO VESTING SCHEDULE. The Employer under Section 13.02 may amend the Plan’s vesting schedule(s) under Section 5.03 at any time. However, the Plan Administrator will not apply the amended vesting schedule to reduce any Participant’s existing Vested percentage (determined on the later of the date the Employer adopts the amendment, or the date the amendment becomes effective) in the Participant’s existing and future Account Balance attributable to Employer contributions, to a percentage less than the Vested percentage computed under the Plan without regard to the amendment. Furthermore, an amended vesting schedule will apply to a Participant only if the Participant receives credit for at least one Hour of Service after the new vesting schedule becomes effective.

If the Employer amends the Plan’s vesting schedule, each Participant having completed at least 3 Years of Service (as described in Section 5.06) with the Employer prior to the expiration of the election period described below, may irrevocably elect to have the Plan Administrator determine the Vested percentage of his/her Account Balance without regard to the amendment. The Participant must file his/her election with the Plan Administrator within 60 days of the latest of: (a) the Employer’s adoption of the amendment; (b) the effective date of the amendment; or (c) the Participant’s receipt of a copy of the amendment. The Plan Administrator, as soon as practicable, must forward a true copy of any amendment to the vesting schedule to each affected Participant, together with a written explanation of the effect of the amendment, the appropriate form upon which the Participant may make an election to remain under the pre-amendment vesting schedule and notice of the time within which the Participant must make an election to remain under the pre-amendment vesting schedule. The election described in this Section 5.11 does not apply to a Participant if the amended vesting schedule provides for vesting at least as rapid at any time as the vesting schedule in effect prior to the amendment. For purposes of this Section 5.11, an amendment to the vesting schedule includes any Plan amendment which directly or indirectly affects the computation of the Vested percentage of a Participant’s Account Balance. Furthermore, any shift in the Plan’s vesting schedule under Article XII, due to a change in the Plan’s top-heavy status, is an amendment to the vesting schedule for purposes of this Section 5.11.

5.12  DEFERRAL CONTRIBUTIONS TAKEN INTO ACCOUNT.  If the Plan includes a 401(k) arrangement, the vesting rules described in Article V must take into account a Participant’s deferral contributions for purposes of determining: (1) if a Participant’s distribution is of his/her entire Vested Account balance as required for a cash-out distribution under Section 5.04; (2) if a Participant repays the entire amount of a prior cash-out distribution so the Participant is entitled to restoration under Section 5.04(A); and (3) if a Participant is 0% vested under Section 5.04(C) and under Section 5.10.

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ARTICLE VI
DISTRIBUTIONS

6.01  TIMING OF DISTRIBUTION. The Plan Administrator will direct the Trustee to commence distribution of a Participant’s Vested Account Balance in accordance with this Section 6.01 upon the Participant’s Separation from Service for any reason, or if the Participant exercises an in-Service distribution right under the Plan. The Trustee may make Plan distributions on any administratively practicable date during the Plan Year, consistent with the Employer’s elections in its Adoption Agreement.

(A)  Distribution upon Separation from Service (other than death).

(1)  Participant’s Vested Account Balance not exceeding $5,000. Upon the Participant’s Separation from Service for any reason other than death, the Plan Administrator without any requirement of Participant or spousal consent) will direct the Trustee to distribute the Participant’s Vested Account Balance (determined in accordance with Section 6.01(A)(6)) not exceeding $5,000 in a lump sum (without regard to Section 6.04), at the time specified in the Adoption Agreement, but in no event later than the 60th day following the close of the Plan Year in which the later of the following events occur: (a) the Participant attains Normal Retirement Age; or (b) the Participant Separates from Service.

(2)  Participant’s Vested Account Balance exceeds $5,000. Upon the Participant’s Separation from Service for any reason other than death, the Plan Administrator, subject to the Participant’s election to postpone distribution under this Section 6.01(A)(2) and the consent requirements of Section 6.01(A)(5), will direct the Trustee to commence distribution of the Participant’s Vested Account Balance (determined in accordance with Section 6.01(A)(6)) exceeding $5,000, at the time specified in the Adoption Agreement and in a form under Section 6.03 elected by the Participant. Any election under this Section 6.01(A)(2) is subject to the requirements of Section 6.02 and of Section 6.04.

A Participant eligible to make an election under this Section 6.01(A)(2) may elect to postpone distribution beyond the time the Employer has elected in its Adoption Agreement, to any specified date including, but not beyond the Participant’s Required Beginning Date, unless the Employer, in its Adoption Agreement, specifically limits a Participant’s right to postpone distribution of his/her Account Balance to the later of the date the Participant attains age 62 or Normal Retirement Age. The Plan Administrator will reapply the notice and consent requirements of Section 6.01(A)(4) and Section 6.01(A)(5) to any distribution postponed under this Section 6.01(A)(2).

In the absence of a Participant’s consent and distribution election (as described in Section 6.01(A)(5)) or in the absence of the Participant’s election to postpone distribution prior to his/her annuity starting date, the Plan Administrator, consistent with the Employer’s elections in its Adoption Agreement, will treat the Participant as having elected to postpone his/her distribution until the 60th day following the close of the Plan Year in which the latest of the following events occurs: (a) the Participant attains Normal Retirement Age; (b) the Participant attains age 62; or (c) the Participant Separates from Service. At the applicable date, the Plan Administrator then will direct the Trustee to distribute the Participant’s Vested Account Balance in a lump sum (or, if applicable, the annuity form of distribution required under Section 6.04).

(3)  Disability. If the Participant’s Separation from Service is because of his/her Disability, the Plan Administrator will direct the Trustee to pay the Participant’s Vested Account Balance in the same manner as if the Participant had incurred a Separation from Service without Disability.

(4)  Distribution notice/annuity starting date. At least 30 days and not more than 90 days prior to the Participant’s annuity starting date, the Plan Administrator must provide a written notice (or a summary notice as permitted under Treasury regulations) to a Participant who is eligible to make an election under Section 6.01(A)(2) (“distribution notice”). The distribution notice must explain the optional forms of benefit in the Plan, including the material features and relative values of those options, and the Participant’s right to postpone distribution until the applicable date described in Section 6.01(A)(2). For all purposes of this Article VI, the term “annuity starting date” means the first day of the first period for which the Plan pays an amount as an annuity or in any other form but in no event is the “annuity starting date” earlier than a Participant’s Separation from Service.

(5)  Consent requirements/Participant distribution election. A Participant must consent, in writing, following receipt of the distribution notice, to any distribution under this Section 6.01, if at the time of the distribution to the Participant, the Participant’s Vested Account Balance exceeds $5,000 and the Participant has not attained the later of Normal Retirement Age or age 62. Accounts which are distributable prior to the foregoing applicable age are “immediately distributable.” Furthermore, the Participant’s spouse also must consent, in writing, to any distribution, for which Section 6.04 requires the spouse’s consent. The Participant may reconsider his/her distribution election at any time prior to the annuity starting date and elect to commence distribution as of any other distribution date permitted under the Plan or under the Adoption Agreement. A Participant may elect to receive distribution at any administratively practicable time which is earlier than 30 days following the Participant’s receipt of the distribution notice, by waiving in writing the balance of the 30 days. However, if the requirements of Section 6.04 apply, the Participant may not elect to commence distribution less than 7 days following the Participant’s receipt of the distribution notice. The consent requirements of this Section 6.01(A)(5) do not apply with respect to defaulted loans described in Section 10.03(E).

(6)  Determination of Vested Account Balance. For purposes of the consent requirements under this Article VI, the Plan Administrator determines a Participant’s Vested Account Balance as of the most recent valuation date immediately prior to the distribution date, and takes into

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account the Participant’s entire Account, including deferral contributions. The Plan Administrator in determining the Participant’s Vested Account Balance at the relevant time, will disregard a Participant’s Vested Account Balance existing on any prior date, except as the Code otherwise may require.

(7)  Consent to cash-out/forfeiture. If a Participant is partially-Vested in his/her Account Balance, a Participant’s election under Section 6.01(A)(2) to receive distribution prior to the Participant’s incurring a Forfeiture Break in Service, must be in the form of a cash-out distribution as defined in Section 5.04.

(8)  Return to employment. A Participant may not receive a distribution by reason of Separation from Service, or continue any installment distribution based on a prior Separation from Service, if, prior to the time the Trustee actually makes the distribution, the Participant returns to employment with the Employer.

(B)  Distribution upon Death. In the event of the Participant’s Separation from Service on account of death, the Plan Administrator will direct the Trustee, in accordance with this Section 6.01(B) and subject to Section 6.02(D), to distribute to the Participant’s Beneficiary the Participant’s Vested Account Balance remaining in the Trust at the time of the Participant’s death.

The Plan Administrator, subject to the requirements of Sections 6.04 and 6.02(D) or to a Beneficiary’s written election (if authorized by the next paragraph of this Section 6.01(B)), must direct the Trustee to distribute or commence distribution of the deceased Participant’s Vested Account Balance, as soon as administratively practicable following the Participant’s death or, if later, the date on which the Plan Administrator receives notification of, or otherwise confirms, the Participant’s death. If the Participant’s Vested Account Balance determined in accordance with Section 6.01(A)(6) does not exceed $5,000, the Trustee will distribute the balance in a lump sum without regard to Section 6.04. If the Participant’s Vested Account Balance exceeds $5,000, the Trustee will distribute the balance subject to Section 6.02(D).

If the Participant’s death benefit is payable in full to the Participant’s surviving spouse, the surviving spouse may elect distribution at any time and in any form (except a joint and survivor annuity) the Plan would permit a Participant to elect upon Separation from Service. The Participant, on a form prescribed by the Plan Administrator, may (subject to the requirements of Section 6.04) elect the payment method or the payment term or both, which will apply to any Beneficiary, including his/her surviving spouse. The Participant’s election may limit any Beneficiary’s right to increase the frequency or the amount of any payments. Any payment term elected by the Participant must not exceed the payment term the Code otherwise would permit the Beneficiary to elect upon the Participant’s death.

(C)  In-Service Distribution. The Employer must elect in its Adoption Agreement the distribution election rights, if any, a Participant has prior to his/her Separation from Service (“in-service distribution”). Subject to any contrary Employer election in Appendix A to its Adoption Agreement, a Participant upon attaining age 70½, until he/she incurs a Separation from Service, has a continuing election to receive all or any portion of his/her Account Balance, including Employer contributions and Participant contributions. If the Employer elects in its Adoption Agreement additional in-service distribution of any Employer contribution (including deferral contributions), the Employer in its Adoption Agreement must specify events or conditions, if any, applicable to such in-service distributions. For special requirements regarding hardship distributions, see Section 6.09. The Employer also must elect in its Adoption Agreement the additional in-service distribution rights, if any, a Participant has with respect to Participant contributions as defined in Section 4.01. If a Participant receives an in-service distribution as to a partially-Vested Account, and the Participant has not incurred a Forfeiture Break in Service, the Plan Administrator will apply the vesting provisions of Section 5.03(A).

A Participant must make any permitted in-service distribution election under this Section 6.01(C) in writing and on a form prescribed by the Plan Administrator which specifies the percentage or dollar amount of the distribution and the Participant’s Plan Account (Employer contributions or Participant contributions and type) to which the election applies. If the Plan permits in-service distributions, a Participant only may elect to receive one in-service distribution per Plan Year under this Section 6.01(C) unless the election form prescribed by the Plan Administrator provides for more frequent distributions. The Trustee, as directed by the Plan Administrator and subject to Sections 6.01(A)(4), 6.01(A)(5) and 6.04, will distribute the amount(s) a Participant elects in single sum, as soon as administratively practicable after the Participant files his/her in-service distribution election with the Plan Administrator. The Trustee will distribute the Participant’s remaining Account Balance in accordance with the other provisions of this Article VI.

The Trustee, prior to a Participant’s Normal Retirement Age or Disability may not make any in-service distribution to the Participant with respect to his/her Account Balance attributable to assets (including post-transfer earnings on those assets) and liabilities transferred, within the meaning of Code §414(l), to a profit sharing plan from a money purchase pension plan or from a target benefit plan qualified under Code §401(a) (other than any portion of those assets and liabilities attributable to Employee contributions).

6.02 REQUIRED MINIMUM DISTRIBUTIONS.

(A)  Priority of Required Minimum Distribution. If any distribution under this Article VI (by Plan provision or by Participant election or nonelection), would commence later than the Participant’s required beginning date (“RBD”), the Plan Administrator instead must direct the Trustee to make distribution on the Participant’s RBD, subject only to the TEFRA election, if applicable, under Section 6.11. The Employer in its Adoption Agreement Appendix B may elect to apply a special effective date to the RBD definition or may elect in Appendix A to continue to apply the RBD definition in effect prior to 1997 (“pre-SBJPA RBD”). The Employer in its Adoption Agreement also may elect to require distribution earlier than the RBD.

(1)  RBD – more than 5% owner. A Participant’s

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RBD is the April 1 following the close of the calendar year in which the Participant attains age 70½ if the Participant is a more than 5% owner (as defined in Code §416) with respect to the Plan Year ending in that calendar year. If a Participant is a more than 5% owner at the close of the relevant calendar year, the Participant may not discontinue required minimum distributions notwithstanding the Participant’s subsequent change in ownership status.

(2)  RBD – non 5% owners. If the Participant is not a more than 5% owner, his/her RBD is the April 1 following the close of the calendar year in which the Participant incurs a Separation from Service or, if later, the April 1 following the close of the calendar year in which the Participant attains age 70½. If a Participant is not a more than 5% owner, his/her pre-SBJPA RBD (if applicable) is April 1 following the close of the calendar year in which the Participant attains age 70½.

(3)  Form of distribution. The Trustee will make a required minimum distribution at the Participant’s RBD in a lump sum (or, if applicable, the annuity form of distribution required under Section 6.04) unless the Participant, pursuant to the provisions of this Article VI, makes a valid election to receive an alternative form of payment.

(B)  Participant Transitional Elections.

(1)  Election to discontinue distributions. A Participant who: (a) is not a more than 5% owner; (b) had attained age 70½ prior to 1997; (c) had commenced prior to 1997 required minimum distributions under the pre-SBJPA RBD; and (d) has not incurred a Separation from Service, has a continuing election to discontinue receiving distributions from the Plan (which previously were required minimum distributions under the Plan). A Participant who makes an election under this Section 6.02(B)(1) must establish a new annuity starting date when he/she recommences payment of his/her Account Balance under the Plan. A married Participant who is subject to Section 6.04 must obtain spousal consent: (a) to discontinue his/her distributions under this Section 6.04(B)(1) if distributions are in QJSA form; and (b) to recommence benefits in a form other than a QJSA. A Participant may not make any election under this Section 6.02(B)(1) which is inconsistent with any QDRO applicable to the Participant’s Account.

(2)  Election to postpone distributions. A Participant who: (a) is not a more than 5% owner; and (b) attained age 70½ after 1996 (or who attained age 70½ in 1996, but who had not commenced his/her required minimum distributions in 1996) may elect under this Section 6.02(B)(2) to postpone distribution of required minimum distributions until the Participant’s RBD established under Section 6.02(A). If the Participant attained age 70½ in 1996, he/she must have elected under this Section 6.02(B)(2) to postpone distributions by December 31, 1997. If the Participant attained age 70½ after 1996, he/she must make the election to postpone distribution under this Section 6.01(B)(2) not later than April 1 of the calendar year following the year in which the Participant attains age 70½.

(3)  Election requirements. All Participant elections made under this Section 6.01(B) are subject to and must be consistent with the Employer’s RBD elections in its Adoption Agreement Appendices A and B. A Participant makes his/her election under this Section 6.02(B) in writing on a form prescribed by the Plan Administrator.

(C)  Minimum Distribution Requirements for Participants. The Plan Administrator may not direct the Trustee to distribute the Participant’s Vested Account Balance, nor may the Participant elect to have the Trustee distribute his/her Vested Account Balance, under a method of payment which, as of the Participant’s RBD, does not satisfy the minimum distribution requirements under Code §401(a)(9) and the applicable Treasury regulations.

(1)  Calculation of amount. The required minimum distribution for a calendar year (“distribution calendar year”) equals the Participant’s Vested Account Balance as of the latest valuation date preceding the beginning of the distribution calendar year (such valuation date being within the “valuation calendar year”) divided by the Participant’s life expectancy or, if applicable, the joint and last survivor expectancy of the Participant and his/her designated Beneficiary (as determined under Article VIII, subject to the requirements of Code §401(a)(9)). The Plan Administrator will increase the Participant’s Vested Account Balance, as determined on the relevant valuation date, for contributions or forfeitures allocated after the valuation date and by December 31 of the valuation calendar year, and will decrease the valuation by distributions made after the valuation date and by December 31 of the valuation calendar year. For purposes of this valuation, any portion of the required minimum distribution for the first distribution calendar year made after the close of that year is a distribution occurring in that first distribution calendar year.

(2)  Recalculation. In computing a required minimum distribution, the Plan Administrator must use the unisex life expectancy multiples under Treas. Reg. §1.72-9. The Plan Administrator, only upon the Participant’s timely election, will compute the required minimum distribution for a distribution calendar year subsequent to the first distribution calendar year by redetermining (“recalculation” of) the Participant’s life expectancy or the Participant’s and spouse designated Beneficiary’s life expectancies as elected. However, the Plan Administrator may not redetermine the joint life and last survivor expectancy of the Participant and a nonspouse designated Beneficiary in a manner which takes into account any adjustment to a life expectancy other than the Participant’s life expectancy. A Participant must elect recalculation under this Section 6.02(C)(2) in writing and on a form the Plan Administrator prescribes, not later than the Participant’s RBD.

(3)  Minimum distribution incidental benefit (MDIB). If the Participant’s spouse is not his/her designated Beneficiary, a method of payment to the Participant (whether by Participant election or by Plan Administrator direction) must satisfy the MDIB requirement under Code §401(a)(9) for distributions made on or after the Participant’s RBD and before the Participant’s death. To satisfy the MDIB requirement, the Plan Administrator will compute the Participant’s required minimum distribution by substituting the applicable MDIB divisor for the applicable life expectancy factor, if the MDIB divisor is a lesser number. Following the Participant’s death, the Plan Administrator will compute the minimum distribution required by Section 6.02(D)

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solely on the basis of the applicable life expectancy factor and will disregard the MDIB factor.

(4)  Payment due date. The required minimum distribution for the first distribution calendar year is due by the Participant’s RBD. The required minimum distribution for each subsequent distribution calendar year, including the calendar year in which the Participant’s RBD occurs, is due by December 31 of that year.

(5)  Nontransferable annuity. If the Participant receives distribution in the form of a Nontransferable Annuity, the distribution satisfies this Section 6.02(C) if the contract complies with the requirements of Code §401(a)(9).

(D)  Minimum Distribution Requirements for Beneficiaries. The method of distribution to the Participant’s Beneficiary must satisfy Code §401(a)(9).

(1)  Death after RBD. If the Participant’s death occurs after his/her RBD (or earlier, if the Participant had commenced an irrevocable annuity pursuant to Section 6.04), the Trustee must distribute the Participant’s remaining benefit to the Beneficiary at least as rapidly as under the method in effect for the Participant, determined without regard to the MDIB requirements of Section 6.02(C)(3).

(2)  Death prior to RBD. If the Participant’s death occurs prior to his/her RBD (and the Participant had not commenced an irrevocable annuity pursuant to Section 6.04), the method of payment to the Beneficiary, subject to Section 6.04, must provide for completion of payment to the Beneficiary over a period not exceeding: (a) 5 years after the date of the Participant’s death; or (b) if the Beneficiary is a designated Beneficiary, the designated Beneficiary’s life expectancy. A designated Beneficiary is a Beneficiary designated by the Participant or determined under Section 8.02. The Plan Administrator may not direct payment of the Participant’s Vested Account Balance over a period described in clause (b) unless the Trustee will commence payment to the designated Beneficiary no later than the December 31 following the close of the calendar year in which the Participant’s death occurred or, if later, and the designated Beneficiary is the Participant’s surviving spouse, December 31 of the calendar year in which the Participant would have attained age 70½.

If the Trustee will make distribution in accordance with clause (b) of this Section 6.02(D)(2), the minimum distribution for a distribution calendar year equals the Participant’s Vested Account Balance as of the latest valuation date preceding the beginning of the distribution calendar year divided by the designated Beneficiary’s life expectancy. The Plan Administrator must use the unisex life expectancy multiples under Treas. Reg. §1.72-9 for purposes of applying this Section 6.02(D).

(3)  Recalculation. The Plan Administrator, only upon the Participant’s election (under Section 6.02(C)(2)) or the Participant’s surviving spouse designated Beneficiary’s election, will recalculate the life expectancy of the Participant’s surviving spouse not more frequently than annually. However, the Plan Administrator may not recalculate the life expectancy of a nonspouse designated Beneficiary after the Trustee commences payment to the designated Beneficiary. The Plan Administrator will apply this Section 6.02(D) by treating any amount paid to the Participant’s child, which becomes payable to the Participant’s surviving spouse upon the child’s attaining the age of majority, as paid to the Participant’s surviving spouse. A surviving spouse designated Beneficiary must elect recalculation under this §6.02(D)(3) in writing and on a form the Plan Administrator prescribes not later than the last day of the spouse’s first distribution year.

(4)  Beneficiary election. If the Participant under Section 6.01(B) had not elected the payment method or payment term, the Participant’s Beneficiary must elect the method of distribution no later than the date specified above upon which the Trustee must commence distribution to the Beneficiary. If the Beneficiary fails to elect timely a distribution method, the Plan Administrator must commence distribution within the time required for a Participant who dies without a designated Beneficiary.

(E)  Model Amendment. The employer in Appendix B to its Adoption Agreement may elect to apply the following IRS Model Amendment:

With respect to distributions under the Plan made on or after the effective date the Employer specifies in Appendix B to its Adoption Agreement, for calendar years beginning on or after January 1, 2001, the Plan will apply the minimum distribution requirements of section 401(a)(9) of the Internal Revenue Code in accordance with the regulations under section 401(a)(9) that were proposed on January 17, 2001, (the “2001 Proposed Regulations”), notwithstanding any provision of the Plan to the contrary. If the total amount of required minimum distributions made to a Participant for 2001 prior to the Appendix B effective date are equal to or greater than the amount of required minimum distributions determined under the 2001 Proposed Regulations, then no additional distributions are required for such Participant for 2001 on or after such date. If the total amount of required minimum distributions made to a Participant for 2001 prior to the Appendix B effective date are less than the amount determined under the 2001 Proposed Regulations, then the amount of required minimum distributions for 2001 on or after such date will be determined so that the total amount of required minimum distributions for 2001 is the amount determined under the 2001 Proposed Regulations. This amendment shall continue in effect until the last calendar year beginning before the effective date of final regulations under section 401(a)(9) or such other date as may be published by the Internal Revenue Service.

6.03  METHOD OF DISTRIBUTION. Subject to any contrary requirements imposed by Sections 6.01 (including 6.01(C) regarding in-service distributions), 6.02 or 6.04, a Participant or a Beneficiary may elect distribution under one, or any combination, of the following methods: (a) by payment in a lump sum; or (b) by payment in monthly, quarterly or annual installments over a fixed reasonable period of time, not exceeding the life expectancy of the Participant, or the joint life and last survivor expectancy of the Participant and his/her designated Beneficiary. The Employer may elect in its Adoption Agreement to modify the methods of payment available under this Section 6.03.

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If the Employer’s Plan is a restated Plan, the Employer in its Adoption Agreement and in accordance with Treas. Reg. §1.411(d)-4, may elect to eliminate from the prior Plan certain Protected Benefits. If the Employer elects or is required to provide an annuity, the annuity must: (1) be a Nontransferable Annuity; and (2) otherwise comply with the Plan terms.

The distribution options permitted under this Section 6.03 are available only if the Participant’s Vested Account Balance, as determined under Section 6.01(A)(6), exceeds $5,000. To facilitate installment payments under this Article VI, the Plan Administrator under Section 9.08(B) may direct the Trustee to segregate all or any part of the Participant’s Account Balance in a segregated investment Account. Under an installment distribution, the Participant or the Beneficiary, at any time, may elect to accelerate the payment of all, or any portion, of the Participant’s unpaid Vested Account Balance.

Pending final accounting for a valuation date, the Plan Administrator may make a partial distribution to a Participant who has incurred a Separation from Service or to a Beneficiary.

6.04  ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND TO SURVIVING SPOUSES.

(A)  Qualified Joint and Survivor Annuity (QJSA). The Plan Administrator must direct the Trustee to distribute a married or unmarried Participant’s Vested Account Balance in the form of a QJSA, unless the Participant, and spouse if the Participant is married, waive the QJSA in accordance with Section 6.05. If, as of the annuity starting date, the Participant is married (even if the Participant has not been married throughout the one year period ending on the annuity starting date), a QJSA is an immediate annuity which is purchasable with the Participant’s Vested Account Balance and which provides a life annuity for the Participant and a survivor annuity payable for the remaining life of the Participant’s surviving spouse equal to 50% of the amount of the annuity payable during the life of the Participant. If, as of the annuity starting date, the Participant is not married, a QJSA is an immediate life annuity for the Participant which is purchasable with the Participant’s Vested Account Balance. A life annuity means an annuity payable in equal installments for the life of the Participant that terminates upon the Participant’s death.

(B)  Qualified Preretirement Survivor Annuity (QPSA). If a married Participant dies prior to his/her annuity starting date, the Plan Administrator will direct the Trustee to distribute a portion of the Participant’s Vested Account Balance to the Participant’s surviving spouse in the form of a QPSA, unless: (1) the Participant has a valid waiver election (as described in Section 6.06) in effect; or (2) the Participant and his/her spouse were not married throughout the one year period ending on the date of the Participant’s death. The Employer in an Addendum to its Adoption Agreement may elect not to apply the one year of marriage requirement in clause (2). A QPSA is an annuity which is purchasable with 50% of the Participant’s Vested Account Balance (determined as of the date of the Participant’s death) and which is payable for the life of the Participant’s surviving spouse. The value of the QPSA is attributable to Employer contributions and to Participant contributions in the same proportion as the Participant’s Vested Account Balance is attributable to those contributions. The portion of the Participant’s Vested Account Balance not payable as a QPSA is payable to the Participant’s Beneficiary, in accordance with the remaining provisions of this Article VI.

(C)  Surviving Spouse Elections. If the Participant’s Vested Account Balance which the Trustee would apply to purchase the QPSA exceeds $5,000, the Participant’s surviving spouse may elect to have the Trustee commence payment of the QPSA at any time following the date of the Participant’s death, but not later than the mandatory distribution periods described in Section 6.02, and may elect any of the forms of payment described in Section 6.03, in lieu of the QPSA. In the absence of an election by the surviving spouse, the Plan Administrator must direct the Trustee to distribute the QPSA on the earliest administratively practicable date following the close of the Plan Year in which the latest of the following events occurs: (1) the Participant’s death; (2) the date the Plan Administrator receives notification of or otherwise confirms the Participant’s death; (3) the date the Participant would have attained Normal Retirement Age; or (4) the date the Participant would have attained age 62.

(D)  Effect of Waiver. If the Participant has in effect a valid waiver election regarding the QJSA or the QPSA, the Plan Administrator must direct the Trustee to distribute the Participant’s Vested Account Balance in accordance with Sections 6.01, 6.02 and 6.03.

(E)  Loan Offset. The Plan Administrator will reduce the Participant’s Vested Account Balance by any security interest (pursuant to any offset rights authorized by Section 10.03(E)) held by the Plan by reason of a Participant loan, to determine the value of the Participant’s Vested Account Balance distributable in the form of a QJSA or QPSA, provided the loan satisfied the spousal consent requirement described in Section 10.03(E).

(F)  Effect of QDRO. For purposes of applying this Article VI, a former spouse (in lieu of the Participant’s current spouse) is the Participant’s spouse or surviving spouse to the extent provided under a QDRO described in Section 6.07. The provisions of this Section 6.04, and of Sections 6.05 and 6.06, apply separately to the portion of the Participant’s Vested Account Balance subject to a QDRO and to the portion of the Participant’s Vested Account Balance not subject to the QDRO.

(G)  Vested Account Balance Not Exceeding $5,000. The Trustee must distribute in a lump sum, a Participant’s Vested Account Balance which the Trustee otherwise under Section 6.04 would apply to provide a QJSA or QPSA benefit, where the Participant’s Vested Account Balance determined under Section 6.01(A)(6) does not exceed $5,000.

(H)  Profit Sharing Plan Exception. If this Plan is a profit sharing plan, the Employer in its Adoption Agreement must elect the extent to which the preceding provisions of Section 6.04 apply. The Employer may elect to exempt from the provisions of Section 6.04, all Participants (“Exempt Participants”) except the following Participants to whom Section 6.04 must be applied: (1) a Participant as respects whom the Plan is a direct or indirect transferee from a plan subject to the Code §417 requirements and the

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Plan received the transfer after December 31, 1984, unless the transfer is an elective transfer described in Section 13.07; (2) a Participant who elects a life annuity distribution (if Section 13.02 of the Plan requires the Plan to provide a life annuity distribution option); and (3) a Participant whose benefits under a defined benefit plan maintained by the Employer are offset by benefits provided under this Plan. If the Employer elects to apply this Section 6.04 to all Participants, the preceding provisions of this Section 6.04 apply to all Participants without regard to the limitations of this Section 6.04(H). Sections 6.05 and 6.06 only apply to Participants to whom the provisions of this Section 6.04 apply.

6.05  WAIVER ELECTION - QJSA. At least 30 days and not more than 90 days before the Participant’s annuity starting date, the Plan Administrator must provide the Participant a written explanation of the terms and conditions of the QJSA, the Participant’s right to make, and the effect of, an election to waive the QJSA benefit, the rights of the Participant’s spouse regarding the waiver election and the Participant’s right to make, and the effect of, a revocation of a waiver election (“QJSA notice”). The Plan does not limit the number of times the Participant may revoke a waiver of the QJSA or make a new waiver during the election period. The Participant (and his/her spouse, if the Participant is married), may revoke an election to receive a particular form of benefit at any time until the annuity starting date.

A married Participant’s QJSA waiver election is not valid unless: (a) the Participant’s spouse (to whom the survivor annuity is payable under the QJSA), after the Participant has received the QJSA notice, has consented in writing to the waiver election, the spouse’s consent acknowledges the effect of the election, and a notary public or the Plan Administrator (or his/her representative) witnesses the spouse’s consent; (b) the spouse consents to the alternative form of payment designated by the Participant or to any change in that designated form of payment; and (c) unless the spouse is the Participant’s sole primary Beneficiary, the spouse consents to the Participant’s Beneficiary designation or to any change in the Participant’s Beneficiary designation. The spouse’s consent to a waiver of the QJSA is irrevocable, unless the Participant revokes the waiver election. The spouse may execute a blanket consent to the Participant’s future payment form election or Beneficiary designation, if the spouse acknowledges the right to limit his/her consent to a specific designation but, in writing, waives that right.

The Plan Administrator will accept as valid a waiver election which does not satisfy the spousal consent requirements if the Plan Administrator establishes the Participant does not have a spouse, the Plan Administrator is not able to locate the Participant’s spouse, the Participant is legally separated or has been abandoned (within the meaning of applicable state law) and the Participant has a court order to that effect, or other circumstances exist under which the Secretary of the Treasury will excuse the spousal consent requirement. If the Participant’s spouse is legally incompetent to give consent, the spouse’s legal guardian (even if the guardian is the Participant) may give consent.

6.06 WAIVER ELECTION – QPSA. The Plan Administrator must provide a written explanation of the QPSA to each married Participant (“QPSA notice”), within the following period which ends last: (1) the period beginning on the first day of the Plan Year in which the Participant attains age 32 and ending on the last day of the Plan Year in which the Participant attains age 34; (2) a reasonable period after an Employee becomes a Participant; (3) a reasonable period after Section 6.04 of the Plan becomes applicable to the Participant; or (4) a reasonable period after the Plan no longer satisfies the requirements for a fully subsidized benefit. A “reasonable period” described in clauses (2), (3) and (4) is the period beginning one year before and ending one year after the applicable event. If the Participant separates from Service before attaining age 35, clauses (1), (2), (3) and (4) do not apply and the Plan Administrator must provide the QPSA notice within the period beginning one year before and ending one year after the Separation from Service. The QPSA notice must describe, in a manner consistent with Treasury regulations, the terms and conditions of the QPSA and of the waiver of the QPSA, comparable to the QJSA notice required under Section 6.05. The Plan does not limit the number of times the Participant may revoke a waiver of the QPSA or make a new waiver during the election period. The election period for waiver of the QPSA ends on the date of the Participant’s death.

A Participant’s QPSA waiver election is not valid unless: (a) the Participant makes the waiver election after the Participant has received the QPSA notice and no earlier than the first day of the Plan Year in which he/she attains age 35; and (b) the Participant’s spouse (to whom the QPSA is payable) satisfies or is excused from the consent requirements as described in Section 6.05, except the spouse need not consent to the form of benefit payable to the designated Beneficiary. The spouse’s consent to the waiver of the QPSA is irrevocable, unless the Participant revokes the waiver election. The spouse also may execute a blanket consent as described in Section 6.05. Irrespective of the time of election requirement described in clause (a), if the Participant separates from Service prior to the first day of the Plan Year in which he/she attains age 35, the Plan Administrator will accept a waiver election as respects the Participant’s Account Balance attributable to his/her Service prior to his/her Separation from Service. Furthermore, if a Participant who has not separated from Service makes a valid waiver election, except for the timing requirement of clause (a), the Plan Administrator will accept that election as valid, but only until the first day of the Plan Year in which the Participant attains age 35.

6.07  DISTRIBUTIONS UNDER QUALIFIED DOMESTIC RELATIONS ORDERS (QDRO). Notwithstanding any other provision of this Plan, the Trustee, in accordance with the direction of the Plan Administrator, must comply with the provisions of a QDRO, as defined in Code §414(p), which is issued with respect to the Plan. This Plan specifically permits distribution to an alternate payee under a QDRO at any time, irrespective of whether the Participant has attained his/her earliest retirement age (as defined under Code §414(p)) under the Plan. A distribution to an alternate payee prior to the Participant’s attainment of earliest retirement age is available only if: (1) the QDRO specifies distribution at that time or permits an agreement between the Plan and the alternate payee to authorize an earlier distribution; and (2) if the present value of the alternate payee’s benefits under the Plan exceeds $5,000, and the QDRO requires, the alternate payee

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consents to any distribution occurring prior to the Participant’s attainment of earliest retirement age. Nothing in this Section 6.07 gives a Participant a right to receive distribution at a time the Plan otherwise does not permit nor does Section 6.07 authorize the alternate payee to receive a form of payment the Plan does not permit.

The Plan Administrator must establish reasonable procedures to determine the qualified status of a domestic relations order. Upon receiving a domestic relations order, the Plan Administrator promptly will notify the Participant and any alternate payee named in the order, in writing, of the receipt of the order and the Plan’s procedures for determining the qualified status of the order. Within a reasonable period of time after receiving the domestic relations order, the Plan Administrator must determine the qualified status of the order and must notify the Participant and each alternate payee, in writing, of the Plan Administrator’s determination. The Plan Administrator must provide notice under this paragraph by mailing to the individual’s address specified in the domestic relations order, or in a manner consistent with DOL regulations.

If any portion of the Participant’s Vested Account Balance is payable under the domestic relations order during the period the Plan Administrator is making its determination of the qualified status of the domestic relations order, the Plan Administrator must maintain a separate accounting of the amounts payable. If the Plan Administrator determines the order is a QDRO within 18 months of the date amounts first are payable following receipt of the domestic relations order, the Plan Administrator will direct the Trustee to distribute the payable amounts in accordance with the QDRO. If the Plan Administrator does not make its determination of the qualified status of the order within the 18-month determination period, the Plan Administrator will direct the Trustee to distribute the payable amounts in the manner the Plan would distribute if the order did not exist and will apply the order prospectively if the Plan Administrator later determines the order is a QDRO.

To the extent it is not inconsistent with the provisions of the QDRO, the Plan Administrator under Section 9.08(B) may direct the Trustee to segregate the QDRO amount in a segregated investment account. The Trustee will make any payments or distributions required under this Section 6.07 by separate benefit checks or other separate distribution to the alternate payee(s).

6.08 DEFAULTED LOAN – TIMING OF OFFSET. If a Participant or a Beneficiary defaults on a Plan loan, the Plan Administrator will determine the timing of the reduction (offset) of the Participant’s Vested Account Balance in accordance with this Section 6.08 and the Plan Administrator’s loan policy. If, under the loan policy a loan default also is a distributable event under the Plan, the Trustee, at the time of the loan default, will offset the Participant’s Vested Account Balance by the lesser of the amount in default (including accrued interest) or the Plan’s security interest in that Vested Account Balance. If the loan is from a money purchase pension plan or from a target benefit plan and the loan default is a distributable event under the loan policy, the Trustee will offset the Participant’s Account Balance in the manner described above, only if the Participant has incurred a Separation from Service or has attained Normal Retirement Age. If the loan is under a 401(k) arrangement, to the extent the loan is attributable to the Participant’s deferral contributions Account, qualified matching contributions Account, qualified nonelective contributions Account or safe harbor contributions Account, the Trustee will not offset the Participant’s Vested Account Balance unless the Participant has incurred a Separation from Service or unless the Participant has attained age 59½.

6.09 HARDSHIP DISTRIBUTION. For purposes of this Plan, unless the Employer in its Adoption Agreement Section 6.01 elects otherwise, a hardship distribution is a distribution on account of one or more of the following immediate and heavy financial needs: (1) expenses for medical care described in Code §213(d) incurred by the Participant, by the Participant’s spouse, or by any of the Participant’s dependents, or necessary to obtain such medical care; (2) costs directly related to the purchase (excluding mortgage payments) of a principal residence of the Participant; (3) payment of post-secondary education tuition and related educational fees (including room and board), for the next 12-month period, for the Participant, for the Participant’s spouse, or for any of the Participant’s dependents (as defined in Code §152); (4) payments necessary to prevent the eviction of the Participant from his/her principal residence or the foreclosure on the mortgage of the Participant’s principal residence; or (5) any need the Revenue Service prescribes in a revenue ruling, notice or other document of general applicability which satisfies the safe harbor definition of hardship under Treas. Reg. §1.401(k)-1(d)(2)(iv)(A). See Section 14.11(A) if a hardship distribution is from a Participant’s elective deferral Account in a 401(k) arrangement. The Employer in its Adoption Agreement Section 6.01 may elect to apply Section 14.11(A) to all Plan hardship distributions. If the Plan permits a hardship distribution from more than one Account type, the Plan Administrator may determine any ordering of a Participant’s hardship distribution from the hardship distribution eligible Accounts.

6.10  DIRECT ROLLOVER OF ELIGIBLE ROLLOVER DISTRIBUTIONS.

(A)  Participant Election. A Participant (including for this purpose, a former Employee) may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of his/her eligible rollover distribution from the Plan paid directly to an eligible retirement plan specified by the Participant in a direct rollover election. For purposes of this Section 6.10, a Participant includes as to their respective interests, a Participant’s surviving spouse and the Participant’s spouse or former spouse who is an alternate payee under a QDRO.

(B)  Rollover and Withholding Notice. At least 30 days and not more than 90 days prior to the Trustee’s distribution of an eligible rollover distribution, the Plan Administrator must provide a written notice (including a summary notice as permitted under applicable Treasury regulations) explaining to the distributee the rollover option, the applicability of mandatory 20% federal withholding to any amount not directly rolled over, and the recipient’s right to roll over within 60 days after the date of receipt of the distribution (“rollover notice”). If applicable, the rollover notice also must explain the availability of income averaging and the exclusion of net unrealized appreciation. A recipient of an eligible rollover distribution

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(whether he/she elects a direct rollover or elects to receive the distribution), also may elect to receive distribution at any administratively practicable time which is earlier than 30 days (but not less than 7 days if Section 6.04 applies) following receipt of the rollover notice.

(C)  Default rollover. The Plan Administrator, in the case of a Participant who does not respond timely to the notice described in Section 6.10(B), may make a direct rollover of the Participant’s Account (as described in Revenue Ruling 2000-36 or in any successor guidance) in lieu of distributing the Participant’s Account.

(D)  Definitions. The following definitions apply to this Section 6.10:

(1)  Eligible rollover distribution. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the Participant, except an eligible rollover distribution does not include: (a) any distribution which is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and the Participant’s designated beneficiary, or for a specified period of ten years or more; (b) any Code §401(a)(9) required minimum distribution; (c) the portion of any distribution which is not includible in gross income (determined without regard to the exclusion of net unrealized appreciation with respect to employer securities); (d) any hardship distribution made after December 31, 1998, from a Participant’s deferral contributions Account (except where the Participant also satisfies a non-hardship distribution event described in Section 14.03(d)); and (e) any distribution which otherwise would be an eligible rollover distribution, but where the total distributions to the Participant during that calendar year are reasonably expected to be less than $200.

(2)  Eligible retirement plan. An eligible retirement plan is an individual retirement account described in Code §408(a), an individual retirement annuity described in Code §408(b), an annuity plan described in Code §403(a), or a qualified trust described in Code §401(a), which accepts the Participant’s or alternate payee’s eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is either an individual retirement account or individual retirement annuity.

(3)  Direct rollover. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee.

6.11  TEFRA ELECTIONS. Notwithstanding the provisions of Sections 6.01, 6.02 and 6.03, if the Participant (or Beneficiary) signed a written distribution designation prior to January 1, 1984, (“TEFRA election”) the Plan Administrator must direct the Trustee to distribute the Participant’s Vested Account Balance in accordance with that election, subject however, to the survivor annuity requirements, if applicable, of Sections 6.04, 6.05 and 6.06. This Section 6.11 does not apply to a TEFRA election, and the Plan Administrator will not comply with that election, if any of the following applies: (1) the elected method of distribution would have disqualified the Plan under Code §401(a)(9) as in effect on December 31, 1983; (2) the Participant did not have an Account Balance as of December 31, 1983; (3) the election does not specify the timing and form of the distribution and the death Beneficiaries (in order of priority); (4) the substitution of a Beneficiary modifies the distribution payment period; or, (5) the Participant (or Beneficiary) modifies or revokes the election. In the event of a revocation, the Trustee must distribute, no later than December 31 of the calendar year following the year of revocation, the amount which the Participant would have received under Section 6.02 if the distribution designation had not been in effect or, if the Beneficiary revokes the distribution designation, the amount which the Beneficiary would have received under Section 6.02 if the distribution designation had not been in effect. The Plan Administrator will apply this Section 6.11 to rollovers and transfers  in accordance with Part J of the Code §401(a)(9) Treasury regulations.

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ARTICLE VII
EMPLOYER ADMINISTRATIVE PROVISIONS

7.01  INFORMATION TO PLAN ADMINISTRATOR. The Employer must supply current information to the Plan Administrator as to the name, date of birth, date of employment, Compensation, leaves of absence, Years of Service and date of Separation from Service of each Employee who is, or who will be eligible to become, a Participant under the Plan, together with any other information which the Plan Administrator considers necessary to administer properly the Plan. The Employer’s records as to the current information the Employer furnishes to the Plan Administrator are conclusive as to all persons.

7.02  NO RESPONSIBILITY FOR OTHERS. Except as required under ERISA, the Employer has no responsibility or obligation under the Plan to Employees, Participants or Beneficiaries for any act (unless the Employer also serves in such capacities) required of the Plan Administrator, the Trustee, the Custodian, or of any other service provider to the Plan.

7.03  INDEMNITY OF CERTAIN FIDUCIARIES. The Employer will indemnify, defend and hold harmless the Plan Administrator from and against any and all loss resulting from liability to which the Plan Administrator may be subjected by reason of any act or omission (except willful misconduct or gross negligence) in its official capacities in the administration of this Trust or Plan or both, including attorneys’ fees and all other expenses reasonably incurred in the Plan Administrator’s defense, in case the Employer fails to provide such defense. The indemnification provisions of this Section 7.03 do not relieve the Plan Administrator from any liability the Plan Administrator may have under ERISA for breach of a fiduciary duty. Furthermore, the Plan Administrator and the Employer may execute a written agreement further delineating the indemnification agreement of this Section 7.03, provided the agreement is consistent with and does not violate ERISA. The indemnification provisions of this Section 7.03 extend to any Trustee, third party administrator, Custodian or other Plan service provider solely to the extent provided by a written agreement executed by such persons and the Employer.

7.04  EMPLOYER DIRECTION OF INVESTMENT. The Employer has the right to direct the Trustee with respect to the investment and re-investment of assets comprising the Trust Fund only if and to the extent the Trustee consents in writing to permit such direction.

7.05  EVIDENCE. Anyone including the Employer, required to give data, statements or other information relevant under the terms of the Plan (“evidence”) may do so by certificate, affidavit, document or other form which the person to act in reliance may consider pertinent, reliable and genuine, and to have been signed, made or presented by the proper party or parties. The Plan Administrator and the Trustee are protected fully in acting and relying upon any evidence described under the immediately preceding sentence.

7.06  PLAN CONTRIBUTIONS. The Employer is solely responsible to determine the proper amount of any Employer contribution it makes to the Plan and for the timely deposit to the Trust of the Employer’s Plan contributions.

7.07  EMPLOYER ACTION. The Employer must take any action under the Plan in accordance with applicable Plan provisions and with proper authority such that the action is valid and under applicable law and is binding upon the Employer.

7.08  FIDUCIARIES NOT INSURERS. The Trustee, the Plan Administrator and the Employer in no way guarantee the Trust Fund from loss or depreciation. The Employer does not guarantee the payment of any money which may be or becomes due to any person from the Trust Fund. The liability of the Employer, the Plan Administrator and the Trustee to make any payment from the Trust Fund at any time and all times is limited to the then available assets of the Trust.

7.09  PLAN TERMS BINDING. The Plan is binding upon the Employer, Trustee, Plan Administrator, Custodian (and all other service providers to the Plan), upon Participants, Beneficiaries and all other persons entitled to benefits, and upon the successors and assigns of the foregoing persons.

7.10  WORD USAGE. Words used in the masculine also apply to the feminine where applicable, and wherever the context of the Plan dictates, the plural includes the singular and the singular includes the plural. Titles of Plan and Adoption Agreement sections are for reference only.

7.11  STATE LAW. The law of the state of the Employer’s principal place of business will determine all questions arising with respect to the provisions of the Plan, except to the extent superseded by ERISA or other federal law. The Employer in an Addendum to its Adoption Agreement and subject to applicable law, may elect to apply the law of another state.

7.12  PROTOTYPE PLAN STATUS. If the Plan fails initially to qualify or to maintain qualification or if the Employer makes any amendment or modification to a provision of the Plan (other than a proper completion of an elective provision under the Adoption Agreement or the attachment of an Addendum authorized by the Plan or by the Adoption Agreement), the Employer no longer may participate under this Prototype Plan. The Employer also may not participate (or continue to participate) in this Prototype Plan if the Trustee or Custodian does not have the written consent of the Prototype Plan Sponsor required under Section 1.33 to serve in the capacity of Trustee or Custodian. If the Employer is not entitled to participate under this Prototype Plan, the Plan is an individually-designed plan and the reliance procedures specified in the applicable Adoption Agreement no longer apply.

7.13  EMPLOYMENT NOT GUARANTEED.  Nothing contained in this Plan, or with respect to the establishment of the Trust, or any modification or any amendment to the Plan or Trust, or in the creation of any Account, or with respect to the payment of any benefit, gives any Employee, Participant or any Beneficiary any

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right to employment or to continued employment by the Employer, or any legal or equitable right against the Employer, the Trustee, the Plan Administrator or any employee or agent thereof, except as expressly provided by the Plan, the Trust, ERISA or other applicable law.

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ARTICLE VIII
PARTICIPANT ADMINISTRATIVE PROVISIONS

8.01  BENEFICIARY DESIGNATION. A Participant from time to time may designate, in writing, any person(s) (including a trust or other entity), contingently or successively, to whom the Trustee will pay the Participant’s Vested Account Balance (including any life insurance proceeds payable to the Participant’s Account) in the event of death. A Participant also may designate the form and method of payment of his/her Account. The Plan Administrator will prescribe the form for the Participant’s written designation of Beneficiary and, upon the Participant’s filing the form with the Plan Administrator, the form effectively revokes all designations filed prior to that date by the same Participant. A divorce decree, or a decree of legal separation, revokes the Participant’s designation, if any, of his/her spouse as his/her Beneficiary under the Plan unless: (1) the decree or a QDRO provides otherwise; or (2) the Employer provides otherwise in an Addendum to its Adoption Agreement. The foregoing revocation provision (if applicable) applies only with respect to a Participant whose divorce or legal separation becomes effective on or following the date the Employer executes this Plan, unless the Employer in its Adoption Agreement specifies a different effective date.

(A)Coordination with Survivor Annuity Requirements. If Section 6.04 applies to the Participant, this Section 8.01 does not impose any special spousal consent requirements on the Participant’s Beneficiary designation unless the Participant waives the QJSA or QPSA benefit. If the Participant waives the QJSA or QPSA benefit without spousal consent to the Participant’s Beneficiary designation: (1) any waiver of the QJSA or of the QPSA is not valid; and (2) if the Participant dies prior to his/her annuity starting date, the Participant’s Beneficiary designation will apply only to the portion of the death benefit which is not payable as a QPSA. Regarding clause (2), if the Participant’s surviving spouse is a primary Beneficiary under the Participant’s Beneficiary designation, the Trustee will satisfy the spouse’s interest in the Participant’s death benefit first from the portion which is payable as a QPSA.

(B)  Profit Sharing Plan Exception. If the Plan is a profit sharing plan, the Beneficiary designation of a married Exempt Participant, as described in Section 6.04(H), is not valid unless the Participant’s spouse consents (in a manner described in Section 6.05) to the Beneficiary designation. The spousal consent requirement in this Section 8.01(B) does not apply if the Participant’s spouse is the Participant’s sole primary Beneficiary, or if the Exempt Participant and his/her spouse are not married throughout the one-year period ending on the date of the Participant’s death.

(C)  Incapacity of Beneficiary. If, in the opinion of the Plan Administrator, a Beneficiary is not able to care for his/her affairs because of a mental condition, physical condition or by reason of age, the Plan Administrator will apply the provisions of Section 10.09.

8.02 NO BENEFICIARY DESIGNATION /DEATH OF BENEFICIARY. If a Participant fails to name a Beneficiary in accordance with Section 8.01, or if the Beneficiary named by a Participant predeceases the Participant, then the Trustee will pay the Participant’s Vested Account Balance in accordance with Section 6.03 in the following order of priority (unless the Employer specifies a different order of priority in an Addendum to its Adoption Agreement), to:

(a)  The Participant’s surviving spouse (without regard to the one-year marriage rule of Sections 6.04(B) and 8.01(B); and if no surviving spouse to

(b)  The Participant’s children (including adopted children), in equal shares by right of representation (one share for each surviving child and one share for each child who predeceases the Participant with living descendents); and if none to

(c)  The Participant’s surviving parents, in equal shares; and if none to

(d)  The Participant’s estate.

If the Beneficiary survives the Participant, but dies prior to distribution of the Participant’s entire Vested Account Balance, the Trustee will pay the remaining Vested Account Balance to the Beneficiary’s estate unless: (1) the Participant’s Beneficiary designation provides otherwise; (2) the Beneficiary has properly designated a beneficiary; or (3) the Employer provides otherwise in an Addendum to its Adoption Agreement. A Beneficiary only may designate a beneficiary for the Participant’s Account Balance remaining at the Beneficiary’s death, if the Participant has not previously designated a successive contingent beneficiary and the Beneficiary’s designation otherwise complies with the Plan terms. If the Plan is a profit sharing plan, and the Plan includes Exempt Participants, the Employer may not specify a different order of priority in an Addendum unless the Participant’s surviving spouse will be the sole primary Beneficiary in the different order of priority. The Plan Administrator will direct the Trustee as to the method and to whom the Trustee will make payment under this Section 8.02.

8.03  ASSIGNMENT OR ALIENATION. Except as provided in Code §414(p) relating to QDROs and in Code §401(a)(13) relating to certain voluntary, revocable assignments, judgments and settlements, neither a Participant nor a Beneficiary may anticipate, assign or alienate (either at law or in equity) any benefit provided under the Plan, and the Trustee will not recognize any such anticipation, assignment or alienation. Furthermore, except as provided by Code §401(a)(13) or other applicable law, a benefit under the Plan is not subject to attachment, garnishment, levy, execution or other legal or equitable process.

8.04  INFORMATION AVAILABLE. Any Participant or Beneficiary may examine copies of the Plan description, latest annual report, any bargaining agreement, this Plan and Trust, and any contract or any other instrument which relates to the establishment or administration of the Plan or Trust. The Plan Administrator will maintain all of the items listed in this Section 8.04 in its office, or in such other place or places as it may designate from time to time in order to comply with the regulations issued under ERISA, for examination during reasonable business hours. Upon

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the written request of a Participant or a Beneficiary, the Plan Administrator must furnish the Participant or Beneficiary with a copy of any item listed in this Section 8.04. The Plan Administrator may make a reasonable copying charge to the requesting person.

8.05  CLAIMS PROCEDURE FOR DENIAL OF BENEFITS. A Participant or a Beneficiary may file with the Plan Administrator a written claim for benefits, if the Participant or the Beneficiary disputes the Plan Administrator’s determination regarding the Participant’s or Beneficiary’s Plan benefit. However, the Plan will distribute only such Plan benefits to Participants or Beneficiaries as the Plan Administrator in its discretion determines a Participant or Beneficiary is entitled to. The Plan Administrator will maintain a separate written document as part of (or which accompanies) the Plan’s summary plan description explaining the Plan’s claims procedure. This Section 8.05 specifically incorporates the written claims procedure as from time to time published by the Plan Administrator as a part of the Plan. If the Plan Administrator pursuant to the Plan’s written claims procedure makes a final written determination denying a Participant’s or Beneficiary’s benefit claim, the Participant or Beneficiary to preserve the claim must file an action with respect to the denied claim not later than 180 days following the date of the Plan Administrator’s final determination.

8.06  PARTICIPANT DIRECTION OF INVESTMENT. A Participant’s direction of the investment of his/her Account is subject to the provisions of this Section 8.06. For purposes of this Section 8.06, a Participant shall also include a Beneficiary where the Beneficiary has succeeded to the Participant’s Account and the Plan affords the Beneficiary the same self-direction or loan rights as a Participant.

(A)  Trustee Authorization and Procedures. A Participant has the right to direct the Trustee with respect to the investment or re-investment of the assets comprising the Participant’s individual Account only if the Trustee consents in writing to permit such direction. If the Trustee consents to Participant direction of investment, the Trustee only will accept direction from each Participant on a written direction of investment form the Plan Administrator provides for this purpose. The Trustee, or with the Trustee’s consent, the Plan Administrator, may establish written procedures relating to Participant direction of investment under this Section 8.06, including procedures or conditions for electronic transfers or for changes in investments by Participants. The Plan Administrator will maintain, or direct the Trustee to maintain, an appropriate individual investment Account to the extent a Participant’s Account is subject to Participant self-direction.

(B)  ERISA §404(c). No Plan fiduciary (including the Employer and Trustee) is liable for any loss or for any breach resulting from a Participant’s direction of the investment of any part of his/her directed Account to the extent the Participant’s exercise of his/her right to direct the investment of his/her Account satisfies the requirements of ERISA §404(c).

(C)  Participant Loans. The Plan Administrator, to the extent provided in a written loan policy adopted under Section 9.04, will treat a Plan loan made to a Participant as a Participant direction of investment under this Section 8.06, even if the Plan otherwise does not permit a Participant to direct his/her Account investments. Where a loan is treated as a directed investment, the borrowing Participant’s Account alone shares in any interest paid on the loan, and it alone bears any expense or loss it incurs in connection with the loan. The Trustee may retain any principal or interest paid on the borrowing Participant’s loan in a segregated Account (as described in Section 9.08(B)) on behalf of the borrowing Participant until the Trustee (or the Named Fiduciary, in the case of a nondiscretionary Trustee) deems it appropriate to add the loan payments to the Participant’s Account under the Plan.

(D)  Collectibles. If the Trustee consents to Participant direction of investment of his/her Account, any post-December 31, 1981, investment by a Participant’s directed Account in collectibles (as defined by Code §408(m)) is a deemed distribution to the Participant for Federal income tax purposes.

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ARTICLE IX
PLAN ADMINISTRATOR

9.01  COMPENSATION AND EXPENSES. The Plan Administrator (and any individuals serving as Plan Administrator) will serve without compensation for services as such, but the Employer will pay all expenses of the Plan Administrator, except to the extent the Trustee properly pays for such expenses, pursuant to Article X.

9.02  RESIGNATION AND REMOVAL. If the Employer appoints one or more persons to serve as Plan Administrator, such person(s) shall serve until they resign by written notice to the Employer or until the Employer removes them by written notice. In case of a vacancy in the position of Plan Administrator, the Employer will exercise any and all of the powers, authority, duties and discretion conferred upon the Plan Administrator pending the filling of the vacancy.

9.03  GENERAL POWERS AND DUTIES. The Plan Administrator has the following general powers and duties which are in addition to those the Plan otherwise accords to the Plan Administrator:

(a)  To determine the rights of eligibility of an Employee to participate in the Plan, all factual questions that arise in the course of administering the Plan, the value of a Participant’s Account Balance (based on the value of the Trust assets, as determined by the Trustee) and the Vested percentage of each Participant’s Account Balance;

(b)  To adopt rules of procedure and regulations necessary for the proper and efficient administration of the Plan, provided the rules are not inconsistent with the terms of the Plan, the Code, ERISA or other applicable law;

(c)  To construe and enforce the terms of the Plan and the rules and regulations the Plan Administrator adopts, including interpretation of the basic plan document, the Adoption Agreement and any document related to the Plan’s operation;

(d)  To direct the Trustee regarding the crediting and distribution of the Trust Fund and to direct the Trustee to conduct interim valuations under Section 10.15;

(e)  To review and render decisions regarding a claim for (or denial of a claim for) a benefit under the Plan;

(f)  To furnish the Employer with information which the Employer may require for tax or other purposes;

(g)  To engage the service of agents whom the Plan Administrator may deem advisable to assist it with the performance of its duties;

(h)  To engage the services of an Investment Manager or Managers (as defined in ERISA §3(38)), each of whom will have full power and authority to manage, acquire or dispose (or direct the Trustee with respect to acquisition or disposition) of any Plan asset under such Manager’s control;

(i)  To make any other determinations and undertake any other actions the Plan Administrator believes are necessary or appropriate for the administration of the Plan; and

(j)  To establish and maintain a funding standard account and to make credits and charges to the account to the extent required by and in accordance with the provisions of the Code.

The Plan Administrator must exercise all of its powers, duties and discretion under the Plan in a uniform and nondiscriminatory manner. The Plan Administrator shall have total and complete discretion to interpret and construe the Plan and to determine all questions arising in the administration, interpretation and application of the Plan. Any determination the Plan Administrator makes under the Plan is final and binding upon any affected person.

9.04  PLAN LOANS. The Plan Administrator may, in its sole discretion, in accordance with Section 10.03(E) establish, amend or terminate from time to time, a nondiscriminatory policy which the Trustee must observe in making Plan loans, if any, to Participants and to Beneficiaries. If the Plan Administrator adopts a loan policy, the loan policy must be a written document and must include: (1) the identity of the person or positions authorized to administer the participant loan program; (2) the procedure for applying for a loan; (3) the criteria for approving or denying a loan; (4) the limitations, if any, on the types and amounts of loans available; (5) the procedure for determining a reasonable rate of interest; (6) the types of collateral which may secure the loan; and (7) the events constituting default and the steps the Plan will take to preserve Plan assets in the event of default. A loan policy the Plan Administrator adopts under this Section 9.04 is part of the Plan, except that the Plan Administrator may amend or terminate the policy without regard to Section 13.02.

9.05  FUNDING POLICY. The Plan Administrator will review, not less often than annually, all pertinent Employee information and Plan data in order to establish the funding policy of the Plan and to determine the appropriate methods of carrying out the Plan’s objectives. The Plan Administrator must communicate periodically, as it deems appropriate, to the Trustee and to any Plan Investment Manager the Plan’s short-term and long-term financial needs for the coordination of the Plan’s investment policy with Plan financial requirements.

9.06  INDIVIDUAL ACCOUNTS. The Plan Administrator will maintain, or direct the Trustee to maintain, a separate Account, or multiple Accounts, in the name of each Participant to reflect the Participant’s Account Balance under the Plan.

(A)  Forfeitures. If a Participant re-enters the Plan subsequent to his/her having a Forfeiture Break in Service, the Plan Administrator, or the Trustee, must maintain a separate Account for the Participant’s pre-Forfeiture Break in Service Account Balance and a separate Account for his post-Forfeiture Break in Service Account Balance, unless

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the Participant’s entire Account Balance under the Plan is 100% Vested.

If the Plan is subject to Participant direction of investment under Section 8.06, the Plan Administrator may maintain, or may direct the Trustee to maintain, a separate temporary forfeiture Account in the name of the Plan to account for Participant forfeitures which occur during the Plan Year. The Trustee will direct the investment of any separate temporary forfeiture Account. As of each Accounting Date, or interim valuation date, if applicable, the Plan Administrator will allocate the net income, gain or loss from the temporary forfeiture Account, if any, to the Accounts of the Participants in accordance with the provisions of Section 9.08.

(B)  Net Income, Gain or Loss. The Plan Administrator will make its allocations of net income, gain or loss or request the Trustee to make its allocations, to the Accounts of the Participants in accordance with the provisions of Section 9.08. The Plan Administrator may direct the Trustee under Section 9.08(B) to maintain a temporary segregated investment Account in the name of a Participant to prevent a distortion of income, gain or loss allocations. The Plan Administrator must maintain records of its activities.

9.07  VALUE OF PARTICIPANT’S ACCOUNT BALANCE. If any or all Plan investment accounts are pooled, each Participant’s Account has an undivided interest in the assets comprising the pooled account. In a pooled account, the value of each Participant’s Account Balance consists of that proportion of the net worth (at fair market value) of the Trust Fund which the net credit balance in his/her Account (exclusive of the cash value of incidental benefit insurance contracts) bears to the total net credit balance in the Accounts (exclusive of the cash value of the incidental benefit insurance contracts) of all Participants plus the cash surrender value of any incidental benefit insurance contracts held by the Trustee on the Participant’s life. If any or all Plan investment accounts are Participant directed, the directing Participant’s Account Balance is comprised of the assets held within the Account and the value of the Account is the fair market value of such assets. For purposes of a distribution under the Plan, the value of a Participant’s Account Balance is its value as of the valuation date immediately preceding the date of the distribution.

9.08  ALLOCATION AND DISTRIBUTION OF NET INCOME, GAIN OR LOSS. This Section 9.08 applies solely to the allocation of net income, gain or loss of the Trust Fund. The Plan Administrator will allocate Employer contributions and Participant forfeitures, if any, in accordance with Article III.

A “valuation date” under this Plan is each: (1) Accounting Date; (2) valuation date the Employer elects in its Adoption Agreement Section 10.15; or (3) valuation date the Plan Administrator establishes under Section 9.03. The Employer in its Adoption Agreement Section 10.15 or the Plan Administrator may elect alternative valuation dates for the different Account types which the Plan Administrator maintains under the Plan. As of each valuation date, the Plan Administrator must adjust Accounts to reflect net income, gain or loss since the last valuation date. The valuation period is the period beginning on the day after the last valuation date and ending on the current valuation date.

The Plan Administrator will allocate net income, gain or loss to the Participant Accounts in accordance with the daily valuation method, balance forward method, weighted average method, or other method the Employer elects under its Adoption Agreement. The Employer in its Adoption Agreement may elect alternative methods under which the Plan Administrator will allocate the net income, gain or loss to the different Account types which the Plan Administrator maintains under the Plan. If the Employer in its Adoption Agreement elects to apply a weighted average allocation method, the Plan Administrator will treat a weighted portion of the applicable contributions as if includible in the Participant’s Account as of the beginning of the valuation period. The weighted portion is a fraction, the numerator of which is the number of months in the valuation period, excluding each month in the valuation period which begins prior to the contribution date of the applicable contributions, and the denominator of which is the number of months in the valuation period. The Employer in its Adoption Agreement may elect to substitute a weighting period other than months for purposes of this weighted average allocation. If the Employer in its Adoption Agreement elects to apply the daily valuation method, the Plan Administrator will allocate the net income, gain or loss on each day of the Plan Year for which Plan assets are valued on an established market and the Trustee is conducting business. If the Employer in its Adoption Agreement elects to apply the balance forward method, the Plan Administrator first will adjust the Participant Accounts, as those Accounts stood at the beginning of the current valuation period, by reducing the Accounts for any forfeitures arising under the Plan, for amounts charged during the valuation period to the Accounts in accordance with Section 9.10 (relating to distributions and to loan disbursement payments) and Section 11.01 (relating to insurance premiums), and for the cash value of incidental benefit insurance contracts. The Plan Administrator then, subject to the restoration allocation requirements of the Plan, will allocate the net income, gain or loss pro rata to the adjusted Participant Accounts. The allocable net income, gain or loss is the net income (or net loss), including the increase or decrease in the fair market value of assets, since the last valuation date.

(A)  Trust Fund (Pooled) Investment Accounts. A pooled investment account is an Account which is not a segregated investment Account or an individual investment Account.

(B)  Segregated Investment Accounts. A segregated investment Account receives all income it earns and bears all expense or loss it incurs. Pursuant to the Plan Administrator’s direction, the Trustee may establish for a Participant a segregated investment Account to prevent a distortion of Plan income, gain or loss allocations or for such other purposes as the Plan Administrator may direct. The Trustee will invest the assets of a segregated investment Account consistent with such purposes. As of each valuation date, the Plan Administrator must reduce a segregated Account for any forfeiture arising under Section 5.09 after the Plan Administrator has made all other allocations, changes or adjustments to the Account for the valuation period.

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(C)  Individual (Directed) Investment Accounts. An individual investment Account is an Account which is subject to Participant or Beneficiary self-direction under Section 8.06. An individual investment Account receives all income it earns and bears all expense or loss it incurs. As of each valuation date, the Plan Administrator must reduce an individual Account for any forfeiture arising from Section 5.09 after the Plan Administrator has made all other allocations, changes or adjustment to the Account for the valuation period.

(D)  Code §415 Excess Amounts. An Excess Amount or suspense account described in Part 2 of Article III does not share in the allocation of net income, gain or loss described in this Section 9.08.

(E)  Interest Adjustment. Any distribution (other than a distribution from a segregated or individual Account) made to a Participant or Beneficiary more than 90 days after the most recent valuation date may include interest on the amount of the distribution as an expense of the Trust Fund. The interest, if any, accrues from such valuation date to the date of the distribution at the rate the Employer specifies in its Adoption Agreement.

(F)  Contributions Prior to Accrual. If the Employer in its Adoption Agreement elects to impose one or more allocation conditions under Section 3.06 and the Employer contributes to the Plan amounts which at the time of the contribution have not accrued under the Plan terms (“pre-accrual contributions”), the Trustee will hold the pre-accrual contributions in the Trust and will invest such contributions as the Trustee determines, pending accrual and allocation to Participant Accounts. When the Plan Administrator allocates to Participants who have satisfied the Plan’s allocation conditions the Employer’s pre-accrual contributions, the Plan Administrator also will allocate the net income, gain or loss thereon pro rata in relation to each Participant’s share of the pre-accrual contribution.

9.09  INDIVIDUAL STATEMENT. As soon as practicable after the Accounting Date of each Plan Year, but within the time prescribed by ERISA and the regulations under ERISA, the Plan Administrator will deliver to each Participant (and to each Beneficiary) a statement reflecting the condition of his/her Account Balance in the Trust as of that date and such other information ERISA requires be furnished the Participant or the Beneficiary. No Participant, except the Plan Administrator, has the right to inspect the records reflecting the Account of any other Participant.

9.10  ACCOUNT CHARGED. The Plan Administrator will charge a Participant’s Account for all distributions made from that Account to the Participant, to his/her Beneficiary or to an alternate payee, including a disbursement payment for a Participant loan. The Plan Administrator, except as prohibited by the Code or ERISA, also will charge a Participant’s Account for any reasonable administrative expenses incurred by the Plan directly related to that Account.

9.11  LOST PARTICIPANTS. If the Plan Administrator is unable to locate any Participant or Beneficiary whose Account becomes distributable under Article VI or under Section 13.06 (a “lost Participant”), the Plan Administrator will apply the provisions of this Section 9.11.

(A)  Attempt to Locate. The Plan Administrator will use one or more of the following methods to attempt to locate a lost Participant: (1) provide a distribution notice to the lost Participant at his/her last known address by certified or registered mail; (2) use of the IRS letter forwarding program under Rev. Proc. 94-22; (3) use of a commercial locator service, the internet or other general search method; or (4) use of the Social Security Administration search program.

(B)  Failure to Locate. If a lost Participant remains unlocated for 6 months following the date of the Plan Administrator first attempts to locate the lost Participant using one or more of the methods described in Section 9.11(A), the Plan Administrator may forfeit the lost Participant’s Account. If the Plan Administrator will forfeit the lost Participant’s Account, the forfeiture occurs at the end of the above-described 6 month period and the Plan Administrator will allocate the forfeiture in accordance with Section 3.05. If a lost Participant whose Account was forfeited thereafter at any time but before the Plan has been terminated makes a claim for his/her forfeited Account, the Plan Administrator will restore the forfeited Account to the same dollar amount as the amount forfeited, unadjusted for net income, gains or losses occurring subsequent to the forfeiture. The Plan Administrator will make the restoration in the Plan Year in which the lost Participant makes the claim, first from the amount, if any, of Participant forfeitures the Plan Administrator otherwise would allocate for the Plan Year, then from the amount, if any, of Trust net income or gain for the Plan Year and last from the amount or additional amount the Employer contributes to the Plan for the Plan Year. The Plan Administrator will distribute the restored Account to the lost Participant not later than 60 days after the close of the Plan Year in which the Plan Administrator restores the forfeited Account. The Plan Administrator under this Section 9.11(B) will forfeit the entire Account of the lost Participant, including deferral contributions and Participant contributions.

(C)  Nonexclusivity and Uniformity. The provisions of Section 9.11 are intended to provide permissible but not exclusive means for the Plan Administrator to administer the Accounts of lost Participants. The Plan Administrator may utilize any other reasonable method to locate lost Participants and to administer the Accounts of lost Participants, including the default rollover under Section 6.10(C) and such other methods as the Revenue Service or the U.S. Department of Labor (“DOL”) may in the future specify. The Plan Administrator will apply Section 9.11 in a reasonable, uniform and nondiscriminatory manner, but may in determining a specific course of action as to a particular Account, reasonably take into account differing circumstances such as the amount of a lost Participant’s Account, the expense in attempting to locate a lost Participant, the Plan Administrator’s ability to establish and the expense of establishing a rollover IRA, and other factors. The Plan Administrator may charge to the Account of a lost Participant the reasonable expenses incurred under this Section 9.11 and which are associated with the lost Participant’s Account.

9.12  PLAN CORRECTION. The Plan Administrator in conjunction with the Employer may undertake such

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correction of Plan errors as the Plan Administrator deems necessary, including correction to preserve tax qualification of the Plan under Code §401(a) or to correct a fiduciary breach under ERISA. Without limiting the Plan Administrator’s authority under the prior sentence, the Plan Administrator, as it determines to be reasonable and appropriate, may undertake correction of Plan document, operational, demographic and employer eligibility failures under a method described in the Plan or under the Employee Plans Compliance Resolution System (“EPCRS”) or any successor program to EPCRS. The Plan Administrator, as it determines to be reasonable and appropriate, also may undertake or assist the appropriate fiduciary or plan official in undertaking correction of a fiduciary breach, including correction under the Voluntary Fiduciary Correction Program (“VFC”) or any successor program to VFC. If the Plan includes a 401(k) arrangement, the Plan Administrator to correct an operational error may require the Trustee to distribute from the Plan elective deferrals or vested matching contributions, including earnings, where such amounts result from an operational error other than a failure of Code §415, Code §402(g), a failure of the ADP or ACP tests, or a failure of the multiple use limitation.

9.13  NO RESPONSIBILITY FOR OTHERS. Except as required under ERISA, the Plan Administrator has no responsibility or obligation under the Plan to Participants or Beneficiaries for any act (unless the Plan Administrator also serves in such capacities) required of the Employer, the Trustee, the Custodian or of any other service provider to the Plan. The Plan Administrator is not responsible to collect any required plan contribution or to determine the correctness or deductibility or any Employer contribution. The Plan Administrator in administering the Plan is entitled to, but is not required to rely upon, information which a Participant, Beneficiary, Trustee, Custodian, the Employer, a Plan service provider or representatives thereof provide to the Plan Administrator.

9.14 NOTICE, DESIGNATION, ELECTION, CONSENT AND WAIVER. All notices under the Plan and all Participant or Beneficiary designations, elections, consents or waivers must be in writing and made in a form the Plan Administrator specifies or otherwise approves. To the extent permitted by Treasury regulations or other applicable guidance, any Plan notice, election, consent or waiver may be transmitted electronically. Any person entitled to notice under the Plan may waive the notice or shorten the notice period except as otherwise required by the Code or ERISA.

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ARTICLE X
TRUSTEE AND CUSTODIAN, POWERS AND DUTIES

10.01  ACCEPTANCE. The Trustee accepts the Trust created under the Plan and agrees to perform the obligations imposed. The Trustee must provide bond for the faithful performance of its duties under the Trust to the extent required by ERISA.

10.02  RECEIPT OF CONTRIBUTIONS. The Trustee is accountable to the Employer for the Plan contributions made by the Employer, but the Trustee does not have any duty to ensure that the contributions received comply with the provisions of the Plan. The Trustee is not obliged to collect any contributions from the Employer, nor is the Trustee obliged to ensure that funds deposited with it are deposited according to the provisions of the Plan.

10.03  INVESTMENT POWERS.

(A)  Discretionary Trustee Designation. If the Employer, in its Adoption Agreement, designates the Trustee to administer the Trust as a discretionary Trustee, then the Trustee has full discretion and authority with regard to the investment of the Trust Fund, except with respect to a Plan asset under the control or the direction of a properly appointed Investment Manager or with respect to a Plan asset properly subject to Employer, or to Participant direction of investment. The Trustee must coordinate its investment policy with Plan financial needs as communicated to it by the Plan Administrator. The Trustee is authorized and empowered, but not by way of limitation, with the following powers, rights and duties:

(a)  To invest consistent with and subject to applicable law any part or all of the Trust Fund in any common or preferred stocks, open-end or closed-end mutual funds (including proprietary funds), put and call options traded on a national exchange, United States retirement plan bonds, corporate bonds, debentures, convertible debentures, commercial paper, U.S. Treasury bills, U.S. Treasury notes and other direct or indirect obligations of the United States Government or its agencies, improved or unimproved real estate situated in the United States, limited partnerships, insurance contracts of any type, mortgages, notes or other property of any kind, real or personal, to buy or sell options on common stock on a nationally recognized exchange with or without holding the underlying common stock, to open and to maintain margin accounts, to engage in short sales, to buy and sell commodities, commodity options and contracts for the future delivery of commodities, and to make any other investments the Trustee deems appropriate, as a prudent person would do under like circumstances with due regard for the purposes of this Plan. Any investment made or retained by the Trustee in good faith is proper but must be of a kind constituting a diversification considered by law suitable for trust investments.

(b)  To retain in cash so much of the Trust Fund as it may deem advisable to satisfy liquidity needs of the Plan and to deposit any cash held in the Trust Fund in a bank account at reasonable interest.

(c)  To invest, if the Trustee is a bank or similar financial institution supervised by the United States or by a state, in any type of deposit of the Trustee (or of a bank related to the Trustee within the meaning of Code §414(b)) at a reasonable rate of interest or in a common trust fund, as described in Code §584, or in a collective investment fund, the provisions of which govern the investment of such assets and which the Plan incorporates by this reference, which the Trustee (or its affiliate, as defined in Code §1504) maintains exclusively for the collective investment of money contributed by the bank (or the affiliate) in its capacity as trustee and which conforms to the rules of the Comptroller of the Currency.

(d)  To manage, sell, contract to sell, grant options to purchase, convey, exchange, transfer, abandon, improve, repair, insure, lease for any term even though commencing in the future or extending beyond the term of the Trust, and otherwise deal with all property, real or personal, in such manner, for such considerations and on such terms and conditions as the Trustee decides.

(e)  To credit and distribute the Trust Fund as directed by the Plan Administrator. The Trustee is not obliged to inquire as to whether any payee or distributee is entitled to any payment or whether the distribution is proper or within the terms of the Plan, or as to the manner of making any payment or distribution. The Trustee is accountable only to the Plan Administrator for any payment or distribution made by it in good faith on the order or direction of the Plan Administrator.

(f)  To borrow money, to assume indebtedness, extend mortgages and encumber by mortgage or pledge.

(g)  To compromise, contest, arbitrate or abandon claims and demands, in the Trustee’s discretion.

(h)  To have with respect to the Trust all of the rights of an individual owner, including the power to exercise any and all voting rights associated with Trust assets, to give proxies, to participate in any voting trusts, mergers, consolidations or liquidations, to tender shares and to exercise or sell stock subscriptions or conversion rights.

(i)  To lease for oil, gas and other mineral purposes and to create mineral severances by grant or reservation; to pool or unitize interests in oil, gas and other minerals; and to enter into operating agreements and to execute division and transfer orders.

(j)  To hold any securities or other property in the name of the Trustee or its nominee, with depositories or agent depositories or in another form as it may deem best, with or without disclosing the trust relationship.

(k)  To perform any and all other acts in its judgment necessary or appropriate for the proper and

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advantageous management, investment and distribution of the Trust.

(l)  To retain any funds or property subject to any dispute without liability for the payment of interest, and to decline to make payment or delivery of the funds or property until a court of competent jurisdiction makes final adjudication.

(m)  To file all information and tax returns required of the Trustee.

(n)  To furnish to the Employer and to the Plan Administrator an annual statement of account showing the condition of the Trust Fund and all investments, receipts, disbursements and other transactions effected by the Trustee during the Plan Year covered by the statement and also stating the assets of the Trust held at the end of the Plan Year, which accounts are conclusive on all persons, including the Employer and the Plan Administrator, except as to any act or transaction concerning which the Employer of the Plan Administrator files with the Trustee written exceptions or objections within 90 days after the receipt of the accounts or for which ERISA authorizes a longer period within which to object.

(o)  To begin, maintain or defend any litigation necessary in connection with the administration of the Plan, except the Trustee is not obliged nor required to do so unless indemnified to its satisfaction.

(B)  Nondiscretionary Trustee Designation/ Appointment of Custodian. If the Employer, in its Adoption Agreement, designates the Trustee to administer the Trust as a nondiscretionary Trustee, then the Trustee will not have any discretion or authority with regard to the investment of the Trust Fund, but must act solely as a directed trustee of the funds contributed to it. A nondiscretionary Trustee, as directed trustee of the funds held by it under the Plan, is authorized and empowered, by way of limitation, with the following powers, rights and duties, each of which the nondiscretionary Trustee exercises solely as directed trustee in accordance with the written direction of the Named Fiduciary (except to the extent a Plan asset is subject to the control and the management of a properly appointed Investment Manager or subject to Employer or Participant direction of investment):

(a)  To invest any part or all of the Trust Fund in any common or preferred stocks, open-end or closed-end mutual funds (including proprietary funds), put and call options traded on a national exchange, United States retirement plan bonds, corporate bonds, debentures, convertible debentures, commercial paper, U.S. Treasury bills, U.S. Treasury notes and other direct or indirect obligations of the United States Government or its agencies, improved or unimproved real estate situated in the United States, limited partnerships, insurance contracts of any type, mortgages, notes or other property of any kind, real or personal, to buy or sell options on common stock on a nationally recognized options exchange with or without holding the underlying common stock, to open and to maintain margin accounts, to engage in short sales, to buy and sell commodities, commodity options and contracts for the future delivery of commodities, and to make any other investments the Named Fiduciary deems appropriate.

(b)  To retain in cash so much of the Trust Fund as the Named Fiduciary may direct in writing to satisfy liquidity needs of the Plan and to deposit any cash held in the Trust Fund in a bank account at reasonable interest.

(c)  To invest, if the Trustee is a bank or similar financial institution supervised by the United States or by a State, in any type of deposit of the Trustee (or of a bank related to the Trustee within the meaning of Code §414(b)) at a reasonable rate of interest or in a common trust fund, as described in Code §584, or in a collective investment fund, the provisions of which govern the investment of such assets and which the Plan incorporates by this reference, which the Trustee (or its affiliate, as defined in Code §1504) maintains exclusively for the collective investment of money contributed by the bank (or the affiliate) in its capacity as trustee and which conforms to the rules of the Comptroller of the Currency.

(d)  To sell, contract to sell, grant options to purchase, convey, exchange, transfer, abandon, improve, repair, insure, lease for any term even though commencing in the future or extending beyond the term of the Trust, and otherwise deal with all property, real or personal, in such manner, for such considerations and on such terms and conditions as the Named Fiduciary directs in writing.

(e)  To credit and distribute the Trust Fund as directed by the Plan Administrator. The Trustee is not obliged to inquire as to whether any payee or distributee is entitled to any payment or whether the distribution is proper or within the terms of the Plan, or as to the manner of making any payment or distribution. The Trustee is accountable only to the Plan Administrator for any payment or distribution made by it in good faith on the order or the direction of the Plan Administrator.

(f)  To borrow money, to assume indebtedness, extend mortgages and encumber by mortgage or pledge in accordance with and at the written direction of the Named Fiduciary.

(g)  To have with respect to the Trust all of the rights of an individual owner, including the power to exercise any and all voting rights associated with Trust assets, to give proxies, to participate in any voting trusts, mergers, consolidations or liquidations, to tender shares and to exercise or sell stock subscriptions or conversion rights, provided the exercise of any such powers is in accordance with and at the written direction of the Named Fiduciary.

(h)  To lease for oil, gas and other mineral purposes and to create mineral severances by grant or reservation; to pool or unitize interests in oil, gas and other minerals; and to enter into operating agreements and to execute division and transfer orders, provided the exercise of any such powers is in accordance with and at the written direction of the Named Fiduciary.

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(i)  To hold any securities or other property in the name of the nondiscretionary Trustee or its nominee, with depositories or agent depositories or in another form as the Named Fiduciary may direct in writing, with or without disclosing the custodial relationship.

(j)  To retain any funds or property subject to any dispute without liability for the payment of interest, and to decline to make payment or delivery of the funds or property until a court of competent jurisdiction makes final adjudication.

(k)  To file all information and tax returns required of the Trustee.

(l)  To furnish to the Named Fiduciary, the Employer and the Plan Administrator an annual statement of account showing the condition of the Trust Fund and all investments, receipts, disbursements and other transactions effected by the nondiscretionary Trustee during the Plan Year covered by the statement and also stating the assets of the Trust held at the end of the Plan Year, which accounts are conclusive on all persons, including the Named Fiduciary, the Employer and the Plan Administrator, except as to any act or transaction concerning which the Named Fiduciary, the Employer or the Plan Administrator files with the nondiscretionary Trustee written exceptions or objections within 90 days after the receipt of the accounts or for which ERISA authorizes a longer period within which to object.

(m)  To begin, maintain or defend any litigation necessary in connection with the administration of the Plan, except the Trustee is not obliged nor required to do so unless indemnified to its satisfaction.

Appointment of Custodian. The Employer may appoint a Custodian under the Plan, the acceptance by the Custodian indicated on the execution page of the Adoption Agreement. If the Employer appoints a Custodian, the Plan must have a discretionary Trustee, as described in Section 10.03(A). A Custodian has the same powers, rights and duties as a nondiscretionary Trustee, as described in this Section 10.03(B). The Custodian accepts the terms of the Plan and Trust by executing the Adoption Agreement. Any reference in the Plan to a Trustee also is a reference to a Custodian where the context of the Plan dictates. A limitation of the Trustee’s liability by Plan provision also acts as a limitation of the Custodian’s liability. Any action taken by the Custodian at the discretionary Trustee’s direction satisfies any provision in the Plan referring to the Trustee’s taking that action.

Modification of Powers/Limited Responsibility. The Employer and the nondiscretionary Trustee (or the Custodian), in writing, may limit the powers of the Custodian or the nondiscretionary Trustee to any combination of powers listed within this Section 10.03(B). If there is a Custodian or a nondiscretionary Trustee under the Plan, then the Employer, in adopting this Plan acknowledges the Custodian or the nondiscretionary Trustee does not have any discretion with respect to the investment or the re-investment of the Trust Fund and the Custodian or the nondiscretionary Trustee is acting solely as a custodian or as a directed trustee with respect to the assets comprising the Trust Fund.

(C)  Limitation of Powers of Certain Custodians. If a Custodian is a bank which, under its governing state law, does not possess trust powers, then Paragraphs (a), (c) as it relates to common trust funds or collective investment funds, (d), (f), (g) and (h) of Section 10.03(B), Section 10.17 and Article XI do not apply to that bank and that bank only has the power and the authority to exercise the remaining powers, rights and duties under Section 10.03(B).

(D)  Named Fiduciary/Limitation of Liability of Nondiscretionary Trustee or Custodian. The Named Fiduciary under the Plan has the sole responsibility for the management and the control of the Trust Fund, except with respect to a Plan asset under the control or the direction of a properly appointed Investment Manager or with respect to a Plan asset properly subject to Participant or Employer direction of investment. If the Employer appoints a discretionary Trustee, the Named Fiduciary is the discretionary Trustee. If the Employer appoints a Custodian, the Named Fiduciary is the discretionary Trustee. Under a nondiscretionary Trustee designation, unless the Employer designates in writing another person or persons to serve as Named Fiduciary, the Named Fiduciary under the Plan is the president of a corporate Employer, the managing partner of a partnership Employer, the managing member of a limited liability company Employer or the sole proprietor, as appropriate. The Named Fiduciary will exercise its management and control of the Trust Fund through its written direction to the nondiscretionary Trustee or to the Custodian, whichever applies to the Plan.

The nondiscretionary Trustee or the Custodian does not have any duty to review or to make recommendations regarding investments made at the written direction of the Named Fiduciary. The nondiscretionary Trustee or the Custodian must retain any investment obtained at the written direction of the Named Fiduciary until further directed in writing by the Named Fiduciary to dispose of such investment. The nondiscretionary Trustee or the Custodian is not liable in any manner or for any reason for making, retaining or disposing of any investment pursuant to any written direction of the Named Fiduciary. The Employer will indemnify, defend and hold the nondiscretionary Trustee or the Custodian harmless from any damages, costs or expenses, including reasonable attorneys’ fees, which the nondiscretionary Trustee or the Custodian may incur as a result of any claim asserted against the nondiscretionary Trustee, the Custodian or the Trust arising out of the nondiscretionary Trustee’s or Custodian’s full and timely compliance with any written direction of the Named Fiduciary.

(E)  Participant Loans. This Section 10.03(E) specifically authorizes the Trustee to make loans on a nondiscriminatory basis to a Participant or to a Beneficiary in accordance with the loan policy established by the Plan Administrator, provided: (1) the loan policy satisfies the requirements of Section 9.04; (2) loans are available to all Participants and Beneficiaries on a reasonably equivalent basis and are not available in a greater amount for Highly Compensated Employees than for Nonhighly Compensated Employees; (3) any loan is adequately secured and bears a reasonable rate of interest; (4) the loan provides for

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repayment within a specified time (however, the loan policy may suspend loan payments pursuant to Code §414(u)(4) or otherwise in accordance with applicable Treasury Regulations); (5) the default provisions of the note permit offset of the Participant’s Vested Account Balance only at the time when the Participant has a distributable event under the Plan, but without regard to whether the Participant consents to distribution as otherwise may be required under Section 6.01(A)(5); (6) the amount of the loan does not exceed (at the time the Plan extends the loan) the present value of the Participant’s Vested Account Balance; and (7) the loan otherwise conforms to the exemption provided by Code §4975(d)(1). The loan policy may provide a Participant’s loan default is a distributable event with respect to the defaulted amount, irrespective of whether the Participant otherwise has incurred a distributable event at the time of default, except as to amounts which the Participant used to secure his/her loan which remain subject to distribution restrictions under Section 14.11 or are money purchase pension plan or target benefit plan balances which may not be distributed in-service at the time of default. If the joint and survivor requirements of Article VI apply to the Participant, the Participant may not pledge any portion of his/her Account Balance as security for a loan unless, within the 90 day period ending on the date the pledge becomes effective, the Participant’s spouse, if any, consents (in a manner described in Section 6.05 other than the requirement relating to the consent of a subsequent spouse) to the security or, by separate consent, to an increase in the amount of security.

A Participant who is an Owner-Employee (including other persons described in Code §4975(f)(6)), or who is a Shareholder-Employee may not receive a loan from the Plan, unless he/she has obtained a prohibited transaction exemption from the DOL.

(F)  Investment in Qualifying Employer Securities and Qualifying Employer Real Property. The Trustee (or as applicable, Investment Manager, Employer or Participant) may invest in qualifying Employer securities or in qualifying Employer real property, as defined in and as limited by ERISA. If the Employer’s Plan is a profit sharing plan, the aggregate investments in qualifying Employer securities and in qualifying Employer real property may exceed 10% of the value of Plan assets, unless the Employer elects in its Adoption Agreement to restrict such investments to 10% (or to some other percentage which is less than 100%). Notwithstanding the foregoing, except where permitted under ERISA §407(b)(2), if the Plan includes a 401(k) arrangement, a participant’s Deferral Contributions Account accumulated in Plan Years beginning after December 31, 1998, including earnings thereon, may not be invested more than 10% in qualifying employer securities and qualifying employer real property, unless such investments are directed by the Participant or the Participant’s Beneficiary.

(G)  Modifications to or Substitution of Trust. The Employer in its Standardized Adoption Agreement may not amend any provision of Article X (or any other provision of the Plan related to the Trust) except to specify the Trust year, the names of the Plan, the Employer, the Trustee, the Custodian, the Plan Administrator, other fiduciaries or the name of any pooled trust in which the Trust will participate. The Employer in its Nonstandardized Adoption Agreement, in addition to the foregoing amendments, may amend or override the administrative provisions of Article X (or any other provision of the Plan related to the Trust), including provisions relating to Trust investment and Trustee duties. Any such amendment: (1) must not conflict with any other provisions of the Plan (except as expressly are intended to override an existing Trust provision); (2) must not cause the Plan to violate Code §401(a); and (3) must be made in accordance with Rev. Proc. 2000-20 or any successor thereto. The Employer using either a Standardized or Nonstandardized Adoption Agreement to establish its Plan, subject to the conditions (1), (2) and (3) described above, may elect to substitute in place of Article X and the remaining trust provisions of the basic plan document, any other trust or custodial account agreement. All Section 10.03(G) Trust modifications or substitutions are subject to Section 13.02 and require the written consent or signature of the Trustee.

(H)  Cofiduciary Liability. Each fiduciary under the Plan is responsible solely for his/her or its own acts or omissions. A fiduciary does not have any liability for another fiduciary’s breach of fiduciary responsibility with respect to the Plan and the Trust unless the fiduciary: (1) participates knowingly in or undertakes to conceal the breach; (2) has actual knowledge of the breach and fails to take reasonable remedial action to remedy the breach; or (3) through negligence in performing his/her or its own specific fiduciary responsibilities that give rise to fiduciary status, the fiduciary has enabled the other fiduciary to commit a breach of the latter’s fiduciary responsibility.

10.04  RECORDS AND STATEMENTS. The records of the Trustee pertaining to the Plan must be open to the inspection of the Plan Administrator and the Employer at all reasonable times and may be audited from time to time by any person or persons as the Employer or Plan Administrator may specify in writing. The Trustee must furnish the Plan Administrator with whatever information relating to the Trust Fund the Plan Administrator considers necessary to perform its duties as Plan Administrator.

10.05  FEES AND EXPENSES FROM FUND. A Trustee or a Custodian will receive reasonable compensation as may be agreed upon from time to time between the Employer and the Trustee or the Custodian. No person who is receiving full pay from the Employer may receive compensation (except for reimbursement of Plan expenses) for services as Trustee or as Custodian. The Trustee will pay from the Trust Fund all fees and reasonable expenses incurred by the Plan, to the extent such fees and expenses are for the ordinary and necessary administration and operation of the Plan and are not “settlor expenses” as determined by the DOL unless the Employer pays such fees and expenses. Any fee or expense paid, directly or indirectly, by the Employer is not an Employer contribution to the Plan, provided the fee or the expense relates to the ordinary and necessary administration of the Trust Fund.

10.06  PARTIES TO LITIGATION. Except as otherwise provided by ERISA, a Participant or a Beneficiary is not a necessary party or required to receive notice of process in any court proceeding involving the Plan, the Trust Fund or any fiduciary of the Plan. Any final judgment entered in any such proceeding will be binding upon the Employer, the Plan Administrator, the Trustee,

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Custodian, Participants and Beneficiaries and upon their successors and assigns.

10.07  PROFESSIONAL AGENTS. The Trustee may employ and pay from the Trust Fund reasonable compensation to agents, attorneys, accountants and other persons to advise the Trustee as in its opinion may be necessary. The Trustee reasonably may delegate to any agent, attorney, accountant or other person selected by it any non-Trustee power or duty vested in it by the Plan, and the Trustee may reasonably act or refrain from acting on the advice or opinion of any agent, attorney, accountant or other person so selected.

10.08 DISTRIBUTION OF CASH OR PROPERTY. The Trustee will make Plan distributions in the form of cash except where: (1) the required form of distribution is a QJSA or QPSA which has not been waived; (2) the Plan is a restated Plan and under the prior Plan, distribution in the form of property (“in-kind distribution”) is a Protected Benefit (3) the Plan Administrator adopts a written policy which provides for in-kind distribution; or (4) the Employer is terminating the Plan, and in the reasonable judgement of the Trustee, some or all Plan assets may not within a reasonable time for making final distribution of Plan assets, be liquidated to cash or may not be so liquidated without undue loss in value. The Plan Administrator’s policy under clause (3) may restrict in-kind distributions to certain types of Trust investments or specify any other reasonable and nondiscriminatory condition or restriction applicable to in-kind distributions. Under clause (4), the Trustee will make Plan termination distributions to Participants and Beneficiaries in cash, in-kind or in a combination of these forms, in a reasonable and nondiscriminatory manner which may take into account the preferences of the distributees. All in-kind distributions will be made based on the current fair market value of the property, as determined by the Trustee.

10.09  PARTICIPANT OR BENEFICIARY INCAPACITATED. If, in the opinion of the Plan Administrator or of the Trustee, a Participant or Beneficiary entitled to a Plan distribution is not able to care for his/her affairs because of a mental condition, a physical condition, or by reason of age, at the direction of the Plan Administrator the Trustee may make the distribution to the Participant’s or Beneficiary’s guardian, conservator, trustee, custodian (including under a Uniform Transfers or Gifts to Minors Act) or to his/her attorney-in-fact or to other legal representative upon furnishing evidence of such status satisfactory to the Plan Administrator and to the Trustee. The Plan Administrator and the Trustee do not have any liability with respect to payments so made and neither the Plan Administrator nor the Trustee has any duty to make inquiry as to the competence of any person entitled to receive payments under the Plan.

10.10  DISTRIBUTION DIRECTIONS. The Trustee must promptly notify the Plan Administrator of any unclaimed Plan distribution and then dispose of the distribution in accordance with the Plan Administrator’s subsequent direction.

10.11  THIRD PARTY RELIANCE. A person dealing with the Trustee is not obligated to see to the proper application of any money paid or property delivered to the Trustee, or to inquire whether the Trustee has acted pursuant to any of the terms of the Plan. Each person dealing with the Trustee may act upon any notice, request or representation in writing by the Trustee, or by the Trustee’s duly authorized agent, and is not liable to any person in so acting. The certificate of the Trustee that it is acting in accordance with the Plan is conclusive in favor of any person relying on the certificate.

10.12  MULTIPLE TRUSTEES. If more than two persons act as Trustee, a decision of the majority of such persons controls with respect to any decision regarding the administration or the investment of the Trust Fund or of any portion of the Trust Fund with respect to which such persons act as Trustee. If there is more than one Trustee, the Trustees jointly will manage and control the assets of the Trust Fund. However, the Trustees may allocate among themselves specific responsibilities or obligations or may authorize one or more of them, either individually or in concert, to exercise any or all of the powers granted to the Trustee under Article X. In addition, the signature of only one Trustee is necessary to effect any transaction on behalf of the Trust.

10.13  RESIGNATION AND REMOVAL. The Trustee or the Custodian may resign its position by giving written notice to the Employer and to the Plan Administrator. The Trustee’s notice must specify the effective date of the Trustee’s resignation, which date must be at least 30 days following the date of the Trustee’s notice, unless the Employer consents in writing to shorter notice.

The Employer may remove a Trustee or a Custodian by giving written notice to the effected party. The Employer’s notice must specify the effective date of removal which date must be at least 30 days following the date of the Employer’s notice, except where the Employer reasonably determines a shorter notice period or immediate removal is necessary to protect Plan assets.

In the event of the resignation or the removal of a Trustee, where no other Trustee continues to service, the Employer must appoint a successor Trustee if it intends to continue the Plan. If two or more persons hold the position of Trustee, in the event of the removal of one such person, during any period the selection of a replacement is pending, or during any period such person is unable to serve for any reason, the remaining person or persons will act as the Trustee. If the Employer fails to appoint a successor Trustee as of the effective date of the Trustee resignation or removal and no other Trustee remains, the Trustee will treat the Employer as having appointed itself as Trustee and as having filed the Employer’s acceptance of appointment as successor Trustee with the former Trustee. If state law prohibits the Employer from serving as successor Trustee, the appointed successor Trustee is the president of a corporate Employer, the managing partner of a partnership Employer, the managing member of a limited liability company Employer or the sole proprietor, as appropriate. If the Employer removes and does not replace a Custodian, the discretionary Trustee will assume possession of Plan assets held by the former Custodian.

10.14  SUCCESSOR TRUSTEE ACCEPTANCE. Each successor Trustee succeeds its predecessor Trustee by accepting in writing its appointment as successor Trustee and by filing the acceptance with the former Trustee and

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the Plan Administrator without the signing or filing of any further statement. The resigning or removed Trustee, upon receipt of acceptance in writing of the Trust by the successor Trustee, must execute all documents and do all acts necessary to vest the title of record in any successor Trustee. Each successor Trustee has and enjoys all of the powers, both discretionary and ministerial, conferred under the Plan upon its predecessor. A successor Trustee is not personally liable for any act or failure to act of any predecessor Trustee, except as required under ERISA. With the approval of the Employer and the Plan Administrator, a successor Trustee, with respect to the Plan, may accept the account rendered and the property delivered to it by a predecessor Trustee without liability.

10.15  VALUATION OF TRUST. The Trustee must value the Trust Fund as of each Accounting Date to determine the fair market value of each Participant’s Account Balance in the Trust. The Trustee also must value the Trust Fund on such other valuation dates as directed in writing by the Plan Administrator or as the Adoption Agreement may require.

10.16  LIMITATION ON LIABILITY - IF INVESTMENT MANAGER, ANCILLARY TRUSTEE OR INDEPENDENT FIDUCIARY APPOINTED. The Trustee is not liable for the acts or omissions of any Investment Manager the Plan Administrator may appoint, nor is the Trustee under any obligation to invest or otherwise to manage any asset of the Trust Fund which is subject to the management of a properly appointed Investment Manager. The Plan Administrator, the Trustee and any properly appointed Investment Manager may execute a written agreement as a part of this Plan delineating the duties, responsibilities and liabilities of the Investment Manager with respect to any part of the Trust Fund under the control of the Investment Manager.

The limitation on liability described in this Section 10.16 also applies to the acts or omissions of any ancillary trustee or independent fiduciary properly appointed under Section 10.18. However, if a discretionary Trustee, pursuant to the delegation described in Section 10.18, appoints an ancillary trustee, the discretionary Trustee is responsible for the periodic review of the ancillary trustee’s actions and must exercise its delegated authority in accordance with the terms of the Plan and in a manner consistent with ERISA. The Employer, the discretionary Trustee and an ancillary trustee may execute a written agreement as a part of this Plan delineating any indemnification agreement among the parties.

10.17  INVESTMENT IN GROUP TRUST FUND. The Employer, by adopting this Plan, specifically authorizes the Trustee to invest all or any portion of the assets comprising the Trust Fund in any group trust fund which at the time of the investment provides for the pooling of the assets of plans qualified under Code §401(a). This authorization applies solely to a group trust fund exempt from taxation under Code §501(a) and the trust agreement of which satisfies the requirements of Revenue Ruling 81-100, or any successor thereto. The provisions of the group trust fund agreement, as amended from time to time, are by this reference incorporated within this Plan and Trust. The provisions of the group trust fund will govern any investment of Plan assets in that fund. The Employer must specify in an Addendum to its Adoption Agreement the group trust fund(s) to which this authorization applies. If the Trustee is acting as a nondiscretionary Trustee, the investment in the group trust fund is available only in accordance with a proper direction, by the Named Fiduciary, in accordance with Section 10.03(B). Pursuant to Paragraph (c) of Section 10.03(A), a Trustee has the authority to invest in certain common trust funds and collective investment funds without the need for the authorizing Addendum described in this Section 10.17.

Furthermore, at the Employer’s direction, the Trustee, for collective investment purposes, may combine into one trust fund the Trust created under this Plan with the trust created under any other qualified retirement plan the Employer maintains. However, the Trustee must maintain separate records of account for the assets of each Trust in order to reflect properly each Participant’s Account Balance under the qualified plans in which he/she is a participant.

10.18  APPOINTMENT OF ANCILLARY TRUSTEE OR INDEPENDENT FIDUCIARY. The Employer, in writing, may appoint any qualified person in any state to act as ancillary trustee with respect to a designated portion of the Trust Fund, subject to any consent required under Section 1.33. An ancillary trustee must acknowledge in writing its acceptance of the terms and conditions of its appointment as ancillary trustee and its fiduciary status under ERISA. The ancillary trustee has the rights, powers, duties and discretion as the Employer may delegate, subject to any limitations or directions specified in the agreement appointing the ancillary trustee and to the terms of the Plan or of ERISA. The investment powers delegated to the ancillary trustee may include any investment powers available under Section 10.03. The delegated investment powers may include the right to invest any portion of the assets of the Trust Fund in a common trust fund, as described in Code §584, or in any collective investment fund, the provisions of which govern the investment of such assets and which the Plan incorporates by this reference, but only if the ancillary trustee is a bank or similar financial institution supervised by the United States or by a state and the ancillary trustee (or its affiliate, as defined in Code §1504) maintains the common trust fund or collective investment fund exclusively for the collective investment of money contributed by the ancillary trustee (or its affiliate) in a trustee capacity and which conforms to the rules of the Comptroller of the Currency. The Employer also may appoint as an ancillary trustee, the trustee of any group trust fund designated for investment pursuant to the provisions of Section 10.17.

The ancillary trustee may resign its position and the Employer may remove an ancillary trustee as provided in Section 10.13 regarding resignation and removal of the Trustee or Custodian. In the event of such resignation or removal, the Employer may appoint another ancillary trustee or may return the assets to the control and management of the Trustee. The Employer may delegate its responsibilities under this Section 10.18 to a discretionary Trustee under the Plan, but not to a nondiscretionary Trustee or to a Custodian, subject to the acceptance by the discretionary Trustee of that delegation.

If the DOL requires engagement of an independent fiduciary to have control or management of all or a portion of the Trust Fund, the Employer will appoint such independent fiduciary, as directed by the DOL. The

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independent fiduciary will have the duties, responsibilities and powers prescribed by the DOL and will exercise those duties, responsibilities and powers in accordance with the terms, restrictions and conditions established by the DOL and, to the extent not inconsistent with ERISA, the terms of the Plan. The independent fiduciary must accept its appointment in writing and must acknowledge its status as a fiduciary of the Plan.

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ARTICLE XI
PROVISIONS RELATING TO INSURANCE AND INSURANCE COMPANY

11.01  INSURANCE BENEFIT. The Employer may elect to provide incidental life insurance benefits for insurable Participants who consent to life insurance benefits by executing the appropriate insurance company application form. The Trustee will not purchase any incidental life insurance benefit for any Participant prior to a contribution allocation to the Participant’s Account. At an insured Participant’s written direction, the Trustee will use all or any portion of the Participant’s Employee contributions, if any, to pay insurance premiums covering the Participant’s life. This Section 11.01 also authorizes (except if the Plan is a money purchase pension plan) the purchase of life insurance, for the benefit of the Participant, on the life of a family member of the Participant or on any person in whom the Participant has an insurable interest. However, if the policy is on the joint lives of the Participant and another person, the Trustee may not maintain that policy if the other person predeceases the Participant.

The Employer will direct the Trustee as to the insurance company and insurance agent through which the Trustee is to purchase the insurance contracts, the amount of the coverage and the applicable dividend plan. Each application for a policy, and the policies themselves, must designate the Trustee as sole owner, with the right reserved to the Trustee to exercise any right or option contained in the policies, subject to the terms and provisions of this Plan. The Trustee must be the named beneficiary for the Account of the insured Participant. Proceeds of insurance contracts paid to the Participant’s Account under this Article XI are subject to the distribution requirements of Article VI. The Trustee will not retain any such proceeds for the benefit of the Trust.

The Trustee will charge the premiums on any incidental benefit insurance contract covering the life of a Participant against the Account of that Participant and will treat the insurance contract as a directed investment of the Participant’s Account, even if the Plan otherwise does not permit a Participant to direct the investment of his/her own Account. The Trustee will hold all incidental benefit insurance contracts issued under the Plan as assets of the Trust created and maintained under the Plan.

(A)  Incidental insurance benefits. The aggregate of life insurance premiums paid for the benefit of a Participant, at all times, may not exceed the following percentages of the aggregate of the Employer’s contributions (including Deferral Contributions and forfeitures) allocated to any Participant’s Account: (i) 49% in the case of the purchase of ordinary life insurance contracts; or (ii) 25% in the case of the purchase of term life insurance or universal life insurance contracts. If the Trustee purchases a combination of ordinary life insurance contract(s) and term life insurance or universal life insurance contract(s), then the sum of one-half of the premiums paid for the ordinary life insurance contract(s) and the premiums paid for the term life insurance or universal life insurance contract(s) may not exceed 25% of the Employer contributions allocated to any Participant’s Account.

(B)  Exception for certain profit sharing plans. If the Plan is a profit sharing plan, the incidental insurance benefits requirement does not apply to the Plan if the Plan purchases life insurance benefits only from Employer contributions accumulated in the Participant’s Account for at least two years (measured from the allocation date).

(C)  Exception for other amounts. The incidental insurance benefits requirement does not apply to life insurance purchased with Employee contributions, rollover contributions, or earnings on Employer contributions.

11.02  LIMITATION ON LIFE INSURANCE PROTECTION. The Trustee will not continue any life insurance protection for any Participant beyond his/her annuity starting date as defined in Section 6.01(A)(4). If the Trustee holds any incidental benefit insurance contract(s) for the benefit of a Participant when he/she terminates his/her employment (other than by reason of death), the Trustee must proceed as follows:

(a)  If the entire cash value of the contract(s) is Vested in the terminating Participant, or if the contract(s) will not have any cash value at the end of the policy year in which Separation from Service occurs, the Trustee will transfer the contract(s) to the Participant endorsed so as to vest in the transferee all right, title and interest to the contract(s), free and clear of the Trust; subject however, to restrictions as to surrender or payment of benefits as the issuing insurance company may permit and as the Plan Administrator directs;

(b)  If only part of the cash value of the contract(s) is Vested in the terminating Participant, the Trustee, to the extent the Participant’s interest in the cash value of the contract(s) is not Vested, may adjust the Participant’s interest in the value of his/her Account attributable to Trust assets other than incidental benefit insurance contracts and proceed as in (a), or the Trustee must effect a loan from the issuing insurance company on the sole security of the contract(s) for an amount equal to the difference between the cash value of the contract(s) at the end of the policy year in which termination of employment occurs and the amount of the cash value that is Vested in the terminating Participant, and the Trustee must transfer the contract(s) endorsed so as to vest in the transferee all right, title and interest to the contract(s), free and clear of the Trust; subject however, to the restrictions as to surrender or payment of benefits as the issuing insurance company may permit and the Plan Administrator directs;

(c)  If no part of the cash value of the contract(s) is Vested in the terminating Participant, the Trustee must surrender the contract(s) for cash proceeds as may be available.

In accordance with the written direction of the Plan Administrator, the Trustee will make any transfer of contract(s) under this Section 11.02 on the Participant’s annuity starting date (or as soon as administratively practicable after that date). The Trustee may not transfer any contract under this Section 11.02 which contains a method of payment not specifically authorized by Article VI or which fails to comply with the joint and survivor annuity requirements, if applicable, of Article VI. In this regard, the Trustee either must convert such a contract to cash and distribute the cash instead of the contract, or

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before making the transfer, must require the issuing company to delete the unauthorized method of payment option from the contract.

11.03  DEFINITIONS. For purposes of this Article XI:

(a)  “Policy” means an ordinary life, term life or universal life insurance contract issued by an insurer on the life of a Participant.

(b)  “Issuing insurance company” is any life insurance company which has issued a policy upon application by the Trustee under the terms of this Plan.

(c)  “Contract” or “Contracts” means a policy of insurance. In the event of any conflict between the provisions of this Plan and the terms of any contract or policy of insurance issued in accordance with this Article XI, the provisions of the Plan control.

(d)  “Insurable Participant” means a Participant to whom an insurance company, upon an application being submitted in accordance with the Plan, will issue insurance coverage, either as a standard risk or as a risk in an extra mortality classification.

11.04  DIVIDEND PLAN. The dividend plan is premium reduction unless the Plan Administrator directs the Trustee to the contrary. The Trustee must use all dividends for a contract to purchase insurance benefits or additional insurance benefits for the Participant on whose life the insurance company has issued the contract. Furthermore, the Trustee must arrange, where possible, for all policies issued on the lives of Participants under the Plan to have the same premium due date and all ordinary life insurance contracts to contain guaranteed cash values with as uniform basic options as are possible to obtain. The term “dividends” includes policy dividends, refunds of premiums and other credits.

11.05  INSURANCE COMPANY NOT A PARTY TO AGREEMENT. No insurance company, solely in its capacity as an issuing insurance company, is a party to this Plan nor is the company responsible for its validity.

11.06  NO RESPONSIBILITY FOR OTHERS. Except as required by ERISA, an issuing insurance company has no responsibility or obligation under the Plan to Participants or Beneficiaries for any act (unless the insurance company also serves in such capacities) required of the Employer, the Plan Administrator, the Trustee, the Custodian or any other service provider to the Plan. No insurance company, solely in its capacity as an issuing insurance company, need examine the terms of this Plan. For the purpose of making application to an insurance company and in the exercise of any right or option contained in any policy, the insurance company may rely upon the signature of the Trustee and is held harmless and completely discharged in acting at the direction and authorization of the Trustee. An insurance company is discharged from all liability for any amount paid to the Trustee or paid in accordance with the direction of the Trustee, and is not obliged to see to the distribution or further application of any moneys the insurance company so pays.

11.07  DUTIES OF INSURANCE COMPANY. Each insurance company must keep such records, make such identification of contracts, funds and accounts within funds, and supply such information as may be necessary for the proper administration of the Plan under which it is carrying insurance benefits.

Note: The provisions of this Article XI are not applicable, and the Plan may not invest in insurance contracts, if a Custodian signatory to the Adoption Agreement is a bank which does not have trust powers from its governing state banking authority.

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ARTICLE XII
TOP-HEAVY PROVISIONS

12.01  DETERMINATION OF TOP-HEAVY STATUS. If this Plan is the only qualified plan maintained by the Employer, the Plan is top-heavy for a Plan Year if the top-heavy ratio as of the Determination Date exceeds 60%. The top-heavy ratio is a fraction, the numerator of which is the sum of the Account Balances of all Key Employees as of the Determination Date and the denominator of which is a similar sum determined for all Employees.

The Plan Administrator must include in the top-heavy ratio, as part of the Account Balances, any contribution not made as of the Determination Date but includible under Code §416 and the applicable Treasury regulations, and distributions made within the Determination Period. The Plan Administrator must calculate the top-heavy ratio by disregarding the Account Balance (and distributions, if any, of the Account Balance) of any Non-Key Employee who was formerly a Key Employee, and by disregarding the Account Balance (including distributions, if any, of the Account Balance) of an individual who has not received credit for at least one Hour of Service with the Employer during the Determination Period. The Plan Administrator must calculate the top-heavy ratio, including the extent to which it must take into account distributions, rollovers and transfers, in accordance with Code §416 and the regulations under that Code section.

If the Employer maintains other qualified plans (including a simplified employee pension plan), or maintained another such plan now terminated, this Plan is top-heavy only if it is part of the Required Aggregation Group, and the top-heavy ratio for the Required Aggregation Group and for the Permissive Aggregation Group, if any, each exceeds 60%. The Plan Administrator will calculate the top-heavy ratio in the same manner as required by the first two paragraphs of this Section 12.01, taking into account all plans within the Aggregation Group. To the extent the Plan Administrator must take into account distributions to a Participant, the Plan Administrator must include distributions from a terminated plan which would have been part of the Required Aggregation Group if it were in existence on the Determination Date. The Plan Administrator will calculate the present value of accrued benefits under defined benefit plans or the account balances under simplified employee pension plans included within the group in accordance with the terms of those plans, Code §416 and the regulations under that Code section.

If a Participant in a defined benefit plan is a Non-Key Employee, the Plan Administrator will determine his/her accrued benefit under the accrual method, if any, which is applicable uniformly to all defined benefit plans maintained by the Employer or, if there is no uniform method, in accordance with the slowest accrual rate permitted under the fractional rule accrual method described in Code §411(b)(1)(C). If the Employer maintains a defined benefit plan, the Plan Administrator will use the actuarial assumptions (interest and mortality only) stated in that plan to calculate the present value of benefits from that defined benefit plan. If an aggregated plan does not have a valuation date coinciding with the Determination Date, the Plan Administrator must value the Account Balance in the aggregated plan as of the most recent valuation date falling within the twelve-month period ending on the Determination Date, except as Code §416 and applicable Treasury regulations require for the first and for the second plan year of a defined benefit plan. The Plan Administrator will calculate the top-heavy ratio with reference to the Determination Dates that fall within the same calendar year. The top-heavy provisions of the Plan apply only for Plan Years in which Code §416 requires application of the top-heavy rules.

12.02  DEFINITIONS. For purposes of applying the top-heavy provisions of the Plan:

(a)  “Compensation” means Compensation as determined under Section 3.18(b) for Code §415 purposes and includes Compensation for the entire Plan Year.

(b)  “Determination Date” means for any Plan Year, the Accounting Date of the preceding Plan Year or, in the case of the first Plan Year of the Plan, the Accounting Date of that Plan Year.

(c)  “Determination Period” means the 5-year period ending on the Determination Date.

(d)  “Employer” means the Employer that adopts this Plan and any Related Employer.

(e)  “Key Employee” means, as of any Determination Date, any Employee or former Employee (or Beneficiary of such Employee) who, at any time during the Determination Period: (i) has Compensation in excess of 50% of the dollar amount prescribed in Code §415(b)(1)(A) (relating to defined benefit plans) and is an officer of the Employer; (ii) has Compensation in excess of the dollar amount prescribed in Code §415(c)(1)(A) (relating to defined contribution plans), owns a more than ½% interest in the Employer and is one of the Employees owning the ten largest interests in the Employer; (iii) is a more than 5% owner of the Employer; or (iv) is a more than 1% owner of the Employer and has Compensation of more than $150,000. The constructive ownership rules of Code §318 (or the principles of that Code section, in the case of an unincorporated Employer,) will apply to determine ownership in the Employer. The number of officers taken into account under clause (i) will not exceed the greater of 3 or 10% of the total number (after application of the Code §414(q) exclusions) of Employees, but no more than 50 officers. The Plan Administrator will make the determination of who is a Key Employee in accordance with Code §416(i)(1) and the regulations under that Code section.

(f)  “Non-Key Employee” means an Employee who does not meet the definition of Key Employee.

(g)  “Participant” means any Employee otherwise eligible to participate in the Plan but who is not entitled to receive any allocation under the Plan (or would have received a lesser allocation) for the Plan Year because of his/her Compensation level or because of his/her failure: (i) to make elective deferrals under a 401(k) arrangement; (ii) to make Employee contributions; or (iii) to complete 1,000 Hours of Service or any other service requirement the

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Employer specifies in its Adoption Agreement as a condition to receive an allocation except for employment on the last day of the Plan Year.

(h)  “Permissive Aggregation Group” means the Required Aggregation Group plus any other qualified plans maintained by the Employer, but only if such group would satisfy in the aggregate the nondiscrimination requirements of Code §401(a)(4) and the coverage requirements of Code §410. The Plan Administrator will determine the Permissive Aggregation Group.

(i)  “Required Aggregation Group” means: (i) each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the Determination Period (including terminated plans); and (ii) any other qualified plan of the Employer which enables a plan described in clause (i) to meet the requirements of Code §401(a)(4) or of Code §410.

12.03  TOP-HEAVY MINIMUM ALLOCATION. The top-heavy minimum allocation requirement applies to the Plan only in a Plan Year for which the Plan is top-heavy. If the Plan is top-heavy in any Plan Year:

(a)  Each Non-Key Employee who is a Participant (as described in Section 12.02(g)) and employed by the Employer on the last day of the Plan Year will receive a top-heavy minimum allocation for that Plan Year.

(b)  The top-heavy minimum allocation is equal to the lesser of 3% of the Non-Key Employee’s Compensation for the Plan Year or the highest contribution rate for the Plan Year made on behalf of any Key Employee. However, if a defined benefit plan maintained by the Employer which benefits a Key Employee depends on this Plan to satisfy the nondiscrimination rules of Code §401(a)(4) or the coverage rules of Code §410 (or another plan benefiting the Key Employee so depends on such defined benefit plan), the top-heavy minimum allocation is 3% of the Non-Key Employee’s Compensation regardless of the contribution rate for the Key Employees.

(c)  If, for a Plan Year, there are no allocations of Employer contributions or of forfeitures for any Key Employee, the Plan does not require any top-heavy minimum allocation for the Plan Year, unless a top-heavy minimum allocation applies because of the maintenance by the Employer of more than one plan.

12.04  DETERMINING TOP-HEAVY CONTRIBUTION RATES. In determining under Section 12.03(b) the highest contribution rate for any Key Employee, the Plan Administrator takes into account all Employer contributions (including deferral contributions and including matching contributions but not including Employer contributions to Social Security) and forfeitures allocated to the Participant’s Account for the Plan Year, divided by his/her Compensation for the entire Plan Year. For purposes of satisfying the Employer’s top-heavy minimum allocation requirement, the Plan Administrator disregards the elective deferrals and matching contributions allocated to a Non-Key Employee’s Account in determining the Non-Key Employee’s contribution rate. However, the Plan Administrator operationally may include in the contribution rate of a Non-Key Employee any matching contributions not necessary to satisfy the nondiscrimination requirements of Code §401(k) or of Code §401(m).

To determine a Participant’s contribution rate, the Plan Administrator must treat all qualified top-heavy defined contribution plans maintained by the Employer (or by any Related Employer) as a single plan.

12.05  PLAN WHICH WILL SATISFY TOP-HEAVY. The Plan will satisfy the top-heavy minimum allocation requirement in accordance with the following requirements:

(a)  If the Employer makes the top-heavy minimum allocation to this Plan, the Employer will make any necessary additional contribution to this Plan. The Plan Administrator first will allocate the Employer contributions (and Participant forfeitures, if any) for the Plan Year in accordance with the provisions of Adoption Agreement Section 3.04. The Employer then will contribute an additional amount for the Account of any Participant entitled under Section 12.03 to a top-heavy minimum allocation and whose contribution rate for the Plan Year, under this Plan and any other plan aggregated under Section 12.02, is less than the top-heavy minimum allocation. The additional amount is the amount necessary to increase the Participant’s contribution rate to the top-heavy minimum allocation. The Plan Administrator will allocate the additional contribution to the Account of the Participant on whose behalf the Employer makes the contribution.

(b)  If the Employer makes the top-heavy minimum allocation under another plan, this Plan does not provide the top-heavy minimum allocation and the Plan Administrator will allocate the annual Employer contributions (and Participant forfeitures) under the Plan solely in accordance with the allocation method selected under Adoption Agreement Section 3.04.

12.06  TOP-HEAVY VESTING. If the Plan is top-heavy and the Employer in its Adoption Agreement does not elect immediate vesting, the Employer must elect a top-heavy (or modified top-heavy) vesting schedule. The specified top-heavy vesting schedule applies to the Plan’s first top-heavy Plan Year and to all subsequent Plan Years, except as the Employer otherwise elects in its Adoption Agreement. If the Employer elects in its Adoption Agreement to apply the specified top-heavy vesting schedule only in Plan Years in which the Plan is top-heavy, any change in the Plan’s vesting schedule resulting from this election is subject to Section 5.11.

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ARTICLE XIII
EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION

13.01  EXCLUSIVE BENEFIT. Except as provided under Article III, the Employer does not have any beneficial interest in any asset of the Trust Fund and no part of any asset in the Trust Fund may ever revert to or be repaid to the Employer, either directly or indirectly; nor, prior to the satisfaction of all liabilities with respect to the Participants and their Beneficiaries under the Plan, may any part of the corpus or income of the Trust Fund, or any asset of the Trust Fund, be (at any time) used for, or diverted to, purposes other than the exclusive benefit of the Participants or their Beneficiaries and for defraying reasonable expenses of administering the Plan.

However, if the Commissioner of Internal Revenue, upon the Employer’s application for initial approval of this Plan, determines the Trust created under the Plan is not a qualified trust exempt from Federal income tax, then (and only then) the Trustee, upon written notice from the Employer, will return the Employer’s contributions (and the earnings thereon) to the Employer. The immediately preceding sentence applies only if the Employer makes the application for the determination by the time prescribed by law for filing the Employer’s tax return for the taxable year in which the Employer adopted the Plan, or by such later date as the Internal Revenue Service may prescribe. The Trustee must make the return of the Employer contribution under this Section 13.01 within one year of a final disposition of the Employer’s request for initial approval of the Plan. The Employer’s Plan and Trust will terminate upon the Trustee’s return of the Employer’s contributions.

13.02  AMENDMENT BY EMPLOYER. The Employer, consistent with this Section 13.02 and other applicable Plan provisions, has the right, at any time:

(a)  To amend the elective provisions of the Adoption Agreement in any manner it deems necessary or advisable;

(b)  To add overriding language in the Adoption Agreement to satisfy Code §§415 or 416 because of the required aggregation of multiple plans; and

(c)  To add model amendments published by the Revenue Service (the adoption of which the Revenue Service provides will not cause the Plan to be individually designed).

(A)  Amendment Formalities. The Employer must make all Plan amendments in writing by means of substituted Adoption Agreement pages or by restatement of the Adoption Agreement. The Employer (and Trustee if the Trustee’s written consent to the amendment is required under Section 10.03(G)), must execute a new Adoption Agreement Execution Page each time the Employer amends the Plan. Each amendment must specify the date as of which the amendment is either retroactively or prospectively effective. See Section 7.12 for the effect of certain amendments adopted by the Employer which will result in the Employer’s Plan losing Prototype Plan status.

(B)  Impermissible Amendment/Protected Benefits. An amendment may not authorize or permit any of the Trust Fund (other than the part required to pay taxes and reasonable administration expenses) to be used for or diverted to purposes other than for the exclusive benefit of the Participants or their Beneficiaries or estates. An amendment may not cause or permit any portion of the Trust Fund to revert to or become a property of the Employer. Furthermore, the Employer may not make any amendment which affects the rights, duties or responsibilities of the Trustee or of the Plan Administrator without the written consent of the affected Trustee or the Plan Administrator.

An amendment (including the adoption of this Plan as a restatement of an existing plan) may not decrease a Participant’s Account Balance, except to the extent permitted under Code §412(c)(8), and except as provided in Treasury regulations, may not reduce or eliminate Protected Benefits determined immediately prior to the adoption date (or, if later, the effective date) of the amendment. An amendment reduces or eliminates Protected Benefits if the amendment has the effect of either (1) eliminating or reducing an early retirement benefit or a retirement-type subsidy (as defined in Treasury regulations), or (2) except as provided by Treasury regulations, eliminating an optional form of benefit.

The Plan Administrator must disregard an amendment to the extent application of the amendment would fail to satisfy this Section 13.02(B). If the Plan Administrator must disregard an amendment because the amendment would violate clause (1) or clause (2), the Plan Administrator must maintain a schedule of the early retirement option or other optional forms of benefit the Plan must continue for the affected Participants.

13.03  AMENDMENT BY PROTOTYPE PLAN SPONSOR. The Prototype Plan Sponsor (or the mass submitter, as agent of the Prototype Plan Sponsor), without the Employer’s consent, may amend the Plan and Trust, from time to time, in order to conform the Plan and Trust to any requirement for qualification of the Plan and Trust under the Internal Revenue Code. The Prototype Plan Sponsor may not amend the Plan in any manner which would modify any election made by the Employer under the Plan without the Employer’s written consent. Furthermore, the Prototype Plan Sponsor may not amend the Plan in any manner which would violate the proscriptions of Section 13.02(B). If the Prototype Plan Sponsor does not adopt the amendments made by the mass submitter, it will no longer be the sponsor of an identical or minor modifier Prototype Plan of the mass submitter.

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13.04  PLAN TERMINATION OR SUSPENSION. The Employer subject to Section 13.02(B) and by proper Employer action has the right, at any time, to suspend or discontinue its contributions under the Plan and thereafter to continue to maintain the Plan (subject to such suspension or discontinuance) until the Employer terminates the Plan. The Employer subject to Section 13.02(B) and by proper Employer action has the right, at any time, to terminate this Plan and the Trust created and maintained under the Plan. The Plan will terminate upon the first to occur of the following:

(a)  The date terminated by proper action of the Employer; or

(b)  The dissolution or merger of the Employer, unless a successor makes provision to continue the Plan, in which event the successor must substitute itself as the Employer under this Plan. Any termination of the Plan resulting from this Paragraph (b) is not effective until compliance with any applicable notice requirements under ERISA.

13.05  FULL VESTING ON TERMINATION. Upon either full or partial termination of the Plan, or, if applicable, upon complete discontinuance of profit sharing plan contributions to the Plan, an affected Participant’s right to his/her Account Balance is 100% Vested, irrespective of the Vested percentage which otherwise would apply under Article V.

13.06  POST TERMINATION PROCEDURE AND DISTRIBUTION.

(A)  General Procedure. Upon termination of the Plan, the distribution provisions of Article VI remain operative, with the following exceptions:

(1)if the Participant’s Vested Account Balance does not exceed $5,000 (or exceeds $5,000 but is not “immediately distributable” in accordance with Section 6.01(A)(5)), the Plan Administrator will direct the Trustee to distribute in cash (subject to Section 10.08) the Participant’s Vested Account Balance to him/her in lump sum as soon as administratively practicable after the Plan terminates; and

(2)if the present value of the Participant’s Vested Account Balance exceeds $5,000 and is immediately distributable, the Participant or the Beneficiary, may elect to have the Trustee commence distribution in cash (subject to Section 10.08) of his/her Vested Account Balance in a lump sum as soon as administratively practicable after the Plan terminates. If a Participant with consent rights under this paragraph (2) does not elect an immediate lump sum distribution with spousal consent if required, to liquidate the Trust, the Plan Administrator will purchase a deferred annuity contract for each Participant which protects the Participant’s distribution rights under the Plan.

(B)  Profit Sharing Plan. If the Plan is a profit sharing plan, in lieu of applying Section 13.06(A) and the distribution provisions of Article VI, the Plan Administrator will direct the Trustee to distribute in cash (subject to Section 10.08) each Participant’s Vested Account Balance, in lump sum, as soon as administratively practicable after the termination of the Plan, irrespective of the Participant’s Vested Account Balance, the Participant’s age and whether the Participant consents to that distribution. This paragraph does not apply if: (1) the Plan at termination provides an annuity option which is a Protected Benefit and which the Employer may not eliminate by Plan amendment; or (2) as of the period between the Plan termination date and the final distribution of assets, the Employer maintains any other defined contribution plan (other than an ESOP). The Employer, in an Addendum to its Adoption Agreement, may elect not to have this paragraph apply.

(C)  Distribution restrictions under Code §401(k). If the Plan includes a 401(k) arrangement or if the Plan holds transferred assets described in Section 13.07 such that in either case, the distribution restrictions of Sections 14.03(d) and 14.11 apply, a Participant’s restricted balances are distributable on account of Plan termination, as described in this Section 13.06, only if: (a) the Employer does not maintain a successor plan and the Plan Administrator distributes the Participant’s entire Vested Account Balance in a lump sum; or (b) the Participant otherwise is entitled under the Plan to a distribution of his/her Vested Account Balance.

A successor plan under clause (b) is a defined contribution plan (other than an ESOP) maintained by the Employer (or by a Related Employer) at the time of the termination of the Plan or within the period ending twelve months after the final distribution of assets. However, a plan is not a successor plan if less than 2% of the Employees eligible to participate in the terminating Plan are eligible to participate (beginning 12 months prior to and ending 12 months after the Plan’s termination date) in the potential successor plan.

(D)  “Lost Participants.” If the Plan Administrator is unable to locate any Participant or Beneficiary whose Account becomes distributable upon Plan termination, the Plan Administrator will apply Section 9.11 except Section 9.11(B) does not apply.

(E)  Continuing Trust Provisions. The Trust will continue until the Trustee in accordance with the direction of the Plan Administrator has distributed all of the benefits under the Plan. On each valuation date, the Plan Administrator will credit any part of a Participant’s Account Balance retained in the Trust with its share of the Trust net income, gains or losses. Upon termination of the Plan, the amount, if any, in a suspense account under Article III will revert to the Employer, subject to the conditions of the Treasury regulations permitting such a reversion. A resolution or an amendment to discontinue all future benefit accrual but otherwise to continue maintenance of this Plan, is not a termination for purposes of this Section 13.06.

13.07  MERGER/DIRECT TRANSFER. The Trustee possesses the specific authority to enter into merger agreements or direct transfer of assets agreements with the trustees of other retirement plans described in Code §401(a), including an elective transfer, and to accept the direct transfer of plan assets, or to transfer plan assets, as a

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party to any such agreement. Except as provided in Section 13.07(A), the Trustee may not consent to, or be a party to, any merger or consolidation with another plan, or to a transfer of assets or liabilities to another plan (or from the other plan to this Plan), unless immediately after the merger, consolidation or transfer, the surviving plan provides each Participant a benefit equal to or greater than the benefit each Participant would have received had the transferring plan terminated immediately before the merger or the consolidation or the transfer. The Trustee will hold, administer and distribute the transferred assets as a part of the Trust Fund and the Trustee must maintain a separate Employer contribution Account for the benefit of the Employee on whose behalf the Trustee accepted the transfer in order to reflect the value of the transferred assets.

The Trustee may accept a direct transfer of plan assets on behalf of an Employee prior to the date the Employee satisfies the Plan’s eligibility conditions. If the Trustee accepts such a direct transfer of plan assets, the Plan Administrator and the Trustee must treat the Employee as a limited Participant as described in Section 4.04.

Sections 13.07(A) and (B) are effective for elective transfers made on or following September 6, 2000. Under an elective transfer which is made pursuant to Section 13.07(A) or (B), the Protected Benefits in the transferring plan are not required to be preserved under Section 13.02(B), except as provided in Section 13.07(B).

(A)  Distributable Event Elective Transfer. The Trustee may consent to, or be a party to, a merger, consolidation or transfer of assets with another qualified plan in accordance with this Section 13.07(A).

A transfer between qualified plans is a distributable event elective transfer if: (1) the Participant has a right to immediate distribution from the transferor plan; (2) the transfer is voluntary, under a fully informed election by the Participant; (3) the Participant has an alternative that retains his/her Protected Benefits (including an option to leave his/her benefit in the transferor plan, if that plan is not terminating); (4) the transferor plan satisfies applicable consent and joint and survivor annuity requirements of the Code; (5) the amount transferred, together with the amount of any contemporaneous direct rollover of the Participant’s remaining Vested Account Balance, constitutes the Participant’s entire Vested Account Balance; (6) the Participant has a 100% Vested interest in the transferred benefit in the transferee plan; and (7) if the transfer is from this Plan to a defined benefit plan, the transferee plan provides a benefit for the affected Participant equal to the benefit (expressed as an annuity payable at normal retirement age) derived solely with respect to the transferred assets.

An elective transfer under this Section 13.07(A) may occur between qualified plans of any type. Any direct transfer of assets from a defined benefit plan to this Plan which does not satisfy the requirements of this Section 13.07(A) renders the Plan individually-designed. See Section 7.12.

Commencing January 1, 2002, the Trustee may not undertake an elective transfer of a Participant’s Account under this Section 13.07(A) if the Participant is eligible to receive an immediate distribution of his/her entire Vested Account Balance which would consist entirely of an eligible rollover distribution as described in Section 6.10(D).

(B)  Transaction/Employment Change Elective Transfer. The Trustee may consent to, or be a party to, a merger, consolidation or transfer of assets with another qualified defined contribution plan in accordance with this Section 13.07(B).

A transfer is a transaction or employment change transfer irrespective of whether the Participant has a right to an immediate distribution from the transferor plan provided: (1) the transfer satisfies requirements (2) and (3) of Section 13.07(A); (2) the transfer only may occur as between plans described in applicable Treasury regulations; (3) the transfer must occur in connection with a merger, asset or stock acquisition, or change in employment resulting in the participant’s loss of right to additional allocations in the transferor plan or in such other circumstances as described in applicable Treasury regulations; (4) the transfer must consist of the Participant’s entire Vested and non-Vested Account Balance within the transferor plan; and (5) the transferee plan must protect the QJSA and QPSA benefits (if any) in the transferor plan.

(C)  Other Transfers. Any transfer which is not an elective transfer under Sections 13.07(A) or 13.07(B) and which includes Protected Benefits is subject to Section 13.02(B). The trustee of the transferee plan in receipt of assets which are Protected Benefits must preserve the Protected Benefits in accordance with applicable Treasury regulations. If the transferor plan contains a 401(k) arrangement with restricted balances as described in Section 14.11, such balances remain subject in the transferee plan to the distribution restrictions described in Section 14.03(d). Any transfer under this Section 13.07(C) from a defined benefit plan to this Plan must be in the form of the transfer of a paid up individual annuity contract which guarantees the payment of benefits in accordance with the transferor plan. Notwithstanding any Plan language to the contrary, if this Plan is a target benefit or money purchase pension plan, and the Trustee merges or the Employer converts by amendment the Plan into another type of defined contribution plan, the Employer operationally may elect whether to vest immediately the Participants’ Account Balances.

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ARTICLE XIV

CODE SECTION 401(k) AND CODE SECTION 401(m) ARRANGEMENTS

14.01  APPLICATION. This Article XIV applies to the Plan only if the Employer is maintaining its Plan under a Code §401(k) Adoption Agreement.

14.02  401(k) ARRANGEMENT. The Employer under Article III of its Adoption Agreement will elect the terms of the 401(k) arrangement as described in Code §401(k)(2), if any, under the Plan. If the Plan is a Standardized Plan, the 401(k) arrangement must be a salary reduction arrangement. If the Plan is a Nonstandardized Plan, the 401(k) arrangement may be a salary reduction arrangement or a cash or deferred arrangement, or both.

(A)  Salary Reduction Arrangement. If the Employer in its Adoption Agreement Section 3.01 elects a salary reduction arrangement, a Participant (or an Employee in anticipation of becoming a Participant) may file a salary reduction agreement with the Plan Administrator. The salary reduction agreement may not be effective earlier than the following date which occurs last: (1) the Participant’s Plan Entry Date (or, in the case of a re-employed Employee, his/her re-participation date under Article II); (2) the execution date of the Participant’s salary reduction agreement; (3) the date the Employer adopts the 401(k) arrangement by executing the Adoption Agreement; or (4) the effective date of the 401(k) arrangement, as specified in the Adoption Agreement.

A salary reduction agreement must specify the dollar amount of Compensation or percentage of Compensation the Participant wishes to defer. The salary reduction agreement will apply only to Compensation which becomes currently available to the Participant after the effective date of the salary reduction agreement. The Employer will apply a salary reduction election to the Participant’s Compensation as determined under Section 1.07 (and to increases in such Compensation) unless the Participant elects in his/her salary reduction agreement to limit the reduction to certain Compensation. The Plan Administrator in the Plan’s salary reduction agreement form, subject to the Plan terms and applicable Revenue Service guidance, will specify additional rules and restrictions applicable to a Participant’s salary reduction agreement.

(B)  Cash or Deferred Arrangement. If the Employer in its Adoption Agreement Section 3.02 elects a cash or deferred arrangement, a Participant may elect to make a cash election against his/her proportionate share of the Employer’s cash or deferred contribution, in accordance with the Employer’s Adoption Agreement elections. A Participant’s proportionate share of the Employer’s cash or deferred contribution is the percentage of the total cash or deferred contribution which bears the same ratio that the Participant’s Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. For purposes of determining each Participant’s proportionate share of the cash or deferred contribution, a Participant’s Compensation is his/her Compensation as determined under Section 1.07, excluding any effect the proportionate share may have on the Participant’s Compensation for the Plan Year. The Plan Administrator will determine the proportionate share prior to the Employer’s actual contribution to the Trust, to provide the Participants the opportunity to file cash elections. The Employer will pay directly to the Participant the portion of his/her proportionate share the Participant has elected to receive in cash.

(C)  Negative Election. The Employer in its Adoption Agreement may elect to apply prospectively to its Plan the negative election provisions of this Section 14.02(C). Under a negative election, the Employer automatically will reduce the Compensation of each Participant who is not deferring an amount at least equal to the negative election amount, by the required election amount, except those Participants who timely make a contrary election under Section 14.02(C)(1). Participants deferring an amount equal to or greater than the negative election amount are not subject to the Plan’s negative election provisions. Amounts deferred under negative election are treated as elective deferrals for all purposes under the Plan. An Employer in its Adoption Agreement must elect whether the negative election applies to all Participants as of the effective date of the negative election or only to Employees whose Plan Entry Date is on or following the effective date of the negative election.

(1)  Participant’s contrary election. A Participant may at any time elect not to defer any Compensation or to defer an amount which is less than the negative election amount (“contrary election”). A Participant’s contrary election generally is effective as of the first payroll period for the month which follows the Participant’s contrary election. However, a Participant may make a contrary election which is effective: (1) for the first payroll period in which he/she becomes a Participant if the Participant makes a contrary election within a reasonable period following the Participant’s Entry Date and before the Compensation to which the election applies becomes currently available; or (2) for the first payroll period following the effective date of the Employer’s adoption of the negative election, if the Participant makes contrary election not later than the effective date of the negative election. A Participant’s contrary election continues in effect until the Participant subsequently changes his/her Salary Reduction Agreement.

(2)  Negative election notice. If the Employer in its Adoption Agreement adopts the negative election provision, the Plan Administrator must provide a notice to each Eligible Employee which explains the effect of the negative election and a Participant’s right to make a contrary election, including the procedure and timing applicable to the contrary election. The Plan Administrator must provide the notice to an Eligible Employee a reasonable period prior to that Employee’s commencement of participation in the Plan subject to the negative election. A Plan Administrator also must notify annually those Participants then subject to the negative election of the existing negative election deferral percentage and the Participant’s right to make a contrary election, including the procedure and timing applicable to the contrary election.

(D)  Safe Harbor 401(k) Plan. The Employer in its Adoption Agreement may elect to apply to its Plan the safe harbor provisions of this Section 14.02(D). Except as otherwise provided in this Plan, in the Code or in other applicable guidance, an Employer must elect the safe harbor plan provisions of this Section 14.02(D) and must

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satisfy the applicable notice requirements prior to the beginning of the Plan Year to which the safe harbor provisions apply. In addition, except as otherwise indicated, the electing Employer must apply the safe harbor provisions for the entire safe harbor Plan Year, including any short Plan Year. The provisions of this Section 14.02(D) apply to an electing Employer notwithstanding any contrary provision of the Plan and all other remaining Plan terms continue to apply to the Employer’s safe harbor plan. An Employer which elects and operationally satisfies the safe harbor provisions of this Section 14.02(D) is not subject to the nondiscrimination provisions of Section 14.08 (ADP test). An electing Employer which provides additional matching contributions as described in Section 14.02(D)(3) is subject to the nondiscrimination provisions of Section 14.09 (ACP test), unless the additional matching contributions satisfy the ACP test safe harbor described in Section 14.02(D)(3).

(1)  Safe harbor - Compensation. For purposes of this Section 14.02(D), Compensation is limited as described in Section 1.07(E) and for purposes of allocating the Employer’s safe harbor contribution and safe harbor matching contribution, the Employer must elect under its Adoption Agreement a nondiscriminatory definition of Compensation as described in Section 1.07(F). An Employer in its Adoption Agreement also may elect to limit the amount of Compensation which is subject to deferral to any reasonable definition which: (a) permits a Participant to receive the maximum matching contribution, if any, available under the Plan; or (b) limits deferrals under the Plan to a whole percentage or dollar amount.

(2)  Safe Harbor Contributions/ADP test safe harbor. An Employer which elects under this Section 14.02(D) to apply the safe harbor provisions, must make a contribution to the Plan which will satisfy the ADP test safe harbor (“safe harbor contribution”). The Employer in its Adoption Agreement must elect whether the Employer will make its safe harbor contribution in the form of: (a) a safe harbor nonelective contribution; (b) a basic matching contribution; or (c) an enhanced matching contribution. A safe harbor nonelective contribution is a fixed nonelective contribution in an amount the Employer elects in its Adoption Agreement and must equal at least 3% of each Participant’s Compensation. A basic matching contribution is a fixed matching contribution equal to 100% of a Participant’s elective deferrals which do not exceed 3% of Compensation, plus 50% of elective deferrals which exceed 3%, but which do not exceed 5% of Compensation. An enhanced matching contribution is a fixed matching contribution made in accordance with any formula the Employer elects in its Adoption Agreement under which, at any rate of elective deferrals, a Participant receives a matching contribution which is at least equal to the match the Participant would receive under the basic matching contribution formula and under which the rate of match does not increase as the rate of deferrals increases. Under a basic or enhanced safe harbor match, a Highly Compensated Employee may not receive a greater rate of match than any Nonhighly Compensated Employee. The Employer in its Adoption Agreement must elect the applicable time period for computing the Employer’s safe harbor basic or enhanced matching contributions. The Plan Administrator must allocate the Employer’s safe harbor contribution without regard to the Section 3.06 allocation conditions, but the Plan Administrator will not allocate a safe harbor contribution where the allocation would exceed a Participant’s Code §§415 or 402(g) limitation or where the Participant is suspended from making deferrals under Section 14.11(A)(1). The Plan Administrator must allocate the safe harbor contribution to all Participants unless the Employer in an Addendum to its Adoption Agreement elects to limit the safe harbor allocation to Nonhighly Compensated Employees. A Participant’s Account Balance attributable to safe harbor contributions at all times 100% Vested and subject to the distribution restrictions described in Section 14.03(d). An Employer’s safe harbor contribution is not subject to nondiscrimination testing under Section 14.08 (ADP test) and if the safe harbor contribution is in the form of a basic matching contribution, it is not subject to nondiscrimination testing under Section 14.09 (ACP test). The Employer in its Adoption Agreement must elect whether to satisfy the ACP test safe harbor Section 14.02(D)(3)(a) amount limitation with respect to the Employer’s enhanced matching contributions or to test, using current year testing, its enhanced matching contributions under Section 14.09 (ACP test).

An Employer electing Section 14.02(D) which in its Adoption Agreement also elects to apply permitted disparity in allocating the Employer’s nonelective contributions, may not include within the permitted disparity formula allocation, any of the Employer’s safe harbor contributions. An Employer in its Adoption Agreement may elect to make the safe harbor contribution to another defined contribution plan maintained by the Employer provided: (i) the Employer maintains its safe harbor 401(k) Plan using a Nonstandardized 401(k) Adoption Agreement; or (ii) the Employer makes its safe harbor contribution to another defined contribution plan paired with the Employer’s safe harbor 401(k) Plan.

(3)  Additional Matching Contributions/ACP test safe harbor. An Employer which satisfies the ADP test safe harbor under Section 14.02(D)(2), in its Adoption Agreement may elect to make matching contributions to the Plan which are in addition to the Employer’s safe harbor contributions and which the Employer does not use to satisfy the ADP test safe harbor (“additional matching contributions”). The Employer in its Adoption Agreement must elect whether to subject the additional matching contributions to the ACP test safe harbor requirements of this Section 14.02(D)(3), or for the Plan Administrator to test, using current year testing, the additional matching contributions for nondiscrimination under Section 14.09 (ACP test). Under the ACP test safe harbor: (a) the Employer may not make matching contributions with respect to a Participant’s deferral contributions which exceed 6% of Plan Year Compensation; (b) the amount of any discretionary matching contribution allocated to any Participant in Plan Years commencing after 1999 may not exceed 4% of the Participant’s Plan Year Compensation; (c) the rate of matching contributions may not increase as the rate of deferrals increases; and (d) subject to application of any Section 3.06 allocation conditions, a Highly Compensated Employee may not receive a greater rate of match than any Nonhighly Compensated Employee. The Employer must elect in its Adoption Agreement the vesting schedule, allocation conditions and distribution provisions applicable to the Employer’s additional matching contributions described in this Section 14.02(D)(3). If the Employer in its Adoption Agreement has elected to permit Employee contributions under the Plan: (i) any Employee

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contributions do not satisfy the ACP test safe harbor and the Plan Administrator must test the Employee contributions under Section 14.09 (ACP test) using current year testing; and (ii) if the Employer in its Adoption Agreement elects to match the Employee contributions, the Plan Administrator in applying the 6% amount limit in clause (a) must aggregate a Participant’s deferral contribution and Employee contributions which are subject to the 6% limit.

(4)  Safe Harbor notice. The Plan Administrator annually must provide a safe harbor notice to each Participant a reasonable period prior to each Plan Year for which the Employer in its Adoption Agreement has elected to apply the safe harbor provisions. For this purpose, the Plan Administrator is deemed to provide timely notice if the Plan Administrator provides the safe harbor notice at least 30 days and not more than 90 days prior to the beginning of the safe harbor Plan Year. The safe harbor notice must provide comprehensive information regarding the Participants’ rights and obligations under the Plan and must be written in a manner calculated to be understood by the average Participant. If an Employee becomes eligible to participate in the Plan after the Plan Administrator has provided the annual safe harbor notice, the Plan Administrator must provide the safe harbor notice no later than the Employee’s Plan Entry Date. A Participant may make or modify a salary reduction agreement under the Employer’s safe harbor 401(k) Plan for 30 days following receipt of the safe harbor notice, or if greater, for the period the Plan Administrator specifies in the salary reduction agreement.

(5)  Mid-year changes in safe harbor status. The Employer may amend its 401(k) Plan during any Plan Year to become a safe harbor plan under this Section 14.02(D) for that Plan Year, provided: (a) the Plan then is using current year testing; (b) the Employer amends the Plan to add the safe harbor provisions not later than 30 days prior to the end of the Plan Year and to apply the safe harbor provisions for the entire Plan Year; (c) the Employer elects to satisfy the safe harbor contribution requirement using the safe harbor nonelective contribution; and (d) the Plan Administrator provides a notice to Participants prior to the beginning of the Plan Year for which the safe harbor amendment may become effective, that the Employer later may amend the Plan to a safe harbor plan for that Plan Year using the safe harbor nonelective contribution and if the Employer so amends the Plan, the Plan Administrator will provide a supplemental notice to Participants at least 30 days prior to the end of that Plan Year informing Participants of the amendment. The Plan Administrator then must timely provide any supplemental notice required under this Section 14.02(D)(5). Except as otherwise specified, the Participant notices described in this Section 14.02(D)(5) also must satisfy the requirements applicable to safe harbor notices under Section 14.02(D)(4).

The Employer may amend its safe harbor 401(k) Plan during a Plan Year to reduce or eliminate prospectively, any safe harbor contribution which is a basic matching or enhanced matching contribution (under Section 14.02(D)(2)) provided: (i) the Plan Administrator provides a notice to the Participants which explains the effect of the amendment, specifies the amendment’s effective date and informs Participants they will have a reasonable opportunity to modify their salary reduction agreements, and if applicable, Employee contributions; (ii) Participants have a reasonable opportunity and period prior to the effective date of the amendment to modify their salary reduction agreements, and if applicable, Employee contributions; and (iii) the amendment is not effective earlier than the later of: (a) 30 days after the Plan Administrator gives notice of the amendment; or (b) the date the Employer adopts the amendment. An Employer which amends its safe harbor Plan to eliminate or reduce the safe harbor matching contribution under this Section 14.02(D)(5), or which terminates the Plan under Section 13.04 effective during the Plan Year, must continue to apply all of the safe harbor requirements of this Section 14.02(D) until the amendment or termination becomes effective and also must apply for the entire Plan Year, using current year testing, the nondiscrimination test under Section 14.08 (ADP test), and if applicable, the nondiscrimination test under Section 14.09 (ACP test).

An Employer maintaining a profit sharing plan, stock bonus plan or pre-ERISA money purchase pension plan may during a Plan Year amend prospectively its Plan to become a safe harbor 401(k) plan provided: (a) the Employer’s Plan is not a successor plan as described in Notice 98-1 or any subsequent applicable guidance; (b) the 401(k) arrangement is in effect for at least 3 months during the Plan Year; (c) the Plan Administrator provides the safe harbor notice described in Section 14.02(D)(4) a reasonable time prior to and not later than the effective date of the amendment; and (d) the Plan satisfies commencing on the effective date of the amendment, all of the safe harbor requirements of this Section 14.02(D).

(E)  SIMPLE 401(k) Plan. The Employer in its Standardized Code §401(k) Adoption Agreement may elect to apply prospectively to its Plan the SIMPLE 401(k) provisions of this Section 14.02(E) if: (1) the Plan Year is the calendar year; (2) the Employer (including Related Employers under Section 1.26) has no more than 100 Employees who received Compensation of at least $5,000 in the immediately preceding calendar year; and (3) the Employer does not maintain any other plan as described in Code §219(g)(5), with respect to which contributions were made or benefits were accrued for Service by an eligible Employee in the Plan Year to which the SIMPLE 401(k) provisions apply. If an electing Employer fails for any subsequent calendar year to satisfy all of the foregoing requirements, including where the Employer is involved in an acquisition, disposition or similar transaction under which the Employer satisfies Code §410(b)(6)(C)(1), the Employer remains eligible to maintain the SIMPLE 401(k) Plan for two additional calendar years following the last year in which the Employer satisfied the requirements. The provisions of this Section 14.02(E) apply to an electing Employer notwithstanding any contrary provision in the Plan.

(1)  SIMPLE – Compensation. For purposes of this Section 14.02(E), Compensation is limited as described in Section 1.07(E) and: (a) in the case of an Employee, means W-2 wages but increased by the Employee’s elective deferrals under a 401(k) arrangement, SIMPLE IRA, SARSEP or 403(b) annuity; and (b) in the case of a Self Employed Individual, means Earned Income determined without regard to contributions made to this Plan.

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(2)  Participant deferral contributions. Each eligible Employee may enter into a salary reduction agreement to make deferral contributions into the SIMPLE 401(k) Plan in an amount not exceeding $6,000 per calendar year, or such other amount as in effect under Code §408(p)(2)(E). A Participant may elect to make deferral contributions or modify a salary reduction agreement at any time in accordance with the Plan Administrator’s SIMPLE 401(k) salary reduction agreement form, but must be provided at least 60 days prior to the beginning of each SIMPLE Plan Year or commencement of participation for this purpose. A Participant also may at any time terminate prospectively, his/her salary reduction agreement applicable to the Employer’s SIMPLE 401(k) Plan.

(3)  Employer SIMPLE 401(k) contributions. An Employer which elects under this Section 14.02(E) to apply the SIMPLE 401(k) provisions, annually must make a SIMPLE 401(k) contribution to the Plan as described in this Section 14.02(E)(3). The Employer operationally must elect whether the Employer will contribute: (1) a matching contribution equal to each Participant’s deferral contributions but not exceeding 3% of Plan Year Compensation or such lower percentage as the Employer may elect under Code §408(p)(2)(C)(ii)(II); or (2) a nonelective contribution equal to 2% of Plan Year Compensation for each Participant whose Compensation is at least $5,000. The Employer in its Adoption Agreement may not elect to apply any Section 3.06 allocation conditions to the Plan Administrator’s allocation of Employer SIMPLE contributions.

(4)  SIMPLE 401(k) notice. The Plan Administrator must provide notice to each Participant a reasonable period of time before the 60th day prior to the beginning of each SIMPLE 401(k) Plan Year, describing the Participant’s deferral election rights and the Employer’s matching or nonelective contributions which the Employer will make for the Plan Year described in the notice.

(5)  Application of remaining Plan provisions. All contributions to the SIMPLE 401(k) Plan are Annual Additions subject to the limitations set forth in Article III. No contributions other than those described in this Section 14.02(E) or rollover contributions described in Section 4.04 may be made to the SIMPLE 401(k) Plan. All contributions to the SIMPLE 401(k) Plan are 100% Vested at all times and in the event of a conversion of a non SIMPLE Plan into a SIMPLE 401(k) Plan, all Account Balances in existence on the first day of the Plan Year to which the SIMPLE 401(k) provisions apply, become 100% Vested. A SIMPLE 401(k) Plan is not subject to nondiscrimination testing under Section 14.08 (ADP test) or Section 14.09 (ACP test) of the Plan and is not subject to the top heavy provisions of Article XII. Except as otherwise described in this Section 14.03(E), if an Employer has elected in its Adoption Agreement to apply the SIMPLE 401(k) provisions of this Section 14.03(E), the Plan Administrator will apply the remaining Plan provisions to Employer’s Plan.

(F)  Election not to participate. A Participant’s or Employee’s election not to participate, pursuant to Section 2.06, includes his/her right to enter into a salary reduction agreement or to share in the allocation of a cash or deferred contribution.

14.03  DEFINITIONS. For purposes of this Article XIV:

(a)  “Compensation” means, except as otherwise provided in this Article XIV, Compensation as defined for nondiscrimination purposes in Section 1.07(F).

(b)  “Current year testing” means for purposes of the ADP test described in Section 14.08 and the ACP test described in Section 14.09, the use of data from the testing year in determining the ADP or ADP for the Nonhighly Compensated Group.

(c)  “Deferral contributions” are salary reduction contributions and cash or deferred contributions the Employer contributes to the Trust on behalf of an eligible Employee, irrespective of whether, in the case of cash or deferred contributions, the contribution is at the election of the Employee. For salary reduction contributions, the terms “deferral contributions” and “elective deferrals” have the same meaning.

(d)  “Distribution restrictions” means the Employee may not receive a distribution of the restricted balances described in Section 14.11 (nor earnings on those contributions) except in the event of: (1) the Participant’s death, Disability, Separation from Service (which for purposes of this Section 14.03(d), means as the Plan Administrator determines under applicable Revenue Service guidance, including the “same desk” rule and Revenue Ruling 2000-27 with respect to certain asset sale transactions) or attainment of age 59½, (2) financial hardship satisfying Section 14.11(A), (3) Plan termination, without establishment of a successor defined contribution plan (other than an ESOP), (4) a sale by a corporate Employer of substantially all of the assets (within the meaning of Code §409(d)(2)) used in a trade or business of the Employer, to another corporation, but only to an Employee who continues employment with the corporation acquiring those assets, or (5) a sale by a corporate Employer of its interest in a subsidiary (within the meaning of Code §409(d)(3)), but only to an Employee who continues employment with the subsidiary. A distribution described in clauses (3), (4) or (5) must be a lump sum distribution, and otherwise must satisfy Code §401(k)(10).

(e)  “Elective deferrals” are all salary reduction contributions and that portion of any cash or deferred contribution which the Employer contributes to the Plan at the election of an eligible Employee. Any portion of a cash or deferred contribution contributed to the Trust because of the Employee’s failure to make a cash election is an elective deferral. However, any portion of a cash or deferred contribution over which the Employee does not have a cash election is not an elective deferral. Elective deferrals do not include amounts which have become currently available to the Employee prior to the election nor amounts designated as an Employee contribution at the time of deferral or contribution. Elective deferrals are 100% vested at all times.

(f)  “Eligible Employee” means, for purposes of the ADP test described in Section 14.08, an Employee who is eligible to enter into a salary reduction

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agreement for all or any portion of the Plan Year, irrespective of whether he/she actually enters into such an agreement, and a Participant who is eligible for an allocation of the Employer’s cash or deferred contribution for the Plan Year. For purposes of the ACP test described in Section 14.09, an eligible Employee is a Participant who is eligible to receive an allocation of matching contributions (or would be eligible if he/she made the type of contributions necessary to receive an allocation of matching contributions) and a Participant who is eligible to make Employee contributions, irrespective of whether he/she actually makes Employee contributions. An Employee continues to be an eligible Employee during a period the Plan suspends the Employee’s right to make elective deferrals or Employee contributions following a hardship distribution.

(g)  “Employee contributions” are nondeductible contributions made by a Participant and designated, at the time of contribution, as an Employee contribution. Elective deferrals and deferral contributions are not Employee contributions. Employee contributions are subject to Article IV.

(h)  “Highly Compensated Employee” means an eligible Employee who satisfies the definition in Section 1.14 of the Plan.

(i)  “Highly Compensated Group” means the group of eligible Employees who are Highly Compensated Employees for the Plan Year.

(j)  “Matching contributions” are contributions made by the Employer on account of elective deferrals under a 401(k) arrangement or on account of Employee contributions. Matching contributions also include Participant forfeitures allocated on account of such elective deferrals or Employee contributions.

(k)  “Nonelective contributions” are contributions made by the Employer which are not subject to a deferral election by an Employee and which are not matching contributions.

(l)  “Nonhighly Compensated Employee” means an eligible Employee who is not a Highly Compensated Employee.

(m)  “Nonhighly Compensated Group” means the group of eligible Employees who are Nonhighly Compensated Employees for the Plan Year.

(n)  “Prior year testing” means for purposes of the ADP test described in Section 14.08 and the ACP test described in Section 14.09, the use of data from the Plan Year immediately prior to the testing year in determining the ADP or ACP for the Nonhighly Compensated Group.

(o)  “Qualified matching contributions” are matching contributions which are 100% Vested at all times and which are subject to the distribution restrictions described in Section 14.03(d). Matching contributions are not 100% Vested at all times if the Employee has a 100% Vested interest because of his/her Years of Service taken into account under a vesting schedule. Any matching contributions allocated to a Participant’s qualified matching contributions Account under the Plan automatically satisfy and are subject to the definition of qualified matching contributions.

(p)  “Qualified nonelective contributions” are nonelective contributions which are 100% Vested at all times and which are subject to the distribution restrictions described in Section 14.03(d). Nonelective contributions are not 100% Vested at all times if the Employee has a 100% Vested interest because of his/her Years of Service taken into account under a vesting schedule. Any nonelective contributions allocated to a Participant’s qualified nonelective contributions Account under the Plan automatically satisfy and are subject to the definition of qualified nonelective contributions.

(q)  “Regular matching contributions” are matching contributions which are not qualified matching contributions.

(r)  “Safe harbor contributions” are Employer nonelective or matching contributions which the Plan Administrator applies to satisfy the ADP test safe harbor under Code §401(k)(12)(B) or (C) and which are 100% Vested at all times and subject to the distribution restrictions described in Section 14.03(d). Safe harbor contributions are not 100% Vested at all times if the Employee has a 100% Vested interest because of his/her Years of Service taken into account under a vesting schedule. Any nonelective contributions allocated to a Participant’s safe harbor contributions Account, automatically satisfy and are subject to the definition of safe harbor contributions.

(s)  “Salary reduction agreement” is a written election by a Participant to make salary reduction contributions as described in Section 14.02(A).

(t)  “Salary reduction contributions” mean Employer contributions elected by a Participant to be made from the Participant’s Compensation pursuant to a salary reduction agreement and which the Plan Administrator must allocate to the electing Participant’s Account.

(u)  “Testing year” means for purposes of the ADP test described in Section 14.08 and the ACP test described in Section 14.09, the Plan Year for which the ADP or ACP test is being performed.

14.04  MATCHING CONTRIBUTIONS/ EMPLOYEE CONTRIBUTIONS. The Employer in Adoption Agreement Section 3.01 may elect to provide matching contributions. The Employer in Adoption Agreement Section 4.02 also may elect to permit a Participant to make Employee contributions.

14.05  DEFERRAL DEPOSIT TIMING/EMPLOYER CONTRIBUTION STATUS. The Employer must make salary reduction contributions to the Trust after withholding the corresponding Compensation from the Participant at the earliest date on which the contributions can reasonably be segregated from the Employer’s general assets. Furthermore, the Employer must make to the Trust salary reduction contributions, cash or deferred contributions, matching contributions (including qualified matching

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contributions), qualified nonelective contributions, safe harbor contributions and SIMPLE contributions no later than the time prescribed by the Code or ERISA. Salary reduction contributions and cash or deferred contributions are Employer contributions for all purposes under this Plan, except to the extent the Code prohibits the use of these contributions to satisfy the qualification requirements of the Code.

14.06  SPECIAL ACCOUNTING AND ALLOCATION PROVISIONS. To make allocations under the Plan, the Plan Administrator must establish for each Participant, consistent with the Employer’s elections under its Adoption Agreement, a deferral contributions Account, a nonelective contributions Account, a qualified matching contributions Account, a regular matching contributions Account, a qualified nonelective contributions Account, a safe harbor contributions Account and a SIMPLE contributions account.

(A)  Deferral contributions. The Plan Administrator will allocate to each Participant’s deferral contributions Account the amount of deferral contributions the Employer makes to the Trust on behalf of the Participant. The Plan Administrator will make this allocation as of the last day of each Plan Year or more frequently as it may determine to be appropriate and consistent with the Plan terms, including those providing for allocation of net income, gain or loss.

(B)  Matching contributions. The Plan Administrator will allocate the Employer’s matching contributions as of the last day of each Plan Year or more frequently as the Plan Administrator may determine to be appropriate and consistent with the Plan terms, including those providing for allocation of net income, gain or loss. The Plan Administrator may not allocate any fixed or discretionary matching contributions with respect to deferral contributions that are excess deferrals under Section 14.07. For this purpose: (a) excess deferrals relate first to deferral contributions for the Plan Year not otherwise eligible for a matching contribution; and (b) if the Plan Year is not a calendar year, the excess deferrals for a Plan Year are the last elective deferrals made for a calendar year. The Plan Administrator may not allocate a matching contribution to a Participant’s Account to the extent the matching contribution exceeds the Participant’s Annual Additions limitation in Part 2 of Article III. The provisions of Section 3.05 govern the treatment of any matching contribution the Plan Administrator allocates contrary to this Section 14.06(B), and the Plan Administrator will compute a Participant’s ACP under Section 14.09 by disregarding the forfeiture.

(1)  Fixed match. To the extent the Employer makes matching contributions under a fixed matching contribution formula set forth in the Employer’s Adoption Agreement, the Plan Administrator will allocate the matching contribution to the Account of the Participant on whose behalf the Employer makes that contribution. A fixed matching contribution formula is a formula under which the Employer contributes a specified percentage or dollar amount on behalf of a Participant based on that Participant’s deferral contributions or Employee contributions eligible for a match. The Employer may contribute on a Participant’s behalf under a specific matching contribution formula only if the Participant satisfies the allocation conditions for matching contributions, if any, the Employer elects in Adoption Agreement Section 3.06. The Employer in its Adoption Agreement may elect whether the Plan Administrator will allocate a fixed matching contribution as a qualified matching contribution or as a regular matching contribution.

(2)  Discretionary match. To the extent the Employer makes matching contributions under a discretionary formula, the Plan Administrator will allocate the discretionary matching contributions to the Account of each Participant who satisfies the allocation conditions, if any, for matching contributions the Employer elects in Adoption Agreement Section 3.06. The allocation of discretionary matching contributions to a Participant’s Account is in the same proportion that each Participant’s deferral contributions bear to the total deferral contributions of all Participants. If the discretionary formula is a tiered formula, the Plan Administrator will make this allocation separately with respect to each tier of deferral contributions, allocating in such manner the amount of the matching contributions made with respect to that tier. The Employer operationally may direct the Plan Administrator to allocate any discretionary match as a regular matching contribution or as a qualified matching contribution.

(3)  Match on deferrals and Employee contributions. If the matching contribution formula applies both to deferral contributions and to Employee contributions, the matching contributions apply first to deferral contributions.

(C)  Qualified nonelective contributions. If the Employer operationally designates a nonelective contribution to be a qualified nonelective contribution for the Plan Year, the Plan Administrator will allocate that qualified nonelective contribution to the qualified nonelective contributions Account of each Participant eligible for an allocation of that designated contribution, as the Employer elects in Adoption Agreement Section 3.04.

(D)  Nonelective contributions. If the Employer makes a nonelective contribution for the Plan Year which the Employer does not designate as a qualified nonelective contribution, the Plan Administrator will allocate the nonelective contribution in accordance with Adoption Agreement Section 3.04. For purposes of the nondiscrimination tests described in Sections 14.08 (ADP test), 14.09 (ACP test) and 14.10 (multiple use limitation), the Plan Administrator may treat nonelective contributions allocated under this Section 14.06(D) as qualified nonelective contributions, if the contributions otherwise satisfy the definition of qualified nonelective contributions. The Employer, to facilitate the Plan Administrator’s correction of test failures under Sections 14.08, 14.09 and 14.10, also may make qualified nonelective contributions to the Plan irrespective of whether the Employer in its Adoption Agreement has elected to provide nonelective contributions.

(E)  Safe harbor contributions. If the Employer elects under Section 14.02(D) to apply the safe harbor provisions to the Plan, the Employer will allocate the safe harbor

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contributions to the safe harbor contributions Account of each Participant unless the Employer in an Addendum to its Adoption Agreement elects to limit safe harbor allocations to Nonhighly Compensated Employees.

(F)  SIMPLE 401(k) Plan contributions. If the Employer elects under Section 14.02(E) to apply the SIMPLE 401(k) provisions to the Plan, the Employer will allocate the SIMPLE contributions to the SIMPLE contributions Account of Participants eligible to receive an allocation of the Employer’s SIMPLE contribution (including Participants who make deferral contributions), as specified in Section 14.02(E).

14.07  ANNUAL ELECTIVE DEFERRAL LIMITATION.

(A)  Annual Elective Deferral Limitation. An Employee’s elective deferrals for a calendar year may not exceed the Code §402(g) limitation (“402(g) limitation”). The 402(g) limitation is the greater of $7,000 or the adjusted amount determined by the Secretary of the Treasury. If, pursuant to a salary reduction agreement or pursuant to a cash or deferral election, the Employer determines the Employee’s elective deferrals to the Plan for a calendar year would exceed the 402(g) limitation, the Employer will suspend the Employee’s salary reduction agreement, if any, until the following January 1 and pay in cash the portion of a deferral election which would result in the Employee’s elective deferrals for the calendar year exceeding the 402(g) limitation. If the Plan Administrator determines an Employee’s elective deferrals already contributed to the Plan for a calendar year exceed the 402(g) limitation, the Plan Administrator will distribute the amount in excess of the 402(g) limitation (the “excess deferral”), as adjusted for allocable income under Section 14.07(C), no later than April 15 of the following calendar year. If the Plan Administrator distributes the excess deferral by the appropriate April 15, the excess deferral is not an Annual Addition under Article III, and the Plan Administrator may make the distribution irrespective of any other provision under this Plan or under the Code. The Plan Administrator will reduce the amount of excess deferrals for a calendar year distributable to the Employee by the amount of excess contributions (as determined in Section 14.08), if any, previously distributed to the Employee for the Plan Year beginning in that calendar year. Elective deferrals distributed to an Employee as excess Annual Additions in accordance with Article III are not taken into account under the Employee’s 402(g) limitation.

(B)  More than One Plan. If an Employee participates in another plan subject to the 402(g) limitation under which he/she makes elective deferrals pursuant to a 401(k) arrangement, elective deferrals under a SARSEP, elective contributions under a SIMPLE IRA or salary reduction contributions to a tax-sheltered annuity (irrespective of whether the Employer maintains the other plan), the Employee may provide to the Plan Administrator a written claim for excess deferrals made to the Plan for a calendar year. The Employee must submit the claim no later than the March 1 following the close of the particular calendar year and the claim must specify the amount of the Employee’s elective deferrals under this Plan which are excess deferrals. If the Plan Administrator receives a timely claim, it will distribute the excess deferral (as adjusted for allocable income) the Employee has assigned to this Plan, in accordance with the distribution procedure described in Section 14.07(A).

(C)  Allocable Income. For purposes of making a distribution of excess deferrals pursuant to this Section 14.07, allocable income means net income or net loss allocable to the excess deferrals for the calendar year (but not beyond the calendar year) in which the Employee made the excess deferral, determined in a manner which is uniform, nondiscriminatory and reasonably reflective of the manner used by the Plan Administrator to allocate income to Participants’ Accounts.

14.08  ACTUAL DEFERRAL PERCENTAGE (ADP) TEST. For each Plan Year, the Plan Administrator must determine whether the Plan’s 401(k) arrangement satisfies either of the following ADP tests:

(i)  The ADP for the Highly Compensated Group does not exceed 1.25 times the ADP of the Nonhighly Compensated Group; or

(ii)  The ADP for the Highly Compensated Group does not exceed the ADP for the Nonhighly Compensated Group by more than two percentage points (or the lesser percentage permitted by the multiple use limitation in Section 14.10) and the ADP for the Highly Compensated Group is not more than twice the ADP for the Nonhighly Compensated Group.

(A)  Calculation of ADP. The ADP for a group is the average of the separate deferral percentages calculated for each eligible Employee who is a member of that group. An eligible Employee’s deferral percentage for a Plan Year is the ratio of the eligible Employee’s deferral contributions for the Plan Year to the Employee’s Compensation for the Plan Year. In determining the ADP, the Plan Administrator must include any Highly Compensated Employee’s excess deferrals, as described in Section 14.07(A), to this Plan or to any other Plan of the Employer and the Plan Administrator will disregard any Nonhighly Compensated Employee’s excess deferrals. The Plan Administrator operationally may include in the ADP test, qualified nonelective contributions and qualified matching contributions the Plan Administrator does not use in the ACP test. The Plan Administrator, under prior year testing, may include qualified nonelective contributions or qualified matching contributions in determining the Nonhighly Compensated Employee ADP only if the Employer makes such contribution to the Plan by the end of the testing year and the Plan Administrator allocates the contribution to the prior Plan Year. In determining whether the Plan’s 401(k) arrangement satisfies either ADP test, the Plan Administrator will use prior year testing, unless the Employer in Adoption Agreement Appendices A or B elects to use current year testing. An Employer may not change from current year testing to prior year testing except as provided in the Code or in other applicable guidance. For the first Plan Year the Employer permits elective deferrals and the Plan is not a successor plan (as provided in the Code or in other applicable guidance), under prior year testing, the prior year ADP for the Nonhighly Compensated Group is 3% unless the Employer in an Addendum to its Adoption Agreement elects to use the

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actual first year ADP for the Nonhighly Compensated Group.

(B)  Special aggregation rule for Highly Compensated Employees. To determine the deferral percentage of any Highly Compensated Employee, the Plan Administrator must take into account any elective deferrals made by the Highly Compensated Employee under any other 401(k) arrangement maintained by the Employer, unless the elective deferrals are to an ESOP. If the plans containing the 401(k) arrangements have different plan years, the Plan Administrator will determine the combined deferral contributions on the basis of the plan years ending in the same calendar year.

(C)  Aggregation of certain 401(k) arrangements. If the Employer treats two or more plans as a single plan for coverage or nondiscrimination purposes, the Employer must combine the 401(k) arrangements under such plans to determine whether the plans satisfy the ADP test. This aggregation rule applies to the ADP determination for all eligible Employees, irrespective of whether an eligible Employee is a Highly Compensated Employee or a Nonhighly Compensated Employee. An Employer may aggregate 401(k) arrangements under this Section 14.08(C) only if the plans have the same plan years and use the same testing method. An Employer may not aggregate an ESOP (or the ESOP portion of a plan) with a non-ESOP plan (or non-ESOP portion of a plan). If the Employer aggregating 401(k) arrangements under this Section 14.08(C) is using prior year testing, the Plan Administrator must adjust the Nonhighly Compensated Group ADP for the prior year as provided in the Code or in other applicable guidance.

(D)  Characterization of excess contributions. If, pursuant to this Section 14.08, the Plan Administrator has elected to include qualified matching contributions in the ADP test, the excess contributions are attributable proportionately to deferral contributions and to qualified matching contributions allocated on the basis of those deferral contributions. The Plan Administrator will reduce the amount of excess contributions for a Plan Year distributable to a Highly Compensated Employee by the amount of excess deferrals (as determined in Section 14.07), if any, previously distributed to that Employee for the Employee’s taxable year ending in that Plan Year.

(E)  Distribution of excess contributions. If the Plan Administrator determines the Plan fails to satisfy the ADP test for a Plan Year, the Trustee, as directed by the Plan Administrator, must distribute the excess contributions, as adjusted for allocable income under Section 14.08(F), during the next Plan Year. However, the Employer may incur an excise tax with respect to the amount of excess contributions for a Plan Year not distributed to the appropriate Highly Compensated Employees during the first 2½ months of that next Plan Year. The excess contributions are the amount of deferral contributions made by the Highly Compensated Employees which causes the Plan to fail the ADP test. The Plan Administrator will determine the total amount of the excess contributions to the Plan by starting with the Highly Compensated Employee(s) who has the greatest deferral percentage, reducing his/her deferral percentage (but not below the next highest deferral percentage), then, if necessary, reducing the deferral percentage of the Highly Compensated Employee(s) at the next highest deferral percentage level, including the deferral percentage of the Highly Compensated Employee(s) whose deferral percentage the Plan Administrator already has reduced (but not below the next highest deferral percentage), and continuing in this manner until the ADP for the Highly Compensated Group satisfies the ADP test.

After the Plan Administrator has determined the total excess contribution amount, the Trustee, as directed by the Plan Administrator, then will distribute to each Highly Compensated Employee his/her respective share of the excess contributions. The Plan Administrator will determine each Highly Compensated Employee’s share of excess contributions by starting with the Highly Compensated Employee(s) who has the highest dollar amount of elective deferrals, reducing his/her elective deferrals (but not below the next highest dollar amount of elective deferrals), then, if necessary, reducing the elective deferrals of the Highly Compensated Employee(s) at the next highest dollar amount of elective deferrals including the elective deferrals of the Highly Compensated Employee(s) whose elective deferrals the Plan Administrator already has reduced (but not below the next highest dollar amount of elective deferrals), and continuing in this manner until the Trustee has distributed all excess contributions.

(F)  Allocable income. To determine the amount of the corrective distribution required under this Section 14.08, the Plan Administrator must calculate the allocable income for the Plan Year (but not beyond the Plan Year) in which the excess contributions arose. “Allocable income” means net income or net loss. To calculate allocable income for the Plan Year, the Plan Administrator will use a uniform and nondiscriminatory method which reasonably reflects the manner used by the Plan Administrator to allocate income to Participants’ Accounts.

14.09  ACTUAL CONTRIBUTION PERCENTAGE (ACP) TEST. For each Plan Year, the Plan Administrator must determine whether the annual Employer matching contributions (other than qualified matching contributions used in the ADP test under Section 14.08), if any, and the Employee contributions, if any, satisfy either of the following ACP tests:

(i)  The ACP for the Highly Compensated Group does not exceed 1.25 times the ACP of the Nonhighly Compensated Group; or

(ii)  The ACP for the Highly Compensated Group does not exceed the ACP for the Nonhighly Compensated Group by more than two percentage points (or the lesser percentage permitted by the multiple use limitation in Section 14.10) and the ACP for the Highly Compensated Group is not more than twice the ACP for the Nonhighly Compensated Group.

(A)  Calculation of ACP. The ACP for a group is the average of the separate contribution percentages calculated for each eligible Employee who is a member of that group. An eligible Employee’s contribution percentage for a Plan Year is the ratio of the eligible Employee’s aggregate contributions for the Plan Year to the Employee’s Compensation for the Plan Year. “Aggregate contributions” are Employer matching contributions (other than qualified matching contributions used in the ADP test under Section

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14.08) and Employee contributions (as defined in Section 14.03). The Plan Administrator operationally may include in the ACP test, qualified nonelective contributions and elective deferrals not used in the ADP test. The Plan Administrator, under prior year testing, may include qualified nonelective contributions or qualified matching contributions in determining the Nonhighly Compensated Employee ACP only if the Employer makes such contribution to the Plan by the end of the testing year and the Plan Administrator allocates the contribution to the prior Plan Year. In determining whether the Plan satisfies either ACP test, the Plan Administrator will use prior year testing, unless the Employer in Appendix A to its Adoption Agreement elects to use the current year testing. An Employer may not change from current year testing to prior year testing except as provided in the Code or in other applicable guidance. For the first Plan Year the Plan permits matching contributions or Employee contributions and the Plan is not a successor plan (as defined in the Code or in other applicable guidance), under prior year testing, the prior year ACP for the Nonhighly Compensated Group is 3% unless the Employer in an Addendum to its Adoption Agreement elects to use the actual first year ACP for the Nonhighly Compensated Group.

(B)  Special aggregation rule for Highly Compensated Employees. To determine the contribution percentage of any Highly Compensated Employee, the aggregate contributions taken into account must include any matching contributions (other than qualified matching contributions used in the ADP test) and any Employee contributions made on his/her behalf to any other plan maintained by the Employer, unless the other plan is an ESOP. If the plans have different plan years, the Plan Administrator will determine the combined aggregate contributions on the basis of the plan years ending in the same calendar year.

(C)  Aggregation of certain 401(m) arrangements. If the Employer treats two or more plans as a single for coverage or nondiscrimination purposes, the Employer must combine the 401(m) arrangements under such plans to determine whether the plans satisfy the ACP test. This aggregation rule applies to the ACP determination for all eligible Employees, irrespective of whether an eligible Employee is a Highly Compensated Employee or a Nonhighly Compensated Employee. An Employer may aggregate 401(m) arrangements under this Section 14.09(C) if where the plans have the same plan year and use the same testing method. An Employer may not aggregate an ESOP (or the ESOP portion of a plan) with a non-ESOP plan (or non-ESOP portion of a plan). If the Employer aggregating 401(m) arrangements under this Section 14.09(C) is using prior year testing, the Plan Administrator must adjust the Nonhighly Compensated Group ACP for the prior year as provided in the Code or in other applicable guidance.

(D)  Distribution of excess aggregate contributions. The Plan Administrator will determine excess aggregate contributions after determining excess deferrals under Section 14.07 and excess contributions under Section 14.08. If the Plan Administrator determines the Plan fails to satisfy the ACP test for a Plan Year, the Trustee, as directed by the Plan Administrator, must distribute the Vested excess aggregate contributions, as adjusted for allocable income, during the next Plan Year. However, the Employer may incur an excise tax with respect to the amount of excess aggregate contributions for a Plan Year not distributed to the appropriate Highly Compensated Employees during the first 2½ months of that next Plan Year. The excess aggregate contributions are the amount of aggregate contributions allocated on behalf of the Highly Compensated Employees which causes the Plan to fail the ACP test. The Plan Administrator will determine the total amount of the excess aggregate contributions by starting with the Highly Compensated Employee(s) who has the greatest contribution percentage, reducing his/her contribution percentage (but not below the next highest contribution percentage), then, if necessary, reducing the contribution percentage of the Highly Compensated Employee(s) at the next highest contribution percentage level, including the contribution percentage of the Highly Compensated Employee(s) whose contribution percentage the Plan Administrator already has reduced (but not below the next highest contribution percentage), and continuing in this manner until the ACP for the Highly Compensated Group satisfies the ACP test.

After the Plan Administrator has determined the total excess aggregate contribution amount, the Trustee, as directed by the Plan Administrator, then will distribute (to the extent Vested) to each Highly Compensated Employee his/her respective share of the excess aggregate contributions. The Plan Administrator will determine each Highly Compensated Employee’s share of excess aggregate contributions by starting with the Highly Compensated Employee(s) who has the highest dollar amount of aggregate contributions, reducing the amount of his/her aggregate contributions (but not below the next highest dollar amount of the aggregate contributions), then, if necessary, reducing the amount of aggregate contributions of the Highly Compensated Employee(s) at the next highest dollar amount of aggregate contributions, including the aggregate contributions of the Highly Compensated Employee(s) whose aggregate contributions the Plan Administrator already has reduced (but not below the next highest dollar amount of aggregate contributions), and continuing in this manner until the Trustee has distributed all excess aggregate contributions.

(E)  Allocable income. To determine the amount of the corrective distribution required under this Section 14.09, the Plan Administrator must calculate the allocable income for the Plan Year (but not beyond the Plan Year) in which the excess aggregate contributions arose. “Allocable income” means net income or net loss. The Plan Administrator will determine allocable income in the same manner as described in Section 14.08(F) for excess contributions.

(F)  Characterization of excess aggregate contributions. The Plan Administrator will treat a Highly Compensated Employee’s allocable share of excess aggregate contributions in the following priority: (1) first as attributable to his/her Employee contributions, if any; (2) then as matching contributions allocable with respect to excess contributions determined under the ADP test described in Section 14.08; (3) then on a pro rata basis to matching contributions and to the deferral contributions relating to those matching contributions which the Plan Administrator has included in the ACP test; and (4) last to qualified nonelective contributions used in the ACP test. To the extent the Highly Compensated Employee’s excess aggregate contributions are attributable to matching contributions, and he/she is not 100% Vested in his/her

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Account Balance attributable to matching contributions, the Plan Administrator will distribute only the Vested portion and forfeit the nonVested portion. The Vested portion of the Highly Compensated Employee’s excess aggregate contributions attributable to Employer matching contributions is the total amount of such excess aggregate contributions (as adjusted for allocable income) multiplied by his/her Vested percentage (determined as of the last day of the Plan Year for which the Employer made the matching contribution).

14.10  MULTIPLE USE LIMITATION. If at least one Highly Compensated Employee is includible in the ADP test under Section 14.08 and in the ACP test under Section 14.09, the sum of the Highly Compensated Group’s ADP and ACP may not exceed the multiple use limitation.

The multiple use limitation is the sum of (i) and (ii):

(i)  125% of the greater of: (a) the ADP of the Nonhighly Compensated Group for the prior Plan Year; or (b) the ACP of the Nonhighly Compensated Group for the Plan Year beginning with or within the prior Plan Year of the 401(k) arrangement.

(ii)  2% plus the lesser of (i)(a) or (i)(b), but no more than twice the lesser of (i)(a) or (i)(b).

The Plan Administrator, in lieu of determining the multiple use limitation as the sum of (i) and (ii), may elect to determine the multiple use limitation as the sum of (iii) and (iv):

(iii)  125% of the lesser of: (a) the ADP of the Nonhighly Compensated Group for the prior Plan Year; or (b) the ACP of the Nonhighly Compensated Group for the Plan Year beginning with or within the prior Plan Year of the 401(k) arrangement.

(iv)  2% plus the greater of (iii)(a) or (iii)(b), but no more than twice the greater of (iii)(a) or (iii)(b).

If the Employer has elected in its Adoption Agreement to use current year testing, the multiple use limitation is calculated using the Nonhighly Compensated Group’s current Plan Year data. The Plan Administrator will determine whether the Plan satisfies the multiple use limitation after applying the ADP test under Section 14.08 and the ACP test under Section 14.09 and using the deemed maximum corrected ADP and ACP percentages in the event the Plan failed either or both tests. If, after applying this Section 14.10, the Plan Administrator determines the Plan has failed to satisfy the multiple use limitation, the Plan Administrator will correct the failure by treating the excess amount as excess contributions under Section 14.08 or as excess aggregate contributions under Section 14.09, as the Plan Administrator determines in its sole discretion. This Section 14.10 does not apply unless, prior to application of the multiple use limitation, the ADP and the ACP of the Highly Compensated Group each exceeds 125% of the respective percentages for the Nonhighly Compensated Group.

14.11  DISTRIBUTION RESTRICTIONS. The Employer in Adoption Agreement Section 6.01 must elect the distribution events permitted under the Plan. The distribution events applicable to the Participant’s deferral contributions Account, qualified nonelective contributions Account, qualified matching contributions Account and safe harbor contributions Account (collectively, “restricted balances”) must satisfy the distribution restrictions described in Section 14.03(d).

(A)  Hardship Distributions from Deferral Contributions Account. The Employer must elect in Adoption Agreement Section 6.01 whether a Participant may receive hardship distribution (as defined in Section 6.09) from his/her deferral contributions Account prior to the Participant’s Separation from Service. A hardship distribution from the deferral contributions Account also must satisfy the requirements of this Section 14.11(A). A hardship distribution option may not apply to a Participant’s qualified nonelective contributions Account, qualified matching contributions Account, nor to his/her safe harbor contributions Account except as provided in Paragraph (2).

(1)  Restrictions. The following restrictions apply to a Participant who receives a hardship distribution from his/her deferral contributions Account: (a) the Participant may not make elective deferrals or Employee contributions to the Plan for the 12-month period following the date of his/her hardship distribution; (b) the distribution may not exceed the amount of the Participant’s immediate and heavy financial need (including any amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution); (c) the Participant must have obtained all distributions, other than hardship distributions, and all nontaxable loans (determined at the time of the loan) currently available under this Plan and all other qualified plans maintained by the Employer; and (d) the Participant must limit elective deferrals under this Plan and under any other qualified plan maintained by the Employer, for the Participant’s taxable year immediately following the taxable year of the hardship distribution, to the 402(g) limitation (as described in Section 14.07), reduced by the amount of the Participant’s elective deferrals made in the taxable year of the hardship distribution. The suspension of elective deferrals and Employee contributions described in clause (a) also must apply to all other qualified plans and to all nonqualified plans of deferred compensation maintained by the Employer, other than any mandatory employee contribution portion of a defined benefit plan, including stock option, stock purchase and other similar plans, but not including health or welfare benefit plans (other than the cash or deferred arrangement portion of a cafeteria plan). The Plan Administrator, absent actual contrary knowledge, may rely on a Participant’s written representation that the distribution is on account of hardship (as defined in Section 6.09) and also satisfies clause (b). In addition, clause (c) regarding loans does not apply if the loan to the Participant would increase the Participant’s hardship need.

(2)  Earnings. A hardship distribution may not include earnings on an Employee’s elective deferrals credited after December 31, 1988. Qualified matching

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contributions and qualified nonelective contributions, and any earnings on such contributions, credited as of December 31, 1988, are subject to withdrawal for a hardship distribution only if the Employer in an Addendum to its Adoption Agreement elects to permit such withdrawals. The Addendum may modify the December 31, 1988, date for purposes of determining credited amounts, provided the date is not later than the end of the last Plan Year ending before July 1, 1989.

(B)  Distributions after Separation from Service. Following the Participant’s Separation from Service, the distribution events applicable to the Participant apply equally to all of the Participant’s Accounts.

14.12  SPECIAL ALLOCATION AND VALUATION RULES. If the 401(k) arrangement provides for salary reduction contributions, if the Plan accepts Employee contributions, or if the Plan allocates matching contributions as of any date other than the last day of the Plan Year, the Employer in Adoption Agreement Sections 9.08 and 10.15 must elect the method the Plan Administrator will apply to allocate net income, gain or loss to such contributions made during the Plan Year and any alternative valuation dates for the different Account types which the Plan Administrator maintains under the Plan.

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AMENDMENT TO
DEFINED CONTRIBUTION PLAN AND TRUST

Effective with respect to Employers adopting this prototype plan on or after July 1, 2002, Section 10.03(G) of the Plan is amended in its entirety to read as follows:

(G)Modifications of Trust. The Employer in its Standardized Adoption Agreement may not amend any provision of Article X (or any other provision of the Plan related to the Trust) except to specify the Trust year, the names of the Plan, the Employer, the Trustee, the Custodian, the Plan Administrator, other fiduciaries or the name of any pooled trust in which the Trust will participate. The Employer in its Nonstandardized Adoption Agreement, in addition to the foregoing amendments, may amend or override the administrative provisions of Article X (or any other provision of the Plan related to the Trust), including provisions relating to Trust investment and Trustee duties. Any such amendment: (1) must not conflict with any other provisions of the Plan (except as expressly are intended to override an existing Trust provision); (2) must not cause the Plan to violate Code §401(a); and (3) must be made in accordance with Rev. Proc. 2000-20 or any successor thereto. The Employer using either a Standardized or Nonstandardized Adoption Agreement to establish its Plan, subject to the conditions (1), (2) and (3) described above, may elect to substitute in place of Article X and the remaining trust provisions of the basic plan document, any other trust or custodial account agreement that has been approved by the IRS for use with this Plan. All Section 10.03(G) Trust modifications or substitutions are subject to Section 13.02 and require the written consent or signature of the Trustee.

Pursuant to Section 13.03 of the Plan, the mass submitter of the prototype plan has made this amendment (as evidenced by the submission of the amendment to the Internal Revenue Service for inclusion with the mass submitter prototype plan) on behalf of minor modifier Prototype Plan Sponsors that received opinion letters prior to March 1, 2002, and all identical Prototype Plan Sponsors of the mass submitter prototype plan.

EX-10.17

Exhibit 10.17

WELLS FARGO BANK MINNESOTA, N.A.

TRUSTEE FOR THE

BRYAN, PENDLETON, SWATS & MCALLISTER, LLC

DEFINED CONTRIBUTION PROTOTYPE PLAN AND TRUST

NONSTANDARDIZED 401(k) PROFIT SHARING PLAN

ADOPTED BY

MSC.SOFTWARE CORPORATION

AS THE

MSC.SOFTWARE CORPORATION
RETIREMENT PLAN

TABLE OF CONTENTS

NONSTANDARDIZED 401(k) PROFIT SHARING PLAN

ITEM		PAGE
ARTICLE I — DEFINITIONS
1	PLAN	1
2	TRUSTEE	1
3	EMPLOYEE	1
4	COMPENSATION	1
5	PLAN YEAR/LIMITATION YEAR	2
6	EFFECTIVE DATE	2
7	HOUR OF SERVICE/ELAPSED TIME METHOD	3
8	PREDECESSOR EMPLOYER SERVICE	3
ARTICLE II — ELIGIBILITY REQUIREMENTS
9	ELIGIBILITY	3
10	YEAR OF SERVICE – ELIGIBILITY	5
11	PARTICIPATION – BREAK IN SERVICE	5
12	ELECTION NOT TO PARTICIPATE	6
ARTICLE III — EMPLOYER CONTRIBUTIONS, DEFERRAL CONTRIBUTIONS AND FORFEITURES
13	AMOUNT AND TYPE	6
14	DEFERRAL CONTRIBUTIONS	7
15	MATCHING CONTRIBUTIONS	7
16	CONTRIBUTION ALLOCATION	9
17	FORFEITURE ALLOCATION	10
18	ALLOCATION CONDITIONS	10
ARTICLE IV — PARTICIPANT CONTRIBUTIONS
19	EMPLOYEE (AFTER TAX) CONTRIBUTIONS	11
ARTICLE V — VESTING REQUIREMENTS
20	NORMAL/EARLY RETIREMENT AGE	11
21	PARTICIPANT’S DEATH OR DISABILITY	11
22	VESTING SCHEDULE	11
23	YEAR OF SERVICE – VESTING	13
24	EXCLUDED YEARS OF SERVICE – VESTING	13
ARTICLE VI — DISTRIBUTION OF ACCOUNT BALANCE
25	TIME OF PAYMENT OF ACCOUNT BALANCE	13
26	DISTRIBUTION METHOD	15
27	JOINT AND SURVIVOR ANNUITY REQUIREMENTS	15
ARTICLE IX — PLAN ADMINISTRATOR – DUTIES WITH RESPECT TO PARTICIPANTS’ ACCOUNTS
28	ALLOCATION OF NET INCOME, GAIN OR LOSS	15
ARTICLE X — TRUSTEE AND CUSTODIAN, POWERS AND DUTIES
29	INVESTMENT POWERS	17
30	VALUATION OF TRUST	17

Nonstandardized 401(k) Profit Sharing Plan

ADOPTION AGREEMENT #005
NONSTANDARDIZED 401(k) PROFIT SHARING PLAN

The undersigned, MSC.Software Corporation (“Employer”), by executing this Adoption Agreement, elects to establish a retirement plan and trust (“Plan”) under the Bryan, Pendleton, Swats & McAllister, LLC Defined Contribution Prototype Plan (basic plan document # 01).  The Employer, subject to the Employer’s Adoption Agreement elections, adopts fully the Prototype Plan and Trust provisions.  This Adoption Agreement, the basic plan document and any attached appendices or addenda, constitute the Employer’s entire plan and trust document.  All section references within this Adoption Agreement are Adoption Agreement section references unless the Adoption Agreement or the context indicate otherwise.  All article references are basic plan document and Adoption Agreement references as applicable.  Numbers in parenthesis which follow headings are references to basic plan document sections.  The Employer makes the following elections granted under the corresponding provisions of the basic plan document.

ARTICLE I
DEFINITIONS

1.	PLAN (1.21). The name of the Plan as adopted by the Employer is MSC.Software Corporation Retirement Plan
2.	TRUSTEE (1.33). The Trustee executing this Adoption Agreement is (Choose one of (a), (b) or (c)):
	o		(a)		A discretionary Trustee. See Plan Section 10.03[A].
	ý		(b)		A nondiscretionary Trustee. See Plan Section 10.03[B].
	o		(c)		A Trustee under a separate trust agreement. See Plan Section 10.03[G].
3.	EMPLOYEE (1.11). The following Employees are not eligible to participate in the Plan (Choose (a) or one or more of (b) through (g) as applicable):
	o	(a)		No exclusions.
	ý	(b)		Collective bargaining Employees.
	o	(c)		Nonresident aliens.
	ý	(d)		Leased Employees.
	ý	(e)		Reclassified Employees.
	ý	(f)		Classifications:   Employees classified as “temporary” employees; interns; co-op students; international employees working in the United States on an “exchange” or “project” basis; employees of the Employer who are not citizens of the United States of America; employees of non-participating employers of the controlled group.
	o	(g)		Exclusions by types of contributions. The following classification(s) of Employees are not eligible for the specified contributions:
				Employee classification:
				Contribution type:
4.	COMPENSATION (1.07). The Employer makes the following election(s) regarding the definition of Compensation for purposes of the contribution allocation formula under Article III (Choose one of (a), (b) or (c)):
	ý	(a)		W-2 wages increased by Elective Contributions.
	o	(b)		Code §3401(a) federal income tax withholding wages increased by Elective Contributions.
	o	(c)		415 compensation.
	[Note: Each of the Compensation definitions in (a), (b) and (c) includes Elective Contributions. See Plan Section 1.07(D). To exclude Elective Contributions, the Employer must elect (g).]

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	Compensation taken into account. For the Plan Year in which an Employee first becomes a Participant, the Plan Administrator will determine the allocation of Employer contributions (excluding deferral contributions) by taking into account (Choose one of (d) or (e)):
	o	(d)	Plan Year. The Employee’s Compensation for the entire Plan Year.
	ý	(e)	Compensation while a Participant. The Employee’s Compensation only for the portion of the Plan Year in which the Employee actually is a Participant.
	Modifications to Compensation definition. The Employer elects to modify the Compensation definition elected in (a), (b) or (c) as follows. (Choose one or more of (f) through (n) as applicable. If the Employer elects to allocate its nonelective contribution under Plan Section 3.04 using permitted disparity, (i), (j), (k) and (l) do not apply):
	o	(f)	Fringe benefits. The Plan excludes all reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation and welfare benefits.
	o	(g)	Elective Contributions. The Plan excludes a Participant’s Elective Contributions. See Plan Section 1.07(D).
	ý	(h)	Exclusion. The Plan excludes Compensation in excess of: excludes all amounts paid as or for medical reimbursements, severance pay, auto allowances, all other forms of extra compensation and compensation not paid by the Employer.
	ý	(i)	Bonuses. The Plan excludes bonuses.
	o	(j)	Overtime. The Plan excludes overtime.
	o	(k)	Commissions. The Plan excludes commissions.
	o	(l)	Nonelective contributions. The following modifications apply to the definition of Compensation for nonelective contributions:
	ý	(m)	Deferral contributions. The following modifications apply to the definition of Compensation for deferral contributions:   includes bonuses.
	ý	(n)	Matching contributions. The following modifications apply to the definition of Compensation for matching contributions: includes bonuses.
5.	PLAN YEAR/LIMITATION YEAR (1.24). Plan Year and Limitation Year mean the 12-consecutive month period (except for a short Plan Year) ending every (Choose one of (a) or (b). Choose (c) if applicable):
	ý	(a)	December 31.
	o	(b)	Other:
	o	(c)	Short Plan Year: commencing on:	and ending on:
6.	EFFECTIVE DATE (1.10). The Employer’s adoption of the Plan is a (Choose one of (a) or (b)):
	o	(a)	New Plan. The Effective Date of the Plan is:
	ý	(b)	Restated Plan. The restated Effective Date is:  August 1, 2004
			This Plan is an amendment and restatement of an existing retirement plan(s) originally established effective as of:  February 1, 1976

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7.	HOUR OF SERVICE/ELAPSED TIME METHOD (1.15). The crediting method for Hours of Service is (Choose one or more of (a) through (d) as applicable):
	ý	(a)	Actual Method. See Plan Section 1.15(B).
	o	(b)	Equivalency Method. The Equivalency Method is:
			[Note: Insert “daily,” “weekly,” “semi-monthly payroll periods” or “monthly.”] See Plan Section 1.15(C).
	o	(c)	Combination method. In lieu of the Equivalency Method specified in (b), the Actual Method applies for purposes of:
	o	(d)	Elapsed Time Method. In lieu of crediting Hours of Service, the Elapsed Time Method applies for purposes of crediting Service for (Choose one or more of (1), (2) or (3) as applicable):
			o	(1)	Eligibility under Article II.
			o	(2)	Vesting under Article V.
			o	(3)	Contribution allocations under Article III.
8.	PREDECESSOR EMPLOYER SERVICE (1.30). In addition to the predecessor service the Plan must credit by reason of Section 1.30 of the Plan, the Plan credits as Service under this Plan service, with the following predecessor employer(s):
	Knowledge Revolution, AES, MDI, PDA Engineering, Silverado Consulting, Marc Analysis, Research Corp, and Universal Analytics, Inc.
	[Note: If the Plan does not credit any additional predecessor service under this Section 1.30, insert “N/A” in the blank line. The Employer also may elect to credit predecessor service with specified Participating Employers only. See the Participation Agreement.] Service with the designated predecessor employer(s) applies (Choose one or more of (a) through (d) as applicable):
	ý	(a)	Eligibility. For eligibility under Article II. See Plan Section 1.30 for time of Plan entry.
	ý	(b)	Vesting. For vesting under Article V.
	ý	(c)	Contribution allocation. For contribution allocations under Article III.
	o	(d)	Exceptions. Except for the following Service:

ARTICLE II
ELIGIBILITY REQUIREMENTS

9.	ELIGIBILITY (2.01).
	Eligibility conditions. To become a Participant in the Plan, an Employee must satisfy the following eligibility conditions (Choose one or more of (a) through (e) as applicable): [Note: If the Employer does not elect (c), the Employer’s elections under (a) and (b) apply to all types of contributions. The Employer as to deferral contributions may not elect (b)(2) and may not elect more than 12 months in (b)(4) and (b)(5).]
	o	(a)	Age. Attainment of age          (not to exceed age 21).
	ý	(b)	Service. Service requirement. (Choose one of (1) through (5)):
			ý	(1)	One Year of Service.
			o	(2)	Two Years of Service, without an intervening Break in Service. See Plan Section 2.03(A).
			o	(3)	One Hour of Service (immediate completion of Service requirement). The Employee satisfies the Service requirement on his/her Employment Commencement Date.
			o	(4)	Months (not exceeding 24).
			o	(5)	An Employee must complete                   Hours of Service within the                           time period following the Employee’s Employment Commencement Date. If an Employee does not complete the stated Hours of Service during the specified time period (if any), the Employee is subject to the One Year of Service requirement. [Note: The number of hours may not exceed 1,000 and the time period may not exceed 24 months. If the Plan does not require the Employee to satisfy the Hours of Service requirement within a specified time period, insert “N/A” in the second blank line.]

3

ý	(c)	Alternative 401(k)/401(m) eligibility conditions. In lieu of the elections in (a) and (b), the Employer elects the following eligibility conditions for the following types of contributions (Choose (1) or (2) or both if the Employer wishes to impose less restrictive eligibility conditions for deferral/Employee contributions or for matching contributions):
		ý	(1)	Deferral/Employee contributions (Choose one of a. through d. Choose e. if applicable):
				o	a.	One Year of Service
				o	b.	One Hour of Service (immediate completion of Service requirement)
				ý	c.	3 months (not exceeding 12)
				o	d.	An Employee must complete                Hours of Service within the                         time period following an Employee’s Employment Commencement Date. If an Employee does not complete the stated Hours of Service during the specified time period (if any), the Employee is subject to the One Year of Service requirement. [Note: The number of hours may not exceed 1,000 and the time period may not exceed 12 months. If the Plan does not require the Employee to satisfy the Hours of Service requirement within a specified time period, insert “N/A” in the second blank line.]
				o	e.	Age        (not exceeding age 21)
		ý	(2)	Matching contributions: (Choose one of f. through i. Choose j. if applicable):
				o	f.	One Year of Service
				o	g.	One Hour of Service (immediate completion of Service requirement)
				ý	h.	3 months (not exceeding 24)
				o	i.	An Employee must complete                Hours of Service within the                     time period following an Employee’s Employment Commencement Date. If an Employee does not complete the stated Hours of Service during the specified time period (if any), the Employee is subject to the One Year of Service requirement. [Note: The number of hours may not exceed 1,000 and the time period may not exceed 24 months. If the Plan does not require the Employee to satisfy the Hours of Service requirement within a specified time period, insert “N/A” in the second blank line.]
				o	j.	Age         (not exceeding age 21)
ý	(d)	Service requirements: Any Employee employed on January 1, 2004, is eligible for matching contributions without regard to the 3-month service requirement.
		[Note: Any Service requirement the Employer elects in (d) must be available under other Adoption Agreement elections or a combination thereof.]
o	(e)	Dual eligibility. The eligibility conditions of this Section 2.01 apply solely to an Employee employed by the Employer after                                      . If the Employee was employed by the Employer by the specified date, the Employee will become a Participant on the latest of: (i) the Effective Date; (ii) the restated Effective Date; (iii) the Employee’s Employment Commencement Date; or (iv) on the date the Employee attains age                        (not exceeding age 21).
Plan Entry Date.  “Plan Entry Date” means the Effective Date and (Choose one of (f) through (j).  Choose (k) if applicable):  [Note: If the Employer does not elect (k), the elections under (f) through (j) apply to all types of contributions.  The Employer must elect at least one Entry Date per Plan Year.]
o	(f)	Semi-annual Entry Dates. The first day of the Plan Year and the first day of the seventh month of the Plan Year.
o	(g)	The first day of the Plan Year.
o	(h)	Employment Commencement Date (immediate eligibility).
ý	(i)	The first day of each: month (e.g., “Plan Year quarter”).
o	(j)	The following Plan Entry Dates:

4

o

(k)

Alternative 401(k)/401(m) Plan Entry Date(s). For the alternative 401(k)/401(m) eligibility conditions under (c), Plan Entry Date means (Choose (1) or (2) or both as applicable):

o

(1)

Deferral/Employee contributions

o

(2)

Matching contributions

(Choose one of a. through d.):

(Choose one of e. through h.):

o

a.

Semi-annual Entry Dates

o

e.

Semi-annual Entry Dates

o

b.

The first day of the Plan Year

o

f.

The first day of the Plan Year

o

c.

Employment Commencement Date (immediate eligibility)

o

g.

Employment Commencement Date (immediate eligibility)

o

d.

The first day of each:

o

h.

The first day of each:

Time of participation. An Employee will become a Participant, unless excluded under Section 1.11, on the Plan Entry Date (if employed on that date) (Choose one of (l), (m) or (n). Choose (o) if applicable): [Note: If the Employer does not elect (o), the election under (l), (m) or (n) applies to all types of contributions.]

ý

(l)

Immediately following or coincident with

o

(m)

Immediately preceding or coincident with

o

(n)

Nearest

o

(o)

Alternative 401(k)/401(m) election(s) (Choose (1) or (2) or both as applicable):

o

(1)

Deferral contributions

o

(2)

Matching contributions

(Choose one of b.,c. or d.):

o

a.

Immediately following or coincident with

o

b.

Immediately following or coincident with

o

c.

Immediately preceding or coincident with

o

d.

Nearest

the date the Employee completes the eligibility conditions described in this Section 2.01. [Note: Unless otherwise excluded under Section 1.11, an Employee must become a Participant by the earlier of: (1) the first day of the Plan Year beginning after the date the Employee completes the age and service requirements of Code §410(a); or (2) 6 months after the date the Employee completes those requirements.]

10.

YEAR OF SERVICE – ELIGIBILITY (2.02). (Choose (a) and (b) as applicable): [Note: If the Employer does not elect a Year of Service condition or elects the Elapsed Time Method, the Employer should not complete (a) or (b).]

ý

(a)

Year of Service. An Employee must complete 1,000 Hour(s) of Service during an eligibility computation period to receive credit for a Year of Service under Article II: [Note: The number may not exceed 1,000. If left blank, the requirement is 1,000.]

ý

(b)

Eligibility computation period. After the initial eligibility computation period described in Plan Section 2.02, the Plan measures the eligibility computation period as (Choose one of (1) or (2)):

ý

(1)

The Plan Year beginning with the Plan Year which includes the first anniversary of the Employee’s Employment Commencement Date.

o

(2)

The 12-consecutive month period beginning with each anniversary of the Employee’s Employment Commencement Date.

11.

PARTICIPATION – BREAK IN SERVICE (2.03). The one year hold-out rule described in Plan Section 2.03(B) (Choose one of (a), (b) or (c)):

ý

(a)

Not applicable. Does not apply to the Plan.

o

(b)

Applicable. Applies to the Plan and to all Participants.

o

(c)

Limited application. Applies to the Plan, but only to a Participant who has incurred a Separation from Service.

5

12.	ELECTION NOT TO PARTICIPATE  (2.06).  The Plan (Choose one of (a) or (b)):
		ý	(a)	Election not permitted.  Does not permit an eligible Employee to elect not to participate.
		o	(b)	Irrevocable election.  Permits an Employee to elect not to participate if the Employee makes a one-time irrevocable election prior to the Employee’s Plan Entry Date.

ARTICLE III
EMPLOYER CONTRIBUTIONS, DEFERRAL CONTRIBUTIONS AND FORFEITURES

13.	AMOUNT AND TYPE  (3.01).  The amount and type(s) of the Employer’s contribution to the Trust for a Plan Year or other specified period will equal (Choose one or more of (a) through (f) as applicable):
		ý	(a)	Deferral contributions (401(k) arrangement).  The dollar or percentage amount by which each Participant has elected to reduce his/her Compensation, as provided in the Participant’s salary reduction agreement and in accordance with Section 3.02.
		ý	(b)	Matching contributions (other than safe harbor matching contributions under Section 3.01(d)).  The matching contributions made in accordance with Section 3.03.
		ý	(c)	Nonelective contributions (profit sharing).  The following nonelective contribution (Choose (1) or (2) or both as applicable): [Note: The Employer may designate as a qualified nonelective contribution, all or any portion of its nonelective contribution.  See Plan Section 3.04(F).]
				ý	(1)	Discretionary.  An amount the Employer in its sole discretion may determine.
				o	(2)	Fixed.  The following amount:
		o	(d)	401(k) safe harbor contributions.  The following 401(k) safe harbor contributions described in Plan Section 14.02(D) (Choose one of (1), (2) or (3).  Choose (4) if applicable):
				o	(1)	Safe harbor nonelective contribution.  The safe harbor nonelective contribution equals               % of a Participant’s Compensation [Note: the amount in the blank must be at least 3%.].
				o	(2)	Basic safe harbor matching contribution.  A matching contribution equal to 100% of each Participant’s deferral contributions not exceeding 3% of the Participant’s Compensation, plus 50% of each Participant’s deferral contributions in excess of 3% but not in excess of 5% of the Participant’s Compensation.  For this purpose, “Compensation” means Compensation for:
						[Note: The Employer must complete the blank line with the applicable time period for computing the Employer’s basic safe harbor match, such as “each payroll period,” “each month,” “each Plan Year quarter” or “the Plan Year.”]
				o	(3)	Enhanced safe harbor matching contribution. (Choose one of a. or b.)
						o	a.	Uniform percentage.  An amount equal to              % of each Participant’s
								deferral contributions not exceeding                % of the Participant’s
								Compensation.  For this purpose, “Compensation” means Compensation for:
								[See the Note in (d)(2).]
						o	b.	Tiered formula.  An amount equal to the specified matching percentage for the corresponding level of each Participant’s deferral contribution percentage.  For this purpose, “Compensation” means Compensation for:
								[See the Note in (d)(2).]
								Deferral Contribution Percentage	Matching Percentage
	[Note: The matching percentage may not increase as the deferral contribution percentage increases and the enhanced matching formula otherwise must satisfy the requirements of Code §§401(k)(12)(B)(ii) and (iii).  If the Employer wishes to avoid ACP testing on its enhanced safe harbor matching contribution, the Employer also must limit deferral contributions taken into account (the “Deferral Contribution Percentage”) for the matching contribution to 6% of Plan Year Compensation.]

6

			o	(4)	Another plan.  The Employer will satisfy the 401(k) safe harbor contribution in the following
					plan:
	o	(e)	Davis-Bacon contributions.  The amount(s) specified for the applicable Plan Year or other applicable period in the Employer’s Davis-Bacon contract(s).  The Employer will make a contribution only to Participants covered by the contract and only with respect to Compensation paid under the contract.  If the Participant accrues an allocation of nonelective contributions (including forfeitures) under the Plan in addition to the Davis-Bacon contribution, the Plan Administrator will (Choose one of (1) or (2)):
			o	(1)	Not reduce the Participant’s nonelective contribution allocation by the Davis-Bacon contribution.
			o	(2)	Reduce the Participant’s nonelective contribution allocation by the Davis-Bacon contribution.
	o	(f)	Frozen Plan.  This Plan is a frozen Plan effective:
			For any period following the specified date, the Employer will not contribute to the Plan, a Participant may not contribute and an otherwise eligible Employee will not become a Participant in the Plan.
14.	DEFERRAL CONTRIBUTIONS  (3.02).  The following limitations and terms apply to an Employee’s deferral contributions (If the Employer elects Section 3.01(a), the Employer must elect (a).  Choose (b) or (c) as applicable):
	ý	(a)	Limitation on amount.  An Employee’s deferral contributions are subject to the following limitation(s) in addition to those imposed by the Code (Choose (1), (2) or (3) as applicable):
			ý	(1)	Maximum deferral amount:	25		%
			ý	(2)	Minimum deferral amount:	2		%
			o	(3)	No limitations.
	For the Plan Year in which an Employee first becomes a Participant, the Plan Administrator will apply any percentage limitation the Employer elects in (1) or (2) to the Employee’s Compensation (Choose one of (4) or (5) unless the Employer elects (3)):
			ý	(4)	Only for the portion of the Plan Year in which the Employee actually is a Participant.
			o	(5)	For the entire Plan Year.
	o	(b)	Negative deferral election.  The Employer will withhold                 % from the Participant’s Compensation unless the Participant elects a lesser percentage (including zero) under his/her salary reduction agreement.  See Plan Section 14.02(C).  The negative election will apply to (Choose one of (1) or (2)):
			o	(1)	All Participants who have not deferred at least the automatic deferral amount as of:
			o	(2)	Each Employee whose Plan Entry Date is on or following the negative election effective date.
	o	(c)	Cash or deferred contributions.  For each Plan Year for which the Employer makes a designated cash or deferred contribution under Plan Section 14.02(B), a Participant may elect to receive directly in cash not more than the following portion (or, if less, the 402(g) limitation) of his/her proportionate share of that cash or deferred contribution (Choose one of (1) or (2)):
			o	(1)	All or any portion.		o		(2)	%.
	Modification/revocation of salary reduction agreement.  A Participant prospectively may modify or revoke a salary reduction agreement, or may file a new salary reduction agreement following a prior revocation, at least once per Plan Year or during any election period specified by the basic plan document or required by the Internal Revenue Service.  The Plan Administrator also may provide for more frequent elections in the Plan’s salary reduction agreement form.
15.	MATCHING CONTRIBUTIONS (INCLUDING ADDITIONAL SAFE HARBOR MATCH UNDER PLAN SECTION 14.02(D)(3))  (3.03).  The Employer matching contribution is (If the Employer elects Section 3.01(b), the Employer must elect one or more of (a), (b) or (c) as applicable.  Choose (d) if applicable):
	o	(a)	Fixed formula.  An amount equal to                  % of each Participant’s deferral contributions.
	ý	(b)	Discretionary formula.  An amount (or additional amount) equal to a matching percentage the Employer from time to time may deem advisable of the Participant’s deferral contributions.  The Employer, in its sole discretion, may designate as a qualified matching contribution, all or any portion of its discretionary

7

			matching contribution.  The portion of the Employer’s discretionary matching contribution for a Plan Year not designated as a qualified matching contribution is a regular matching contribution.
	o	(c)	Multiple level formula.  An amount equal to the following percentages for each level of the Participant’s deferral contributions.  [Note: The matching percentage only will apply to deferral contributions in excess of the previous level and not in excess of the stated deferral contribution percentage.]
					Deferral Contributions		Matching Percentage
	o	(d)	Related Employers.  If two or more Related Employers contribute to this Plan, the Plan Administrator will allocate matching contributions and matching contribution forfeitures only to the Participants directly employed by the contributing Employer.  The matching contribution formula for the other Related
			Employer(s) is:
			[Note: If the Employer does not elect (d), the Plan Administrator will allocate all matching contributions and matching forfeitures without regard to which contributing Related Employer directly employs the Participant.]
Time period for matching contributions.  The Employer will determine its matching contribution based on deferral contributions made during each (Choose one of (e) through (h)):
	ý	(e)	Plan Year.
	o	(f)	Plan Year quarter.
	o	(g)	Payroll period.
	o	(h)	Alternative time period:					[Note: Any alternative time period
			the Employer elects in (h) must be the same for all Participants and may not exceed the Plan Year.]
Deferral contributions taken into account.  In determining a Participant’s deferral contributions taken into account for the above-specified time period under the matching contribution formula, the following limitations apply (Choose one of (i), (j) or (k)):
	o	(i)	All deferral contributions.  The Plan Administrator will take into account all deferral contributions.
	ý	(j)	Specific limitation.  The Plan Administrator will disregard deferral contributions exceeding  5% of the
			Participant’s Compensation.  [Note: To avoid the ACP test in a safe harbor 401(k) plan, the Employer must limit deferrals and Employee contributions which are subject to match to 6% of Plan Year Compensation.]
	o	(k)	Discretionary.  The Plan Administrator will take into account the deferral contributions as a percentage of the Participant’s Compensation as the Employer determines.
Other matching contribution requirements.  The matching contribution formula is subject to the following additional requirements (Choose (l) or (m) or both as applicable):
	o	(l)	Matching contribution limits.  A Participant’s matching contributions may not exceed (Choose one of (1) or (2)):
			o	(1)		[Note: The Employer may elect (1) to place an overall dollar or
					percentage limit on matching contributions.]
			o	(2)	4% of a Participant’s Compensation for the Plan Year under the discretionary matching contribution formula.  [Note: The Employer must elect (2) if it elects a discretionary matching formula with the safe harbor 401(k) contribution formula and wishes to avoid the ACP test.]
	o	(m)	Qualified matching contributions.  The Plan Administrator will allocate as qualified matching
			contributions, the matching contributions specified in Adoption Agreement Section:						.
			The Plan Administrator will allocate all other matching contributions as regular matching contributions.  [Note: If the Employer elects two matching formulas, the Employer may use (m) to designate one of the formulas as a qualified matching contribution.]

8

16.	CONTRIBUTION ALLOCATION (3.04).
	Employer nonelective contributions (3.04(A)). The Plan Administrator will allocate the Employer’s nonelective contribution under the following contribution allocation formula (Choose one of (a), (b) or (c). Choose (d) if applicable):
	o	(a)	Nonintegrated (pro rata) allocation formula.
	ý	(b)	Permitted disparity. The following permitted disparity formula and definitions apply to the Plan (Choose one of (1) or (2). Also choose (3)):
			ý	(1)	Two-tiered allocation formula.
			o	(2)	Four-tiered allocation formula.
			ý	(3)	For purposes of Section 3.04(b), “Excess Compensation” means Compensation in excess of (Choose one of a. or b.):
					ý	a.	100% of the taxable wage base in effect on the first day of the Plan Year, rounded to the next highest $1 (not exceeding the taxable wage base).
					o	b.	The following integration level:
							[Note: The integration level cannot exceed the taxable wage base in effect for the Plan Year for which this Adoption Agreement first is effective.]
	o	(c)	Uniform points allocation formula. Under the uniform points allocation formula, a Participant receives (Choose (1) or both (1) and (2) as applicable):
			o	(1)	point(s) for each Year of Service. Year of Service means:
			o	(2)	One point for each $                         [not to exceed $200] increment of Plan Year Compensation.
	o	(d)	Incorporation of contribution formula. The Plan Administrator will allocate the Employer’s nonelective contribution under Section(s) 3.01(c)(2), (d)(1) or (e) in accordance with the contribution formula adopted by the Employer under that Section.
	Qualified nonelective contributions. (3.04(F)). The Plan Administrator will allocate the Employer’s qualified nonelective contributions to (Choose one of (e) or (f)):
	o	(e)	Nonhighly Compensated Employees only.
	o	(f)	All Participants.
	Related Employers. (Choose (g) if applicable)
	o	(g)	Allocate only to directly employed Participants. If two or more Related Employers adopt this Plan, the Plan Administrator will allocate all nonelective contributions and forfeitures attributable to nonelective contributions only to the Participants directly employed by the contributing Employer. If a Participant receives Compensation from more than one contributing Employer, the Plan Administrator will determine the allocations under this Section 3.04 by prorating the Participant’s Compensation between or among the participating Related Employers. [Note: If the Employer does not elect 3.04(g), the Plan Administrator will allocate all nonelective contributions and forfeitures without regard to which contributing Related Employer directly employs the Participant. The Employer may not elect 3.04(g) under a safe harbor 401(k) Plan.]

9

17.	FORFEITURE ALLOCATION  (3.05).  The Plan Administrator will allocate a Participant forfeiture (Choose one or more of (a), (b) or (c) as applicable): [Note: Even if the Employer elects immediate vesting, the Employer should complete Section 3.05.  See Plan Section 9.11.]
	ý	(a)	Matching contribution forfeitures.  To the extent attributable to matching contributions (Choose one of (1) through (4)):
			o	(1)	As a discretionary matching contribution.
			ý	(2)	To reduce matching contributions.
			o	(3)	As a discretionary nonelective contribution.
			o	(4)	To reduce nonelective contributions.
	ý	(b)	Nonelective contribution forfeitures.  To the extent attributable to Employer nonelective contributions (Choose one of (1) through (4)):
			ý	(1)	As a discretionary nonelective contribution.
			o	(2)	To reduce nonelective contributions.
			o	(3)	As a discretionary matching contribution.
			o	(4)	To reduce matching contributions.
	o	(c)	Reduce administrative expenses.  First to reduce the Plan’s ordinary and necessary administrative expenses for the Plan Year and then allocate any remaining forfeitures in the manner described in Sections 3.05(a) or (b), as applicable.
	Timing of forfeiture allocation.  The Plan Administrator will allocate forfeitures under Section 3.05 in the Plan Year (Choose one of (d) or (e)):
	ý	(d)	In which the forfeiture occurs.
	o	(e)	Immediately following the Plan Year in which the forfeiture occurs.
18.	ALLOCATION CONDITIONS  (3.06).
	Allocation conditions.  The Plan does not apply any allocation conditions to deferral contributions, 401(k) safe harbor contributions (under Section 3.01(d)) or to Davis-Bacon contributions (except as the Davis-Bacon contract provides).  To receive an allocation of matching contributions, nonelective contributions, qualified nonelective contributions or Participant forfeitures, a Participant must satisfy the following allocation condition(s) (Choose one or more of (a) through (i) as applicable):
	ý	(a)	Hours of Service condition.  The Participant must complete at least the specified number of Hours of Service (not exceeding 1,000) during the Plan Year: 1,000
	o	(b)	Employment condition.  The Participant must be employed by the Employer on the last day of the                                              (designate time period).
	o	(c)	No allocation conditions.
	o	(d)	Elapsed Time Method.  The Participant must complete at least the specified number (not exceeding 182) of consecutive calendar days of employment with the Employer during the Plan Year:
	o	(e)	Termination of Service/501 Hours of Service coverage rule.  The Participant either must be employed by the Employer on the last day of the Plan Year or must complete at least 501 Hours of Service during the Plan Year.  If the Plan uses the Elapsed Time Method of crediting Service, the Participant must complete at least 91 consecutive calendar days of employment with the Employer during the Plan Year.
	o	(f)	Special allocation conditions for matching contributions.  The Participant must complete at least                Hours of Service during the                                              (designate time period) for the matching contributions made for that time period.

10

	o	(g)	Death, Disability or Normal Retirement Age.  Any condition specified in Section 3.06               applies if the Participant incurs a Separation from Service during the Plan Year on account of:                                                 (e.g., death, Disability or Normal Retirement Age).
	o	(h)	Suspension of allocation conditions for coverage.  The suspension of allocation conditions of Plan Section 3.06(E) applies to the Plan.
	ý	(i)	Limited allocation conditions.  The Plan does not impose an allocation condition for the following types of contributions: matching contributions [Note: Any election to limit the Plan’s allocation conditions to certain contributions must be the same for all Participants, be definitely determinable and not discriminate in favor of Highly Compensated Employees.]
ARTICLE IV
PARTICIPANT CONTRIBUTIONS
19.	EMPLOYEE (AFTER TAX) CONTRIBUTIONS  (4.02).  The following elections apply to Employee contributions (Choose one of (a) or (b).  Choose (c) if applicable):
	ý	(a)	Not permitted.  The Plan does not permit Employee contributions.
	o	(b)	Permitted.  The Plan permits Employee contributions subject to the following limitations:
			[Note: Any designated limitation(s) must be the same for all Participants, be definitely determinable and not discriminate in favor of Highly Compensated Employees.]
	o	(c)	Matching contribution.  For each Plan Year, the Employer’s matching contribution made with respect to
			Employee contributions is:
ARTICLE V
VESTING REQUIREMENTS
20.	NORMAL/EARLY RETIREMENT AGE  (5.01).  A Participant attains Normal Retirement Age (or Early Retirement Age, if applicable) under the Plan on the following date (Choose one of (a) or (b).  Choose (c) if applicable):
	ý	(a)	Specific age.  The date the Participant attains age 65.  [Note: The age may not exceed age 65.]
	o	(b)	Age/participation.  The later of the date the Participant attains                 years of age or the                  anniversary of the first day of the Plan Year in which the Participant commenced participation in the Plan.  [Note: The age may not exceed age 65 and the anniversary may not exceed the 5th.]
	o	(c)	Early Retirement Age.  Early Retirement Age is the later of: (i) the date a Participant attains age          or (ii) the date a Participant reaches his/her                     anniversary of the first day of the Plan Year in which the Participant commenced participation in the Plan.
21.	PARTICIPANT’S DEATH OR DISABILITY  (5.02).  The 100% vesting rule under Plan Section 5.02 does not apply to (Choose (a) or (b) or both as applicable):
	o	(a)	Death.
	o	(b)	Disability.
22.	VESTING SCHEDULE  (5.03).  A Participant has a 100% Vested interest at all times in his/her deferral contributions, qualified nonelective contributions, qualified matching contributions, 401(k) safe harbor contributions and Davis-Bacon contributions (unless otherwise indicated in (f)).  The following vesting schedule applies to Employer regular matching contributions and to Employer nonelective contributions (Choose (a) or choose one or more of (b) through (f) as applicable):
	ý	(a)	Immediate vesting.  100% Vested at all times.  [Note: The Employer must elect (a) if the Service condition under Section 2.01 exceeds One Year of Service or more than twelve months.]

11

o	(b)	Top-heavy vesting schedules.  [Note: The Employer must choose one of (b)(1), (2) or (3) if it does not elect (a).]
		o	(1)	6-year graded as specified in the Plan		o	(3)	Modified top-heavy schedule
		o	(2)	3-year cliff as specified in the Plan
					Years of Service				Vested Percentage
					Less than 1				a.
					1				b.
					2				c.
					3				d.
					4				e.
					5				f.
					6 or more				100		%
o	(c)	Non-top-heavy vesting schedules.  [Note: The Employer may elect one of (c)(1), (2) or (3) in addition to (b).]
		o	(1)	7-year graded as specified in the Plan		o	(3)	Modified non-top-heavy schedule
		o	(2)	5-year cliff as specified in the Plan
					Years of Service				Vested Percentage
					Less than 1				a.
					1				b.
					2				c.
					3				d.
					4				e.
					5				f.
					6				g.
					7 or more					100	%
If the Employer does not elect (c), the vesting schedule elected in (b) applies to all Plan Years.  [Note: The modified top-heavy schedule of (b)(3) must satisfy Code §416.  If the Employer elects (c)(3), the modified non-top-heavy schedule must satisfy Code §411(a)(2).]
ý	(d)	Separate vesting election for regular matching contributions.  In lieu of the election under (a), (b) or (c), the following vesting schedule applies to a Participant’s regular matching contributions (Choose one of (1) or (2)):
		o	(1)	100% Vested at all times.
		ý	(2)	Regular matching vesting schedule:  less than 1 year = 0%; 1 yr + 25%; 2 yrs = 50%;
				3 yrs = 100%.  Same schedule shall apply if plan is top heavy.
				[Note: The vesting schedule completed under (d)(2) must comply with Code §411(a)(4).]
o	(e)	Application of top-heavy schedule.  The non-top-heavy schedule elected under (c) applies in all Plan Years in which the Plan is not a top-heavy plan.  [Note: If the Employer does not elect (e), the top-heavy vesting schedule will apply for the first Plan Year in which the Plan is top-heavy and then in all subsequent Plan Years.]

12

	o	(f)	Special vesting provisions:
			[Note: Any special vesting provision must satisfy Code §411(a).  Any special vesting provision must be definitely determinable, not discriminate in favor of Highly Compensated Employees and not violate Code §401(a)(4).]
23.	YEAR OF SERVICE – VESTING  (5.06).  (Choose (a) and (b)): [Note: If the Employer elects the Elapsed Time Method or elects immediate vesting, the Employer should not complete (a) or (b).]
	ý	(a)	Year of Service.  An Employee must complete at least 1,000 Hours of Service during a vesting computation period to receive credit for a Year of Service under Article V.  [Note: The number may not exceed 1,000.  If left blank, the requirement is 1,000.]
	ý	(b)	Vesting computation period.  The Plan measures a Year of Service on the basis of the following 12-consecutive month period (Choose one of (1) or (2)):
			ý	(1)	Plan Year.
			o	(2)	Employment year (anniversary of Employment Commencement Date).
24.	EXCLUDED YEARS OF SERVICE – VESTING  (5.08).  The Plan excludes the following Years of Service for purposes of vesting (Choose (a) or choose one or more of (b) through (f) as applicable):
	ý	(a)	None.  None other than as specified in Plan Section 5.08(a).
	o	(b)	Age 18.  Any Year of Service before the Year of Service during which the Participant attained the age of 18.
	o	(c)	Prior to Plan establishment.  Any Year of Service during the period the Employer did not maintain this Plan or a predecessor plan.
	o	(d)	Parity Break in Service.  Any Year of Service excluded under the rule of parity.  See Plan Section 5.10.
	o	(e)	Prior Plan terms.  Any Year of Service disregarded under the terms of the Plan as in effect prior to this restated Plan.
	o	(f)	Additional exclusions.  Any Year of Service before:
			[Note: Any exclusion specified under (f) must comply with Code §411(a)(4).  Any exclusion must be definitely determinable, not discriminate in favor of Highly Compensated Employees and not violate Code §401(a)(4).  If the Employer elects immediate vesting, the Employer should not complete Section 5.08.]

ARTICLE VI
DISTRIBUTION OF ACCOUNT BALANCE

25.	TIME OF PAYMENT OF ACCOUNT BALANCE  (6.01).  The following time of distribution elections apply to the Plan:
	Separation from Service/Vested Account Balance not exceeding $5,000.  Subject to the limitations of Plan Section 6.01(A)(1), the Trustee will distribute in a lump sum (regardless of the Employer’s election under Section 6.04) a separated Participant’s Vested Account Balance not exceeding $5,000 (Choose one of (a) through (d)):
	ý	(a)	Immediate.  As soon as administratively practicable following the Participant’s Separation from Service.
	o	(b)	Designated Plan Year.  As soon as administratively practicable in the            Plan Year beginning after the Participant’s Separation from Service.
	o	(c)	Designated Plan Year quarter.  As soon as administratively practicable in the                                                 Plan Year quarter beginning after the Participant’s Separation from Service.
	o	(d)	Designated distribution.  As soon as administratively practicable in the
			following the Participant’s Separation from Service.  [Note: The designated distribution time must be the same for all Participants, be definitely determinable, not discriminate in favor of Highly Compensated Employees and not violate Code §401(a)(4).]

13

Separation from Service/Vested Account Balance exceeding $5,000.  A separated Participant whose Vested Account Balance exceeds $5,000 may elect to commence distribution of his/her Vested Account Balance no earlier than (Choose one of (e) through (i).  Choose (j) if applicable):
ý	(e)	Immediate.  As soon as administratively practicable following the Participant’s Separation from Service.
o	(f)	Designated Plan Year.  As soon as administratively practicable in the                              Plan Year beginning after the Participant’s Separation from Service.
o	(g)	Designated Plan Year quarter.  As soon as administratively practicable in the                                              Plan Year quarter following the Plan Year quarter in which the Participant elects to receive a distribution.
o	(h)	Normal Retirement Age.  As soon as administratively practicable after the close of the Plan Year in which the Participant attains Normal Retirement Age and within the time required under Plan Section 6.01(A)(2).
o	(i)	Designated distribution.  As soon as administratively practicable in the
		following the Participant’s Separation from Service.  [Note: The designated distribution time must the same for all Participants, be definitely determinable, not discriminate in favor of Highly Compensated Employees and not violate Code §401(a)(4).]
o	(j)	Limitation on Participant’s right to delay distribution.  A Participant may not elect to delay commencement of distribution of his/her Vested Account Balance beyond the later of attainment of age 62 or Normal Retirement Age.  [Note: If the Employer does not elect (j), the Plan permits a Participant who has Separated from Service to delay distribution until his/her required beginning date.  See Plan Section 6.01(A)(2).]
Participant elections prior to Separation from Service.  A Participant, prior to Separation from Service may elect any of the following distribution options in accordance with Plan Section 6.01(C).  (Choose (k) or choose one or more of (l) through (o) as applicable): [Note: If the Employer elects any in-service distribution option, a Participant may elect to receive one in-service distribution per Plan Year unless the Plan’s in-service distribution form provides for more frequent in-service distributions.]
o	(k)	None.  A Participant does not have any distribution option prior to Separation from Service, except as may be provided under Plan Section 6.01(C).
ý	(l)	Deferral contributions.  Distribution of all or any portion (as permitted by the Plan) of a Participant’s Account Balance attributable to deferral contributions if (Choose one or more of (1), (2) or (3) as applicable):
		ý	(1)	Hardship (safe harbor hardship rule).  The Participant has incurred a hardship in accordance with Plan Sections 6.09 and 14.11(A).
		ý	(2)	Age.  The Participant has attained age 59½ .  (Must be at least age 59½.)
		ý	(3)	Disability.  The Participant has incurred a Disability.
o	(m)	Qualified nonelective contributions/qualified matching contributions/safe harbor contributions.  Distribution of all or any portion of a Participant’s Account Balance attributable to qualified nonelective contributions, to qualified matching contributions, or to 401(k) safe harbor contributions if (Choose (1) or (2) or both as applicable):
		o	(1)	Age.  The Participant has attained age              .  (Must be at least age 59½.)
		o	(2)	Disability.  The Participant has incurred a Disability.
ý	(n)	Nonelective contributions/regular matching contributions.  Distribution of all or any portion of a Participant’s Vested Account Balance attributable to nonelective contributions or to regular matching contributions if (Choose one or more of (1) through (5):
		o	(1)	Age/Service conditions (Choose one or more of a.  through d.  as applicable):
				o	a.	Age.  The Participant has attained age            .
				o	b.	Two-year allocations.  The Plan Administrator has allocated the contributions to be distributed, for a period of not less than                            Plan Years before the distribution date.  [Note: The minimum number of years is 2.]

14

							o	c.	Five years of participation.  The Participant has participated in the Plan for at Least           Plan Years.  [Note: The minimum number of years is 5.]
							o	d.	Vested.  The Participant is                  % Vested in his/her Account Balance.
									See Plan Section 5.03(A).  [Note: If an Employer makes more than one election under Section 6.01(n)(1), a Participant must satisfy all conditions before the Participant is eligible for the distribution.]
					o	(2)	Hardship.  The Participant has incurred a hardship in accordance with Plan Section 6.09.
					o	(3)	Hardship (safe harbor hardship rule).  The Participant has incurred a hardship in accordance with Plan Sections 6.09 and 14.11(A).
					ý	(4)	Disability.  The Participant has incurred a Disability.
					o	(5)	Designated condition.  The Participant has satisfied the following condition(s):
							[Note: Any designated condition(s) must be the same for all Participants, be definitely determinable and not discriminate in favor of Highly Compensated Employees.]
	o	(o)			Participant contributions.  Distribution of all or any portion of a Participant’s Account Balance attributable to the following Participant contributions described in Plan Section 4.01 (Choose one of (1), (2) or (3)):
					o	(1)	All Participant contributions.
					o	(2)	Employee contributions only.
					o	(3)	Rollover contributions only.
	Participant loan default/offset.  See Section 6.08 of the Plan.
26.	DISTRIBUTION METHOD  (6.03).  A separated Participant whose Vested Account Balance exceeds $5,000 may elect distribution under one of the following method(s) of distribution described in Plan Section 6.03 (Choose one or more of (a) through (d) as applicable):
	ý	(a)		Lump sum.
	o	(b)		Installments.
	o	(c)		Installments for required minimum distributions only.
	o	(d)		Annuity distribution option(s):
				[Note: Any optional method of distribution may not be subject to Employer, Plan Administrator or Trustee discretion.]
27.	JOINT AND SURVIVOR ANNUITY REQUIREMENTS  (6.04).  The joint and survivor annuity distribution requirements of Plan Section 6.04 (Choose one of (a) or (b)):
	ý	(a)	Profit sharing plan exception.  Do not apply to a Participant, unless the Participant is a Participant described in Section 6.04(H) of the Plan.
	o	(b)	Applicable.  Apply to all Participants.

ARTICLE IX
PLAN ADMINISTRATOR – DUTIES WITH RESPECT TO PARTICIPANTS’ ACCOUNTS

28.	ALLOCATION OF NET INCOME, GAIN OR LOSS  (9.08).  For each type of contribution provided under the Plan, the Plan allocates net income, gain or loss using the following method (Choose one or more of (a) through (e) as applicable):
	ý	(a)	Deferral contributions/Employee contributions (Choose one or more of (1) through (5) as applicable):
			ý	(1)	Daily valuation method.  Allocate on each business day of the Plan Year during which Plan assets for which there is an established market are valued and the Trustee is conducting business.

15

		o	(2)	Balance forward method.  Allocate using the balance forward method.
		o	(3)	Weighted average method.  Allocate using the weighted average method, based on the following weighting period:
				See Plan Section 14.12.
		o	(4)	Balance forward method with adjustment.  Allocate pursuant to the balance forward method, except treat as part of the relevant Account at the beginning of the valuation period                 % of the contributions made during the following valuation period:
		o	(5)	Individual account method.  Allocate using the individual account method.  See Plan Section 9.08.
ý	(b)	Matching contributions.  (Choose one or more of (1) through (5) as applicable):
		ý	(1)	Daily valuation method.  Allocate on each business day of the Plan Year during which Plan assets for which there is an established market are valued and the Trustee is conducting business.
		o	(2)	Balance forward method.  Allocate using the balance forward method.
		o	(3)	Weighted average method.  Allocate using the weighted average method, based on the following weighting period:
				See Plan Section 14.12.
		o	(4)	Balance forward method with adjustment.  Allocate pursuant to the balance forward method, except treat as part of the relevant Account at the beginning of the valuation period     % of the contributions made during the following valuation period:
		o	(5)	Individual account method.  Allocate using the individual account method.  See Plan Section 9.08.
ý	(c)	Employer nonelective contributions. (Choose one or more of (1) through (5) as applicable):
		ý	(1)	Daily valuation method.  Allocate on each business day of the Plan Year during which Plan assets for which there is an established market are valued and the Trustee is conducting business.
		o	(2)	Balance forward method.  Allocate using the balance forward method.
		o	(3)	Weighted average method.  Allocate using the weighted average method, based on the
				following weighting period:
				See Plan Section 14.12.
		o	(4)	Balance forward method with adjustment.  Allocate pursuant to the balance forward method, except treat as part of the relevant Account at the beginning of the valuation period            % of the contributions made during the following valuation period:
		o	(5)	Individual account method.  Allocate using the individual account method.  See Plan Section 9.08.
o	(d)	Specified method.  Allocate pursuant to the following method:
		[Note: The specified method must be a definite predetermined formula which is not based on Compensation, which satisfies the nondiscrimination requirements of Treas. Reg. §1.401(a)(4) and which is applied uniformly to all Participants.]
o	(e)	Interest rate factor.  In accordance with Plan Section 9.08(E), the Plan includes interest at the following rate on distributions made more than 90 days after the most recent valuation date:

16

ARTICLE X
TRUSTEE AND CUSTODIAN, POWERS AND DUTIES

29.	INVESTMENT POWERS  (10.03).  The following additional investment options or limitations apply under Plan
	Section 10.03:
				[Note: Enter “N/A” if not applicable.]
30.	VALUATION OF TRUST (10.15).  In addition to the last day of the Plan Year, the Trustee must value the Trust Fund on the following valuation date(s) (Choose one of (a) through (d)):
	ý	(a)	Daily valuation dates.  Each business day of the Plan Year on which Plan assets for which there is an established market are valued and the Trustee is conducting business.
	o	(b)	Last day of a specified period.  The last day of each		of the Plan Year.
	o	(c)	Specified dates:
	o	(d)	No additional valuation dates.

17

EXECUTION PAGE

The Trustee (and Custodian, if applicable), by executing this Adoption Agreement, accepts its position and agrees to all of the obligations, responsibilities and duties imposed upon the Trustee (or Custodian) under the Prototype Plan and Trust.  The Employer hereby agrees to the provisions of this Plan and Trust, and in witness of its agreement, the Employer by its duly authorized officers, has executed this Adoption Agreement, and the Trustee (and Custodian, if applicable) has signified its

acceptance, on:

.

Name of Employer:					MSC.SOFTWARE CORPORATION
Employer’s EIN:				95-2239450
Signed:	/s/ Louis A. Greco
			[Name/Title]
Name(s) of Trustee:
		WELLS FARGO BANK, N.A.
Trust EIN (Optional):
Signed:
			[Name/Title]
Signed:
			[Name/Title]
Signed:
			[Name/Title]
Name of Custodian (Optional):
Signed:
			[Name/Title]

31.	Plan Number.  The 3-digit plan number the Employer assigns to this Plan for ERISA reporting purposes (Form 5500
	Series) is:  001
Use of Adoption Agreement.  Failure to complete properly the elections in this Adoption Agreement may result in disqualification of the Employer’s Plan.  The Employer only may use this Adoption Agreement in conjunction with the basic plan document referenced by its document number on Adoption Agreement page one.
Execution for Page Substitution Amendment Only.  If this paragraph is completed, this Execution Page documents an
amendment to Adoption Agreement Section(s)		effective
by substitute Adoption Agreement page number(s)
Prototype Plan Sponsor.  The Prototype Plan Sponsor identified on the first page of the basic plan document will notify all adopting employers of any amendment of this Prototype Plan or of any abandonment or discontinuance by the Prototype Plan Sponsor of its maintenance of this Prototype Plan.  For inquiries regarding the adoption of the Prototype Plan, the Prototype Plan Sponsor’s intended meaning of any Plan provisions or the effect of the opinion letter issued to the Prototype Plan Sponsor, please contact the Prototype Plan Sponsor at the following address and telephone number:
BPSM, LLC, 5301 Virginia Way, Suite 400, Brentwood, TN 37027, (615) 665-1640
Reliance on Sponsor Opinion Letter.  The Prototype Plan Sponsor has obtained from the IRS an opinion letter specifying the form of this Adoption Agreement and the basic plan document satisfy, as of the date of the opinion letter, Code §401.  An adopting Employer may rely on the Prototype Sponsor’s IRS opinion letter only to the extent provided in Announcement 2001-77, 2001-30 I.R.B.  The Employer may not rely on the opinion letter in certain other circumstances or with respect to certain qualification requirements, which are specified in the opinion letter and in Announcement 2001-77.  In order to have reliance in such circumstances or with respect to such qualification requirements, the Employer must apply for a determination letter to Employee Plans Determinations of the Internal Revenue Service.

18

PARTICIPATION AGREEMENT

oCheck here if not applicable and do not complete this page.

The undersigned Employer, by executing this Participation Agreement, elects to become a Participating Employer in the Plan identified in Section 1.21 of the accompanying Adoption Agreement, as if the Participating Employer were a signatory to that Adoption Agreement.  The Participating Employer accepts, and agrees to be bound by, all of the elections granted under the provisions of the Prototype Plan as made by the Signatory Employer to the Execution Page of the Adoption Agreement, except as otherwise provided in this Participation Agreement.
32.	EFFECTIVE DATE  (1.10).  The Effective Date of the Plan for the Participating Employer is: August 1, 2004
33.	NEW PLAN/RESTATEMENT.  The Participating Employer’s adoption of this Plan constitutes (Choose one of (a) or (b)):
	o		(a)	The adoption of a new plan by the Participating Employer.
	ý		(b)	The adoption of an amendment and restatement of a plan currently maintained by the Participating
				Employer, identified as: MSC.Software Corporation Retirement Plan
				and having an original effective date of:  July 20, 2001, as to this Participating Employer
34.	PREDECESSOR EMPLOYER SERVICE  (1.30).  In addition to the predecessor service credited by reason of Section 1.30 of the Plan, the Plan credits as Service under this Plan, service with this Participating Employer (Choose one or more of (a) through (d) as applicable): [Note: If the Plan does not credit any additional predecessor service under Section 1.30 for this Participating Employer, do not complete this election.]
	ý		(a)	Eligibility.  For eligibility under Article II.  See Plan Section 1.30 for time of Plan entry.
	ý		(b)	Vesting.  For vesting under Article V.
	ý		(c)	Contribution allocation.  For contribution allocations under Article III.
	o		(d)	Exceptions.  Except for the following Service:
Name of Plan:						Name of Participating Employer:
MSC.Software Corporation Retirement Plan						MSC.Software Sales
						Signed:	/s/ Louis A. Greco
						[Name/Title]
						[Date]
						Participating Employer’s EIN:			33-0669359
Acceptance by the Signatory Employer to the Execution Page of the Adoption Agreement and by the Trustee.
Name of Signatory Employer:					MSC.Software Corporation	Name(s) of Trustee:		Wells Fargo Bank, N.A.
[Name/Title]						[Name/Title]
Signed:		/s/ Louis A. Greco				Signed:
[Date]						[Date]
[Note: Each Participating Employer must execute a separate Participation Agreement.  If the Plan does not have a Participating Employer, the Signatory Employer may delete this page from the Adoption Agreement.]

19

APPENDIX A
TESTING ELECTIONS/EFFECTIVE DATE ADDENDUM

35.	The following testing elections and special effective dates apply (Choose one or more of (a) through (n) as applicable):
	o	(a)	Highly Compensated Employee (1.14).  For Plan Years beginning after			,
			the Employer makes the following election(s) regarding the definition of Highly Compensated Employee:
			o	(1)	Top paid group election.
			o	(2)	Calendar year data election (fiscal year plan).
	ý	(b)	401(k) current year testing.  The Employer will apply the current year testing method in applying the
			ADP and ACP tests effective for Plan Years beginning after  1997
			[Note:  For Plan Years beginning on or after the Employer’s execution of its “GUST” restatement, the Employer must use the same testing method within the same Plan Year for both the ADP and ACP tests.]
	o	(c)	Compensation.  The Compensation definition under Section 1.07 will apply for Plan Years beginning after:
	o	(d)	Election not to participate.  The election not to participate under Section 2.06 is effective:
	o	(e)	401(k) safe harbor.  The 401(k) safe harbor provisions under Section 3.01(d) are effective:
	o	(f)	Negative election.  The negative election provision under Section 3.02(b) is effective:
	o	(g)	Contribution/allocation formula.  The specified contribution(s) and allocation method(s) under
			Sections 3.01 and 3.04 are effective:
	o	(h)	Allocation conditions.  The allocation conditions of Section 3.06 are effective:
	o	(i)	Benefit payment elections.  The distribution elections of Section(s)
			are effective:
	o	(j)	Election to continue pre-SBJPA required beginning date.  A Participant may not elect to defer commencement of the distribution of his/her Vested Account Balance beyond the April 1 following the calendar year in which the Participant attains age 70½.  See Plan Section 6.02.
	o	(k)	Elimination of age 70½ in-service distributions.  The Plan eliminates a Participant’s (other than a more than 5% owner) right to receive in-service distributions on April 1 of the calendar year following the year in
			which the Participant attains age 70½ for Plan Years beginning after:
	o	(l)	Allocation of earnings.  The earnings allocation provisions under Section 9.08 are effective:
	o	(m)	Elimination of optional forms of benefit.  The Employer elects prospectively to eliminate the following optional forms of benefit (Choose one or more of (1), (2) and (3) as applicable):
			o	(1)	QJSA and QPSA benefits as described in Plan Sections 6.04, 6.05 and 6.06 effective:
			o	(2)	Installment distributions as described in Section 6.03 effective:
			o	(3)	Other optional forms of benefit (Any election to eliminate must be consistent with Treas. Reg.
					§1.411(d)-4):
	ý	(n)	Special effective date(s):  Item 9(c)(2) effective January 1, 2004.
For periods prior to the above-specified special effective date(s), the Plan terms in effect prior to its restatement under this Adoption Agreement will control for purposes of the designated provisions.  A special effective date may not result in the delay of a Plan provision beyond the permissible effective date under any applicable law.

20

APPENDIX B
GUST REMEDIAL AMENDMENT PERIOD ELECTIONS

36.

The following GUST restatement elections apply (Choose one or more of (a) through (j) as applicable):

o

(a)

Highly Compensated Employee elections.  The Employer makes the following remedial amendment period elections with respect to the Highly Compensated Employee definition:

(1)

1997:

o

Top paid group election.

o

Calendar year election.

(2)

1998:

o

Top paid group election.

o

Calendar year data election.

(3)

1999:

o

Top paid group election.

o

Calendar year data election.

(4)

2000:

o

Top paid group election.

o

Calendar year data election.

(5)

2001:

o

Top paid group election.

o

Calendar year data election.

(6)

2002:

o

Top paid group election.

o

Calendar year data election.

(7)

2003

o

Top paid group election.

o

Calendar year data election.

o

(b)

401(k) testing methods.  The Employer makes the following remedial amendment period elections with respect to the ADP test and the ACP test: [Note: The Employer may use a different testing method for the ADP and ACP tests through the end of the Plan Year in which the Employer executes its GUST restated Plan.]

ADP Test

ACP Test

(1)

1997:

o

prior year

o

current year

1997:

o

prior year

o

current year

(2)

1998:

o

prior year

o

current year

1998:

o

prior year

o

current year

(3)

1999:

o

prior year

o

current year

1999:

o

prior year

o

current year

(4)

2000:

o

prior year

o

current year

2000:

o

prior year

o

current year

(5)

2001:

o

prior year

o

current year

2001:

o

prior year

o

current year

(6)

2002:

o

prior year

o

current year

2002:

o

prior year

o

current year

(7)

2003

o

prior year

o

current year

2003

o

prior year

o

current year

o

(c)

Delayed application of SBJPA required beginning date.  The Employer elects to delay the effective date for the required beginning date provision of Plan Section 6.02 until Plan Years beginning after:

o

(d)

Model Amendment for required minimum distributions.  The Employer adopts the IRS Model

Amendment in Plan Section 6.02(E) effective

[Note: The date must not be earlier than January 1, 2001.]

Defined Benefit Limitation

o

(e)

Code §415(e) repeal.  The repeal of the Code §415(e) limitation is effective for Limitation Years beginning

after

[Note: If the Employer does not make an election under

(e), the repeal is effective for Limitation Years beginning after December 31, 1999.]

Code §415(e) limitation.  To the extent necessary to satisfy the limitation under Plan Section 3.17 for Limitation Years beginning prior to the repeal of Code §415(e), the Employer will reduce (Choose one of (f) or (g)):

o

(f)

The Participant’s projected annual benefit under the defined benefit plan.

o

(g)

The Employer’s contribution or allocation on behalf of the Participant to the defined contribution plan and then, if necessary, the Participant’s projected annual benefit under the defined benefit plan.

Coordination with top-heavy minimum allocation.  The Plan Administrator will apply the top-heavy minimum allocation provisions of Article XII with the following modifications (Choose (h) or choose (i) or (j) or both as applicable):

o

(h)

No modifications.

o

(i)

For Non-Key Employees participating only in this Plan, the top-heavy minimum allocation is the minimum

allocation determined by substituting

% (not less than 4%) for “3%,” except

(Choose one of (1) or (2)):

o

(1)

No exceptions.

o

(2)

Plan Years in which the top-heavy ratio exceeds 90%.

o

(j)

For Non-Key Employees also participating in the defined benefit plan, the top-heavy minimum is (Choose one of (1) or (2)):

o

(1)

5% of Compensation irrespective of the contribution rate of any Key Employee (Choose one of a. or b.):

o

a.

No exceptions.

o

b.

Substituting “7½%” for “5%” if the top-heavy ratio does not exceed 90%.

o

(2)

0%.  [Note: The defined benefit plan must satisfy the top-heavy minimum benefit requirement for these Non-Key Employees.]

Actuarial assumptions for top-heavy calculation.  To determine the top-heavy ratio, the Plan Administrator will use the following interest rate and mortality assumptions to value accrued benefits under a defined benefit plan:

21

ADDENDUM I
TO THE ADOPTION AGREEMENT

Effective August 1, 2004

(unless a different date is indicated below)

The Prototype Plan permits the Employer to make certain additions or revisions to the Plan by attaching addenda to the Adoption Agreement.  This form lists some of the permitted addenda and provides a means of memorializing such addenda as part of the Plan.  Only those items checked and/or completed below shall be considered part of and incorporated into the Plan.  Use of this form shall not preclude the Employer from attaching additional addenda as allowed by the Plan.

1.	Disability (1.08).  Unless elected otherwise, the Employer shall require medical evidence to confirm a Participant’s Disability (choose another option or a combination as applicable):
	o	No medical evidence will be required; employer will make determination on disability.
	In addition to medical evidence, the Employer may:
	ý	Allow receipt of Social Security disability benefits to be conclusive evidence of disability.
	o	Allow receipt of any insured disability benefits to be conclusive evidence of disability.
	o	Notwithstanding the definition of Disability as described in Plan section 1.08 receipt of (choose one or both options):
		o	Social Security disability benefits
		o	any insured disability benefits
		shall be required as exclusive evidence of disability[Optional]effective as of the date of execution of the Adoption Agreement.
2.	Employer Contributions (3.01(A)).  Unless elected otherwise, the Employer need not have net profits to make a contribution under the Plan.
	o	Net profits required
3.	Top-Heavy Minimum Allocation (3.04(C)).  Unless elected otherwise, the top-heavy minimum allocation requirement shall be satisfied by this Plan.
	o	The top-heavy minimum allocation requirement shall be satisfied by the other qualified plan, which is not maintained under this basic plan document.  Plan Name:
4.	Qualified Replacement Plan (3.04(G)).  Unless elected otherwise, the Plan Administrator will allocate the transferred amounts under Section 3.04(G) in the same manner as the Plan Administrator allocates Employer nonelective contributions.  Otherwise (select one):
	o	Such transferred amounts shall be applied toward the Plan’s administrative expenses.
	o	For a 401(k) Plan, such transferred amounts shall be used as matching contributions.
5.	Suspension of Allocation Conditions Under a Nonstandardized Plan (3.06(E)).  Unless elected otherwise, the terms of the Plan document shall apply.
	o	Use the Average Benefit Percentage Test described in Code §410(b)(2).
6.	Annual Additions (3.14 and 3.16).  Unless elected otherwise, the terms of this plan shall apply.  Otherwise, Annual
	Additions shall be limited as follows:
7.	Defined benefit plan fraction (3.18(j)).  Unless elected otherwise, Year of Service shall mean a Plan Year with at least 1,000 hours of service.
	o	A Year of Service shall mean:

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8.	100% Limitation (3.18(l)).  Unless elected otherwise, for a Standardized Plan, the 100% limitation applies in all Limitation Years.  Otherwise, the 125% limitation applies and the Plan satisfies the extra minimum benefit requirements of Code §416(h) as follows:
	o
9.	“Grossed-Up” Vesting Formula (5.03(A)).  Unless elected otherwise the Plan Administrator shall apply the standard formula pursuant to the Plan document.
	o	Use modified formula pursuant to the Plan document
10.	Time and Method of Forfeiture Restoration (5.04(B)).  Unless elected otherwise, the Plan Administrator will complete the restoration of forfeitures pursuant to the Plan document; otherwise the sources of restoration, and the order of priority, shall be as follows (indicate order of priority by number, with one (1) being the initial source; use zero (0) if you wish to eliminate a source):
	o	The amount, if any, of Participant forfeitures the Plan Administrator otherwise would allocate under Section 3.05;
	o	The amount, if any, of the Trust Fund net income or gain for the Plan Year;
	o	The Employer contribution for the Plan Year to the extent made under a discretionary formula.
11.	Deemed Cash-out of 0% Vested Participant (5.04(C)).  Unless elected otherwise, the deemed cash-out rule applies to any 0% Vested Participant.
	o	Alternative:
12.	Qualified Preretirement Survivor Annuity (QPSA) (6.04(B)).  Unless elected otherwise, the one year of marriage requirement shall apply.
	o	The one year of marriage requirement does not apply.
13.	State Law (7.11).  Unless elected otherwise, the law of the state of the Employer’s principal place of business will determine all questions arising with respect to the provisions of the Plan, except to the extent superceded by ERISA or other federal law.
	o	Subject to applicable law, the law of the state of	shall apply.
14.	Beneficiary Designation (8.01).  Unless elected otherwise, a divorce decree, or a decree of legal separation, revokes the Participant’s designation, if any, of his/her spouse as his/her Beneficiary under the Plan unless the decree or a QDRO provides otherwise. (Choose all that apply.)
	o	A divorce decree will not revoke a Participant’s designation.
	o	A decree of legal separation will not revoke a Participant’s designation.
15.	No Beneficiary Designation/Death of Beneficiary (8.02).  Unless elected otherwise, the Trustee will pay the Participant’s Vested Account Balance in accordance with Section 8.02 of the Plan document.  Alternatively, the order of priority shall be as follows:
	1.
	2.
	3.
	Unless elected otherwise, if the Beneficiary survives the Participant, but dies prior to distribution of the Participant’s entire Vested Account Balance, the Trustee will pay the Participant’s Vested Account Balance in accordance with Section 8.02 of the Plan document.  Alternatively, the Vested Account Balance shall be paid as follows:
	o
	o
	o

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16.	Investment in Group Trust Fund (10.17).  If this Section is applicable, the authorization of this Section applies to the following group trust fund(s):
	o
17.	Post Termination Procedure and Distribution (13.06(B)).  Unless elected otherwise, the provisions of this Section shall apply.
	o	Section 13.06(B) does not apply.
18.	Safe Harbor Contributions/ADP test safe harbor (14.02(D)(2) and 14.06(E)).  Unless elected otherwise, the Plan Administrator must allocate the safe harbor contribution to all Participants.
	o	Limit the safe harbor allocation to Nonhighly Compensated Employees only.
19.	Allocable Income (14.07(C), 14.08(F), and 14.09(E)).  Unless elected otherwise, for purposes of these Sections, allocable income shall not include allocable income for the time period between the close of the Plan Year and the distribution date (i.e., the “GAP” period).  Otherwise,
	o	GAP income shall be included for plan years beginning prior to the first day of the plan year of adoption of this current Plan document.
20.	Calculation of ADP (14.08(A)).  Unless elected otherwise, for the first Plan Year the Employer permits elective deferrals and the Plan is not a successor plan (as provided in the Code or in other applicable guidance), under prior year testing, the prior year ADP for the Nonhighly Compensated Group is 3%.
	o	Use the actual first year ADP for the Nonhighly Compensated Group.
21.	Calculation of ACP (14.09(A)).  Unless elected otherwise, for the first Plan Year the Plan permits matching contributions or Employee contributions and the Plan is not a successor plan (as defined in the Code or in other applicable guidance), under prior year testing, the prior year ACP for the Nonhighly Compensated Group is 3%.
	o	Use the actual first year ACP for the Nonhighly Compensated Group.
22.	Hardship Distributions from Deferral Contributions Account (14.11(A)(2)).  Unless elected otherwise, the Plan does not permit hardship withdrawals of qualified matching contributions and qualified nonelective contributions, and any earnings on such contributions, credited as of December 31, 1988.
	o	Include the above stated contributions and earnings
	o	Include the above stated contributions and earnings, but substitute December 31, 1988 with
		(Note:  Date cannot be later than the end of the last Plan Year ending before July 1, 1989.)

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CHECKLIST OF EMPLOYER INFORMATION
AND EMPLOYER ADMINISTRATIVE ELECTIONS

Commencing  August 1, 2003
The Prototype Plan permits the Employer to make certain administrative elections not reflected in the Adoption Agreement. This form lists those administrative elections and provides a means of recording the Employer’s elections.  This checklist is not part of the Plan document.
1.	Employer Information.
	MSC.Software Corporation
	[Employer Name]
	2 MacArthr Place
	[Physical Address]					[Mailing Address]
	Santa Ana, CA 92707
	[City, State and Zip Code]					[City, State and Zip Code]
	(714) 540-8900
	[Telephone Number]
2.	Form of Business.
	ý	(a)	C Corporation			o	(b)	S Corporation
	o	(c)	Limited Liability Entity			o	(d)	Sole Proprietorship
			o	(1)	taxed as Corporation	o	(e)	Partnership
			o	(2)	taxed as Partnership	o	(f)
3.	Surety bond company:								Surety bond amount: $
4.	Section 1.07(D) – §132(f)(4) Compensation.  Amounts described in §132(f)(4) are not Elective Contributions until Plan Years beginning on or after January 1, 2001 unless otherwise indicated.
	o	(b)	January 1, 2001 shall be replaced with:
			(Note:  effective date can be no earlier than January 1, 1998)
5.	Section 1.07(F) – Nondiscriminatory definition of Compensation.  When testing nondiscrimination under the Plan, the Plan permits the Employer to make elections regarding the definition of Compensation.  [Note: This election solely is for purposes of nondiscrimination testing.  The election does not affect the Employer’s elections under Section 1.07 which apply for purposes of allocating Employer contributions and Participant forfeitures.]  (Choose either (a) or (b) of each item (1), (2) and (3)).
	o	1(a)	The Plan will “gross up” Compensation for Elective Contributions.
	o	1(b)	The Plan will exclude Elective Contributions.
	o	2(a)	The Plan will not exclude items excludable under §414(s)
	o	2(b)	The Plan will exclude items excludable under §414(s)
	o	3(a)	The Plan will use Compensation only for the portion of the Plan Year the Employee was a Participant (or for which the Plan or 401(k) arrangement was in effect).
	o	3(b)	The Plan will use Compensation for the entire Plan Year.
6.	Section 3.02 and 14.02(A) – Deferral/Employee contributions commencement dates.  Deferral/Employee contributions begin as of the first payroll period concurrent with or following (choose as many as apply):
	o	(a)	the first day of the Plan Year
	o	(b)	the first day of the seventh month of the Plan Year
	ý	(c)	any date
	o	(d)	other:

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7.	Section 3.02 and 14.02(A) – Changing Deferral/Employee contributions.  A Participant’s election to change his Deferral/Employee contributions is effective the first payroll period concurrent with or following (choose as many as apply):
	o	(a)	the first day of the Plan Year
	o	(b)	the first day of the seventh month of the Plan Year
	ý	(c)	any date
	o	(d)	other:
8.	Section 3.02 and 14.02(A) – Terminating Deferral/Employee contributions.  A Participant’s election to terminate his Deferral/Employee contributions is effective:
	o	(a)	the first day of the Plan Year
	o	(b)	the first day of the seventh month of the Plan Year
	o	(c)	as soon as administratively feasible upon providing written notice to the Plan Administrator
	o	(d)	other:
9.	Section 3.02 and 14.02(A) – Elective deferrals on bonuses.  A Participant’s election for Deferral/Employee contributions will apply to bonuses as follows:
	ý	(a)	does not apply
	o	(b)	will apply automatically
	o	(c)	participant must make special election
	o	(d)	other:
10.	Section 3.02 and 14.02(A) – Elective deferrals amounts.  Elective deferrals shall be made (select (a) and/or (b) or (c)):
	o	(a)	in whole percentages
	o	(b)	in whole dollar amounts
	o	(c)	no restrictions on increments
11.	Section 3.03 – Matching of elective deferral amounts.  Elective deferrals which are withdrawn prior to the allocation date:
	o	(a)	shall be eligible for matching contributions.
	o	(b)	shall not be eligible for matching contributions.
	For this purpose, any partial withdrawal will first be considered a withdrawal of current elective deferrals.
12.	Section 3.04(F) – Qualified Nonelective Contributions.  Qualified nonelective contributions shall be allocated as follows:
	o	to eligible Participants pro rata in relation to Compensation
	o	to eligible Participants in the same amount without regard to Compensation (flat dollar)
	o	under the reverse allocation or other similar method (explain):
13.	Section 4.02 – Employee contributions (after-tax, voluntary).  Employee contributions shall be made by the following method:
	o	(a)	via payroll deduction
	o	(b)
14.	Section 4.04 – Rollover contributions.
	ý	(a)	The Plan accepts rollover contributions.			Describe:
			ý	(1)	From eligible plans (or IRAs holding monies from eligible plans) excluding after-tax contributions.
			ý	(2)	From any eligible employee even if not a participant.
	o	(b)	The Plan does not accept rollover contributions.

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15.	Section 8.06 – Participant direction of investment/404(c).  The Plan authorizes Participant direction of investment with Trustee consent.  If the Trustee permits Participant direction of investment, the Employer and the Trustee should adopt a policy which establishes the applicable conditions and limitations, including whether they intend the Plan to comply with ERISA §404(c).
	ý	(a)		The Plan permits Participant direction of investment and is a 404(c) plan.
	o	(b)		The Plan permits Participant direction of investment but is a non-404(c) plan.
	o	(c)		The Plan does not permit Participant direction of investment.
16.	Section 9.04[A] – Participant loans.  The Plan Administrator must adopt a written loan policy to permit Participant loans.
	ý	(a)		The Plan permits Participant loans subject to the following conditions:
				ý	(1)		Minimum loan amount: $1,000
				ý	(2)		Maximum number of outstanding loans:   2
				o	(3)		Reasons for which a Participant may request a loan:
							o	a.	Any purpose.
							o	b.	Hardship events.
							o	c.	Other:
				o	(4)		Suspension of loan repayments:
							o	a.	Not permitted.
							o	b.	Permitted for non-military leave of absence.
							o	c.	Permitted for military service leave of absence.
				o	(5)		The Participant must be a party in interest.
	o	(b)		The Plan does not permit Participant loans.
17.	Section 11.01 – Life insurance.  The Plan with Employer approval authorizes the Trustee to acquire life insurance.
	o	(a)		The Plan will invest in life insurance contracts.
	ý	(b)		The Plan will not invest in life insurance contracts.
18.	Section 14.11(A)(1) – Salary Deferral Limit Following a Hardship Distribution.  The IRC section 402(g) special limit restriction on salary deferrals made in the year following a hardship distribution was lifted by IRS Notice 2002-4 (EGTRRA Technical Corrections) and is optional for 401(k) plans that are not safe harbor plans.  Safe harbor plans described in Code sec. 401(k) (12) or 401(m)(11) that rely on matching contributions to meet testing requirements cannot impose the special limit.  Plan section 14.11 describes the limit as: The  IRC section 402(g) limit applicable for the year following the year of a participant’s hardship distribution reduced by salary deferrals made by the participant during the year of the hardship distribution.  The Plan shall be administered as follows:
	o	(a)		Impose the special limit as described in the plan.
	o	(b)		Not impose the special limit as described in the plan.
	o	(c)		The plan is a safe harbor 401(k) plan and the 402(g) special limit cannot be imposed.
19.	Control Group/Affiliated Service Group Members.
										Adopting Plan?
	CG		ASG			Member Name				Yes	No
	ý		o			MSC.Software Sales				ý	o
	o		o							o	o
	o		o							o	o
	o		o							o	o
	o		o							o	o
20.	Additional Information. (e.g. rollover contributions prior to participation, in-kind distributions, etc.)
	Loans are available only from a participant’s salary deferral account and rollover account.

3

EGTRRA

AMENDMENT TO THE

BRYAN, PENDLETON, SWATS & MCALLISTER, LLC

DEFINED CONTRIBUTION PROTOTYPE PLAN AND TRUST

ARTICLE I
PREAMBLE

1.1	Adoption and effective date of amendment.  This amendment of the plan is adopted to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”).  This amendment is intended as good faith compliance with the requirements of EGTRRA and is to be construed in accordance with EGTRRA and guidance issued thereunder.  Except as otherwise provided, this amendment shall be effective as of the first day of the first plan year beginning after December 31, 2001.  This amendment amends and restates an existing good faith amendment implemented for the purposes set forth in this Section 1.1, and originally adopted on December 20, 2001.
1.2	Adoption by prototype sponsor.  Except as otherwise provided herein, pursuant to Section 5.01 of Revenue Procedure 2000-20 (or pursuant to the corresponding provision in Revenue Procedure 89-9 or Revenue Procedure 89-13), the sponsor hereby adopts this amendment on behalf of all adopting employers.
1.3	Supersession of inconsistent provisions.  This amendment shall supersede the provisions of the plan to the extent those provisions are inconsistent with the provisions of this amendment.

ARTICLE II
ADOPTION AGREEMENT ELECTIONS

The questions in this Article II only need to be completed in order to override the default provisions set forth below.  If all of the default provisions will apply, then these questions should be skipped and the employer  does not need to execute this amendment.
Unless the employer elects otherwise in this Article II, the following defaults apply:
1)	The vesting schedule for matching contributions will be a 6 year graded schedule (if the plan currently has a graded schedule that does not satisfy EGTRRA) or a 3 year cliff schedule (if the plan currently has a cliff schedule that does not satisfy EGTRRA), and such schedule will apply to all matching contributions (even those made prior to 2002).
2)	Rollovers are automatically excluded in determining whether the $5,000 threshold has been exceeded for automatic cash-outs (if the plan is subject to the qualified joint and survivor annuity rules and provides for automatic cash-outs).  This is applied to all participants regardless of when the distributable event occurred.
3)	The suspension period after a hardship distribution is made will be 6 months and this will only apply to hardship distributions made after 2001.
4)	Catch-up contributions will be allowed and, if applicable, will be eligible for matching contributions, without regards to the limits set forth in Code section 402(g).
5)	For target benefit plans, the increased compensation limit of $200,000 will be applied retroactively (i.e., to years prior to 2002).

2.1	Vesting Schedule for Matching Contributions
	If there are matching contributions subject to a vesting schedule that does not satisfy EGTRRA, then unless otherwise elected below, for participants who complete an hour of service in a plan year beginning after December 31, 2001, the following vesting schedule will apply to all matching contributions subject to a vesting schedule:
	If the plan has a graded vesting schedule (i.e., the vesting schedule includes a vested percentage that is more than 0% and less than 100%) the following will apply:

Years of vesting service	Nonforfeitable percentage
2	20	%
3	40	%
4	60	%
5	80	%
6	100	%

If the plan does not have a graded vesting schedule, then matching contributions will be nonforfeitable upon the completion of 3 years of vesting service.

2

In lieu of the above vesting schedule, the employer elects the following schedule:
a.	o	3 year cliff (a participant’s accrued benefit derived from employer matching contributions shall be nonforfeitable upon the participant’s completion of three years of vesting service).
b.	o	6 year graded schedule (20% after 2 years of vesting service and an additional 20% for each year thereafter).
c.	o	Other (must be at least as liberal as a. or the b. above):

Years of vesting service	Nonforfeitable percentage
		%
		%
		%
		%
		%

	The vesting schedule set forth herein shall only apply to participants who complete an hour of service in a plan year beginning after December 31, 2001, and, unless the option below is elected, shall apply to all matching contributions subject to a vesting schedule.
	d.	o	The vesting schedule will only apply to matching contributions made in plan years beginning after  December 31, 2001 (the prior schedule will apply to matching contributions made in prior plan years).
2.2	Exclusion of Rollovers in Application of Involuntary Cash-out Provisions (for profit sharing and 401(k) plans only).  If the plan is not subject to the qualified joint and survivor annuity rules and includes involuntary cash-out provisions, then unless one of the options below is elected, effective for distributions made after December 31, 2001, rollover contributions will be excluded in determining the value of the participant’s nonforfeitable account balance for purposes of the plan’s involuntary cash-out rules.
	a.	o	Rollover contributions will not be excluded.
	b.	o	Rollover contributions will be excluded only with respect to distributions made after (Enter a date no earlier than December 31, 2001).
	c.	o	Rollover contributions will only be excluded with respect to participants who separated from service after
				.  (Enter a date.  The date may be earlier than December 31, 2001.)
2.3	Suspension period of hardship distributions.  If the plan provides for hardship distributions upon satisfaction of the safe harbor (deemed) standards as set forth in Treas. Reg. Section 1.401(k)-1(d)(2)(iv), then, unless the option below is elected, the suspension period following a hardship distribution shall only apply to hardship distributions made after December 31, 2001.
		o	With regard to hardship distributions made during 2001, a participant shall be prohibited from making elective deferrals and employee contributions under this and all other plans until the later of January 1, 2002, or  6 months after receipt of distribution.
2.4	Catch-up contributions (for 401(k) profit sharing plans only): The plan permits catch-up contributions and such catch-up contributions are eligible for a matching contribution, to the extent applicable and without regards to the limits set forth in Code section 402(g).  (Article VI unless one of the options below is elected)
		o	The plan does not permit catch-up contributions to be made.
		o	The plan permits catch-up contributions to be made, but such catch-up contributions are  not eligible for a matching contribution.
		o	The plan permits catch-up contributions to be made, but only that portion of a catch-up contribution which does not exceed the limits set forth in Code section 402(g) shall be eligible for a matching contribution.
		o	Other:
2.5	For target benefit plans only: The increased compensation limit ($200,000 limit) shall apply to years prior to 2002 unless the option below is elected.
		o	The increased compensation limit will not apply to years prior to 2002.

ARTICLE III
VESTING OF MATCHING CONTRIBUTIONS

3.1 Applicability.  This Article shall apply to participants who complete an Hour of Service after December 31, 2001, with respect to accrued benefits derived from employer matching contributions made in plan years beginning after December 31, 2001.  Unless otherwise elected by the employer in Section 2.1 above, this Article shall also apply to all such participants with respect to accrued benefits derived from employer matching contributions made in plan years beginning prior to January 1, 2002.

3

3.2 Vesting schedule.  A participant’s accrued benefit derived from employer matching contributions shall vest as provided in Section 2.1 of this amendment.

ARTICLE IV
INVOLUNTARY CASH-OUTS

4.1

Applicability and effective date.  If the plan provides for involuntary cash-outs of amounts less than $5,000, then unless otherwise elected in Section 2.2 of this amendment, this Article shall apply for distributions made after December 31, 2001, and shall apply to all participants.  However, regardless of the preceding, this Article shall not apply if the plan is subject to the qualified joint and survivor annuity requirements of Sections 401(a)(11) and 417 of the Code.

4.2

Rollovers disregarded in determining value of account balance for involuntary distributions.  For purposes of the Sections of the plan that provide for the involuntary distribution of vested accrued benefits of $5,000 or less, the value of a participant’s nonforfeitable account balance shall be determined without regard to that portion of the account balance that is attributable to rollover contributions (and earnings allocable thereto) within the meaning of Sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16) of the Code.  If the value of the participant’s nonforfeitable account balance as so determined is $5,000 or less, then the plan shall immediately distribute the participant’s entire nonforfeitable account balance.

ARTICLE V
HARDSHIP DISTRIBUTIONS

5.1

Applicability and effective date.  If the plan provides for hardship distributions upon satisfaction of the safe harbor (deemed) standards as set forth in Treas. Reg. Section 1.401(k)-1(d)(2)(iv) then this Article shall apply for calendar years beginning after 2001.

5.2

Suspension period following hardship distribution.  A participant who receives a distribution of elective deferrals after December 31, 2001, on account of hardship shall be prohibited from making elective deferrals and employee contributions under this and all other plans of the employer for 6 months after receipt of the distribution.  Furthermore, if elected by the employer in Section 2.3 of this amendment, a participant who receives a distribution of elective deferrals in calendar year 2001 on account of hardship shall be prohibited from making elective deferrals and employee contributions under this and all other plans until the later of January 1, 2002, or 6 months after receipt of the distribution.

ARTICLE VI
CATCH-UP CONTRIBUTIONS

Catch-up Contributions.  Unless otherwise elected in Section 2.4 of this amendment, all employees who are eligible to make elective deferrals under this plan and who have attained age 50 before the close of the plan year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Section 414(v) of the Code.  Such catch-up contributions shall not be taken into account for purposes of the provisions of the plan implementing the required limitations of Sections 402(g) and 415 of the Code.  Unless otherwise elected in Section 2.4 of this amendment, and to the extent applicable, catch-up contributions will be eligible for a matching contribution under the plan.  The plan shall not be treated as failing to satisfy the provisions of the plan implementing the requirements of Section 401(k)(3), 401(k)(11), 401(k)(12), 410(b), or 416 of the Code, as applicable, by reason of the making of such catch-up contributions.

ARTICLE VII
INCREASE IN COMPENSATION LIMIT

Increase in Compensation Limit.  The annual compensation of each participant taken into account in determining allocations for any plan year beginning after December 31, 2001, shall not exceed $200,000, as adjusted for cost-of-living increases in accordance with Section 401 (a)(17)(B) of the Code.  Annual compensation means compensation during the plan year or such other consecutive 12-month period over which compensation is otherwise determined under the plan (the determination period).  If this is a target benefit plan, then except as otherwise elected in Section 2.5 of this amendment, for purposes of determining benefit accruals in a plan year beginning after December 31, 2001, compensation for any prior determination period shall be limited to $200,000.  The cost-of-living adjustment in effect for a calendar year applies to annual compensation for the determination period that begins with or within such calendar year.

ARTICLE VIII
PLAN LOANS

Plan loans for owner-employees or shareholder-employees.  If the plan permits loans to be made to participants, then effective for plan loans made after December 31, 2001, plan provisions prohibiting loans to any owner-employee or shareholder-employee shall cease to apply.

4

ARTICLE IX
LIMITATIONS ON CONTRIBUTIONS (IRC SECTION 415 LIMITS)

9.1	Effective date.  This Section shall be effective for limitation years beginning after December 31, 2001.
9.2	Maximum annual addition.  Except to the extent permitted under Article XIV of this amendment and Section 414(v) of the Code, if applicable, the annual addition that may be contributed or allocated to a participant’s account under the plan for any limitation year shall not exceed the lesser of:
	a.	$40,000, as adjusted for increases in the cost-of-living under Section 415(d) of the Code, or
	b.	100 percent of the participant’s compensation, within the meaning of Section 415(c)(3) of the Code, for the limitation year.
	The compensation limit referred to in b. shall not apply to any contribution for medical benefits after separation from service (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an annual addition.

ARTICLE X
MODIFICATION OF TOP-HEAVY RULES

10.1	Effective date.  This Article shall apply for purposes of determining whether the plan is a top-heavy plan under Section 416(g) of the Code for plan years beginning after December 31, 2001, and whether the plan satisfies the minimum benefits requirements of Section 416(c) of the Code for such years.  This Article amends the top-heavy provisions of the plan.
10.2	Determination of top-heavy status.
10.2.1	Key employee.  Key employee means any employee or former employee (including any deceased employee) who at any time during the plan year that includes the determination date was an officer of the employer having annual compensation greater than $130,000 (as adjusted under Section 416(i)(1) of the Code for plan years beginning after December 31, 2002), a 5-percent owner of the employer, or a 1-percent owner of the employer having annual compensation of more than $150,000.  For this purpose, annual compensation means compensation within the meaning of Section 415(c)(3) of the Code.  The determination of who is a key employee will be made in accordance with Section 416(i)(1) of the Code and the applicable regulations and other guidance of general applicability issued thereunder.
10.2.2	Determination of present values and amounts.  This Section 10.2.2 shall apply for purposes of determining the present values of accrued benefits and the amounts of account balances of employees as of the determination date.
	a.	Distributions during year ending on the determination date.  The present values of accrued benefits and the amounts of account balances of an employee as of the determination date shall be increased by the distributions made with respect to the employee under the plan and any plan aggregated with the plan under Section 416(g)(2) of the Code during the 1 -year period ending on the determination date.  The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the plan under Section 416(g)(2)(A)(i) of the Code.  In the case of a distribution made for a reason other than separation from service, death, or disability, this provision shall be applied by substituting “5-year period” for “1-year period.”
	b.	Employees not performing services during year ending on the determination date.  The accrued benefits and accounts of any individual who has not performed services for the employer during the 1-year period ending on the determination date shall not be taken into account.
10.3	Minimum benefits.
10.3.1	Matching contributions.  Employer matching contributions shall be taken into account for purposes of satisfying the minimum contribution requirements of Section 416(c)(2) of the Code and the plan.  The preceding sentence shall apply with respect to matching contributions under the plan or, if the plan provides that the minimum contribution requirement shall be met in another plan, such other plan.  Employer matching contributions that are used to satisfy the minimum contribution requirements shall be treated as matching contributions for purposes of the actual contribution percentage test and other requirements of Section 401(m) of the Code.

5

10.3.2 Contributions under other plans.  The employer may provide, in an addendum to this amendment, that the minimum benefit requirement shall be met in another plan (including another plan that consists solely of a cash or deferred arrangement which meets the requirements of Section 401(k)(12) of the Code and matching contributions with respect to which the requirements of Section 401(m)(11) of the Code are met).  The addendum should include the name of the other plan, the minimum benefit that will be provided under such other plan, and the employees who will receive the minimum benefit under such other plan.

ARTICLE XI
DIRECT ROLLOVERS

11.1	Effective date.  This Article shall apply to distributions made after December 31, 2001.
11.2	Modification of definition of eligible retirement plan.  For purposes of the direct rollover provisions of the plan, an eligible retirement plan shall also mean an annuity contract described in Section 403(b) of the Code and an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this plan.  The definition of eligible retirement plan shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relation order, as defined in Section 414(p) of the Code.
11.3	Modification of definition of eligible rollover distribution to exclude hardship distributions.  For purposes of the direct rollover provisions of the plan, any amount that is distributed on account of hardship shall not be an eligible rollover distribution and the distributee may not elect to have any portion of such a distribution paid directly to an eligible retirement plan.
11.4	Modification of definition of eligible rollover distribution to include after-tax employee contributions.  For purposes of direct rollover provisions in the plan, a portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income.  However, such portion may be transferred only to an individual retirement account or annuity described in Section 408(a) or (b) of the Code, or to a qualified defined contribution plan described in Section 401 (a) or 403 (a) of the Code that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible.

ARTICLE XII
ROLLOVERS FROM OTHER PLANS

Rollovers from other plans.  The employer, operationally and on a nondiscriminatory basis, may limit the source of rollover contributions that may be accepted by this plan.

ARTICLE XIII
REPEAL OF MULTIPLE USE TEST

Repeal of Multiple Use Test.  The multiple use test described in Treasury Regulation Section 1.401(m)-2 and the plan shall not apply for plan years beginning after December 31, 2001.

ARTICLE XIV
ELECTIVE DEFERRALS

14.1

Elective Deferrals - Contribution Limitation.  No participant shall be permitted to have elective deferrals made under this plan, or any other qualified plan maintained by the employer during any taxable year, in excess of the dollar limitation contained in Section 402(g) of the Code in effect for such taxable year, except to the extent permitted under Article VI of this amendment and Section 414(v) of the Code, if applicable.

14.2

Maximum Salary Reduction Contributions for SIMPLE plans.  If this is a SIMPLE 401 (k) plan, then except to the extent permitted under Article VI of this amendment and Section 414(v) of the Code, if applicable, the maximum salary reduction contribution that can be made to this plan is the amount determined under Section 408(p)(2)(A)(ii) of the Code for the calendar year.

ARTICLE XV 
SAFE HARBOR PLAN PROVISIONS

Modification of Top-Heavy Rules.  The top-heavy requirements of Section 416 of the Code and the plan shall not apply in any year beginning after December 31, 2001, in which the plan consists solely of a cash or deferred arrangement which meets the requirements of Section 401(k)(12) of the Code and matching contributions with respect to which the requirements of Section 401(m)(11) of the Code are met.

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ARTICLE XVI
DISTRIBUTION UPON SEVERANCE OF EMPLOYMENT

16.1

Effective date.  This Article shall apply for distributions and transactions made after December 31, 2001, regardless of when the severance of employment occurred.

16.2

New distributable event.  A participant’s elective deferrals, qualified nonelective contributions, qualified matching contributions, and earnings attributable to these contributions shall be distributed on account of the participant’s severance from employment.  However, such a distribution shall be subject to the other provisions of the plan regarding distributions, other than provisions that require a separation from service before such amounts may be distributed.

Except with respect to any election made by the employer in Article II, this amendment is hereby adopted by the prototype sponsor on behalf of all adopting employers on August 8, 2002.
Sponsor Name:	Bryan, Pendleton, Swats & McAllister, LLC
By:

NOTE: The employer only needs to execute this amendment if an election has been made in Article II of this amendment.

This amendment has been executed this        day of                                       ,              .

Name of Employer:
By:
	EMPLOYER
Name of Plan:

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EX-10.18

Exhibit 10.18

THE MSC.SOFTWARE CORPORATION

Supplemental Retirement and Deferred Compensation Plan

TABLE OF CONTENTS

ARTICLE I - INTRODUCTION	1
ARTICLE II - DEFINITIONS	1
ARTICLE III - ELIGIBILITY	3
3.1  General Rules	3
3.2  Level A Supplemental Benefit	3
3.3  Level B Supplemental Benefit	3
3.4  Deferral Benefit	4
ARTICLE IV - BENEFITS	4
4.1  Level A Supplemental Benefit	4
4.2  Level B Supplemental Benefit	4
4.3  Deferral Benefit	4
4.4  Vesting	5
ARTICLE V - PARTICIPANT ACCOUNTS	5
5.1  Establishment of Accounts	5
5.2  Credits, Charges and Expenses	5
5.3  Earnings Tied to Investment Vehicles	5
5.4  Account Statements	5
ARTICLE VI - DISTRIBUTIONS	6
6.1  Hardship Distributions	6
6.2  Pre-Retirement Deferral Benefit Distributions	6
6.3  Death Distributions	6
6.4  Termination and Retirement Distributions	7
6.5  Cash Payments Only	7
ARTICLE VII - ADMINISTRATION	7
7.1  Plan Administrator	7

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7.2  Amendment and Termination	7
7.3  Indemnification	8
7.4  Claims Procedure	8
ARTICLE VIII - FUNDING	8
8.1  Funding	8
8.2  Nonalienation	8
8.3  Limitation of Rights	9
8.4  Governing Law	9
APPENDIX A

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The MSC.Software Corporation

SUPPLEMENTAL RETIREMENT

AND

DEFERRED COMPENSATION PLAN

Effective as of January 1, 1994

The MSC.Software Corporation

Supplemental Retirement and Deferred Compensation Plan

ARTICLE I

INTRODUCTION

The MSC.Software Corporation hereby establishes The MSC.Software Corporation Supplemental Retirement and Deferred Compensation Plan effective as of January 1, 1994, for the purpose of providing certain of its employees with the opportunity to defer the receipt of compensation.  The MSC.Software Corporation intends to maintain this plan primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of §§201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended.  The provisions of this plan, including any appendices that may be attached, shall be interpreted in a manner consistent with these purposes and intentions.  This Plan is the exclusive arrangement under which nonqualified deferred compensation is provided to the employees of MSC.Software Corporation.

ARTICLE II

DEFINITIONS

The terms set forth below have the indicated meanings unless a contrary meaning is plainly intended by the context.

2.1Account means the total of all Level A Supplemental Benefits, Level B Supplemental Benefits and Elective Deferral Benefits credited to a Participant under Article IV, as appropriately adjusted for earnings and distributions.

2.2Beneficiary means the individual(s) or entity designated by a Participant (or otherwise under this section) to receive any benefit payable upon the death of a Participant or Beneficiary.  A Beneficiary designation must be signed by the Participant and delivered to the Plan Administrator on such form as specified by the Plan Administrator.  In the absence of a valid or effective Beneficiary designation, the Beneficiary will be the Participant’s surviving spouse, or if there is no surviving spouse, the Participant’s estate.  The spouse of a married Participant must consent irrevocably in writing if, while married to the spouse, the Participant designates a beneficiary other than the spouse.

2.3Board means the Board of Directors of the Company.

2.4Code means the Internal Revenue Code of 1986, as amended.

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2.5Company means The MSC.Software Corporation, a corporation organized under the laws of the state of Delaware, any successor of The MSC.Software Corporation, and any affiliate thereto designated by the Board as a participating employer.

2.6Compensation Limitation means the annual limitation on compensation, as adjusted, prescribed under Code §401(a)(17).

2.7Deferral Agreement means an agreement entered into by a Participant and the Company to reduce the Participant’s Deferral Compensation for a specific period and contribute such amounts to the Plan, pursuant to Section 4.3.

2.8Deferral Benefit means an amount deferred pursuant to a Deferral Agreement.

2.9Deferral Compensation means “compensation” as defined under the Profit Sharing Plan for purposes of determining a Participant’s 401(k) contribution under such plan, computed (i) without regard to the Compensation Limitation and (ii) before deduction for Deferral Benefits.

2.10Disability means “disability” (or similar term) as defined in the Company’s long-term disability program and which results in payments to the Participant under such program.

2.11Early Retirement Age means age 55 with 10 years of Service.

2.12Eligible Employee means an Employee who meets the eligibility requirements set forth under Section 3.1.

2.13Employee means a common law employee of the Company.

2.14ERISA means the Employee Retirement Income Security Act of 1974, as amended.

2.15Excess Benefit Percentage means that percentage applied to the Participant’s Profit Sharing Compensation in excess of the social security wage base when determining the Participant’s allocation for the Plan Year under the Profit Sharing Plan.

2.16Level A Supplemental Benefit means a benefit provided under Section 4.1.

2.17Level B Supplemental Benefit means a benefit provided under Section 4.2.

2.18Participant means an Eligible Employee or a person with an Account balance.

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2.19Plan means The MSC.Software Corporation Supplemental Retirement and Deferred Compensation Plan, as set forth in this document, as it may be amended.

2.20Plan Administrator means the administrator of the Plan as described in Section 7.1.

2.21Plan Year means the calendar year.

2.22Profit Sharing Compensation means “compensation” as defined under the Profit Sharing Plan for purposes of determining a Participant’s allocation of the Company’s profit sharing contribution under such plan for the Plan Year, computed (i) without regard to the Compensation Limitation and (ii) before deduction for Deferral Benefits.

2.23Profit Sharing Plan means The MSC.Software Corporation Profit Sharing Plan, an employee pension benefit plan qualified (or intended to qualify) under Code §401(a).

2.24Retirement Age means age 65.

2.25Year of Service means, with respect to a Participant, a Year of Service as defined in the Profit Sharing Plan.

ARTICLE III

ELIGIBILITY

3.1General Rules.  An Employee shall be eligible for benefits under the Plan as an Eligible Employee if (i) his Profit Sharing Compensation for a Plan Year is expected to exceed the Compensation Limit and (ii) he is a member of a select group of management or highly compensated employees as described under §§201(2), 301(a)(3) and 401(a)(1) of ERISA.  The Plan Administrator may, however, notify any Employee in writing he shall not be an Eligible Employee, and such Employee shall be treated as not having met the requirements of this paragraph.  An Eligible Employee shall be eligible only for those benefits for which he qualifies as provided in Sections 3.2, 3.3 and 3.4., and only for the period he is an Eligible Employee.

3.2Level A Supplemental Benefit.  An Eligible Employee shall be eligible for a Level A Supplemental Benefit under Section 4.1 provided he (i) is eligible for a profit sharing allocation under the Profit Sharing Plan, (ii) is an Employee on the last day of the Plan Year and (iii) has been designated in writing by the Plan Administrator as being eligible for a Level A Supplemental Benefit.

3.3Level B Supplemental Benefit.  An Eligible Employee shall be eligible for a Level B Supplemental Benefit under Section 4.2 provided he (i) is eligible for a profit

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sharing allocation under the Profit Sharing Plan, (ii) is an Employee on the last day of the Plan Year and (iii) has not been designated in writing by the Plan Administrator as being eligible for a Level A Supplemental Benefit.

3.4Deferral Benefit.  Any Eligible Employee shall be eligible for a Deferral Benefit under Section 4.3 provided he also is eligible to make a 401(k) deferral election under the Profit Sharing Plan.

ARTICLE IV

BENEFITS

4.1Level A Supplemental Benefit.  A Participant eligible for a Level A Supplemental Benefit for a Plan Year shall be credited with an amount equal to (i) 133-1/3% of his Excess Benefit Percentage multiplied by his Profit Sharing Compensation, minus (ii) his Excess Benefit Percentage multiplied by the amount of compensation actually taken into account for purposes of computing his allocation under the Profit Sharing Plan.

4.2Level B Supplemental Benefit.  A Participant eligible for a Level B Supplemental Benefit for a Plan Year shall be credited with an amount equal to his Excess Benefit Percentage multiplied by the difference between (i) his Profit Sharing Compensation and (ii) the amount of compensation actually taken into account for purposes of computing his allocation under the Profit Sharing Plan.

4.3Deferral Benefit.

(a)General Rule.  Any Eligible Employee may elect to defer the receipt of up to 40% of his Deferral Compensation described in paragraph (b), that otherwise would be paid to the Employee as salary, a bonus or commissions, under a Deferral Agreement.  Amounts deferred under this subsection shall be credited to the Participant’s Account within 30 days of the date the amount would have been paid to the Participant’s Account but for the Participant’s deferral election.

(b)Deferral Agreement.  A Participant making an election to defer under subsection (a) shall enter into a deferral agreement to defer the receipt of any Deferral Compensation.  The Company shall withhold amounts deferred by the Participant in accordance with the Deferral Agreement.  A Deferral Agreement must be made, on such form and in such manner as prescribed by the Plan Administrator, before the first day of the Plan Year for which the Deferral Compensation to be deferred is to be earned, except that an individual who becomes eligible to make a deferral for the first time shall be permitted, within the 30-day period that begins on the day the individual first became eligible, to make an election to defer Deferral Compensation that will be earned after the effective date of such election.  A Deferral Agreement must be contemplated to defer the receipt of at least $4,000 of Deferral Compensation.  A Deferral Agreement shall be

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effective for one Plan Year and shall be irrevocable, except that a Participant may terminate a Deferral Agreement prospectively if he can establish the existence of a hardship as described in Section 6.1.  A Deferral Agreement shall cease to be effective immediately upon the Participant’s termination of employment with the Company (other then by reason of the Participant’s death), and accordingly shall not be effective for Deferral Compensation paid thereafter.  A Deferral Agreement for a Participant who has incurred a Disability will continue in effect only so long as the Participant continues to receive Deferral Compensation from regular payroll.  At the time a Participant enters into a Deferral Agreement, he shall elect the time of distribution (as provided under Section 6.2) of Deferral Benefits attributable to the Deferral Agreement for that Plan Year.

4.4Vesting.  A Participant’s Account shall be fully vested at all times.

ARTICLE V

PARTICIPANT ACCOUNTS

5.1Establishment of Accounts.  The Plan Administrator shall establish and maintain an Account on behalf of each Participant.  Such Accounts will exist primarily for accounting purposes and will not restrict the operation of the Plan or require separate earmarked assets to be allocated to any Account.  The establishment of an Account will not give any Participant the right to receive any assets held by the Company in connection with the Plan or otherwise.

5.2Credits, Charges and Expenses.  The Plan Administrator will credit to a Participant’s Account the amount of any benefit earned by the Participant under Article IV as of the date required under Article IV.  Amounts credited to an Account which relate to a Deferral Benefit for a particular Plan Year shall be accounted for separately from any other amount in the Account.  Expenses incurred in connection with the administration of the Plan may, at the discretion of the Company, be charged to Participant Accounts on any reasonable basis as determined by the Plan Administrator.

5.3Earnings Tied to Investment Vehicles.  Earnings and losses shall be credited or charged, as the case may be, on the same basis as that of an investment vehicle (e.g. mutual fund) selected by the Participant from a group of investment vehicles designated by the Plan Administrator in advance.  The Plan Administrator may change periodically the number, identity or composition of the designated investment vehicles in such manner as the Plan Administrator deems appropriate.  The Plan Administrator may credit earnings to an Account by applying a designated investment vehicle’s actual rate of return, whether or not any specified assets were actually invested in such designated investment vehicle.

5.4Account Statements.  The Plan Administrator shall provide a statement of each Participant’s Account as soon as is practicable after the end of each calendar quarter.  Neither the Company nor the Plan Administrator to any extent warrants, guarantees or

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represents that the value of any Participant’s Account at any time will equal or exceed the amount previously allocated or contributed to the Account.

ARTICLE VI

DISTRIBUTIONS

6.1Hardship Distributions.

(a)General Rule.  A Participant who is not eligible for a distribution under Sections 6.2, 6.3 or 6.4, but who qualifies for a hardship distribution, may obtain a hardship distribution of any portion of his Account.  The Participant qualifies for a hardship distribution if he has experienced an unforeseeable and unanticipated emergency caused by an event beyond his control, and which will result in severe financial hardship to the Participant if a distribution is not permitted.  Hardship requests will be evaluated by the Plan Administrator in accordance with the terms of Treasury Regulation §1.457-2(h)(4).  The amount of any hardship distribution shall not exceed the amount required to meet the hardship, including any taxes or penalties due on the distribution.

(b)Procedures.  To obtain a hardship distribution the Participant must submit a written request to the Plan Administrator on such form and in such manner as the Plan Administrator prescribes.  The request must (i) certify as to the hardship condition and the severe financial need and (ii) state whether the Participant requests a withdrawal of all or a portion of his Account to meet the hardship.  The Company shall terminate a Participant’s existing Deferral Agreement upon approving the Participant’s hardship distribution.  The Participant may make a new Deferral Agreement for the succeeding Plan Year, subject to the generally applicable provisions of the Plan.  A hardship distribution shall be made in a single sum cash payment as soon as is practicable after the Plan Administrator approves the hardship request.

6.2Pre-Retirement Deferral Benefit Distributions.  The portion of a Participant’s Account attributable to Deferral Benefits shall be distributed to the Participant in a single sum during the 30-day period beginning on any anniversary (as elected by the Participant under Section 4.3(b)) of the effective date of the Deferral Agreement pursuant to which the Deferral Benefit was deferred, provided that such anniversary occurs no earlier than the fifth, and no later than the tenth, anniversary of the effective date of the Deferral Agreement.

6.3Death Distributions.  The Account of a deceased Participant shall be distributed to the Participant’s Beneficiary in a single sum as soon as is practicable after the Participant’s death, but no earlier than 60 days after the Participant’s death.  The Plan Administrator may require reasonable evidence of the Participant’s death (e.g., a death certificate) from the Beneficiary before distribution.  Should the Participant’s Beneficiary not be the Participant’s spouse, the Plan Administrator shall make reasonable efforts to notify the Participant’s surviving spouse, if any, of an anticipated distribution under this

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section.  Within 60 days of such notification, the surviving spouse must either (i) file an action with a competent court for a determination of his or her rights in the Participant’s Account (in which case the Plan Administrator shall withhold distribution of the Account pending the resolution of the matter by settlement or court order) or (ii) enter into a binding agreement with the Participant’s Beneficiary (in which case the Account shall be distributed pursuant to the agreement).  If the surviving spouse fails to satisfy the preceding sentence, the Account shall be distributed to the Participant’s Beneficiary upon expiration of the 60-day notification period, and the Plan shall have no further liability with respect to the Participant’s Account.  The Plan Administrator shall have no duty to notify any former spouse of the Participant of the Participant’s death, though the procedures otherwise applicable to a surviving spouse will be applied to a surviving former spouse during the 60-day period beginning on the Participant’s death.

6.4Termination and Retirement Distributions.  A Participant’s Account shall be distributed in a single sum during the 60-day period commencing on the Participant’s termination of employment with the Company (including by reason of retirement, but not by reason of death).  If a January 1 falls within such 60-day period, then such distribution shall not occur earlier than such January 1.

6.5Cash Payments Only.  All distributions under the Plan shall be made in cash by check.

ARTICLE VII

ADMINISTRATION

7.1Plan Administrator.   The Board shall appoint a committee of one or more individuals to be the “plan administrator” within the meaning of ERISA §3(16)(A).  The Plan Administrator shall have sole authority to control and manage the operation and administration of the Plan and have all powers authority and discretion necessary or appropriate to carry out the Plan provisions, and to interpret and apply the terms of the Plan to particular cases or circumstances.  All decisions, determinations and interpretations of the Plan Administrator will be binding on all interested parties, subject to the claims and appeal procedures necessary to satisfy the minimum standard of ERISA §503, and will be given the maximum deference allowed by law.  The Plan Administrator may delegate in writing its responsibilities.  Plan Administrator members who are Participants will abstain from voting on any Plan matters that relate primarily to themselves or that would cause them to be in constructive receipt of amounts credited to their respective Deferral Account.  The Board may identify in writing one or more individuals to serve as a temporary replacement of any abstaining Plan Administrator member.

7.2Amendment and Termination.   The Board, by resolution or written consent, may amend all or any provision of the Plan, and may terminate the Plan in its entirety, at any time and for any reason.  No amendment or termination of the Plan will reduce any

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Participant’s Account as of the effective date of such amendment or termination.  Any amendment which substantially revises the manner in which a Participant’s Account will earn interest shall become effective no earlier than 30 days after the Participant has been notified in writing of the change.

7.3Indemnification.  The Company will and hereby does indemnify and hold harmless any of its employees, officers, directors or members of the Plan Administrator who have fiduciary or administrative responsibilities with respect to the Plan from and against any and all losses, claims, damages, expenses, and liabilities (including reasonable attorneys’ fees and amounts paid, with the approval of the Board, in settlement of any claim) arising out of or resulting from the implementation of a duty, act or decision with respect to the Plan, so long as such duty, act or decision does not involve gross negligence or willful misconduct on the part of any such individual.

7.4Claims Procedure.   A Participant or his beneficiary (the “Claimant”) may file a written claim for benefits under the Plan with the Plan Administrator.  Within 60 days of the filing of the claim, the Plan Administrator shall notify the Claimant of the Plan Administrator’s decisions whether to approve the claim.  Such notice shall include specific reasons for any denial of the claim.  Within 60 days of the date the Claimant was notified of the denial of a claim, the Claimant may appeal the Plan Administrator’s decision by making a written submission containing any pertinent information.  Any decision not appealed within such 60-day period shall be final, binding and conclusive.  The Plan Administrator shall receive information submitted with an appeal and render a decision within 60 days of the submission of the appeal.  If it is not feasible for the Plan Administrator to render a decision on an appeal within the prescribed 60-day period, the period may be extended to a 120-day period.

ARTICLE VIII

MISCELLANEOUS

8.1Funding.  The Company may, but is not required to, earmark a portion of its general assets as assets which may be used to satisfy the Company’s liability to pay benefits with respect to a Participant’s Account.  Any such earmarked assets shall at all times remain part of the Company’s general assets and be subject to the claims of the Company’s general creditors.  Participants and Beneficiaries shall have no right against the Company with respect to the payment of any portion of the Participant’s Account, except as a general unsecured creditor of the Company.

8.2Nonalienation.

(a)General Rules.  No benefit or interest of any Participant (including his spouse and Beneficiary) under the Plan will be subject to assignment, alienation, anticipation, sale, transfer, pledge, or encumbrance, whether voluntary or involuntary.  Before distribution of a Participant’s Account, no Account balance will be subject to the debts,

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contracts, liabilities, engagements or torts of the Participant.  (See subsection (b) below for distributions pursuant to a domestic relations order, and Section 6.3 for distributions upon the Participant’s death.)

(b)Domestic Relations Orders.  The Plan Administrator shall honor a court order affecting a Participant’s Account, provided the order would satisfy the requirements of a qualified domestic relations order under ERISA §206(d) if the Plan were subject to Part II of Title I of ERISA.  The Plan Administrator shall apply procedures substantially similar to those procedures applicable to domestic relations orders submitted to the administrator of the Profit Sharing Plan.

8.3Limitation of Rights.  Nothing in this Plan will be construed to give a Participant the right to continue in the employ of the Company at any particular position or to interfere with the right of the Company to discharge, lay off or discipline a Participant at any time and for any reason, or to give the Company the right to require any Participant to remain in its employ or to interfere with the Participant’s right to terminate his or her employment.

8.4Governing Law.  The Provisions of the Plan will be construed, enforced and administered in accordance with the laws of California, except to the extent preempted by ERISA.

IN WITNESS WHEREOF, the Company by its duly authorized officer has executed this plan, The MSC.Software Corporation Supplemental Retirement and Deferred Compensation Plan, on this                          day of January, 1995.

The MSC.Software Corporation

 By:

Title:

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EX-14

Exhibit 14

MSC.SOFTWARE CORPORATION

CODE OF BUSINESS CONDUCT AND ETHICS

MSC.SOFTWARE CORPORATION

CODE OF BUSINESS CONDUCT AND ETHICS

1.   INTRODUCTION

We are firmly committed to conducting business in compliance with the letter and spirit of the law and other accepted standards of business conduct reflected in our corporate and personnel policies.

This Code of Business Conduct and Ethics (“Code”) sets forth the policies and business practices that apply to our Chief Executive Officer and senior financial officers (“Covered Persons”).   Failure to comply with this Code and applicable laws and regulations could severely harm the MSC.Software Corporation (the “Company”).

This Code is in addition to and supplements the Company’s Code of Conduct.  If this Code is inconsistent with the Company’s Code of Conduct, this Code will apply.

We are a publicly traded company.  As such, we rely on the public securities markets for capital to fund many of our activities.  Public investors rely upon the quality and integrity of our financial reports and press releases.  Accordingly, it is imperative that the Company maintain accurate books and records and report its financial results and condition accurately.

This Code does not cover every issue that may arise, but sets out basic principles.  If a law conflicts with a policy in this Code, you must comply with the law.  If you have any questions about the application of this Code to any particular situation, or if you are in a situation that you believe may violate or lead to a violation of this Code, you should contact the Company’s Senior Counsel.

Persons who violate this Code will be subject to disciplinary action and other consequences, as described below.

2.   PROCEDURAL MATTERS; REPORTING

2.1Reporting violations.  We encourage and expect you to bring possible violations of the Code to the attention of management by reporting them through the procedures set forth in this Code.

Compliance.  We have appointed the Company’s Senior Counsel as the individual overseeing matters related to this Code.  The Senior Counsel will consult in a confidential manner on specific issues and matters of policy covered by this Code.  You can approach the Senior Counsel on a confidential basis with questions or concerns regarding this Code.  The Senior Counsel will report directly to the Audit Committee on a regular basis.

Audit Committee; Financial or SEC Reporting Issues.  If you have a concern about the Company’s accounting, internal accounting controls or auditing matters you may also communicate that concern directly to our Audit Committee.  The Audit Committee consists entirely of directors who are independent of Company management.  You can decide to keep communications about these matters confidential or anonymous.

2.2Confidentiality; No retaliation.  Any good faith communication of possible violations will be kept confidential to the extent practicable.  If you want to keep your identity secret, we will do so to the full extent possible.  The Company does not permit retaliation of any kind against employees for good faith reports of such violations.  We take claims of retaliation seriously.  Allegations of retaliation will be investigated and appropriate action taken.

You can report violations of this Code, Company policies or applicable law in confidence and without fear of retaliation.

2.3Certification.  All Covered Persons will be required, on an annual basis, to certify their compliance with this Code.  Certification requires signing and returning a Certificate of Compliance in a form that will be supplied to you.  Failure to do so will be deemed refusal to comply with this Code and may result in disciplinary action.

2.4Sanctions; disciplinary actions.  If you violate this Code or any additional policies and procedures issued by the Company, or fail to cooperate with any investigation, you will be subject to disciplinary action.  Those actions could include, but are not limited to, reassignment, demotion, suspension or, where appropriate, dismissal.  You might also be subject to legal proceedings to recover the amount of any losses that the Company may have incurred as a result of such actions.  Actions that violate this Code may also lead to your prosecution under any applicable criminal statutes.

3.   LEGAL COMPLIANCE MATTERS

Our ethical standards require us to obey the law, both in letter and in spirit.  We seek to outperform our competition fairly and honestly through superior performance, never through unethical or illegal business practices.  The Company’s funds, services or assets must not be used for any unlawful or improper purpose.

This Code does not summarize all laws, rules and regulations applicable to the Company and Covered Persons.  Please consult the Company’s Senior Counsel and the various guidelines the Company has prepared if you have questions on specific matters.

3.1Insider trading.  Because people who buy or sell securities on the basis of “inside information” have an unfair advantage over other investors, such actions are unlawful and could subject you and the Company to great harm, risk or embarrassment.  All non-public information about the Company should be considered confidential information.  If you have any questions, please consult the Company’s Chief Financial Officer.

The Company has adopted a detailed Insider Trading Policy, which has been distributed to you, setting forth more detail about the matters and procedures for buying and selling Company securities.

3.2Political contributions; bribes of governmental officials.  Political contributions or payments to governmental officials are highly regulated and restricted by law.  There are several basic aspects of our policy with respect to such matters.

2

Political activities.  You must not make or permit any direct or indirect payment or contribution on behalf of the Company for the support of political parties or political candidates for any office (federal, state or local) in the United States or any foreign country, unless authorized in advance in writing by the Company’s  Senior Counsel.  This restriction includes contributions to candidates, office holders and political parties, and can include such things as buying tickets for a political fundraising event, providing meals, goods, services, travel, accommodations or tickets for sporting and entertainment events, loaning personnel during working hours for fundraising activities, and paying for advertisements or other campaign expenses.

Employees are free, and indeed encouraged, to endorse, advocate, contribute to, or otherwise support any political party, candidate or cause they choose.  However, in public political statements, references to your affiliation with the Company should be avoided.  In any personal activity you should make it clear that you are not acting on behalf of the Company.

You must not exert any pressure, direct or implied, that restricts any employee from deciding whether, to whom, and in what amount, he or she will make a political contribution or render services to individual candidates or political committees where permitted by applicable laws.

Lobbying.  Lobbying requires disclosure, is subject to specific rules and covers many kinds of activity.  You may be engaged in lobbying if your work involves contacts with legislatures, regulators, executive branch officials or their staffs, government contract sales, or efforts to influence legislative or administrative action.  You must discuss these activities with the Company’s Senior Counsel in advance to determine whether disclosure and other rules apply before you engage in any of these activities

Foreign Corrupt Practices Act.  The U.S. Foreign Corrupt Practices Act and similar laws prohibit giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business or for any other improper purpose.  This includes payments to reduce taxes or customs duties.  In addition we must be careful in selecting agents and partners, since any improper payments made through them could also result in violations of law by us.  You must not make illegal payments to government officials of any country.  A violation is a serious criminal offense both for Company and individuals which can result in fines, loss of export privileges, and imprisonment for individuals.

3.3Bribery; gifts; entertainment.  We want to be successful based on our merits, not because we have unlawfully paid someone for a favor.  We prohibit bribes to anyone, anywhere in the world, for any reason.  Remember that it is your responsibility to avoid prohibited actions.  You must not engage in soliciting, receiving, or accepting, directly or indirectly, any bribe, kickback or other payment or benefit from any employee or agent of any current or prospective vendor, supplier, landlord, lessee, competitor, or other person or entity in any matter related to the Company.

Competition; antitrust.  We believe in fair and open competition.  The U.S. antitrust laws seek to protect, promote, and preserve, free, fair, honest and vigorous competition.

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Although the goals of the antitrust laws are clear, the laws themselves are broad, complex and sometimes vague.    Compliance with that policy and the antitrust laws is a fundamental part of our values.

3.4Environment, health and safety.  We are committed to environmental, health and safety protection for our employees, customers, neighbors and others who may be affected by our products or activities.  Failure to comply with the Company’s health, safety and environmental policies could pose risks to employees, contractors, customers, neighboring communities, or the environment.  Under many laws, misconduct, even if unintentional, also carries serious penalties and could result in criminal prosecution of employees involved and the Company.

You are responsible for fully supporting our policy of compliance with applicable laws and regulations regarding health, safety, and environmental protection.  Our efforts to maintain and to enhance protection of health, safety and the environment depends on every employee’s familiarity with Company policies and willingness to correct and to report potential noncompliance promptly.

4.   PROFESSIONAL CONDUCT

4.1Honesty.  All Covered Persons must ensure that they are honest in the exercise of their responsibilities on behalf of the Company.  Obviously, all situations cannot be covered by a policy statement such as this Code.  Good judgment, coupled with a high sense of personal integrity, is the best policy.  Where situations arise that appear uncertain, you should consult with the Company’s Senior Counsel for guidance.

Solicitation or acceptance of gifts; Entertainment.  We want companies and individuals who do business with us to be free of pressures to give gifts, favors or the like (“Gifts”) to individuals who make decisions about doing business with them.  Gifts include merchandise, services, lavish or unusual entertainment, personal travel, use of real property, and other tangible or intangible items.  Soliciting or accepting Gifts from Customers or Suppliers or from other persons who currently, or who may in the future, do business with the Company is prohibited.

4.2Selection of suppliers.  Wherever practicable, Suppliers will be selected by fair and open selection procedures based on quality, need, performance and cost.  All purchases from Suppliers must be in accordance with the Company’s purchasing policies.

4.3Conduct outside the Company.  You are expected to adhere to acceptable ethical principles in matters of personal conduct and to exhibit a high degree of personal integrity at all times.  You should not act in a way that might reasonably be viewed as reflecting negatively on the Company and its business activities during times when you are not at work or are not acting on behalf of the Company.

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5.   CONFLICTS OF INTEREST

A “conflict of interest” occurs when your private interests interfere with the interests of the Company.  A conflict situation can arise if you take action or have interests that may make it difficult to perform your work for the Company objectively and effectively.  Conflicts of interest may also arise if you or members of your family receive improper personal benefits as a result of your position in the Company.  “Family” includes your spouse, grandparents, parents, stepparents, children, stepchildren, siblings, stepsiblings, grandchildren, uncles, aunts, nephews and nieces, and any spouses or persons in a same-sex committed relationship with you or any of the foregoing persons.  On conflicts questions you are not responsible for learning about the activities of family members who do not reside with you, but if you know about their activities, you must take them into account in these matters.

Conflicts of interest are prohibited except under guidelines approved by the Board of Directors or its Audit Committee.  Activities or positions approved in advance by the Company’s Audit Committee or arising out of business affiliations of Company directors disclosed to the Company’s Board of Directors in connection with its periodic reviews of director independence will not be deemed a conflict of interest under this Code.

Conflicts of interest may not always be clear-cut, so if you have a question, you should consult with higher levels of management or the Company’s Senior Counsel.

Consequences; Penalties.  In litigation involving a possible conflict of interest, a Covered Person may not, under applicable state law, be entitled to any indemnification payments by the Company.  Further, insurance coverage for directors and officers may not be applicable due to a traditional exception with respect to any conduct in connection with a conflict of interest.

Set forth below are areas where conflicts may arise.  These examples are not a comprehensive list of all possible conflicts of interest.

5.1Work for third parties.  It is almost always a conflict of interest for you to work simultaneously for a competitor, customer or supplier.  You are not allowed to work for a competitor, customer or supplier as a consultant, board member, officer, agent, employee or in any other capacity.  The best policy is to avoid any direct or indirect personal business connection with our competitors, customers, or suppliers, except on behalf of the Company.

5.2Causing the Company to do business where you or a family member stands to gain.  You must not cause the Company to do business with any business in which you or a member of your family directly or indirectly stands to personally gain.  For example, a potential conflict of interest might exist if you are able to negotiate better prices for another business in which you have an interest because you allow the supplier to do business with the Company.

5.3Investments; Family businesses.  You and your close relatives need to be careful that your investments do not create conflicts of interest, or the appearance of conflicts of interest, that would impair your ability to make proper decisions on behalf of the Company.  Conflicts can occur if investments are made in competitors, suppliers or

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customers.  You must not invest in any security (stocks, bonds, options, short sales, etc.) or lend money or otherwise invest in a customer or supplier, its parent company, or any subsidiaries, unless the aggregate of the amount invested constitutes not more than one percent (1%) of the outstanding debt or equity of the customer or supplier.  You must promptly report in writing to the Company’s Senior Counsel any investments in customers or suppliers exceeding the above threshold.  The Company’s Senior Counsel will decide an appropriate course of action, which might require you to dispose of such investments.  For the purposes of this paragraph, the terms “invest” or “investment” includes any investment personally owned or beneficially owned by your family members, nominees, or others where the effect is that you or any family member derives any benefit from such investment.

Such a conflict of interest does not exist if (a) the enterprise is publicly traded and your investment is less than 1% of the Company’s stock or the enterprise is privately held, your interest is worth less than $50,000 or (b) the ownership is through a widely-held mutual fund or similar pooled investment vehicle.

Reporting Investments.Family businesses or other businesses in which you participate as an owner, a partner, director, officer, employee, consultant or shareholder that may create a conflict of interest or may interfere with your duties to the Company must be disclosed in writing to the Company’s Senior Counsel for review and approval.  The appearance of favoritism, potential for conflict and likelihood of discouraging other service/product providers in the future will be considered by the Company’s Senior Counsel.

5.4Hiring or retaining family members; Consultants. The activities of a close relative can create a conflict of interest, or an appearance of a conflict of interest.  This happens when an employee’s loyalty becomes divided – or may appear to be divided – between loyalty to the close relative (who has one set of interest) and loyalty to the Company (which may have different interests).  You must not cause the Company to retain or employ as an employee or consultant or other capacity a member of your family in a reporting or supervisory position, except as otherwise authorized by the Audit Committee.

5.5Corporate Opportunity.  Covered Persons are prohibited from (a) taking for themselves personally opportunities that properly belong to the Company or are discovered through the use of corporate property, information or position; (b) using corporate property, information or position for personal gain; and (c) competing with the Company.

6.   FINANCIAL MATTERS; HONESTY

You are expected to do everything within your power to ensure that Company financial and non-financial information is maintained and reported accurately and properly.

6.1Books and records.  All assets, liabilities, expenses and transactions must be recorded in the Company’s regular books of account in a manner consistent with the Company’s internal controls and accounting policies.  Undisclosed or unrecorded funds or assets of

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the Company must not be established or maintained for any purpose.  Documentation of all material business transactions must accurately describe the essential information.

6.2Record retention and destruction.  Records should be retained or destroyed according to the Company’s record retention policies only in accordance with such policies.  In accordance with those policies, in the event of pending or threatened litigation or governmental investigation, consult the Company’s attorney before destroying any documents or records directly or indirectly related to that matter.

6.3Financial statements.  Knowingly misrepresenting facts in the preparation of financial statements, financial data or other Company records is strictly prohibited by Company policy and the law.  In that regard, you must not:

•Make or approve, or direct another person to make, materially false or misleading entries in the financial statements or records of the Company;

•Fail to correct any financial statements or records of the Company that are materially false or misleading when you have the authority to make such corrections;

•Sign, or permit or direct another to sign, a document that contains materially false or misleading information or that omits material information necessary to prevent the document, in light of the circumstances at the time, from being misleading.

6.4Periodic reports and other disclosure documents.  We are committed to providing full, fair, accurate, timely and understandable disclosure in periodic reports required to be filed with the SEC (“Periodic Reports”) and in all other disclosure documents filed with or submitted to the SEC or provided to the Company’s investors or prospective investors (“Disclosure Documents”).  If you participate in the preparation, review, filing or distribution of the Company’s Periodic Reports or Disclosure Documents, or the collection and submission of financial and non-financial data for inclusion in such reports or documents, you should:

•Promptly notify appropriate management personnel of all material information relating to the Company, particularly during periods in which any such report or document is being prepared.

•Carefully review the financial statements and other financial information (including, as applicable, footnote disclosure, selected financial data, and management’s discussion and analysis of financial condition and results of operation) contained in drafts of any Periodic Reports or Disclosure Document submitted to you for review.

•If you believe the financial statements and/or other financial information included in such report or document does not fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented, you should promptly notify appropriate management personnel or follow the reporting alternatives under Section 2.1 of any issues, concerns or significant deficiencies in the financial and non-financial disclosure contained in any draft Periodic Report or Disclosure Document.

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•Promptly notify appropriate management personnel or follow the reporting alternatives under Section 2.1 if you become aware of (a) any significant deficiencies in the design or operation of the Company’s internal controls that could adversely affect the Company’s ability to record, process, summarize and report financial data and information, and (b) any fraud, whether or not material, that involves management or other Company employees who have a significant role in the Company’s financial reporting or internal controls.

6.5Dealings with external auditors and internal audit staff.  Our personnel who communicate with our external auditors and internal audit staff are expected to adhere to the guidelines set forth below.

•You should be candid and forthright in all dealings with the Company’s external auditors or internal audit staff, and you must not knowingly misrepresent facts or knowingly fail to disclose material facts.

•You must not take or direct any other person to take, any action to fraudulently influence, coerce, manipulate, or mislead any auditor engaged in the performance of an audit of the Company’s financial statements for the purpose of rendering such financial statements materially misleading.

•You must not make false or misleading statements to an accountant or auditor in connection with any audit or examination of the Company’s financial statements.

6.6Disagreements or questioning of financial statements or reporting.  If you have a disagreement or dispute relating to the preparation of financial statements or the recording of transactions in the Company’s books, you should take appropriate steps to ensure that the situation is resolved properly.  You should make your concerns known to the appropriate higher level(s) of management within the Company or follow the reporting alternatives under Section 2.1.  You should document your understanding of the facts, the issues involved, and the parties with whom these matters were discussed.

7.   OTHER PROVISIONS

7.1Amendments; Waivers.  Amendments to this Code must be in writing, and material amendments may be made only with the prior approval of the Audit Committee of the Board.  Any exception from or waiver of the specific policies set forth in this Code can be made only by the Audit Committee.

7.2Enforcement.  The Company’s Senior Counsel and all executive and management personnel are responsible for the enforcement and compliance with this Code.  Such responsibilities include, but are not limited to, the periodic distribution to and discussion of this Code with employees under their supervision to ensure employee knowledge and compliance.

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7.3Audit Procedures.  The Company’s Senior Counsel, Chief Executive Officer, Chief Financial Officer, the Board of Directors or the Audit Committee may, at their discretion, from time to time, establish and disseminate additional personnel policies and procedures or accounting and financial policies and procedures to monitor and to test compliance with this Code.

7.4Interpretation.  All questions regarding the interpretation, scope, and application of the policies set forth in this Code shall be referred to the Company’s Senior Counsel or to the Audit Committee.

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EX-21

EXHIBIT 21

MATERIAL SUBSIDIARIES OF THE REGISTRANT

Name	Country	% Ownership
Advanced Enterprise Solutions, Inc.	U.S.A. (Delaware)		100	%
Knowledge Revolution	U.S.A. (California)		100	%
MSC International Company	U.S.A. (California)		100	%
Tyra Technologies, Inc.	U.S.A. (California)		100	%
MSC.Flyer, LLC	U.S.A. (Delaware)		100	%
MSC.Software Australia Pty Ltd.	Australia		100	%
MSC.Software Asia Pty Ltd.	Australia		100	%
MSC Brasil Software e Engenharia Ltda.	Brazil		100	%
MSC.Software Ltd.	Canada		100	%
MSC.Software s.r.o.	Czech Republic		100	%
MSC.Software SARL	France		100	%
MSC.Software GmbH	Germany		100	%
MSC.Software China (Hong Kong) Limited	Hong Kong		100	%
MSC.Software S.r.l.	Italy		100	%
MSC.Software Corporation India Private Limited	India		100	%
Estech Corporation	Japan		100	%
MSC.Software Ltd.	Japan		100	%
MSC.Software Korea Corporation	Korea		100	%
Compumod Sdn. Bhd.	Malaysia		100	%
MSC.Software Benelux B.V.	Netherlands		100	%
MSC.Software AS	Norway		100	%
MSC.Software Sp. zo.o	Poland		100	%
MSC.Software (Singapore) Pte. Ltd.	Singapore		100	%
MSC.Software Simulating Reality, S.A.	Spain		100	%
MSC.Software Sweden A.B.	Sweden		100	%
MSC.Software Limited	United Kingdom		100	%

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EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos 333-89317, 333-86809, 333-89319, 333-106603 on Form S-3 and Registration Statement Nos 33-51744, 33-65239, 333-12189, 333-62187, 333-84219, 333-38884, 333-68760, 333-68762, 333-110948, 333-100254, 333-100255 on Form S-8 of our report on the consolidated financial statements and financial statement schedule of MSC.Software Corporation and subsidiaries (the “Company”) dated April 14, 2006 (which report expresses an unqualified opinion and includes explanatory paragraphs relating to the Company’s adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets effective January 1, 2002 and the restatement of the 2002 consolidated financial statements) and of our report on internal control over financial reporting of MSC.Software Corporation dated April 14, 2006 (which report disclaimed an opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of material weaknesses and the scope limitation) appearing in this Annual Report on Form 10-K of MSC.Software Corporation for the year ended December 31, 2004.

DELOITTE & TOUCHE LLP

Costa Mesa, California

April 14, 2006

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EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, William J. Weyand, certify that:

1.I have reviewed this annual report on Form 10-K of MSC.Software Corporation;

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

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

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined) in Exchange Act Rules 13a-15(f0 and 15d-15 (f) for the registrant and we have:

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

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

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

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

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

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

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

Date: April 14, 2006	By:	/s/ WILLIAM J. WEYAND
		William J. Weyand
		Chairman of the Board and Chief Executive Officer

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EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, John J. Laskey, certify that:

1.      I have reviewed this annual report on Form 10-K of MSC.Software Corporation;

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

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

4.      The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined) in Exchange Act Rules 13a-15(f0 and 15d-15 (f) for the registrant and we have:

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

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

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

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

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

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

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

Date: April 14, 2006	By:	/s/ JOHN J. LASKEY
		JOHN J. LASKEY
		Chief Financial Officer

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EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of MSC.Software Corporation (the “Company”) on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Weyand, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 except that (i) the Report was not filed by the date by which the Report was required to be filed and (ii); Item 6. Selected Financial Data in this Report does not include selected financial information for the five years ended December 31, 2004 as required by Item 301 of Regulation S-K; and

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

Date: April 14, 2006	By:	/s/ WILLIAM J. WEYAND
		William J. Weyand Chairman of the Board and Chief Executive Officer

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EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of MSC.Software Corporation (the “Company”) on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John J. Laskey, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 except that (i) the Report was not filed by the date by which the Report was required to be filed and (ii); Item 6. Selected Financial Data in this Report does not include selected financial information for the five years ended December 31, 2004 as required by Item 301 of Regulation S-K; and

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

Date: April 14, 2006	By:	/s/ JOHN J. LASKEY
		JOHN J. LASKEY
		Chief Financial Officer

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