10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: February 28, 2003 OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from              to
Commission file number: 1-8803

MATERIAL SCIENCES CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

The aggregate market value of the voting stock of the registrant held by shareowners of the registrant (not including any voting stock owned by directors or executive officers of the registrant (such exclusion shall not be deemed an admission that any such person is an affiliate of the registrant)) was approximately $160,900,782 as of August 30, 2002, the last business day of the registrant’s most recently completed second fiscal quarter (based on the closing sale price on the New York Stock Exchange on such date, as reported by The Wall Street Journal Midwest Edition).

As of April 28, 2003, the registrant had outstanding an aggregate of 14,144,517 of its Common Stock.

Document Incorporated by Reference

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

Document	Part of Form 10-K into which incorporated
Registrant’s Proxy Statement for the Annual Meeting of Shareowners to be held on June 26, 2003	Part III

2

PART I

Item 1. Business

Overview

Material Sciences Corporation (unless otherwise indicated by the context, including its subsidiaries, “MSC” or “Company”) designs, manufactures and markets material-based solutions. The Company is organized under two business segments – MSC Engineered Materials and Solutions Group (“EMS”) and MSC Electronic Materials and Devices Group (“EMD”). The Company is re-evaluating the strategic position, growth and Economic Value Added (“EVA^®”) potential of portions of its business. Depending on available options, the Company may decide to invest or disinvest with the objective of creating additional value for shareowners. In fiscal 2001, MSC operated under four segments: Coated Products and Services; Engineered Materials; Specialty Films; and Pinole Point Steel. The Specialty Films segment was sold on June 29, 2001, and the Pinole Point Steel business was sold on May 31, 2002. Both of these segments have been reported as discontinued operations since August 31, 2001. In November 2001, the Company announced a reorganization and new operating structure whereby the previous business units and management structures were eliminated, resulting in one reportable segment, EMS. In fiscal 2003, the Company significantly increased its investment in field-effect technology for sensors, switches, displays and interface solutions in the consumer electronics and transportation markets. This business is now operating as a separate business segment, EMD. For more information concerning the Company’s operating results by segment, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 13–24, and Note 15 of the Notes to the Consolidated Financial Statements entitled “Business Segments,” on page 49).

EMS, which represented 99.9% of the Company’s fiscal 2003 net sales, focuses on providing material-based solutions for electronic, acoustical/thermal and coated metal applications. The electronic material-based solutions include coated and laminated noise reducing materials used in electronic applications to solve customer specific problems and enhance performance. The acoustical/thermal material-based solutions include multilayer composites consisting of metals, polymeric coatings and other materials used to manage noise and thermal energy. The coated metal material-based solutions include coil coated and electrogalvanized (“EG”) protective and decorative coatings applied to coils of metal in a continuous, high-speed, roll-to-roll process. The Company’s material-based solutions are designed to meet specific customer requirements for the automotive, building and construction, electronics, lighting and appliance markets. The electronic and acoustical/thermal products are primarily manufactured and marketed as EMS’s own products. With coated metal applications, EMS generally acts as a “toll coater” by processing its customers’ metal for a fee, without taking ownership of the metal.

EMD’s primary focus to date is commercializing the technology licensed from TouchSensor Technologies, LLC (“TST”). On January 31, 2002, the Company, in an effort to expand its electronic material-based solutions, entered into an exclusive license agreement with TST. This agreement provides EMD the right to manufacture, use and sell TST’s patented field-effect technology for sensors, switches, displays and interface solutions in the consumer electronics and transportation markets. Royalty payments to TST, per the license agreement, consist of a certain percentage of net sales of licensed products plus a certain percentage of sublicense profits subject to a minimum annual royalty amount (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 13–24, and Note 14 of the Notes to the Consolidated Financial Statements entitled “Contractual Commitment” on page 48). In general, the exclusive license period ends on February 28, 2006, subject to the Company’s right to extend the exclusive license period in certain circumstances.

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

3

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

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

Available Information

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

MSC Engineered Materials and Solutions Group

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

Electronic Material-Based Solutions

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

Acoustical/Thermal Material-Based Solutions

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

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

Coated Metal Material-Based Solutions

The Company believes that coil coating is the most environmentally safe and energy-efficient method available for applying paint and other coatings to metal. This continuous, roll-to-roll, highly automated,

4

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

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

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

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

The Partnership has primarily served the automotive market by electrogalvanizing steel coils. On May 7, 2003, MSCWC purchased the remaining 33.5% ownership interest in the Partnership and, as of that date, has a 100% controlling interest in the Partnership’s electrogalvanizing facility in Walbridge, Ohio (see Note 17 of the Notes to the Consolidated Financial Statements entitled “Subsequent Events,” on pages 50 and 51). Electrogalvanized steel (“EG”) is the primary corrosion-resistant steel product used to manufacture automobile and light-truck body skins. Domestic demand for EG began in 1985, and the Company believes that it will continue to serve the automotive market through its own marketing efforts (including Quiet Steel) and through tolling agreements. However, the use of automotive quality hot-dip galvanized steel has been introduced by the steel industry and continues to make inroads into the EG market. The Company is unable to determine the effect, if any, on the market resulting from the existence of excess capacity, the entrance of additional capacity, changes in galvanizing technology or the substitution of other materials.

MSCWC electrogalvanizes zinc and zinc-alloy coatings and applies organic coatings onto sheet metal in coil form. MSCWC offers a full complement of pure zinc and zinc-nickel plated products with or without organic coatings or top coats that offer corrosion, forming or cosmetic advantages over competitive products, such as plastic and hot-dip galvanized, to the automotive as well as other markets. Demand for coatings over the electrogalvanized plating has increased due to greater corrosion expectations for steel products and enhanced cosmetic requirements. The MSCWC facility is the only facility in North America capable of meeting, in a single pass through its line, the demand for this full complement of products. During fiscal 2001, laminating capability was added to the facility in order to produce Quiet Steel for acoustical/thermal applications.

From July 23, 1999 to May 13, 2002, a subsidiary of the LTV Steel Company, Inc. (“LTV”) owned a 16.5% equity interest in the Partnership, providing LTV with access to 33% of the facilities available line time. A subsidiary of BSC owned 33.5% and MSCWC owned 50% of the Partnership during this period. On December 29, 2000, LTV commenced bankruptcy proceedings and on May 13, 2002, the Company acquired all the LTV interests in the Partnership (“LTV Transaction”). There were no sales to LTV through the Partnership in fiscal 2003.

5

On October 15, 2001, BSC also commenced bankruptcy proceedings. On May 7, 2003, International Steel Group Inc. (“ISG”) purchased substantially all of BSC’s assets, including BSC’s 33.5% interest in the Partnership, and the Company purchased this Partnership interest from ISG (collectively, the “ISG Transactions”). As a result of the ISG transactions, the Company has a 100% controlling interest in the Partnership interests and will consolidate the results of operations of the MSCWC facility on a prospective basis. In connection with the purchase, MSCWC entered into a tolling agreement with ISG to provide EG and other coating and ancillary services to ISG until December 31, 2004, and ISG assumed all amounts payable by BSC to the Partnership. Through the expiration of the tolling agreement, ISG has priority production rights for up to 25% of the available line time at the MSCWC facility. The EG products processed by MSCWC for ISG are expected to be sold primarily to the automotive industry.

On December 15, 2001, a major fire destroyed an electrogalvanizing facility owned by the Double Eagle Steel Coating Company (“DESCO”), a joint venture between U.S. Steel Corporation and Rouge Steel Company. The Partnership serviced both U.S. Steel Corporation and Rouge Steel Company, in addition to BSC, ISPAT Inland Inc. and other customers with EG and other services in fiscal 2002 and 2003. The DESCO facility resumed production in September 2002, and EMS does not expect to continue to supply U.S. Steel Corporation’s and Rouge Steel Company’s long-term requirements. For fiscal 2003, EG sales to U.S. Steel Corporation and Rouge Steel Company was a total of $7.4 million ($4,235 through the Partnership and $3,140 direct from the Company) and they utilized 8% of the Partnership’s available line time. In addition, the Company expects that MSCWC’s sales to ISG for fiscal 2004 will not be as great as the Partnership’s fiscal 2003 sales to BSC ($37.4 million). Based upon the loss of DESCO’s business, the expected decline in ISG’s utilization of the facility, partially offset by increased production of Quiet Steel, the Company anticipates that the MSCWC facility will operate at approximately 60% of capacity for the next six to twelve months. MSCWC’s current and future production levels, however, are dependent, in large part, upon economic conditions in the industries that use EG and other coated sheet steel products, including the automotive and appliance industries.

ISG and the other mills utilizing the MSCWC facility are major suppliers of sheet steel to the United States automobile industry. The orders for MSCWC’s toll coating services are primarily and independently generated by ISG and MSC for their respective customers. Partnership sales to non-partners prior to the LTV Transaction were $6.1 million from March 1, 2002 to May 13, 2002. Subsequent to May 13, 2002, MSC sold $16.8 million of EG services directly to non-partner customers. For reporting periods ending on or before the date of the ISG Transactions, EMS’s net sales for electrogalvanizing primarily consisted of various fees charged to the Partnership for operating the facility. Net sales to the Partnership represented 20%, 21% and 20% of MSC’s net sales in fiscal 2003, 2002 and 2001, respectively. The fees consisted of a variable portion, based on the production volumes and product mix, and a fixed portion, including taxes, rent, insurance and the fixed portion of electricity. The overall profitability to EMS depended on MSCWC’s processing skill and efficiency. MSCWC’s pricing of services to ISG is contractually fixed, while pricing of services to other customers is market driven.

MSC Electronic Materials and Devices Group

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

Pinole Point Steel

On May 31, 2002, the Company completed the sale of substantially all of the assets of its Pinole Point Steel business. The Company is in the process of liquidating the remaining assets and liabilities of the business. As of February 28, 2003, the Company has received $47.8 million related to the disposition and

6

liquidation of the business, consisting of $31.2 million of sale proceeds from Grupo IMSA S.A. de C.V. and $16.6 million from liquidating the Pinole Point Steel operations. In addition, as of February 28, 2003, there is $16.0 million in net assets remaining to be liquidated. The net assets consist primarily of the expected tax refund due to a loss carryback offsetting a portion of the gain on sale of its Specialty Films business in fiscal 2002. The remaining net assets include accounts receivable, offset, in part, by severance expenses and other liabilities not assumed by Grupo IMSA S.A. de C.V. Pinole Point Steel has been reported as a discontinued operation, and the Consolidated Financial Statements have been reclassified to segregate the net assets and operating results of the business.

Competition

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

The coated metal material-based solutions process competes with other methods of producing coated sheet metal, principally post-fabrication finishing methods such as spraying, dipping and brushing. The Company expects that, although there can be no assurance in this regard, the market penetration of coated metal (coil coating) will increase as a result of more stringent environmental regulation and the energy efficiency, quality and cost advantages provided by prepainted metal as compared to post-fabrication painting, particularly in high-volume manufacturing operations. The Company believes it is one of the largest coil coaters, with approximately 10% of the total tons processed in the United States in calendar 2002. Competition in the coil coating industry is heavily influenced by geography, due to the high costs involved in transporting sheet metal coils. Within geographic areas, coil coaters compete on the basis of quality, price, customer service, technical support and product development capability.

Competition in the production and sale of EG steel for the automotive industry comes from other steel companies that, either directly or through joint ventures, produce EG steel on seven manufacturing lines in the United States. Limited quantities of EG steel also are imported into the United States from foreign steel suppliers. The Company believes that the Walbridge facility is well-positioned to serve the current and expected end-users of EG steel, however, the use of automotive quality hot-dip galvanized steel has been introduced by the steel industry and continues to make inroads into the EG market. The Company is unable to determine the effect, if any, on the market resulting from the existence of excess capacity, the entrance of additional capacity, changes in galvanizing technology or the substitution of other materials.

International

The Company believes that significant opportunities exist internationally, particularly for the Company’s computer hard disk drive materials, disc brake noise dampers and Quiet Steel products. As a percentage of net sales, direct export sales represented 8%, 15% and 11% in fiscal 2003, 2002 and 2001, respectively.

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

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

Marketing and Sales

The Company markets its electronic (both EMS and EMD), acoustical/thermal and coated metal products, services and technologies primarily through its in-house sales and marketing organization and also through independent distributors, agents and licensees. The Company focuses its sales efforts on manufacturers, but also sells to steel mills and their intermediaries, metal service centers and metal brokers. In fiscal 2003, BSC was the primary marketing partner for EG steel. ISG is requesting to continue to market EG steel processed by MSCWC under a tolling agreement. EMS itself markets EG and other products (including Quiet Steel) using the MSCWC production rights to 75% of the available line time at the MSCWC facility. EMS has the right to utilize available line time to the extent that ISG does not provide firm orders for EMS services. In fiscal 2003, EMS utilized 34% of the total available line time and BSC utilized 49%.

7

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

The Company estimates that customers in the building products market were the end-users for approximately 18%, 22% and 22% of MSC’s net sales in fiscal 2003, 2002 and 2001, respectively. The Company also estimates that the original equipment and aftermarket segment of the transportation industry were the end-users for approximately 51%, 48% and 51% of MSC’s net sales in fiscal 2003, 2002 and 2001, respectively. Due to concentration in the automotive industry, the Company believes that sales to individual automotive companies, including indirect sales, are significant. However, no individual customer (other than the Partnership) accounted for more than 10% of the Company’s consolidated net sales in fiscal 2003, 2002 and 2001.

The Company’s backlog of orders as of February 28, 2003, was approximately $23.0 million, all of which is expected to be filled during the remainder of the current fiscal year. The Company’s backlog was approximately $22.6 million as of February 28, 2002.

MSC is generally not dependent on any one source for raw materials or purchased components essential to its business for which an alternative source is not readily available, and it is believed that such raw materials and components will be available in adequate quantities to meet anticipated production schedules.

MSC believes that its business, in the aggregate, is not seasonal. Some of its products, such as materials used for building products and swimming pools, however, sell more heavily in some seasons than others.

Environmental Matters

The Company believes it operates its facilities and conducts its business, in all material respects, in accordance with all environmental laws presently applicable to its facilities. The Company spent approximately $2.9 million in fiscal 2003, and has budgeted approximately $3.2 million for fiscal 2004, for maintenance or installation of environmental controls at its facilities. For additional information regarding the Company’s environmental matters, see “Legal Proceedings” on pages 10 and 11 and Note 4 of the Notes to the Consolidated Financial Statements entitled “Contingencies”, on pages 38 and 39.

Research and Development

Management estimates that it spent approximately $3.9 million in fiscal 2003, $6.1 million in fiscal 2002 and $6.3 million in fiscal 2001 for product and process development activities.

While the Company considers its various patents, licenses and trademarks to be important, it does not believe that the loss of any individual patent, license or trademark would have a material adverse effect upon its business as a whole. However, the loss of EMD’s license with TST would have a material adverse effect on EMD’s business and operating results. EMD represented less than 1% of the Company’s net sales in fiscal 2003.

Employees

As of February 28, 2003, the Company had 740 full-time employees. Of these, approximately 503 were engaged in manufacturing, 58 in marketing and sales, 167 in administrative and clerical positions and 12 in process and product development.

The employees at the Walbridge, Ohio and the Eisenach, Germany facilities are not represented by a union. Hourly manufacturing employees at Elk Grove Village, Illinois; Morrisville, Pennsylvania; and Middletown, Ohio are covered by separate union contracts expiring in February 2007, November 2005 and May 2007, respectively.

Executive Officers to the Registrant

The executive officers of the Company as of April 28, 2003, are as follows:

Name	Age	Position(s) Held
Michael J. Callahan	64	President and Chief Executive Officer, MSC since April 2003 and a director of MSC since 1999. Prior to joining the Company, Mr. Callahan was a business consultant from 1999 to 2003. Mr. Callahan served as Executive Vice President and Chief Financial Officer of FMC Corporation from 1994 to 1999.
James J. Waclawik, Sr.	44	Vice President, Chief Financial Officer and Secretary, MSC since October 1996.

8

Name	Age	Position(s) Held
Frank J. Lazowski, Jr.	63	Senior Vice President, Human Resources, MSC since March 1999; and Vice President, Human Resources, MSC from July 1991 to March 1999.
David J. DeNeve	34	Assistant Secretary, MSC and Vice President, Finance, EMS since November 2001; from Vice President and Controller, MSC from March 2001 to November 2001; and Controller, MSC from October 1996 to March 2001.
Robert J. Mataya	60	Vice President, Business Planning and Development, MSC since July 1991.
Ronald L. Millar, Jr.	52	President, EMS since November 2001; and Group Vice President and General Manager, MSCLC from November 1995 to November 2001.
James W. Carlen	50	Vice President, Sales, EMS since November 2001; and Vice President, Sales, MSCLC from December 1997 to November 2001.
John M. Klepper	56	Vice President, Human Resources, EMS since November 2001; and Director of Corporate Human Resources, MSC from March 2000 to November 2001. Prior to joining the Company, Mr. Klepper was Vice President, Human Resources for Fluid Management, Inc. since 1997.
Clifford D. Nastas	40	Vice President, Marketing, EMS since November 2001; and Vice President, Marketing, MSCLC from January 2001 to November 2001. Prior to joining the Company, Mr. Nastas was Global Automotive Business Director for Honeywell International Inc. since 1995.
Andrew G. Blake	45	President, EMD since July 2002. Prior to joining the Company, Mr. Blake was a Management Consultant for MSC since 1999; President for Innovative Manufacturing Solutions Corporation since 1998; and President and CEO for Exton Corporation since 1997.
John J. Glazier, Jr.	41	Vice President Administration and Finance, EMD since July 2002; Director Corporate Procurement, from April 2000 to July 2002; and Plant Manager, Pre Finish Metals (EGV) Inc. from September 1996 to April 2000.
Gayle L. Schaeffer	45	Vice President Consumer Electronics, EMD since February 2003. Prior to joining the Company, Ms. Schaeffer was Vice President, Marketing for Elo TouchSystems, Inc. since 1997.

Item 2. Properties

The Company owns or leases facilities with an aggregate of approximately 1,373,000 square feet of space. In addition to the principal physical properties used by the Company in its manufacturing operations as summarized in the table below, the Company leases insignificant sales and administrative offices pursuant to short-term leases. The Company considers all of its principal facilities to be in good operating condition and sufficient to meet the Company’s near-term operating requirements.

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

9

(1) This facility is held under a capital lease until June 30, 2003. The Company has extended the lease for five years until June 30, 2008 and this extension period will be treated as an operating lease. The lease may be further extended in five year increments, at the option of the Company, through June 30, 2023. From April 1, 1986 to May 7, 2003, this facility was subleased to the Partnership (see Note 6 of the Notes to the Consolidated Financial Statements entitled “Leases,” on pages 40 and 41).

Item 3. Legal Proceedings

Environmental Matters

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

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

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

MSC believes its range of exposure for all known sites, based on allocations of liability among PRPs and the most recent estimate of remedial work, is $1.1 million to $1.8 million. The Company’s environmental reserves were approximately $1.3 million as of February 28, 2003.

On February 27, 2002, the Company received a notice of alleged violations of environmental laws, regulations or permits from the Illinois EPA related to VOM air emissions and other permitting issues at its Elk Grove Village facility. The Company has filed a response and performed stack testing for one of its production lines (“Tested Line”) under the supervision of the Illinois EPA. Those recent stack test results, when considered with stack test results from the facility’s other production lines taken in the past, indicate the Company’s Elk Grove Village facility is in compliance with the overall VOM emission limitations in its Clean Air Act permit. However, the Company’s VOM coating application volume on its Tested Line is in excess of the permit limit. To address that issue, the Company has filed a permit modification request to reflect the current VOM application rates on the facility’s production lines, which the Illinois EPA recently granted. The Illinois EPA has indicated that resolution of the matters alleged in the February 27, 2002 Notice of Violation may require referral to the office of the Illinois Attorney General for potential enforcement action, which could lead to the imposition of penalties on the Company.

The Company believes that the ultimate outcome of its environmental legal proceedings will not have a material adverse effect on the Company’s financial condition or results of operations, given the reserves recorded as of February 28, 2003 and, where applicable, taking into account contributions from other PRPs. However, there can be no assurance that the Company’s environmental legal proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s financial condition or results of operations due to a number of uncertainties, including without limitation, the costs of site cleanup, the discretionary authority of the Illinois Attorney General in bringing enforcement actions and other factors.

10

Other Matters

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

On May 26, 2000, a settlement agreement was executed regarding a class action lawsuit related to accounting irregularities announced in April 1997. The plaintiff claimed that the Company and certain of its current and former officers violated the federal securities laws and were aware of, or recklessly disregarded, material misstatements that were made in MSC’s publicly filed financial reports. The Court entered an order preliminarily approving the agreement on May 31, 2000 and ordered that the class be advised of the proposed settlement. On August 1, 2000, the class members were afforded the opportunity to present any objections at a fairness hearing, at which time the settlement was approved with no objections, and the case was dismissed. The costs of the settlement and related legal fees were covered under the Company’s insurance policies, net of retention and were expensed in fiscal 1998.

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

There were no matters submitted to the Company’s shareowners during the fourth quarter of fiscal 2003.

PART II

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

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

Fiscal Year	Fiscal Quarter	High		Low
2003	1st	$	12.3000	$	9.9700
	2nd		15.6500		12.4000
	3rd		14.1200		9.6300
	4th		14.9400		10.2600

Fiscal Year	Fiscal Quarter	High		Low
2002	1st	$	9.0000	$	6.7000
	2nd		10.9600		8.0800
	3rd		10.2200		7.9000
	4th		10.5000		9.4000

There were 826 shareowners of record of the Company’s common stock at the close of business on April 28, 2003.

On April 22, 2003, the Company announced that the Board of Directors voted to terminate the Company’s shareholder rights agreement. The agreement will be terminated by redeeming all of the outstanding rights at a price of $0.01 per right, payable in cash. There is currently one right attached to each outstanding share of common stock. The redemption payment will be mailed on or about May 16, 2003 to shareowners of record on April 28, 2003. As a result of the redemption, the rights cannot become exercisable, and the shareholder rights agreement will be terminated (see Note 17 of the Notes to the Consolidated Financial Statements entitled “Subsequent Events,” on pages 50 and 51).

MSC has not paid cash dividends other than a nominal amount in lieu of fractional shares in connection with stock dividends. Management currently anticipates that all earnings will be retained for development of the Company’s business. If business circumstances should change, the Board of Directors may declare and instruct the Company to pay dividends. However, the Company’s ability to pay dividends on its common stock is limited by certain covenants contained in the Company’s credit and Senior Note agreements (see Note 5 of the Notes to the Consolidated Financial Statements entitled “Indebtedness” on pages 39 and 40).

11

Item 6. Selected Financial Data

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

(Dollars and number of shares in thousands, except per share data)	Fiscal Year
	2003			2002			2001			2000			1999
Income Statement Data
Net Sales	$	266,818		$	250,506		$	273,860		$	278,669		$	257,218
Income (Loss) from Continuing Operations Before Income Taxes		2,222			(7,621	)		10,415			21,380			19,716
Net Income (Loss)(1)		1,494			(25,083	)		(684	)		16,715			7,947
Diluted Net Income (Loss) Per Share	$	0.11		$	(1.79	)	$	(0.05	)	$	1.10		$	0.52
Balance Sheet Data
Working Capital	$	63,398		$	115,463		$	162,735		$	163,378		$	164,614
Net Property, Plant and Equipment		93,188			102,915			118,464			124,922			131,398
Total Assets		237,809			299,474			345,539			350,564			353,007
Total Debt		55,503			105,262			137,465			120,667			138,117
Shareowners' Equity		121,887			128,624			149,736			158,982			149,338
Average Capital Employed		205,638			260,544			283,425			283,552			305,409
Cash Flow Data
Depreciation and Amortization	$	16,397		$	17,826		$	17,064		$	16,803		$	17,066
EBITDA(2)		21,059			9,079			28,305			38,913			38,943
Net Cash Provided by (Used in) Operating Activities		33,622			(25,510	)		12,450			47,730			70,473
Capital Expenditures		6,259			5,289			9,710			9,763			11,602
Free Cash Flow(3)		27,363			(30,799	)		2,740			37,967			58,871
Financial Ratios
Gross Profit as a % of Net Sales		17.8%			18.1%			19.7%			22.6%			21.8%
SG&A Expenses as a % of Net Sales		15.2%			16.9%			15.3%			14.0%			12.9%
Income (Loss) from Continuing Operations
Before Income Taxes as a % of Net Sales		0.8%			(3.0%	)		3.8%			7.7%			7.7%
Net Income (Loss) as a % of Net Sales		0.6%			(10.0%	)		(0.2%	)		6.0%			3.1%
Research and Development as a % of Net Sales		1.5%			2.4%			2.3%			1.9%			2.2%
Effective Income Tax Rate		7.8%			41.1%			37.4%			33.3%			38.1%
Return on Average Shareowners' Equity		1.2%			(18.0%	)		(0.4%	)		10.8%			5.5%
Return on Average Capital Employed		0.7%			(9.6%	)		(0.2%	)		5.9%			2.6%
Total Debt to Total Capital Employed		31.3%			45.0%			47.9%			43.1%			48.0%
Other Data
Per Share Information:
Net Cash Provided by (Used in) Operating Activities	$	2.36		$	(1.82	)	$	0.88		$	3.14		$	4.59
Free Cash Flow	$	1.92		$	(2.20	)	$	0.19		$	2.50		$	3.83
Book Value	$	8.57		$	9.18		$	10.59		$	10.46		$	9.72
Market Price:
High	$	15.65		$	10.96		$	14.31		$	15.75		$	13.13
Low	$	9.63		$	6.70		$	7.50		$	6.38		$	6.75
Close	$	10.26		$	10.00		$	8.80		$	14.44		$	7.19
P/E (High)		142.3	x		NM			NM			14.3	x		25.3	x
P/E (Low)		87.5	x		NM			NM			5.8	x		13.0	x
Weighted Average Number of Common Shares Outstanding Plus Dilutive Shares		14,226			14,007			14,141			15,200			15,364
Shareowners of Record		826			893			929			950			1,042
Number of Employees(4)		740			745			815			808			793

12

(1) In 2003, the Company recorded a gain on the sale of Pinole Point Steel of $1,934; a loss on the sale of Specialty Films of $101; a loss on early retirement of debt of $2,388; and a pretax restructuring charge against income from continuing operations of $855.

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

In 1999, MSC recorded the cumulative effect of adopting SOP 98-5, which reduced net income by $2,207, net of income taxes.

(2) EBITDA represents income (loss) before discontinued operations, extraordinary loss on retirement of debt, provision (benefit) for income taxes, interest (income) expense, net and depreciation and amortization expense. EBITDA is not a calculation based upon generally accepted accounting principles. The amounts included in the EBITDA calculation, however, are derived from amounts included in the historical financial statements. In addition, EBITDA should not be considered as an alternative to net income or operating income as an indicator of the Company's operating performance, or as an alternative to net cash provided by (used in) operating activities as a measure of liquidity. The Company regularly reviews EBITDA as a measure of the Company's ability to incur debt and invest or disinvest in portions of the business. The Company also believes EBITDA assists investors in comparing the Company's performance on a consistent basis without regard to depreciation and amortization, which can vary significantly depending upon many factors. However, the EBITDA measure presented in this document may not always be comparable to similarly titled measures reported by other companies due to differences in the components of the calculation. EBITDA is derived from the Consolidated Statements of Income (Loss) and the Consolidated Statements of Cash Flows.

	2003		2002			2001		2000		1999
EBITDA
Income (Loss) from Continuing Operations	$	2,049	$	(4,491	)	$	6,523	$	14,260	$	12,204
Provision (Benefit) for Income Taxes		173		(3,130	)		3,892		7,120		7,512
Interest (Income) Expense, Net		2,440		(1,126	)		826		730		2,161
Depreciation and Amortization Expense		16,397		17,826			17,064		16,803		17,066
EBITDA	$	21,059	$	9,079		$	28,305	$	38,913	$	38,943

(3) The amounts included in the free cash flow calculation are net cash provided by (used in) operating activities less capital expenditures. The Company regularly reviews free cash flow as a measure of cash generated after capital expenditures in the ordinary course to fund other investing and financing activities. The Company believes that free cash flow assists investors in understanding our ability to meet our primary operating obligations. Free cash flow is derived from the Consolidated Statements of Cash Flows.

	2003			2002			2001			2000			1999
Free Cash Flow
Net Cash Provided by (Used in) Operating Activities	$	33,622		$	(25,510	)	$	12,450		$	47,730		$	70,473
Capital Expenditures		(6,259	)		(5,289	)		(9,710	)		(9,763	)		(11,602	)
Free Cash Flow	$	27,363		$	(30,799	)	$	2,740		$	37,967		$	58,871

(4) This figure represents employees from continuing operations.

NM: Not meaningful.

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

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

Material Sciences Corporation (“MSC” or “Company”) reports segment information based on how management disaggregates its businesses for evaluating performance and making operating decisions. As a result of the Company’s restructuring program in fiscal 2002 and its significant increase in expense related to field-effect switches/sensors, MSC is reporting results for all periods on the basis of two business segments, MSC Engineered Materials and Solutions Group (“EMS”) and MSC Electronic Materials and Devices Group (“EMD”). EMS’s electronic material-based solutions consist primarily of coated metal and laminated noise reducing materials used in the electronics market. EMS’s acoustical/thermal material-based solutions consist of layers of metal and other materials used to manage noise and thermal energy for the automotive, lighting and appliance markets. EMS’s coated metal material-based solutions include coil coated and electrogalvanized (“EG”) products primarily used in the automotive, building and construction, appliance and lighting markets. EMD’s electronic material-based solutions include field-effect technology for sensors, switches, displays and interface solutions in the consumer electronics and transportation markets.

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

13

Results of Operations – Fiscal 2003 Compared with Fiscal 2002

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

On April 17, 2003, the Chairman, President and Chief Executive Officer resigned and was replaced by a non-executive Chairman of the Board and a new President and Chief Executive Officer. MSC entered into a separation agreement with the former officer, resulting in a pretax charge to earnings of $1,777 in the first quarter of fiscal 2004. (See Note 17 of the Notes to the Consolidated Financial Statements entitled “Subsequent Events,” on pages 50 and 51.)

MSC Engineered Materials and Solutions Group

Net sales for EMS increased 6.4% in fiscal 2003 to $266,546 from $250,506 in fiscal 2002. Sales of electronic-based materials grew 13.5% to $22,540 in fiscal 2003 from $19,856 in the prior year. The growth was due to increased sales of NRGDamp^TM for computer disk drive covers as well as set-top box sales. In fiscal 2003, acoustical/thermal materials sales declined 2.2% to $61,938 from $63,306 in fiscal 2002 primarily due to lower sales to the aftermarket brake and lighting markets, somewhat offset by higher shipments to the body panel laminate and engine markets. Coated metal materials sales increased 8.8% in fiscal 2003 to $182,068 from $167,344 recorded in the prior year primarily due to higher electrogalvanizing sales as a result of supplying a portion of Double Eagle Steel Coating Company’s (“DESCO”) requirements, whose coating line capabilities were interrupted by a major fire at the DESCO facility in December 2001. In addition, higher sales to the appliance, swimming pool, clutch plate and gas tank markets were somewhat offset by lower sales to the building and construction and lighting markets.

EMS’s gross profit margin was 17.8%, or $47,540, in fiscal 2003 as compared with 18.1%, or $45,231, in the prior year. Higher capacity utilization and a favorable product mix were offset by additional resources being focused at the manufacturing facilities as a result of the Company’s restructuring programs.

SG&A expenses of $28,919 were 10.8% of net sales in fiscal 2003 as compared with $32,764, or 13.1%, of net sales in fiscal 2002. The decrease in SG&A percentage was due to the increase in net sales offset by increased spending in marketing and research and development, higher variable compensation expense and higher spending on professional services. In addition, the SG&A expenses in fiscal 2002 include $1,270 of bad debt expense incurred due to several customers declaring bankruptcy.

MSC Electronic Materials and Devices Group

Sales related to the switch/sensor business were $272 in fiscal 2003. There were no switch/sensor sales in fiscal 2002 or fiscal 2001.

EMD’s gross profit margin was 12.9%, or $35, in fiscal 2003. The margin reflects the costs associated with initial prototype development, new product introductions and a specific application with high non-electronic content.

SG&A expenses were $3,774 in fiscal 2003. The SG&A expenses relate to marketing and research and development spending related to the switch/sensor business and the license fee payable to TouchSensor Technologies, LLC (“TST”). The Company anticipates marketing and research and development spending and the license fee payable to TST related to the switch/sensor business to be in excess of $6,000 for fiscal 2004 based on current spending levels.

Asset Impairments and Restructuring Expenses

On November 20, 2002, the Company announced it implemented a program to reduce overhead and improve efficiencies. The program involved restructuring the Company’s manufacturing organization, including terminations of 14 salaried personnel in the third quarter of fiscal 2003. The Company recorded a restructuring charge of $855 for severance and other related costs in the third quarter of fiscal 2003. Of this amount, $677 pertained to severance expenses and $178 for other related costs. Total cash paid in fiscal 2003 related to this restructuring program was $383. The remaining restructuring reserve for this program was $472 as of February 28, 2003, and is scheduled to be paid throughout fiscal 2004.

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

14

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

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

	Severance			Other			Total
Restructuring Reserve Recorded on November 15, 2001	$	1,110		$	340		$	1,450
Cash Payments		(676	)		(236	)		(912	)
Restructuring Reserve as of February 28, 2002	$	434		$	104		$	538
Restructuring Reserve Recorded on November 20, 2002		677			178			855
Cash Payments		(720	)		(201	)		(921	)
Total Restructuring Reserve as of February 28, 2003	$	391		$	81		$	472

Total Other Expense, Net and Income Taxes

Total other expense, net, was $4,022 in fiscal 2003 as compared to $708 in the prior year. The variance was primarily due to the allocation of interest expense to the Pinole Point Steel business for all of fiscal 2002 versus only the first quarter of fiscal 2003. Equity in Results of Joint Ventures was a net loss of $1,557 in fiscal 2003 as compared with a net loss of $1,560 in fiscal 2002. MSC’s effective income tax rate was 7.8% in fiscal 2003 as compared with 41.1% (benefit) in fiscal 2002. During fiscal 2003, the Internal Revenue Service completed its review of fiscal years 1997, 1998 and 1999. The Company analyzed its income tax reserve position based on this event and reduced its previously provided income tax reserves by $673 in the fourth quarter of fiscal 2003. The variance in the effective tax rate compared to the statutory rate was due to the income tax reserve adjustment and tax credits and other permanent items relative to income (loss) before income taxes.

General

EMS

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

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

On May 7, 2003, International Steel Group (“ISG”) purchased substantially all of Bethlehem Steel Corporation’s (“BSC”) assets as part of BSC’s bankruptcy proceedings. On the same day, MSC purchased from ISG the remaining 33.5% ownership interest in the Partnership for $3,600. As of May 7, 2003, the Company has a 100% controlling interest in the Partnership facility. In conjunction with the purchase, MSC entered into a tolling agreement with ISG to provide EG and other coating and ancillary services to ISG for a period ending on December 31, 2004, and ISG assumed amounts payable by BSC to the Partnership. ISG will have priority production rights to 25% of the available line time and MSC will market the remaining line time.

On December 15, 2001, a major fire destroyed an electrogalvanizing facility owned by DESCO, a joint venture between U.S. Steel Corporation and Rouge Steel Company. The Partnership serviced both U.S. Steel Corporation and Rouge Steel Company, in addition to BSC, ISPAT Inland Inc. and other customers with EG and other services in fiscal 2003. The DESCO facility resumed production in September 2002, and EMS does not expect to continue to supply U.S. Steel Corporation’s and Rouge Steel Company’s long-term requirements. For fiscal 2003, EG sales to U.S. Steel Corporation and Rouge Steel Company were $7,375 ($4,235 through the Partnership and $3,140 direct from the Company) and

15

they utilized 8% of the Partnership’s available line time. In addition, the Company also expects that MSCWC’s sales to ISG for fiscal 2004 will not be as great as the Partnership’s fiscal 2003 sales to BSC ($37,379). Based upon the loss of DESCO’s business, the expected decline in ISG’s utilization of the facility, partially offset by increased production of Quiet Steel, the Company anticipates that the MSCWC facility will operate at approximately 60% of capacity for the next six to twelve months. MSCWC’s current and future production levels, however, are dependent, in large part, upon economic conditions in the industries that use EG and other coated sheet steel products, including the automotive and appliance industries.

EMD

On January 31, 2002, the Company expanded its electronic material-based solutions by entering into an exclusive license agreement with TST. This agreement provides EMD the right to manufacture, use and sell TST’s patented Touch Sensor Technology for sensors, switches, displays and interface solutions in the consumer electronics and transportation markets. There were no sales in fiscal 2002 or fiscal 2001 and sales of $272 in fiscal 2003. Royalty payments to TST, per the license agreement, consist of a certain percentage of net sales of licensed products plus a certain percentage of sublicense profits subject to a minimum annual royalty amount (see Note 14 of the Notes to the Consolidated Financial Statements entitled “Contractual Commitment,” on page 48). In general, the exclusive license period ends on February 28, 2006, subject to the Company’s right to extend the exclusive license period in certain circumstances. See “Contractual Obligations” on page 20.

Other

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

Results of Discontinued Operations – Fiscal 2003 Compared with Fiscal 2002

Specialty Films

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

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

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

Pinole Point Steel

On May 31, 2002, the Company completed the sale of substantially all of the assets of its Pinole Point Steel business. The Company is in the process of liquidating the remaining assets and liabilities of the business. As of February 28, 2003, the Company has received $47,811 related to the disposition and liquidation of the business, consisting of $31,174 of sale proceeds from Grupo IMSA S.A. de C.V. and $16,637 from liquidating the Pinole Point Steel operations. In addition, as of February 28, 2003, there is $16,035 in net assets remaining to be liquidated. The net assets consist primarily of the expected tax refund due to a loss carryback offsetting a portion of the gain on sale of its Specialty Films business in the prior year. The remaining net assets include accounts receivable, offset, in part, by severance expenses and other liabilities not assumed by Grupo IMSA S.A. de C.V. Pinole Point Steel has been reported as a discontinued operation, and the Consolidated Financial Statements have been reclassified to segregate the net assets and operating results of the business.

As of February 28, 2002, the Company recorded a provision for loss on discontinued operation, net of income taxes, of $53,287. The loss on discontinued operation, net of income taxes, included the allocation of consolidated interest expense of $5,391 incurred from September 1, 2001 through May 31, 2002. The allocations were based on the debt associated with the original purchase of Pinole Point Steel in December 1997 and Pinole Point Steel’s subsequent cash flow. During fiscal 2003, the Company

16

recorded an adjustment on sale of discontinued operation, net of income taxes, of $1,934 to reduce the previously provided loss on discontinued operation. The adjustment consisted of a favorable change in the estimated proceeds of the sale of $2,436 and a reduction for estimated operating losses of $1,247 due to higher plant utilization and customers’ willingness to accelerate product deliveries prior to the closing of the transaction. The adjustment also included an additional loss of $949 related to bad debt, product claims, workers compensation and employee expenses as well as a reduction of $800 primarily due to a change in the estimated apportionment of state income taxes.

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

Results of Operations – Fiscal 2002 Compared with Fiscal 2001

Net sales for continuing operations of MSC in fiscal 2002 decreased 8.5% to $250,506 from $273,860 in fiscal 2001. MSC’s gross profit margin was 18.1%, or $45,231, in fiscal 2002 as compared with 19.7%, or $54,007, in the prior year. SG&A expenses of $42,333 were 16.9% of net sales in fiscal 2002 as compared with $41,897, or 15.3%, of net sales in fiscal 2001.

MSC Engineered Materials and Solutions Group

Net sales for EMS in fiscal 2002 decreased 8.5% to $250,506 from $273,860 in fiscal 2001. Sales of electronic-based materials grew 56.1% to $19,856 in fiscal 2002 from $12,719 in the prior year. The growth was due to an increase in NRGDamp sales for computer disk drive covers. Acoustical/thermal materials sales increased 6.9% in fiscal 2002 to $63,306 as compared with $59,204 in fiscal 2001 due to higher sales to the automotive market, offset in part by lower sales to the lighting market. In fiscal 2002, sales of coated metal materials decreased 17.1% to $167,344 from $201,937 in fiscal 2001. A decline in shipments of coated metal materials to the building and construction market due to poor domestic economic conditions was the main reason for the significant shortfall.

EMS’s gross profit margin was 18.1%, or $45,231, in fiscal 2002 as compared with 19.7%, or $54,007, in the prior year. The decrease in gross profit margin was primarily the result of an unfavorable product mix and lower capacity utilization due to sales shortfalls of coated metal products and higher operating costs.

SG&A expenses were $32,764, or 13.1%, of net sales in fiscal 2002 versus $30,686, or 11.2%, of net sales in fiscal 2001. The higher SG&A percentage was due to the decrease in net sales and $1,270 of bad debt expense incurred due to several customers declaring bankruptcy.

MSC Electronic Materials and Devices Group

SG&A expenses were $167 in fiscal 2002 which related to the TST royalty fee per the license agreement signed on January 31, 2002.

Asset Impairments and Restructuring Expenses

The Company recorded special charges of $8,361 for asset impairments and $1,450 relating to the Company’s restructuring program.

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

In fiscal 2002, the Company reviewed its investment in the capitalized intangible assets and equipment related to its license with Northwestern University to commercialize its SSSP technology. The Company completed research studies with potential licensees of the SSSP technology. Based on the projected cash flows from the SSSP assets, MSC recorded a $2,001 charge to earnings in fiscal 2002.

On November 15, 2001, the Company announced it implemented a reorganization and cost reduction program. MSC terminated 41 employees primarily in sales, general and administrative departments of the Company and recorded a restructuring charge of $1,450 in fiscal 2002. Of this amount, $1,110 pertained to severance expenses and $340 for other related costs. As of February 28, 2002, cash of $912 was paid in conjunction with the restructuring program. The restructuring reserve was $538 as of February 28, 2002.

17

Total Other Expense, Net and Income Taxes

Total other expense, net, was $708 in fiscal 2002 as compared to $1,695 in the prior year. The variance was partially due to higher interest income and lower interest expense as a result of the cash proceeds received from the sale of the Company’s Specialty Films segment during the second quarter of fiscal 2002. In September 2000, the Company entered into a forward contract for 15 million DEM related to the acquisition of Goldbach Automobil Consulting (“GAC”) in fiscal 2002. The forward contract was executed on January 26, 2001 and resulted in a gain of $514. Equity in Results of Joint Ventures was a net loss of $1,560 in fiscal 2002 as compared with a net loss of $1,194 in fiscal 2001. MSC’s effective income tax rate was 41.1% (benefit) in fiscal 2002 due to the amount of loss before income taxes relative to tax credits and other permanent items versus 37.4% (provision) in fiscal 2001.

Results of Discontinued Operations – Fiscal 2002 Compared with Fiscal 2001

Specialty Films

Net sales of Specialty Films for the partial year of fiscal 2002 were $21,578 as compared to $58,306 in all of fiscal 2001. Income from discontinued operation, net of income taxes, was $1,469 for the partial year of fiscal 2002 versus $5,785 in all of fiscal 2001.

Pinole Point Steel

Net sales of Pinole Point Steel in fiscal 2002 decreased to $128,397, 14.3% lower than $149,810 last fiscal year. The decrease in sales was due to an overall weak West Coast building and construction market. Loss from discontinued operation, net of income taxes, was $16,456 in fiscal 2002 as compared to $12,992 in fiscal 2001. The decline was due to deteriorating selling prices that more than offset the decrease in the cost of steel purchased, as well as lower volume and higher utility costs. This was partially offset by lower depreciation expense of $5,567 due to changes made to the estimated useful lives of the assets. Loss from discontinued operation, net of income taxes, includes an allocation of consolidated interest expense totaling $8,100 in fiscal 2002 versus $8,844 in the prior year. The allocations were based on the debt associated with the original purchase of Pinole Point Steel in December 1997 and Pinole Point Steel’s subsequent cash flow.

Liquidity and Capital Resources

The Company has historically financed its operations with funds generated from operating activities, borrowings under credit facilities and long-term debt instruments and sales of various assets. The Company believes that its cash on hand, marketable securities and availability under its credit facility will be sufficient to fund its operations and working capital needs.

MSC generated $33,622 of cash from operating activities in fiscal 2003, as compared with utilizing $25,510 in the prior fiscal year. This change was due mainly to an improvement in net income from a loss of $25,083 to net income of $1,494 in fiscal 2003. In addition, $31,445 was utilized in fiscal 2002 for income taxes payable related to the fiscal 2002 gain on the sale of Specialty Films. Working capital investment was $2,398 in fiscal 2003 versus an investment of $13,684 in fiscal 2002.

In fiscal 2003, MSC invested $6,259 in capital improvement projects compared with $5,289 in fiscal 2002. Capital spending related to discontinued operations was $176 in fiscal 2003 and $2,941 in fiscal 2002. Investments in joint ventures were $3,405 in fiscal 2003 compared with $893 in fiscal 2002. The change in investments in joint ventures related to the Company’s purchase of LTV’s ownership interest in the Partnership for $3,137 in fiscal 2003. There were no investments in joint ventures related to discontinued operations in fiscal 2003 compared with $5,114 in fiscal 2002 due to the investment in the joint venture with Bekaert Corporation prior to the disposition of the Company’s Specialty Films business. Fiscal 2004 capital expenditures are projected to be approximately $12,500.

On May 7, 2003, the Company invested $3,600 to purchase the remaining ownership interest in the Partnership from ISG.

MSC’s total debt decreased to $55,503 in fiscal 2003 from $105,262 as of February 28, 2002. The Company made principal debt payments of $13,421 and interest payments of $3,594 on May 31, 2002 related to the 1998 Senior Notes and the 1997 Senior Notes. In addition, on July 31, 2002, the Company made a debt payment of $39,852 to the holders of the 1997 Senior Notes. The debt payment consisted of principal of $35,714, interest of $420 and a contractual prepayment penalty of $3,718 (pretax basis). The extraordinary loss on early retirement of debt, net of income taxes, includes the prepayment penalty of $2,257 and a $131 write-off of debt issuance costs. The Company has principal debt payments of

18

$11,278 and projected interest payments of $1,870 due May 31, 2003 related to the 1998 Senior Notes (see Note 5 of the Notes to the Consolidated Financial Statements entitled “Indebtedness,” on pages 39 and 40).

The Company entered into a $20,000 committed line of credit on October 11, 2001. The agreement expires on October 11, 2004. No borrowings were outstanding under the line as of February 28, 2003. There were $2,280 in outstanding letters of credit as of February 28, 2003. A fee of .25% is charged for the unused portion of the line. At the Company’s option, interest is at the bank’s reference rate (4.25% as of February 28, 2003) or at LIBOR plus a margin (.75% as long as the Company’s letters of credit continue to be cash collateralized). The financial covenants include a fixed charge coverage ratio of not less than 1.0 to 1.0 commencing February 28, 2002; a liquidity ratio of not less than 1.5 to 1.0 commencing November 30, 2001; a maximum leverage ratio (3.0 to 1.0 from February 28, 2003 to November 30, 2003, and 2.5 to 1.0 thereafter); and minimum net worth of $140,000 plus 50% of cumulative consolidated net income accruing for fiscal years ending after November 30, 2001, and only for such periods that the Company’s balance sheet leverage exceeds 2.0 to 1.0. However, compliance with the financial covenants is not required at times when the Company does not have borrowings outstanding under the line of credit and has cash collateralized its obligations. As of February 28, 2003, the outstanding letters of credit have been cash collateralized. A total of $2,280 was classified as Restricted Cash in the Consolidated Balance Sheets. Other than the aforementioned restricted cash balance, there are no other restrictions on the Company’s use of its cash and cash equivalents at times when no borrowings are outstanding under the facility. The line of credit is secured by accounts receivable of the Company. In January 2003, a $200 letter of credit was issued. In April 2002, one of the letters of credit for $3,235 was canceled and the related cash collateral was released to the Company.

Interest payments for the 1998 Senior Notes are due semi-annually on May 31 and November 30 of each year. The 1998 Senior Note agreements require the Company to adhere to certain covenants including maintenance of consolidated cumulative adjusted net worth of $118,341. This covenant may limit the Company’s ability to repurchase its common stock and pay dividends from time to time. As of February 28, 2003, the Company’s consolidated cumulative adjusted net worth was $121,887. Based on current business conditions, the Company believes that it will remain in compliance with this and other covenants, but there can be no assurance in this regard. The Company believes, based on discussions with the lenders, that it would be able to re-pay or re-finance the Senior Notes if necessary. Other covenants include consolidated senior debt ratio (maximum of 55.0% until agreement expiration), and total indebtedness ratio (maximum of 60.0% until agreement expiration). MSC was in compliance with the financial covenants related to the 1998 Senior Notes for the period ended February 28, 2003.

On September 23, 1999, MSC’s Board of Directors authorized the repurchase of up to one million shares of the Company’s common stock, of which 468,900 shares were purchased through February 29, 2000. During the first six months of fiscal 2001, the Company purchased the remaining 531,100 shares at an average purchase price of $10.30 per share. On June 22, 2000, MSC’s Board of Directors authorized a program to repurchase an additional one million shares. As of February 28, 2001, the Company suspended the program after purchasing 695,788 shares under this authorization at an average purchase price of $10.45 per share. On March 1, 2002, the Company purchased 13,593 of its shares from certain employees at $10.00 per share related to the vesting of the Company’s 1999 Long-Term Incentive/Leverage Stock Awards Program. The Compensation Committee of the Board of Directors approved the share repurchase under the provisions of the Material Sciences Corporation 1992 Omnibus Awards Plan for Key Employees to cover a portion of the participants’ tax withholding liability for the vesting of these shares under the 1999 Program. On June 20, 2002, the Company resumed the previously approved repurchase program and purchased the remaining 290,619 shares with an average purchase price of $14.89 per share by February 28, 2003. On June 20, 2002, MSC’s Board of Directors also authorized a new program to repurchase up to an additional 500,000 shares of the Company’s common stock. The repurchase of 500,000 shares was complete as of February 28, 2003 with an average purchase price of $14.50 per share. No further share repurchase programs have been approved by the Company’s Board of Directors.

MSC had a capital lease obligation of $281 as of February 28, 2003 and $905 as of February 28, 2002, relating to a facility that the Company subleases to the Partnership. The capital lease expires on June 30, 2003. In the fourth quarter of fiscal 2003, the Company renewed the term of the lease for five years ending June 30, 2008. The extension will be treated as an operating lease (see Note 6 of the Notes to the Consolidated Financial Statements entitled “Leases,” on pages 40 and 41).

19

The Company paid minimum royalty fees of $1,167 in fiscal 2003 related to the license agreement with TST. The Company has a contingent liability related to the license agreement with TST to pay minimum royalty fees of $1,500 in fiscal 2004 and an aggregate of $5,500 in fiscal 2005 to 2006.

On April 22, 2003, the Company announced that the Board of Directors voted to terminate the Company’s shareholder rights agreement. The agreement will be terminated by redeeming all of the outstanding rights at a price of $0.01 per right, or approximately $141 in the aggregate, payable in cash. There is currently one right attached to each outstanding share of common stock. The redemption payment will be mailed on or about May 16, 2003 to shareowners of record on April 28, 2003. As a result of the redemption, the rights cannot become exercisable, and the shareholder rights agreement will be terminated.

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

The Company is a party to various legal proceedings in connection with the remediation of certain environmental matters. MSC believes its range of exposure for all known and quantifiable environmental exposures, based on allocations of liability among potentially responsible parties, the most recent estimate of remedial work and other information available, is $1,100 to $1,800 as of February 28, 2003 (see “Legal Proceedings” on pages 10 and 11, and Note 4 of the Notes to the Consolidated Financial Statements entitled “Contingencies,” on pages 38 and 39).

On May 26, 2000, a settlement agreement was executed regarding the class action lawsuit related to accounting irregularities announced in April 1997. The plaintiff claimed that the Company and certain of its current and former officers violated the federal securities laws and were aware of, or recklessly disregarded, material misstatements that were made in MSC’s publicly filed financial reports. The Court entered an order preliminarily approving the agreement on May 31, 2000 and ordered that the class be advised of the proposed settlement. On August 1, 2000, the class members were afforded the opportunity to present any objections at a fairness hearing, at which time the settlement was approved with no objections, and the case was dismissed. The costs of the settlement and related legal fees were covered under the Company’s insurance policies, net of retention (expensed in fiscal 1998).

Contractual Obligations

The following table summarizes the contractual obligations the Company has outstanding as of  February 28, 2003.

Contractual Obligations	Obligations Due In
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Operating Leases	$	7,754	$	2,035	$	3,185	$	2,153	$	381
Capital Lease		281		281		—		—		—
Minimum Royalties		7,000		1,500		5,500		—		—
Long-Term Debt Principal and Interest Payments		69,046		14,642		17,679		15,971		20,754
Total	$	84,081	$	18,458	$	26,364	$	18,124	$	21,135

Inflation

MSC believes that inflation has not had a significant impact on fiscal 2003, 2002 and 2001 results of operations.

Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting. With the adoption of SFAS No. 142 on March 1, 2002, goodwill will no longer be subject to amortization over its estimated useful life. Goodwill will be subject to at least an annual assessment of impairment by applying a fair-value based test, beginning on the date of adoption of the new accounting standard. The Company completed its initial assessment as of August 31, 2002 as required under the impairment requirements of SFAS No. 142 and no impairment

20

was deemed necessary. The Company also completed the required annual impairment assessment as of February 28, 2003 and no impairment was deemed necessary.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which is effective for financial statements issued for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. It is anticipated that the adoption of SFAS No. 143 will have no impact on the financial position or results of operations of the Company.

The Company adopted SFAS No. 144, “Impairment or Disposal of Long-Lived Assets” on March 1, 2002. This statement addresses accounting and reporting for the impairment or disposal of long-lived assets, including discontinued operations, and establishes a single accounting model for long-lived assets to be disposed of by sale. MSC has assessed the impairment requirements of SFAS No. 144 and believes that no adjustment is necessary as of February 28, 2003.

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

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability be recognized at fair value for costs associated with exit or disposal activities only when the liability is incurred as opposed to at the time the Company commits to an exit plan as permitted under EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 is to be applied prospectively for exit or disposal activities that are initiated after December 31, 2002. The Company will be required to comply with the provisions of this Statement for any future exit or disposal activities.

In November 2002, the FASB issued Interpretation No. 45 “Guarantees, Including Indirect Guarantees of Indebtedness to Others,” which expands previously issued accounting guidance and disclosure requirements for certain guarantees. Interpretation No. 45 requires the Company to recognize an initial liability for fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective immediately and have been considered for purposes of the Company’s footnote disclosures. The adoption of FASB Interpretation No. 45 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows and, therefore, no disclosure is required. The Company has evaluated the provisions of Interpretation No. 45, and has determined that no guarantees or indemnifications currently exist that must be disclosed according to the requirements of Interpretation No. 45.

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

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” Under this Interpretation, certain entities known as “Variable Interest Entities” (“VIE”) must be consolidated by the “primary beneficiary” of the entity. The primary beneficiary is generally defined as having the majority of the risks and rewards arising from the VIE. For VIEs in which a significant (but not majority) variable interest is held, certain disclosures are required. The Company is required to apply the requirements of FASB Interpretation No. 46 for its fiscal 2004 third quarter Form 10-Q filing. The

21

Company is presently assessing the impact of this FASB Interpretation, however, it is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Critical Accounting Policies

MSC’s significant accounting policies are presented within the Notes to the Consolidated Financial Statements (see Note 1 of the Notes to the Consolidated Financial Statements entitled “Summary of Significant Accounting Policies,” on pages 34-36) included elsewhere in this Form 10-K. While all of the significant accounting policies impact the Company’s Consolidated Financial Statements, some of the policies may be viewed to be critical. These policies are those that are both most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective or complex judgments and estimates. Management bases its judgments and estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. The results of judgments and estimates form the basis for making judgments about the Company’s value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.

Revenue Recognition. The Company recognizes revenue upon shipment of goods to customers, at which time title (MSC’s value added content in the case of toll processing) and risk of loss passed to the customer. The Company records shipping and handling billed to a customer in a sales transaction as revenue. Costs incurred for shipping and handling are recorded in cost of sales. Volume discounts due customers are recognized as earned and reported as reductions of revenue in the Consolidated Statements of Income (Loss). The Company’s revenue recognition policies comply with the criteria set forth in Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.”

Accounts Receivable Reserves. The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there were a sudden or unexpected deterioration of a major customer’s creditworthiness or if actual defaults were significantly higher than the Company’s historical experience, the allowance for doubtful accounts might not be adequate to absorb the impact.

Inventory Valuation Reserves. The Company provides reserves for slow moving inventory based upon the age of the inventory. The Company also provides reserves for inventory that is not in conformance with customer product specifications. In both cases, the reserve requirement is estimated based upon a review of specific inventory items.

Environmental Liabilities and Contingencies. The Company records environmental liabilities and contingent liabilities when the cost or range of possible costs can be reasonably estimated and the contingent event and/or environmental assessment are probable. Some of the factors on which the Company bases its estimates include information provided by feasibility studies, potentially responsible party negotiations and the development of remedial action plans.

Long-Lived Assets. Long-lived assets consist of property, plant and equipment and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based on projections of cash flows on a non-discounted basis. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. Fair value is determined based on market quotes, if available, or is based on valuation techniques, such as discounted cash flows. In addition, goodwill is tested for impairment by applying a fair-value based test on an annual basis.

Concentrations of Credit Risks. Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of temporary and short-term cash investments and trade receivables. The Company places its temporary cash investments with high credit, quality financial institutions and in investment grade securities with maturities 90 days or less. In fiscal 2003, the Company made investments in marketable securities. These marketable securities are available for sale and consist primarily of investments in U.S. agency and corporate notes. These investments are expected to be held less than twelve months and are classified as Marketable Securities in the Consolidated Balance Sheets. The Company records unrealized gains and losses on its investments in marketable securities to adjust the carrying value of these investments to fair value. Unrealized gains were $112 and unrealized losses were $28 as of February 28, 2003. Realized gains were $72 during fiscal 2003. The unrealized gains and losses are classified as a component of Accumulated Other Comprehensive Income (Loss) in Shareowners’ Equity. Approximately 41% of the Company’s receivables as of February 28, 2003 were with customers in the automotive industry. Approximately 4% of the Company’s

22

receivables as of February 28, 2003 were with U.S. steel mills. The Partnership had an additional $2,041 of receivables with U.S. steel mills as of February 28, 2003.

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

Cautionary Statement Concerning Forward-Looking Statements

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

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

• Impact of changes in the overall economy;

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

• Competitive factors;

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

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

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

• Acts of war, including the war in Iraq, or terrorism;

• Acceptance of Quiet Steel parts by the North American automotive market;

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

• Increases in the prices of raw and other material inputs used by the Company;

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

• The risk of the successful development, introduction and marketing of new products and technologies, including products based on the Touch Sensor Technology the Company has licensed from TST;

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

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

• Final realization of proceeds on the sale of Pinole Point Steel including receipt of the income tax refund;

• The risks associated with the termination of the joint venture partnership with Tekno in December 2003;

• The impact of future warranty expenses;

• Environmental risks, costs, recoveries and penalties associated with the Company’s past and present manufacturing operations, including any risks, costs and penalties arising out of an

23

enforcement action by the Illinois EPA and Attorney General related to the Company’s Elk Grove Village facility;

• Continuation of current interest rates and the potential impact on potential future early extinguishment of debt; and

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

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company operates internationally (Malaysia, Germany and Brazil), and thus is subject to potentially adverse movements in foreign currency rate changes. As of February 28, 2003, foreign sales were approximately 5% of consolidated net sales. Historically, the effect of movements in the exchange rates have not been material to the financial position or the results of operations of the Company. The Company believes that movement in foreign currency exchange rates will not have a material adverse affect on the financial position or results of operations of the Company.

The Company has entered into certain forward contracts that exceed the term of one year for other raw materials and resources such as zinc, gas and electricity.

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

	Expected Maturity Date (Fiscal Year)
(Dollars in Thousands)	2004		2005		2006		2007		2008		Thereafter		Total		Fair Value
Total Debt:
Fixed Rate:
Principal Amount	$	11,559	$	6,278	$	6,278	$	6,278	$	6,278	$	18,832	$	55,503	$	48,222
Average Interest Rate		6.8%		6.8%		6.8%		6.8%		6.8%		6.8%		6.8%
Variable Rate:
Principal Amount	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Average Interest Rate		N/A		N/A		N/A		N/A		N/A		N/A		N/A

24

Item 8. Financial Statements and Supplementary Data

Material Sciences Corporation

Index to Consolidated Financial Statements

Covered by Report of Independent Accountants

	Page No.
Independent Auditors’ Report	26
Report of Independent Public Accountants	28
Consolidated Statements of Income (Loss) for the years ended February 28, 2003, 2002 and 2001	29
Consolidated Balance Sheets as of February 28, 2003 and 2002	30
Consolidated Statements of Cash Flows for the years ended February 28, 2003, 2002 and 2001	31
Consolidated Statements of Changes in Shareowners’ Equity for the years ended February 28, 2003, 2002 and 2001	32
Consolidated Statements of Comprehensive Income (Loss) for the years ended February 28, 2003, 2002 and 2001	33
Notes to Consolidated Financial Statements	34

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

25

Independent Auditors’ Report

To the Board of Directors of Material Sciences Corporation

Elk Grove Village, Illinois

We have audited the accompanying consolidated balance sheet of Material Sciences Corporation and Subsidiaries (“the Company”) as of February 28, 2003, and the related statements of income, cash flows, shareowners’ equity and comprehensive income for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. The financial statements of the Company as of and for the years ending February 28, 2002 and 2001, prior to (i) the addition of the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), described in Note 1 to the financial statements and (ii) the adjustment necessary to conform the 2002 and 2001 segment disclosures to the 2003 composition of reportable segments, were audited by other auditors who have ceased operations.  Those auditors expressed an unqualified opinion on those financial statements in their report dated  April 29, 2002.

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

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

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

As discussed above, the financial statements of Material Sciences Corporation and Subsidiaries as of February 28, 2002 and 2001, and for the years then ended were audited by other auditors who have ceased operations. As described in Note 1, these financial statements have been revised to include the transitional disclosures required by SFAS No. 142, which was adopted by the Company as of March 1, 2002. Our audit procedures with respect to the disclosures in Note 1 related to 2002 and 2001 included (i) comparing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill, equity method goodwill, and intangible assets that are no longer being amortized, as a result of initially applying SFAS No. 142 (including any related tax effects) to the Company’s underlying records obtained from management, and (ii) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings per share amounts. In our opinion, the transitional disclosures for 2002 and 2001 in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2002 or 2001 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2002 or 2001 financial statements taken as a whole.

As discussed above, the financial statements of Material Sciences Corporation as of February 28, 2002 and 2001, and for the years then ended were audited by other auditors who have ceased operations. As described in Note 15, the company changed the composition of its reportable segments in 2003, and the amounts in the 2002 and 2001 financial statements relating to reportable segments have been restated to conform to the 2003 composition of reportable segments. We audited the adjustments that were applied to restate the disclosures for reportable segments reflected in the 2002 and 2001 financial statements. Our procedures included (i) comparing the adjusted amounts of segment revenues, operating income and assets to the Company’s underlying records obtained from management, and

26

(ii) testing the mathematical accuracy of the reconciliations of segment amounts to the consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2002 or 2001 financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2002 or 2001 financial statements taken as a whole.

/s/    DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Chicago, Illinois

April 16, 2003 except for Note 17, as to which the date is May 7, 2003

27

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

To the Board of Directors of Material Sciences Corporation:

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

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

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

Arthur Andersen LLP

Chicago, Illinois

April 29, 2002

28

Consolidated Statements of Income (Loss)

Material Sciences Corporation and Subsidiaries

	For the years ended February 28,
(In thousands, except per share data)	2003			2002			2001
Net Sales	$	266,818		$	250,506		$	273,860
Cost of Sales		219,243			205,275			219,853
Gross Profit	$	47,575		$	45,231		$	54,007
Selling, General and Administrative Expenses		40,476			42,333			41,897
Asset Impairments and Restructuring Expenses		855			9,811			—
Income (Loss) from Operations	$	6,244		$	(6,913	)	$	12,110
Other (Income) and Expense:
Interest (Income) Expense, Net	$	2,440		$	(1,126	)	$	826
Equity in Results of Joint Ventures		1,557			1,560			1,194
Other, Net		25			274			(325	)
Total Other Expense, Net	$	4,022		$	708		$	1,695
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes	$	2,222		$	(7,621	)	$	10,415
Provision (Benefit) for Income Taxes		173			(3,130	)		3,892
Income (Loss) from Continuing Operations	$	2,049		$	(4,491	)	$	6,523
Discontinued Operations:
Income from Discontinued Operation – Specialty Films (Net of Provision for Income Taxes of $0, $1,009, and $3,991, Respectively)		—			1,469			5,785
Loss from Discontinued Operation – Pinole Point Steel (Net of Benefit for Income Taxes of $0, $5,261, and $9,035, Respectively)		—			(7,561	)		(12,992	)
Gain (Loss) on Sale of Discontinued Operation – Specialty Films (Net of Benefit for Income Taxes of $70 and Provision for Income Taxes of $31,445 and $0, Respectively)		(101	)		38,787			—
Gain (Loss) on Discontinued Operation – Pinole Point Steel (Net of Provision for Income Taxes of $2,726, Benefit for Income Taxes of $37,047 and $0, Respectively)		1,934			(53,287	)		—
Extraordinary Loss on Early Retirement of Debt (Net of Benefit for Income Taxes of $1,546)		(2,388	)		—			—
Net Income (Loss)	$	1,494		$	(25,083	)	$	(684	)
Basic Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.15		$	(0.32	)	$	0.47
Income from Discontinued Operation – Specialty Films		—			0.10			0.41
Loss from Discontinued Operation – Pinole Point Steel		—			(0.54	)		(0.93	)
Gain (Loss) on Sale of Discontinued Operation – Specialty Films		(0.01	)		2.77			—
Gain (Loss) on Discontinued Operation – Pinole Point Steel		0.14			(3.80	)		—
Extraordinary Loss on Early Retirement of Debt		(0.17	)		—			—
Basic Net Income (Loss) Per Share	$	0.11		$	(1.79	)	$	(0.05	)
Diluted Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.14		$	(0.32	)	$	0.46
Income from Discontinued Operation – Specialty Films		—			0.10			0.41
Loss from Discontinued Operation – Pinole Point Steel		—			(0.54	)		(0.92	)
Gain (Loss) on Sale of Discontinued Operation – Specialty Films		(0.01	)		2.77			—
Gain (Loss) on Discontinued Operation – Pinole Point Steel		0.15			(3.80	)		—
Extraordinary Loss on Early Retirement of Debt		(0.17	)		—			—
Diluted Net Income (Loss) Per Share	$	0.11		$	(1.79	)	$	(0.05	)
Weighted Average Number of Common Shares Outstanding Used for Basic Net Income (Loss) Per Share		13,941			14,007			14,027
Dilutive Shares		285			—			114
Weighted Average Number of Common Shares Outstanding Plus Dilutive Shares		14,226			14,007			14,141
Outstanding Common Stock Options Having No Dilutive Effect		633			912			1,560

The accompanying notes are an integral part of these statements.

29

Consolidated Balance Sheets

Material Sciences Corporation and Subsidiaries

	February 28,
(In thousands, except share data)	2003			2002
Assets
Current Assets:
Cash and Cash Equivalents	$	43,880		$	33,806
Restricted Cash		2,280			5,315
Total Cash, Cash Equivalents and Restricted Cash	$	46,160		$	39,121
Marketable Securities		1,002			13,121
Receivables, Less Reserves of $4,874 in 2003 and $4,754 in 2002		27,607			27,249
Income Taxes Receivable		2,339			4,325
Prepaid Expenses		1,792			1,431
Inventories:
Raw Materials		10,540			10,211
Finished Goods		15,832			14,645
Deferred Income Taxes		1,461			2,451
Asset Held for Sale		506			—
Current Assets of Discontinued Operation, Net – Pinole Point Steel		16,035			65,104
Total Current Assets	$	123,274		$	177,658
Property, Plant and Equipment:
Land and Building	$	59,975		$	58,960
Machinery and Equipment		171,576			167,284
Capital Leases		17,195			17,195
Construction in Progress		2,497			1,270
	$	251,243		$	244,709
Accumulated Depreciation and Amortization		(158,055	)		(141,794	)
Net Property, Plant and Equipment	$	93,188		$	102,915
Other Assets:
Investment in Joint Ventures	$	12,881		$	11,033
Goodwill		7,116			5,956
Other		1,350			1,912
Total Other Assets	$	21,347		$	18,901
Total Assets	$	237,809		$	299,474
Liabilities
Current Liabilities:
Current Portion of Long-Term Debt	$	11,559		$	14,045
Accounts Payable		22,944			23,518
Accrued Payroll Related Expenses		13,705			10,338
Accrued Expenses		6,668			10,911
Accrued Future Operating Losses – Pinole Point Steel		—			3,383
Total Current Liabilities	$	54,876		$	62,195
Long-Term Liabilities:
Deferred Income Taxes	$	5,699		$	7,053
Long-Term Debt, Less Current Portion		43,944			91,217
Other		11,403			10,385
Total Long-Term Liabilities	$	61,046		$	108,655
Shareowners' Equity
Preferred Stock, $1.00 Par Value; 10,000,000 Shares Authorized; 1,000,000 Designated Series B Junior Participating Preferred; None Issued	$	—		$	—
Common Stock, $.02 Par Value; 40,000,000 Shares Authorized; 18,221,830 Shares Issued and 14,033,182 Shares Outstanding as of February 28, 2003 and 18,115,624 Shares Issued and 14,731,188 Shares Outstanding as of February 28, 2002		365			363
Additional Paid-In Capital		70,143			67,441
Treasury Stock at Cost, 4,188,648 Shares as of February 28, 2003 and 3,384,436 Shares as of February 28, 2002		(46,528	)		(34,813	)
Retained Earnings		97,296			95,802
Accumulated Other Comprehensive Income (Loss)		611			(169	)
Total Shareowners' Equity	$	121,887		$	128,624
Total Liabilities and Shareowners' Equity	$	237,809		$	299,474

The accompanying notes are an integral part of these statements.

30

Consolidated Statements of Cash Flows

Material Sciences Corporation and Subsidiaries

	For the years ended February 28,
(In thousands)	2003			2002			2001
Cash Flows From:
Operating Activities:
Net Income (Loss)	$	1,494		$	(25,083	)	$	(684	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by
(Used in) Operating Activities:
Discontinued Operation, Net – Specialty Films		—			(2,597	)		(1,978	)
Discontinued Operation, Net – Pinole Point Steel		16,637			1,096			7,014
(Gain) Loss on Sale of Discontinued Operation – Specialty Films		101			(38,787	)		—
(Gain) Loss on Discontinued Operation – Pinole Point Steel		(1,934	)		53,287			—
Depreciation and Amortization		16,397			17,826			17,064
Asset Impairments		—			8,361			—
Provision (Benefit) for Deferred Income Taxes		76			779			(2,928	)
Compensatory Effect of Stock Plans		1,460			2,753			2,794
Other, Net		1,789			1,984			1,100
Changes in Assets and Liabilities:
Receivables		(358	)		2,258			1,512
Income Taxes Receivable		1,986			(2,688	)		(1,637	)
Prepaid Expenses		(462	)		810			(356	)
Inventories		(1,516	)		271			(913	)
Accounts Payable		(574	)		(4,369	)		(3,105	)
Accrued Expenses		(891	)		(9,366	)		(3,629	)
Income Taxes Payable		—			(31,445	)		—
Other, Net		(583	)		(600	)		(1,804	)
Net Cash Provided by (Used in) Operating Activities	$	33,622		$	(25,510	)	$	12,450
Investing Activities:
Discontinued Operation, Net – Specialty Films	$	—		$	(6,508	)	$	(2,049	)
Discontinued Operation, Net – Pinole Point Steel		(176	)		(1,583	)		(1,901	)
Cash Received from Sale of Specialty Films, Net		—			121,982			—
Cash Received from Sale of Pinole Point Steel, Net		31,174			—			—
Capital Expenditures		(6,259	)		(5,289	)		(9,710	)
Acquisitions, Net of Cash Acquired		—			(634	)		—
Investment in Joint Ventures		(3,405	)		(893	)		(3,489	)
Distribution from Joint Ventures		—			—			169
Purchases of Marketable Securities		(8,003	)		(30,701	)		—
Proceeds from Sale of Marketable Securities		20,199			17,423			—
Other		117			(451	)		(448	)
Net Cash Provided by (Used in) Investing Activities	$	33,647		$	93,346		$	(17,428	)
Financing Activities:
Discontinued Operation, Net – Specialty Films	$	—		$	(294	)	$	(2,189	)
Proceeds Under Lines of Credit		—			65,800			129,800
Payments Under Lines of Credit		—			(90,300	)		(112,500	)
Payments of Debt		(49,759	)		(7,703	)		(502	)
Cash from Cancellation (Issuance) of Letters of Credit		3,035			(5,315	)		—
Purchase of Treasury Stock		(11,715	)		—			(12,739	)
Issuance of Common Stock		1,244			1,363			1,383
Net Cash Provided by (Used in) Financing Activities	$	(57,195	)	$	(36,449	)	$	3,253
Net Increase (Decrease) in Cash	$	10,074		$	31,387		$	(1,725	)
Cash and Cash Equivalents at Beginning of Year		33,806			2,419			4,144
Cash and Cash Equivalents at End of Year	$	43,880		$	33,806		$	2,419
Supplemental Cash Flow Disclosures:
Interest Paid	$	7,898		$	8,650		$	9,931
Income Taxes Paid		2,364			17,682			3,997
Non-Cash Investing and Financing Activities:
Accrued Future Operating Losses – Pinole Point Steel	$	—		$	3,383		$	—
Accrued Expenses Related to Pinole Point Steel Disposition		—			2,121			—

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

The accompanying notes are an integral part of these statements.

31

Consolidated Statements of Changes in Shareowners' Equity

Material Sciences Corporation and Subsidiaries

	Common Stock				Additional Paid-In Capital					Treasury Stock
(In thousands, except share data)	Shares		Amount				Retained Earnings			Shares		Amount
Balance as of February 29, 2000	17,343,858		$	347	$	59,164	$	121,545		(2,157,548	)	$	(22,074	)
Net Loss	—			—		—		(684	)	—			—
Issuance of Common Stock	141,428			3		1,301		—		—			—
Purchase of Treasury Stock	—			—		—		—		(1,226,888	)		(12,739	)
Compensatory Effect of Stock Plans	191,698			4		2,828		—		—			—
Tax Benefit from Exercise of Stock Options	—			—		41		—		—			—
Balance as of February 28, 2001	17,676,984		$	354	$	63,334	$	120,861		(3,384,436	)	$	(34,813	)
Net Loss	—			—		—		(25,083	)	—			—
Issuance of Common Stock	166,198			3		1,293		—		—			—
Compensatory Effect of Stock Plans	272,442			6		2,741		—		—			—
Tax Benefit from Exercise of Stock Options	—			—		73		—		—			—
Conformity of Fiscal Years for Joint Venture	—			—		—		24		—			—
Balance as of February 28, 2002	18,115,624		$	363	$	67,441	$	95,802		(3,384,436	)	$	(34,813	)
Net Income	—			—		—		1,494		—			—
Issuance of Common Stock	126,238			2		1,113		—		—			—
Purchase of Treasury Stock	—			—		—		—		(804,212	)		(11,715	)
Compensatory Effect of Stock Plans	(20,032	)		—		1,442		—		—			—
Tax Benefit from Exercise of Stock Options	—			—		147		—		—			—
Balance as of February 28, 2003	18,221,830		$	365	$	70,143	$	97,296		(4,188,648	)	$	(46,528	)

The accompanying notes are an integral part of these statements.

32

Consolidated Statements of Comprehensive Income (Loss)

Material Sciences Corporation and Subsidiaries

	For the years ended February 28,
(In thousands)	2003			2002			2001
Net Income (Loss)	$	1,494		$	(25,083	)	$	(684	)
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments		1,408			(85	)		—
Minimum Pension Liability, Net of Benefit for Income Taxes of $440		(712	)		—			—
Unrealized Gain (Loss) on Marketable Securities		84			(84	)		—
Comprehensive Income (Loss)	$	2,274		$	(25,252	)	$	(684	)

The accompanying notes are an integral part of these statements.

33

Notes to Consolidated Financial Statements

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

For the three years ended February 28, 2003

Note 1: Summary of Significant Accounting Policies

Nature of Operations

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

Summary of Significant Accounting Policies

The significant accounting policies of MSC, as summarized below, conform with generally accepted accounting principles. Certain prior-year amounts have been reclassified to conform to the fiscal 2003 presentation.

The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and the disclosures in the financial statements. Actual results could differ from those estimates. Significant estimates include amounts for inventory and receivable exposures, customer claims, asset valuations, income taxes and contingencies.

Principles of Consolidation

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

Inventories

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

Long-Lived Assets

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

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

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

34

Fair value is determined based on market quotes, if available, or is based on valuation techniques, such as discounted cash flows.

Revenue Recognition

The Company recognizes revenue upon shipment of goods to customers, at which time title (MSC’s value added content in the case of toll processing) and risk of loss passed to the customer. The Company records shipping and handling billed to a customer in a sales transaction as revenue. Costs incurred for shipping and handling are recorded in cost of sales. Volume discounts due customers are recognized as earned and reported as reductions of revenue in the Consolidated Statements of Income (Loss). The Company’s revenue recognition policies comply with the criteria set forth in Staff Accounting Bulletin  No. 101, “Revenue Recognition in Financial Statements.”

Research and Development

The Company expenses all research and development costs in the period incurred. Research and development expenses were $3,919 in fiscal 2003, $6,121 in fiscal 2002 and $6,279 in fiscal 2001 and are included in the Selling, General and Administrative Expenses on the Consolidated Statements of Income (Loss).

Concentrations of Credit Risks

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of temporary and short-term cash investments and trade receivables.

The Company places its temporary cash investments with high credit, quality financial institutions and in investment grade securities with maturities 90 days or less. In fiscal 2003, the Company made investments in marketable securities. These marketable securities are available for sale and consist primarily of investments in U.S. agency and corporate notes. These investments are expected to be held less than twelve months and are classified as Marketable Securities in the Consolidated Balance Sheets. The Company records unrealized gains and losses on its investments in marketable securities to adjust the carrying value of these investments to fair value. Unrealized gains were $112 and unrealized losses were $28 as of February 28, 2003. Realized gains were $72 during fiscal 2003. The unrealized gains and losses are classified as a component of Accumulated Other Comprehensive Income (Loss) in Shareowners’ Equity. The Company reviews the collectability of accounts receivable on a regular basis, taking into account customer liquidity, payment history and industry condition. Approximately 41% of the Company’s receivables as of February 28, 2003 were with customers in the automotive industry. Approximately 4% of the Company’s receivables as of February 28, 2003 were with U.S. steel mills. The Partnership has an additional $2,041 of receivables with U.S. steel mills as of February 28, 2003.

Foreign Currency

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

Goodwill

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting. With the adoption of SFAS No. 142 on March 1, 2002, goodwill will no longer be subject to amortization over its estimated useful life. Goodwill will be subject to at least an annual assessment of impairment by applying a fair-value based test, beginning on the date of adoption of the new accounting standard. The Company completed its initial assessment as of August 31, 2002 as required under the impairment requirements of SFAS No. 142 and no impairment was deemed necessary. The Company also completed the required annual impairment assessment as of February 28, 2003 and no impairment was deemed necessary. Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over a period of 20 years.

35

All goodwill relates to the EMS segment. Apart from goodwill, the Company has no other material, identified intangible assets resulting from acquisitions recorded on the Consolidated Balance Sheets. Changes in the carrying amount of goodwill for the year ended February 28, 2003 are shown below.

Goodwill, Net as of February 28, 2002	$	5,956
Foreign Exchange		1,160
Goodwill, Net as of February 28, 2003	$	7,116

For comparison purposes, the following table presents the prior year amounts adjusted to exclude amortization expense related to goodwill that is no longer being amortized.

	2003		2002			2001
Net Income (Loss):
As Reported	$	1,494	$	(25,083	)	$	(684	)
Goodwill Amortization, Net of Tax		—		73			68
Adjusted Net Income (Loss)	$	1,494	$	(25,010	)	$	(616	)
Basic Net Income (Loss) Per Share:
As Reported	$	0.11	$	(1.79	)	$	(0.05	)
Goodwill Amortization, Net of Tax		—		.01			.01
Adjusted Net Income (Loss) Per Share	$	0.11	$	(1.78	)	$	(0.04	)
Diluted Net Income (Loss) Per Share:
As Reported	$	0.11	$	(1.79	)	$	(0.05	)
Goodwill Amortization, Net of Tax		—		.01			.01
Adjusted Net Income (Loss) Per Share	$	0.11	$	(1.78	)	$	(0.04	)

Recent Accounting Pronouncements

The Company adopted SFAS No. 144, “Impairment or Disposal of Long-Lived Assets” on March 1, 2002. This statement addresses accounting and reporting for the impairment or disposal of long-lived assets, including discontinued operations, and establishes a single accounting model for long-lived assets to be disposed of by sale. MSC has assessed the impairment requirements of SFAS No. 144 and believes that no adjustment is necessary as of February 28, 2003.

In November 2002, the FASB issued Interpretation No. 45 “Guarantees, Including Indirect Guarantees of Indebtedness to Others,” which expands previously issued accounting guidance and disclosure requirements for certain guarantees. Interpretation No. 45 requires the Company to recognize an initial liability for fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective immediately and have been considered for purposes of the Company’s footnote disclosures. The adoption of FASB Interpretation  No. 45 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows and, therefore, no disclosure is required. The Company has evaluated the provisions of Interpretation No. 45, and has determined that no guarantees or indemnifications currently exist that must be disclosed according to the requirements of Interpretation No. 45.

Note 2: Acquisitions

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

36

Note 3: Joint Venture and Partnership

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

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

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

On December 15, 2001, a major fire destroyed an electrogalvanizing facility owned by the Double Eagle Steel Coating Company (“DESCO”), a joint venture between U.S. Steel Corporation and Rouge Steel Company. The Partnership serviced both U.S. Steel Corporation and Rouge Steel Company, in addition to BSC, ISPAT Inland Inc. and other customers with EG and other services in fiscal 2002 and 2003. The DESCO facility resumed production in September 2002, and the Company does not expect to continue to supply U.S. Steel Corporation’s and Rouge Steel Company’s long-term requirements. For fiscal 2003, sales of EG steel to U.S. Steel Corporation and Rouge Steel Company were $7,375 ($4,235 through the Partnership and $3,140 direct from the Company) and they utilized 8% of the Partnership’s available line time.

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

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

Summarized financial information for the Partnership is presented below.

	2003			2002			2001
Income Statement Information
Net Sales	$	52,438		$	51,714		$	53,918
Loss from Operations		(2,564	)		(3,146	)		(2,392	)
Net Loss		(2,468	)		(3,101	)		(2,376	)
	2003			2002			2001
Balance Sheet Information
Current Assets	$	6,552		$	7,949		$	6,880
Total Assets		17,483			20,632			22,012
Total Liabilities		609			1,627			349
Partners’ Capital		16,874			19,005			21,663

The orders for the Partnership’s toll coating services were primarily and independently generated by BSC and MSC for their respective customers. The Partnership’s Net Sales include amounts billed to BSC, MSC and customers other than BSC. Sales to BSC through the Partnership were $37,379 in fiscal 2003.

37

Third Party sales (Partnership sales to parties other than BSC and MSC) were $6,080 from March 1, 2002 to May 13, 2002. Subsequent to May 13, 2002, MSC sold EG services directly to its customers. The Partnership’s pricing of services to BSC and MSC was contractually based. The Partnership’s costs include fees paid to MSC for operating the facility, depreciation expense of the equipment (owned by the Partnership) and certain administrative expenses. The Loss from Operations was primarily related to the annual depreciation expense that is not included in the contractual pricing to the partners.

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

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

Under the equity method, MSC includes its portion of the Partnership’s and Tekno’s results of operations in the Consolidated Statements of Income (Loss) under Equity in Results of Joint Ventures. The Equity in Results of Joint Ventures was a net loss of $1,557 in fiscal 2003, $1,560 in fiscal 2002 and $1,194 in fiscal 2001.

Note 4: Contingencies

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

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

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

MSC believes its range of exposure for all known sites, based on allocations of liability among PRPs and the most recent estimate of remedial work, is $1,100 to $1,800. The Company’s environmental reserves were approximately $1,300 as of February 28, 2003.

On February 27, 2002, the Company received a notice of alleged violations of environmental laws, regulations or permits from the Illinois EPA related to volatile organic matter (“VOM”) air emissions and other permitting issues at its Elk Grove Village facility. The Company has filed a response and performed

38

stack testing for one of its production lines (“Tested Line”) under the supervision of the Illinois EPA. Those recent stack test results, when considered with stack test results from the facility’s other production lines taken in the past, indicate the Company’s Elk Grove Village facility is in compliance with the overall VOM emission limitations in its Clean Air Act permit. However, the Company’s VOM coating application volume on its Tested Line is in excess of the permit limit. To address that issue, the Company has filed a permit modification request to reflect the current VOM application rates on the facility’s production lines, which the Illinois EPA recently granted. The Illinois EPA has indicated that resolution of the matters alleged in the February 27, 2002 Notice of Violation may require referral to the office of the Illinois Attorney General for potential enforcement action, which could lead to the imposition of penalties on the Company.

The Company believes that the ultimate outcome of its environmental legal proceedings will not have a material adverse effect on the Company’s financial condition or results of operations, given the reserves recorded as of February 28, 2003 and, where applicable, taking into account contributions from other PRPs. However, there can be no assurance that the Company’s environmental legal proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s financial condition or results of operations due to a number of uncertainties, including without limitation, the costs of site cleanup, the discretionary authority of the Illinois Attorney General in bringing enforcement actions and other factors.

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

On May 26, 2000, a settlement agreement was executed regarding a class action lawsuit related to accounting irregularities announced in April 1997. The plaintiff claimed that the Company and certain of its current and former officers violated the federal securities laws and were aware of, or recklessly disregarded, material misstatements that were made in MSC’s publicly filed financial reports. The Court entered an order preliminarily approving the agreement on May 31, 2000 and ordered that the class be advised of the proposed settlement. On August 1, 2000, the class members were afforded the opportunity to present any objections at a fairness hearing, at which time the settlement was approved with no objections, and the case was dismissed. The costs of the settlement and related legal fees were covered under the Company’s insurance policies, net of retention (expensed in fiscal 1998).

Note 5: Indebtedness

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

	2003		2002
Long-Term Debt Obligations
Borrowings Under Lines of Credit	$	—	$	—
1998 Senior Notes		55,222		61,500
1997 Senior Notes		—		42,857
Obligations Under Capital Lease (Note 6)		281		905
	$	55,503	$	105,262
Less Current Portion		11,559		14,045
Long-Term Debt	$	43,944	$	91,217

Projected Principal Payments of Long-Term Debt
2004	$	11,559
2005		6,278
2006		6,278
2007		6,278
2008		6,278
2009 and Thereafter		18,832
Total	$	55,503

39

The Company entered into a $20,000 committed line of credit on October 11, 2001. The agreement expires on October 11, 2004. No borrowings were outstanding under the line as of February 28, 2003. There were $2,280 in outstanding letters of credit as of February 28, 2003. A fee of .25% is charged for the unused portion of the line. At the Company’s option, interest is at the bank’s reference rate (4.25% as of February 28, 2003) or at LIBOR plus a margin (.75% as long as the Company’s letters of credit continue to be cash collateralized). The financial covenants include a fixed charge coverage ratio of not less than 1.0 to 1.0 commencing February 28, 2002; a liquidity ratio of not less than 1.5 to 1.0 commencing November 30, 2001; a maximum leverage ratio (3.0 to 1.0 from February 28, 2003 to November 30, 2003, and 2.5 to 1.0 thereafter); and minimum net worth of $140,000 plus 50% of cumulative consolidated net income accruing for fiscal years ending after November 30, 2001, and only for such periods that the Company’s balance sheet leverage exceeds 2.0 to 1.0. However, compliance with the financial covenants is not required at times when the Company has no outstanding borrowings and has cash collateralized its obligations under the line of credit. As of February 28, 2003, there are no outstanding borrowings and the outstanding letters of credit have been cash collateralized. A total of $2,280 was classified as Restricted Cash in the Consolidated Balance Sheets. Other than the aforementioned restricted cash balance, there are no other restrictions on the Company’s use of its cash and cash equivalents at times when no borrowings are outstanding under the facility. The line of credit is secured by accounts receivable of the Company. In January 2003, a $200 letter of credit was issued. In April 2002, one of the letters of credit for $3,235 was canceled and the related cash collateral was released to the Company.

On February 27, 1998, MSC authorized the issuance and sale of $61,500 Senior Notes (“1998 Senior Notes”) in two series. The interest rate on the Series A Note ($5,000) is 6.49%, and the Note matures on May 31, 2003. The interest rate on the Series B Notes ($56,500) is 6.80%, and the Notes mature on May 31, 2010. The 1998 Senior Notes were issued and funded on February 27, 1998. On May 31, 2002, the Company made a principal payment of $6,278 against the 1998 Senior Notes. The estimated fair value of the 1998 Senior Notes, based on discounted cash flows, was less than the carrying value by $7,281 as of February 28, 2003.

On February 15, 1997, the Company authorized the issuance and sale of $50,000 Senior Notes (“1997 Senior Notes”). As of February 28, 1997, $30,000 of the 1997 Senior Notes was issued and funded. The remaining $20,000 was issued and funded on May 5, 1997. The interest rate on the 1997 Senior Notes was 7.05%. On May 31, 2001, the Company made a principal payment of $7,143 against the 1997 Senior Notes. On May 31, 2002, the Company made a principal payment of $7,143 against the 1997 Senior Notes. On July 31, 2002, the Company made a debt payment of $39,852 to the holders of the 1997 Senior Notes. The debt payment consisted of principal of $35,714, interest of $420 and a contractual prepayment penalty of $3,718 (pretax basis). The extraordinary loss on early retirement of debt, net of income taxes, includes the prepayment penalty of $2,257 and a $131 write-off of debt issuance costs. With the adoption of SFAS No. 145 on March 1, 2003, the extraordinary loss on early retirement of debt will no longer be classified as an extraordinary item and will be reflected as a component of income from continuing operations in the Consolidated Statements of Income (Loss).

Interest payments for the 1998 Senior Notes are due semi-annually on May 31 and November 30 of each year. The 1998 Senior Note agreements require the Company to adhere to certain covenants. The most significant of these covenants include maintenance of consolidated cumulative adjusted net worth of $118,341. This covenant may limit the Company’s ability to repurchase its common stock and pay dividends from time to time. As of February 28, 2003, the Company’s consolidated cumulative adjusted net worth was $121,887. Other covenants include consolidated senior debt ratio (maximum of 55.0% until agreement expiration), and total indebtedness ratio (maximum of 60.0% until agreement expiration). MSC was in compliance with the financial covenants related to the 1998 Senior Notes for the period ended February 28, 2003.

Note 6: Leases

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

40

The Walbridge, Ohio facility lease contains certain covenants with which the Company was in compliance. MSC subleased its interest in this facility to the Partnership.

Some leases also contain escalation provisions based upon specified inflation indices. The table below presents future minimum lease payments.

	Capital Lease		Operating Leases
Minimum Lease Payments
2004	$	281	$	2,035
2005		—		1,686
2006		—		1,499
2007		—		1,075
2008		—		1,078
2009 and Thereafter		—		381
Total Minimum Lease Payments	$	281	$	7,754
Amount Representing Interest		—
Present Value of Minimum Lease Payments	$	281

Amortization of leased property was $812 in fiscal 2003, $809 in fiscal 2002 and $813 in fiscal 2001. Total rental expense under operating leases was $2,911 in fiscal 2003, $2,431 in fiscal 2002 and $3,784 in fiscal 2001.

Note 7: Retirement Plans

MSC has non-contributory defined benefit and defined contribution pension plans that cover a majority of its employees. The Company funds amounts required to meet ERISA funding requirements for the defined benefit plans. The Company makes an annual contribution to the defined contribution plan for the amount earned by participating employees after the end of each calendar year. The cost of this plan was $1,704 in fiscal 2003, $1,691 in fiscal 2002 and $1,771 in fiscal 2001. In addition to the benefits previously described, some MSC officers participate in a non-contributory supplemental pension plan.

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

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

	Pension Benefits						Postretirement Benefits
	2003			2002			2003			2002
Change in Benefit Obligation:
Obligation, March 1	$	9,689		$	9,390		$	2,512		$	2,273
Service Cost Benefits Earned During the Period		297			275			124			145
Interest Cost on Benefit Obligation		672			653			143			172
Plan Amendments		98			—
Actuarial (Gain) Loss		761			(11	)		(246	)		82
Benefit Payments		(465	)		(461	)		(134	)		1
Curtailments		—			(157	)		—			(161	)
Obligation, February 28	$	11,052		$	9,689		$	2,399		$	2,512
Change in Plan Assets:
Plan Assets at Fair Value March 1	$	5,006		$	5,318		$	66		$	59
Actual Return of Plan Assets		(219	)		(233	)		(2	)		7
Company Contributions		452			382			134			(1	)
Benefit Payments		(465	)		(461	)		(134	)		1
Plan Assets at Fair Value, February 28	$	4,774		$	5,006		$	64		$	66
Funded Status:
Funded Status	$	(6,277	)	$	(4,683	)	$	(2,335	)	$	(2,446	)
Unrecognized Transition Obligation		9			11			—			—
Unrecognized Prior Service Cost		591			585			(741	)		(810	)
Unrecognized (Gain) Loss		1,187			(193	)		(580	)		(394	)
Net Amount Recognized	$	(4,490	)	$	(4,280	)	$	(3,656	)	$	(3,650	)

41

	Pension Benefits									Postretirement Benefits
	2003			2002			2001			2003			2002			2001
Components of Net Periodic Benefit Cost:
Service Cost Benefits Earned During the Period	$	297		$	275		$	272		$	124		$	145		$	140
Interest Cost on Benefit Obligation		672			653			648			143			172			154
Expected Return on Assets		(400	)		(419	)		(377	)		(5	)		(4	)		(4	)
Amortization of Transition Obligation		2			3			3			—			—			—
Amortization of Prior Service Cost		92			85			85			(69	)		(69	)		(69	)
Amortization of Net Gain		—			(21	)		(58	)		(53	)		(30	)		(24	)
Net Periodic Benefit Cost	$	663		$	576		$	573		$	140		$	214		$	197

	Pension Benefits						Postretirement Benefits
	2003			2002			2003			2002
Amounts Recognized in the Consolidated Balance Sheets:
Prepaid Benefit Cost	$	626		$	545		$	—		$	—
Accrued Benefit Liability		(6,622	)		(4,825	)		(3,656	)		(3,650	)
Intangible Asset		354			—			—			—
Accumulated Other Comprehensive Loss		1,152			—			—			—
Net Amount Recognized	$	(4,490	)	$	(4,280	)	$	(3,656	)	$	(3,650	)

	2003	2002	2001
Assumptions Used in Determining the Plans' Funded Status:
Discount Rate	6.33%	7.00%	7.50%
Expected Long-Term Rate of Return on Assets	8.40%	8.00%	8.00%
Rate of Increase in Compensation Levels	3.00%	6.00%	6.00%

The Company recognizes a minimum pension liability when the accumulated benefit obligation for a plan exceeds the fair value of the respective plan’s assets, in accordance with SFAS No. 87, “Employers’ Accounting for Pensions.” In fiscal 2003, the Company recorded a minimum pension liability adjustment in Accumulated Other Comprehensive Income (Loss) of $712, net of benefit for income taxes of $440, due to adverse conditions in the equity markets and lower interest rates.

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

A 1% increase in assumed health care cost trend rates will raise the total of the service and interest cost components of net periodic postretirement benefit cost by $65 and the health care component of the accumulated postretirement benefit obligation by $416 as of February 28, 2003. A 1% decrease in assumed health care cost trend rates will lower the total of the service and interest cost components of net periodic postretirement benefit cost by $49 and the health care component of the accumulated postretirement benefit obligation by $328 as of February 28, 2003.

Note 8: Interest (Income) Expense, Net

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

	2003			2002			2001
Interest (Income) Expense, Net
Interest Expense	$	5,173		$	8,322		$	9,818
Interest Income		(936	)		(1,348	)		(148	)
Interest Expense Allocated to Pinole Point Steel		(1,797	)		(8,100	)		(8,844	)
Interest (Income) Expense, Net	$	2,440		$	(1,126	)	$	826

The table above excludes interest expense of $62, $127 and $185 for fiscal years 2003, 2002 and 2001, respectively, related to the Walbridge, Ohio facility. This facility was subleased to the Partnership. The interest expense and amortization relating to this lease was reduced by sublease income received

42

from the Partnership, and the net result was included in Other, Net, shown in the Consolidated Statements of Income (Loss). The loss from discontinued operation, net of income taxes of Pinole Point Steel, includes an allocation of consolidated interest expense as noted in the table above. The allocations were based on the debt associated with the original purchase of Pinole Point Steel in December 1997 and Pinole Point Steel’s subsequent cash flow.

Note 9: Income Taxes

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

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

	2003			2002			2001
Tax Provision (Benefit)
Current:
Federal	$	261		$	(4,251	)	$	6,206
State		(164	)		342			845
	$	97		$	(3,909	)	$	7,051
Deferred:
Federal	$	(183	)	$	1,451		$	(2,799	)
State		259			(672	)		(360	)
	$	76		$	779		$	(3,159	)
Tax Provision (Benefit)	$	173		$	(3,130	)	$	3,892
Tax Rate Reconciliation
Federal Statutory Rate		35.0	%		35.0	%		35.0	%
State and Local Taxes, Net of Federal Tax Benefit		4.3			4.3			6.1
Extraterritorial Income Exclusion/Foreign Sales Corp.		(3.3	)		5.4			(2.1	)
State Tax Credits		—			—			(1.5	)
Reserve Adjustment		(30.3	)		—			—
Other, Net		2.1			(3.6	)		(0.1	)
Effective Income Tax Rate		7.8	%		41.1	%		37.4	%

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

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

	2003			2002
Property and Equipment	$	11,003		$	13,050
Reserves Not Deductible Until Paid		(2,699	)		(2,574	)
Employee Benefit Liabilities		(5,286	)		(5,669	)
Deferred State Income Taxes, Net		145			(114	)
Tax Credit Carryforwards		—			(1,095	)
Other		1,075			1,004
Deferred Tax Liabilities, Net	$	4,238		$	4,602

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

	2003			2002
Long-Term Liabilities – Deferred Income Taxes	$	5,699		$	7,053
Current Assets – Deferred Income Taxes		(1,461	)		(2,451	)
Deferred Tax Liabilities, Net	$	4,238		$	4,602

43

Note 10: Significant Customers and Export Sales

Net sales to the Partnership represented 20%, 21% and 20% of MSC’s net sales in fiscal 2003, 2002 and 2001, respectively. Export sales represented 8% of the Company’s net sales in fiscal 2003, 15% in fiscal 2002 and 11% in fiscal 2001.

Note 11: Equity and Compensation Plans

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

	2003			2002			2001
Net Income (Loss):
As Reported	$	1,494		$	(25,083	)	$	(684	)
Stock Based Employee Compensation Expense		(861	)		(116	)		(311	)
Pro Forma	$	633		$	(25,199	)	$	(995	)
Basic Net Income (Loss) Per Share:
As Reported	$	0.11		$	(1.79	)	$	(0.05	)
Pro Forma	$	0.05		$	(1.80	)	$	(0.07	)
Diluted Net Income (Loss) Per Share:
As Reported	$	0.11		$	(1.79	)	$	(0.05	)
Pro Forma	$	0.04		$	(1.80	)	$	(0.07	)

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

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

Under the 1992 Plan, restricted stock and cash awards generally vest over three to five years from the date of grant. Certain of these awards require a cash contribution from the employee. Shares of restricted stock are awarded in the name of the employee, who has all the rights of a shareowner, subject to certain restrictions or forfeitures. Restricted stock and cash awards have been issued with restrictions based upon time, stock price performance or a combination thereof. The market value of the restricted stock at the date of grant is amortized to compensation expense over the period in which the shares vest (time based awards). In the event of accelerated vesting due to the achievement of market value appreciation as defined by the plan, the recognition of the unamortized expense would be accelerated. For awards based on both time and performance (performance based awards), the Company determines the compensation cost to be recorded on the date the performance levels are achieved. On that date, compensation expense representing a pro rata portion of the total cost is recognized. The remaining compensation expense is recorded ratably over the remaining vesting period. If the specified stock performance levels are not achieved by the end of the five-year period from the date of grant, the employee contribution, elected restricted stock and the cash award are forfeited.

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

44

There are 250,000 shares authorized under the 1996 Directors Plan. This plan consisted of grants that provided for 50% of each non-employee director’s annual retainer (“Retainer Options”) and annual incentive stock options (“Incentive Options”). The Retainer Options vested on the date of grant and expire five years after that date. The Incentive Options vest one year from the date of grant and expire five years after the date of grant. No further shares will be issued under this plan, and 90,264 shares were outstanding as of February 28, 2003. The 1996 Directors Plan was replaced with the 2001 Directors Plan that was approved by the shareowners in June 2000 and was effective March 1, 2001.

There are 150,000 shares authorized under the 2001 Directors Plan. This plan consists of grants that provide for all or a portion of each non-employee director’s annual retainer, according to the non-employee director’s election to receive the annual retainer either in cash, shares of common stock, deferred stock units (entitles the non-employee director to receive shares at a later date), or a combination thereof. The shares and deferred stock units vest in four equal installments on the date of grant and the three, six and nine-month anniversaries of the date of grant. Any portion which has not vested prior to the date the non-employee director ceases to be a non-employee director shall expire and be forfeited. The 2001 Directors Plan also consists of grants to provide for annual incentive stock options (“Incentive Options”). The Incentive Options vest one year from the date of grant and expire ten years after the date of grant. As of February 28, 2003, 72,999 shares were outstanding under the 2001 Directors Plan.

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

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

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

	Options Outstanding						Exercisable Options
	Directors		Key Employees		Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
Stock Option Activity
Outstanding as of February 29, 2000	279,518		1,319,336		$	13.74	1,342,439	$	13.55
Granted	52,542		15,300			11.93
Exercised	(22,174	)	—			5.37
Canceled	(106,227	)	(31,402	)		14.48
Outstanding as of February 28, 2001	203,659		1,303,234		$	13.74	1,348,026	$	13.75
Granted	36,273		9,000			8.80
Exercised	(14,400	)	(49,325	)		8.32
Canceled	(9,174	)	(538,409	)		12.81
Outstanding as of February 28, 2002	216,358		724,500		$	14.36	899,545	$	14.51
Granted	24,884		903,844			10.17
Exercised	(40,889	)	(24,537	)		9.17
Canceled	(23,291	)	(206,745	)		13.99
Outstanding as of February 28, 2003	177,062		1,397,062		$	12.12	983,535	$	13.11

Options Outstanding as of February 28, 2003					Exercisable Options as of February 28, 2003
Range of Exercise Prices	Shares	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$  6.80–$10.13	878,405	4.02	$	9.87	340,156	$	9.67
$10.15–$12.34	62,501	4.91		11.04	52,427		10.87
$12.80–$14.44	167,292	2.50		13.97	125,027		14.24
$14.50–$18.75	465,926	3.06		15.85	465,925		15.85
$  4.95–$18.75	1,574,124	3.61	$	12.12	983,535	$	13.11

45

The weighted average fair value of individual options granted in fiscal 2003, 2002 and 2001 is $10.17, $8.78 and $6.13, respectively.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the option grants in fiscal 2003, 2002 and 2001, respectively: risk-free interest rates of 4.08%, 5.18% and 6.21%; expected life of 3.07 years, 10.0 years and 6.1 years; and expected volatility of 51.58%, 39.44% and 42.28%.

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

Restricted Stock Activity
Unvested as of February 29, 2000	496,100
Granted	205,900
Vested	(162,698	)
Canceled	(14,202	)
Unvested as of February 28, 2001	525,100
Granted	378,440
Vested	(367,742	)
Canceled	(105,998	)
Unvested as of February 28, 2002	429,800
Granted	10,024
Vested	(163,352	)
Canceled	(30,055	)
Unvested as of February 28, 2003	246,417

Compensation effects arising from issuing restricted stock and stock options were $1,442 in fiscal 2003, $2,741 in fiscal 2002 and $2,828 in fiscal 2001, and have been charged against income and recorded as Additional Paid-In Capital in the Consolidated Balance Sheets.

The Employee Stock Purchase Plan permits eligible employees to purchase shares of common stock at 85% of the lower fair market value of the stock as of two measurement dates six months apart. Common stock sold to employees under this plan was 60,811 in fiscal 2003, 102,473 in fiscal 2002 and 119,254 in fiscal 2001. MSC does not record expense related to the 15% stock purchase price discount permitted under the Employee Stock Purchase Plan for eligible employees to purchase shares of common stock. The 15% stock purchase price discount would have resulted in expense of $86 in fiscal 2003, $104 in fiscal 2002 and $188 in fiscal 2001.

On June 20, 1996, the Company issued a dividend to shareowners of record on July 2, 1996, of one right (“Right”) for each outstanding share of MSC’s common stock. Each Right entitles the shareowners to buy 1/100^th of a share of Series B Junior Participating Preferred Stock at an initial exercise price of $70.00. As amended on June 22, 1998, the Rights will be exercisable only if a person or group acquires, or announces a tender offer, for 15% or more of MSC’s common stock. If 15% or more of MSC’s common stock is acquired by a person or group, the Rights (other than those held by that person or group) convert into the right to buy the number of shares of MSC’s common stock valued at two-times the exercise price of the Rights. In addition, if MSC enters into a merger or other business combination with a person or group owning 15% or more of MSC’s outstanding common stock, the Rights (other than those held by that person or group) then convert into the right to buy that number of shares of common stock of the acquiring company valued at two-times the exercise price of the Rights. MSC may exchange the Rights for its common stock on a one-for-one basis at any time after a person or group has acquired 15% or more of its outstanding common stock. MSC will be entitled to redeem the Rights at one cent per Right (payable in common stock of the Company, cash or other consideration, at MSC’s option) at any time before public disclosure that a 15% position has been acquired. The Rights will expire on July 1, 2006, unless previously redeemed or exercised.

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

46

Note 12: Discontinued Operations

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

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

On May 31, 2002, the Company completed the sale of substantially all of the assets of its Pinole Point Steel business. The Company is in the process of liquidating the remaining assets and liabilities of the business. As of February 28, 2003, the Company has received $47,811 related to the disposition and liquidation of the business, consisting of $31,174 of sale proceeds from Grupo IMSA S.A. de C.V. and $16,637 from liquidating the Pinole Point Steel operations. In addition, as of February 28, 2003, there is $16,035 in net assets remaining to be liquidated. The net assets consist primarily of the expected tax refund due to a loss carryback offsetting a portion of the gain on sale of its Specialty Films business in the prior year. The remaining net assets include accounts receivable, offset, in part, by severance expenses and other liabilities not assumed by Grupo IMSA S.A. de C.V. Pinole Point Steel has been reported as a discontinued operation, and the Consolidated Financial Statements have been reclassified to segregate the net assets and operating results of the business.

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

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

	For the Years Ended February 28
	2003			2002
Net Sales	$	48,050		$	128,397
Loss from Discontinued Operation, Net of Income Taxes		(2,136	)		(16,456	)

The loss from discontinued operation, net of income taxes, for fiscal 2003 and 2002 includes the allocation of consolidated interest expense of $1,797 and $8,100, respectively.

47

Note 13: Asset Impairment and Restructuring

On November 20, 2002, the Company announced it implemented a program to reduce overhead and improve efficiencies. The program involved restructuring MSC’s manufacturing organization, including terminations of 14 salaried personnel in the third quarter of fiscal 2003. The Company recorded a restructuring charge of $855 for severance and other related costs in the third quarter of fiscal 2003. Of this amount, $677 pertained to severance expenses and $178 for other related costs. Total cash paid in fiscal 2003 related to this restructuring program was $383. The remaining restructuring reserve for this program was $472 as of February 28, 2003 and is scheduled to be paid throughout fiscal 2004.

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

The restructuring reserve as of February 28, 2003 was $472 as presented in the chart.

	Severance			Other			Total
Restructuring Reserve Recorded on November 15, 2001	$	1,110		$	340		$	1,450
Cash Payments		(676	)		(236	)		(912	)
Restructuring Reserve as of February 28, 2002	$	434		$	104		$	538
Restructuring Reserve Recorded on November 20, 2002		677			178			855
Cash Payments		(720	)		(201	)		(921	)
Total Restructuring Reserve as of February 28, 2003	$	391		$	81		$	472

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

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

Note 14: Contractual Commitment

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

Minimum Annual Royalties
2004	$	1,500
2005		2,750
2006		2,750
Total	$	7,000

48

Note 15: Business Segments

The Company changed the composition of its reportable segments in fiscal 2003, and the amounts in the fiscal 2002 and 2001 financial statements relating to reportable segments have been restated to conform to the 2003 composition of reportable segments. MSC reports segment information based on how management views its business for evaluating performance and making operating decisions. The Company’s two reportable segments are: MSC Engineered Materials and Solutions Group (“EMS”) and MSC Electronic Materials and Devices Group (“EMD”). EMS focuses on providing material-based solutions for electronic, acoustical/thermal and coated metal applications. The electronic material-based solutions primarily include coated and laminated noise reducing materials used in electronic applications to solve customer specific problems and enhance performance. The acoustical/thermal material-based solutions include multilayer composites consisting of metals, polymeric coatings and other materials used to manage noise and thermal energy. The coated metal material-based solutions include coil coated and EG protective and decorative coatings applied to coils of metal in a continuous, high-speed, roll-to-roll process. The Company’s material-based solutions are designed to meet specific customer requirements for the automotive, building and construction, electronics, lighting and appliance markets. EMS domestic and foreign sales are presented in the chart. Of the foreign sales, no one country comprised greater than 10% of consolidated EMS sales. EMD focuses on field-effect technology for sensors, switches, displays and interface solutions in the consumer electronics and transportation markets. Corporate represents cash, certain fixed assets, income taxes receivable, deferred income taxes and unallocated general corporate expenses. Loss before income taxes for Corporate includes interest expense of $3,376, $222 and $974 not allocated to discontinued operations during fiscal 2003, 2002 and 2001, respectively.

	2003			2002			2001
Net Sales
EMS – Domestic	$	254,043		$	249,185		$	273,860
EMS – Foreign		12,503			1,321			—
EMD		272			—			—
Total	$	266,818		$	250,506		$	273,860
Depreciation and Amortization
EMS	$	15,442		$	15,888		$	15,496
EMD		2			—			—
Corporate		953			1,938			1,568
Total	$	16,397		$	17,826		$	17,064
Income (Loss) Before Income Taxes
EMS	$	17,064		$	3,536		$	22,255
EMD		(3,739	)		(167	)		—
Corporate		(11,103	)		(10,990	)		(11,840	)
Total	$	2,222		$	(7,621	)	$	10,415
Total Assets
EMS	$	167,494		$	167,203		$	185,685
EMD		319			—			—
Corporate		53,961			67,167			14,459
Subtotal	$	221,774		$	234,370		$	200,144
Discontinued Operations		16,035			65,104			145,395
Total	$	237,809		$	299,474		$	345,539
Capital Expenditures
EMS	$	6,064		$	5,243		$	8,874
EMD		58			—			—
Corporate		137			46			836
Total	$	6,259		$	5,289		$	9,710

49

Note 16: Earning Per Share

Below is the computation of basic and diluted earnings per share for the years ended February 28, 2003, 2002 and 2001.

	2003			2002			2001
Income (Loss) from Continuing Operations	$	2,049		$	(4,491	)	$	6,523
Income from Discontinued Operation – Specialty Films		—			1,469			5,785
Loss from Discontinued Operation – Pinole Point Steel		—			(7,561	)		(12,992	)
Gain (Loss) on Sale of Discontinued Operation – Specialty Films		(101	)		38,787			—
Gain (Loss) on Discontinued Operation – Pinole Point Steel		1,934			(53,287	)		—
Extraordinary Loss on Early Retirement of Debt		(2,388	)		—			—
Net Income (Loss)	$	1,494		$	(25,083	)	$	(684	)
Weighted Average Number of Common Shares Outstanding Used for Basic Net Income (Loss) Per Share		13,941			14,007			14,027
Dilutive Stock Options		136			—			21
Dilutive Restricted Stock		149			—			93
Weighted Average Number of Common Shares Outstanding Plus Dilutive Shares		14,226			14,007			14,141
Basic Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.15		$	(0.32	)	$	0.47
Income from Discontinued Operation – Specialty Films		—			0.10			0.41
Loss from Discontinued Operation – Pinole Point Steel		—			(0.54	)		(0.93	)
Gain (Loss) on Sale of Discontinued Operation – Specialty Films		(0.01	)		2.77			—
Gain (Loss) on Discontinued Operation – Pinole Point Steel		0.14			(3.80	)		—
Extraordinary Loss on Early Retirement of Debt		(0.17	)		—			—
Basic Net Income (Loss) Per Share	$	0.11		$	(1.79	)	$	(0.05	)
Diluted Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.14		$	(0.32	)	$	0.46
Income from Discontinued Operation – Specialty Films		—			0.10			0.41
Loss from Discontinued Operation – Pinole Point Steel		—			(0.54	)		(0.92	)
Gain (Loss) on Sale of Discontinued Operation – Specialty Films		(0.01	)		2.77			—
Gain (Loss) on Discontinued Operation – Pinole Point Steel		0.15			(3.80	)		—
Extraordinary Loss on Early Retirement of Debt		(0.17	)		—			—
Diluted Net Income (Loss) Per Share	$	0.11		$	(1.79	)	$	(0.05	)

Options to purchase 633,217 shares of common stock at a price range of $12.80-$18.75 per share were outstanding during fiscal 2003 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.

Note 17: Subsequent Events

Senior Management Resignation

On April 17, 2003, the Chairman, President and Chief Executive Officer resigned and was replaced by a non-executive Chairman of the Board and a new President and Chief Executive Officer. A separation arrangement was entered into resulting in a pretax charge to earnings of $1,777 in the first quarter of fiscal 2004. $1,499 is scheduled to be paid out over two years and the remainder relates to the executive’s non-contributory supplemental pension plan.

50

Shareholder Rights Agreement

On April 16, 2003, the Company’s Board of Directors voted to terminate the Company’s shareholder rights agreement. The agreement will be terminated by redeeming all of the outstanding rights at a price of $0.01 per right, payable in cash. There is currently one right attached to each outstanding share of common stock. The redemption payment will be mailed on or about May 16, 2003 to shareowners of record on April 28, 2003. As a result of the redemption, the rights cannot become exercisable, and the shareholder rights agreement will be terminated.

Purchase of Partnership Interest

On May 7, 2003, ISG purchased substantially all of BSC’s assets, including BSC’s 33.5% interest in the Partnership, and MSC purchased this Partnership interest from ISG. Accordingly, as of this date, the Company has a 100% controlling interest in the Partnership’s facility. In conjunction with these transactions, the Company entered into a tolling agreement with ISG to provide EG and other coating and ancillary services to ISG until December 31, 2004 and ISG assumed all amounts payable by BSC to the Partnership. Through the expiration of the tolling agreement, ISG has priority production rights for up to 25% of the available line time at the MSCWC facility and MSC will market the remaining 75% of the line time.

Note 18: Selected Quarterly Results of Operations (Unaudited)

The table presented below is a summary of quarterly data for the years ended February 28, 2003 and February 28, 2002.

	2003
	First Quarter		Second Quarter			Third Quarter			Fourth Quarter
Net Sales	$	71,660	$	68,151		$	67,401		$	59,606
Gross Profit		12,839		14,358			11,808			8,570
Income (Loss) from Continuing Operations		2,170		1,459			(298	)		(1,282	)
Loss on Sale of Discontinued Operation – Specialty Films		—		(101	)		—			—
Gain (Loss) on Discontinued Operation – Pinole Point Steel		3,683		(610	)		(145	)		(994	)
Extraordinary Loss on Early Retirement of Debt		—		(2,388	)		—			—
Net Income (Loss)		5,853		(1,640	)		(443	)		(2,276	)
Basic Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.15	$	0.10		$	(0.02	)	$	(0.09	)
Loss on Sale of Discontinued Operation – Specialty Films		—		(0.01	)		—			—
Gain (Loss) on Discontinued Operation – Pinole Point Steel		0.26		(0.04	)		(0.01	)		(0.08	)
Extraordinary Loss on Early Retirement of Debt		—		(0.17	)		—			—
Basic Net Income (Loss) Per Share	$	0.41	$	(0.12	)	$	(0.03	)	$	(0.17	)
Diluted Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.15	$	0.10		$	(0.02	)	$	(0.09	)
Loss on Sale of Discontinued Operation – Specialty Films		—		(0.01	)		—			—
Gain (Loss) on Discontinued Operation – Pinole Point Steel		0.25		(0.03	)		(0.01	)		(0.08	)
Extraordinary Loss on Early Retirement of Debt		—		(0.17	)		—			—
Diluted Net Income (Loss) Per Share	$	0.40	$	(0.11	)	$	(0.03	)	$	(0.17	)

51

	2002
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net Sales	$	66,000		$	67,361		$	63,249		$	53,896
Gross Profit		12,235			12,650			11,754			8,592
Income (Loss) from Continuing Operations		800			1,486			(319	)		(6,458	)
Income from Discontinued Operation – Specialty Films		1,243			226			—			—
Loss from Discontinued Operation – Pinole Point Steel		(3,694	)		(3,867	)		—			—
Gain on Sale of Discontinued Operation – Specialty Films		—			38,787			—			—
Loss on Discontinued Operation – Pinole Point Steel		—			(42,248	)		—			(11,039	)
Net Loss		(1,651	)		(5,616	)		(319	)		(17,497	)
Basic Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.06		$	0.11		$	(0.02	)	$	(0.46	)
Income from Discontinued Operation – Specialty Films		0.09			0.02			—			—
Loss from Discontinued Operation – Pinole Point Steel		(0.27	)		(0.28	)		—			—
Gain on Sale of Discontinued Operation – Specialty Films		—			2.78			—			—
Loss on Discontinued Operation – Pinole Point Steel		—			(3.03	)		—			(0.78	)
Basic Net Loss Per Share	$	(0.12	)	$	(0.40	)	$	(0.02	)	$	(1.24	)
Diluted Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.06		$	0.11		$	(0.02	)	$	(0.46	)
Income from Discontinued Operation – Specialty Films		0.09			0.02			—			—
Loss from Discontinued Operation – Pinole Point Steel		(0.27	)		(0.28	)		—			—
Gain on Sale of Discontinued Operation – Specialty Films		—			2.75			—			—
Loss on Discontinued Operation – Pinole Point Steel		—			(3.00	)		—			(0.78	)
Diluted Net Loss Per Share	$	(0.12	)	$	(0.40	)	$	(0.02	)	$	(1.24	)

52

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

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

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

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

53

PART III

Item 10. Directors and Executive Officers of the Registrant

Reference is made to the information found under the caption “Election of Directors” in the Company’s Proxy Statement for the 2003 Annual Meeting of Shareowners (“Proxy Statement”), all of which is incorporated by reference herein, for information on the directors of the Company. Reference is made to the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” set forth in the Proxy Statement, all of which is incorporated herein by reference. Reference is made to Part I of this report for information on the executive officers of the Company.

Item 11. Executive Compensation

Reference is made to the information under the caption “Compensation of Executive Officers” in the Proxy Statement, all of which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Holders and Management

Reference is made to the information under the caption “Stock Ownership” set forth in the Proxy Statement, all of which is incorporated herein by reference.

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

Plan Category	(a) Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights	(b) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)
Equity Compensation Plans Approved by Security Holders	1,574,124	$	12.12	532,566
Equity Compensation Plans Not Approved by Security Holders	—		—	—
Total	1,574,124	$	12.12	532,566

Item 13. Certain Relationships and Related Transactions

Reference is made to the information under the caption “Compensation of Executive Officers” set forth in the Proxy Statement, all of which is incorporated herein by reference.

Item 14. Controls and Procedures

Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934) as of a date (the “Evaluation Date”) within 90 days before the filing date of this annual report, have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.

Changes in internal controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s disclosure controls and procedures subsequent to the Evaluation Date.

54

PART IV

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

(A) Financial Statements and Schedule of the Company

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

II Supplemental Schedule. The report and schedule listed below appear on pages 59 and 60 of this report.

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

(ii) Schedule II – Reserve for Receivable Allowances

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

(B) Reports on Form 8-K

On January 30, 2003, the Company filed a Current Report on Form 8-K, pursuant to Items 5 and 7, to file an amendment to the Rights Agreement, dated as of June 20, 1996, between Material Sciences Corporation and Mellon Investor Services LLC.

(C) Exhibits

Reference is made to the Index to Exhibits on pages 61–63.

55

Signatures

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

Material Sciences Corporation
By:	/S/    MICHAEL J. CALLAHAN
	Michael J. Callahan President, Chief Executive Officer and Director

Date: May 15, 2003

Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on May 15, 2003.

Signature	Title
/S/    MICHAEL J. CALLAHAN         Michael J. Callahan	President, Chief Executive Officer and Director (Principal Executive Officer)
/S/    JAMES J. WACLAWIK, SR.         James J. Waclawik, Sr.	Vice President, Chief Financial Officer and Secretary (Principal Financial Officer)
/S/    DAVID J. DENEVE         David J. DeNeve	Assistant Secretary (Principal Accounting Officer)
/S/    EUGENE W. EMMERICH         Eugene W. Emmerich	Director
/S/    G. ROBERT EVANS         G. Robert Evans	Director
/S/    AVRUM GRAY         Avrum Gray	Director
E.F. Heizer, Jr.	Director
/S/    FRANK L. HOHMANN III         Frank L. Hohmann III	Director
/S/    RONALD A. MITSCH         Ronald A. Mitsch	Non-Executive Chairman of the Board
/S/    MARY P. QUIN         Mary P. Quin	Director
John D. Roach	Director
/S/    CURTIS G. SOLSVIG III         Curtis G. Solsvig III	Director

56

Certifications

I, Michael J. Callahan, certify that:

1. I have reviewed this annual report on Form 10-K of Material Sciences Corporation;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have:

a.) designed such disclosure controls and procedures 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 annual report is being prepared;

b.) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c.) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent function):

a.) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

By:	/S/    MICHAEL J. CALLAHAN
	Michael J. Callahan President and Chief Executive Officer

Dated: May 15, 2003

57

I, James J. Waclawik, Sr., certify that:

1. I have reviewed this annual report on Form 10-K of Material Sciences Corporation;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have:

a.) designed such disclosure controls and procedures 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 annual report is being prepared;

b.) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c.) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent function):

a.) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

By:	/S/    JAMES J. WACLAWIK, SR.
	James J. Waclawik, Sr. Vice President, Chief Financial Officer and Secretary

Dated: May 15, 2003

58

Report of Independent Public Accountants with Respect to Supplemental Schedule to the Financial Statements

The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP. This report applies to Supplemental Schedule II – Reserve for Receivable Allowances for the years ended February 28, 2002 and 2001.

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

/s/    Arthur Andersen LLP        

Arthur Andersen LLP

Chicago, Illinois

April 29, 2002

59

Schedule II

Material Sciences Corporation and Subsidiaries (in thousands)

Reserve for Receivable Allowances

			Additions
	Balance at Beginning of Year		Charged to Costs and Expense		Charged to Other Accounts		Reclassifications and Acquisitions		Deductions from Reserve			Balance at End of Year
Fiscal 2001
Receivable Allowances	$	3,470	$	7,401	$	—	$	—	$	(7,750	)	$	3,121
Fiscal 2002
Receivable Allowances	$	3,121	$	7,563	$	—	$	—	$	(5,930	)	$	4,754
Fiscal 2003
Receivable Allowances	$	4,754	$	8,880	$	—	$	—	$	(8,760	)	$	4,874

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

60

Index to Exhibits

Exhibit Number	Description of Exhibit
2(a)	Asset Purchase Agreement by and among Colorstrip, Inc., the Registrant, and MSC Pinole Point Steel Inc., dated as of November 14, 1997.(7)
2(b)	Purchase Agreement by and among Material Sciences Corporation, MSC Specialty Films, Inc., Bekaert Corporation and N.V. Bekaert S.A., dated June 10, 2001.(14)
2(c)	First Amendment to Purchase Agreement, dated June 29, 2001.(14)
3(a)	Registrant’s Restated Certificate of Incorporation.(6)
3(b)	Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock.(2)
3(c)	Registrant’s By-laws, as amended.(9)
4(a)	Note Agreement dated as of February 15, 1998, by and among the Registrant and the purchasers described on Schedule I attached thereto.(8)
4(b)	First Amendment to Note Agreement dated as of January 23, 1998, among the Registrant, Principal Mutual Life Insurance Company, Great-West Life & Annuity Insurance Company, The Great-West Life Assurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and West Coast Life Insurance Company.(8)
4(d)	Second Amendment to Note Agreement dated as of February 27, 1998, among the Registrant, Principal Mutual Life Insurance Company, Great-West Life & Annuity Insurance Company, The Great-West Life Assurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and West Coast Life Insurance Company.(8)
4(e)	Rights Agreement dated as of June 20, 1996, between Material Sciences Corporation and Chase Mellon Shareholder Services, L.L.C., as Rights Agent.(2)
4(f)	First Amendment to Rights Agreement dated as of June 17, 1998, between the Registrant and Chase Mellon Shareholder Services, L.L.C., as Rights Agent.(9)
4(g)	Loan and Security Agreement dated as of October 11, 2001 among Material Sciences Corporation and LaSalle Bank National Association, The Northern Trust Company and LaSalle Bank National Association, as Agent.(15)
4(h)	Second Amendment to Rights Agreement, dated as of January 30, 2003, between Material Sciences Corporation and Mellon Investor Services LLC (f/k/a ChaseMellon Shareholder Services, L.L.C.), as Rights Agent.
	There are omitted certain instruments with respect to long-term debt, the total amount of securities authorized under each of which does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. A copy of each such instrument will be furnished to the Securities and Exchange Commission upon request.
10(a)	Material Sciences Corporation Stock Purchase Plan.(1)†
10(b)	Material Sciences Corporation Supplemental Pension Plan.(1)†
10(c)	Material Sciences Corporation Employee Stock Purchase Plan.(10)†
10(d)	Material Sciences Corporation 1985 Stock Option Plan for Key Employees.(10)†
10(e)	Material Sciences Corporation 1985 Stock Option Plan for Directors.(10)†
10(f)	Material Sciences Corporation 1992 Omnibus Stock Awards Plan for Key Employees.(3)†

61

Exhibit Number	Description of Exhibit
10(g)	Employment Agreement effective February 27, 1991, between Material Sciences Corporation and G. Robert Evans.(10)†
10(h)	Material Sciences Corporation 1991 Stock Option Plan for Directors.(10)†
10(i)	Material Sciences Corporation Directors Deferred Compensation Plan.(10)†
10(j)	Material Sciences Corporation 1996 Stock Option Plan for Non-Employee Directors.(4)†
10(k)	Deferred Compensation Plan of Material Sciences Corporation and Certain Participating Subsidiaries.(10)†
10(l)	Lease and Agreement dated as of December 1, 1980, between Line 6 Corp. and Pre Finish Metals Incorporated, relating to Walbridge, Ohio facility.(1)
10(m)	First Amendment to Lease and Agreement dated as of May 30, 1986, between Corporate Property Associates and Corporate Property Associates 2 and Pre Finish Metals Incorporated.(10)
10(n)	Lease Guaranty dated as of May 30, 1986, from Material Sciences Corporation to Corporate Property Associates and Corporate Property Associates 2.(10)
10(o)	Agreement dated as of May 30, 1986, between Material Sciences Corporation and Corporate Property Associates and Corporate Property Associates 2.(10)
10(p)	Form of Standstill Agreement dated as of January 29, 1986, among Material Sciences Corporation, Richard L. Burns and Joyce Burns.(10)
10(q)	Form of Indemnification Agreement between Material Sciences Corporation and each of its officers and directors.(10)
10(r)	Severance Benefits Agreement dated October 22, 1996, between Material Sciences Corporation and James J. Waclawik, Sr.(5)†
10(s)	Tolling Agreement dated as of June 30, 1998, between Walbridge Coatings and Inland Steel Company.(10)(17)
10(t)	Form of Change in Control Agreement.(9)†
10(u)	Amendment to the Supplemental Employee Retirement Plan.(9)†
10(v)	Form of Change in Control Agreement (MSC Executive Officers).(13)†
10(w)	Form of Change in Control Agreement (Subsidiary Executive Officers).(13)†
10(x)	License Agreement, dated as of January 31, 2002, by and between Material Sciences Corporation and TouchSensor Technologies, L.L.C.(16)(17)
10(y)	Purchase Agreement, dated April 23, 2002, by and among Material Sciences Corporation, LTV Steel Company, Inc., LTV Walbridge, Inc. and MSC Walbridge Coatings Inc.(16)
10(z)	Separation Agreement and General Release, dated April 23, 2003, by and between Material Sciences Corporation and Gerald G. Nadig.*
10(aa)	Purchase Agreement, dated as of May 2, 2003, by and among ISG Acquisition Inc., ISG Venture Inc., MSC Walbridge Coatings Inc. and Material Sciences Corporation.*
10(bb)	Tolling Agreement, dated as of May 6, 2003, by and among International Steel Group, Inc., MSC Walbridge Coatings Inc. and Material Sciences Corporation.*
10(cc)	Material Sciences Corporation Supplemental Retirement Plan.†*
21	Subsidiaries of the Registrant.*

62

Exhibit Number	Description of Exhibit
23(a)	Consent of Deloitte & Touche LLP.*
23(b)	Notice Regarding Consent of Arthur Andersen LLP.*
99	Certifications of the Registrant’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes- Oxley Act of 2002.*

   * Filed herewith.

   † Management contract or compensatory plan.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

63

EX-10.Z

                                                                   Exhibit 10(z)

April 23, 2003


Mr. Gerald G. Nadig
24354 Grandview Drive
Barrington, IL 60010

Re: Change In Status/Separation Agreement and General Release

Dear Gerry:

The purpose of this letter agreement (the "Agreement") is to confirm our mutual
understanding and agreement regarding your change in status and subsequent
separation of employment from Material Sciences Corporation ("MSC"). Please read
this Agreement very carefully. It includes a general release of all possible
claims related to your employment by MSC, including the termination of your
employment.

Change in Status/Termination of Employment

Effective April 17, 2003 (your separation date), you have resigned from your
position as Chairman, President and Chief Executive Officer of MSC and all
subsidiary companies, as well as a board member of MSC.

Salary Continuation

For the period commencing on April 17, 2003 and ending on April 15, 2005
("Salary Continuation Period"), you shall receive your current salary of
$43,091.66 per month.

Health Insurance

Beginning May 1, 2003 and continuing until October 31, 2003, you and your
eligible family members will be maintained on the medical, dental and vision
benefits you have previously selected. The Company will pay for its portion of
the monthly premium. You will be responsible for the normal employee portion.
Also, under the Company's COBRA policy, you and your eligible family members can
elect continued health insurance (medical, dental and vision) for up to 18
months beginning November 1, 2003. (A COBRA letter will follow and provide you
with details.) The Company will pay its portion of the COBRA premium for
coverage for you for a period of eighteen (18) months ending April 30, 2005.



Gerald G. Nadig
Page Two

If you decide not to continue your health insurance coverage during the COBRA
period, then this benefit will be canceled. Also, your acceptance of other
employment and coverage under your new employer's medical plans, during the
COBRA period, will result in your no longer being eligible for continued medical
coverage under COBRA.

Supplemental Pension Plan

You are fully vested under the Company's 1984 Supplemental Pension Plan. You are
eligible to retire under this plan as early as June 1, 2005. You are required to
apply to the Company to activate this benefit.

Other Employee Benefits

From and after April 17, 2003, except as otherwise expressly provided herein,
you shall cease to be eligible for and to participate in any employee benefit
plans, perquisites or other similar arrangements of MSC including, but not
limited to, any Life Insurance Plans, Short and Long Term Disability Plans,
Savings and Investment Plans and the MSC Retirement Plan.

For purposes of the MSC Retirement Plan, you shall not be eligible to receive a
contribution for calendar year 2003. Regarding the Savings and Investment Plan
(401k), you may withdraw your funds at any time within the provisions of the
Plan.

Long-Term Incentive (LTI), Stock and Stock Option Plans

MSC shall take the following actions, which have been approved by the
Compensation and Organization Committee and the MSC Board of Directors, with
respect to the specific awards of stock options, stock and cash made to you
under the 1992 Omnibus Stock Awards Plan for Key Employees (the "1992 Plan") and
listed below:

     1993 Restricted Stock/Stock Option Awards Agreement Dated September 22,
     1993. Under this Agreement (the "1993 Agreement"), you were granted an
     option (the "Option") to purchase up to 16,983 shares of common stock (the
     "Non-Qualified Option Shares") and up to 7,017 shares of common stock (the
     "Incentive Option Shares") at an exercise price of $14.25 per share. The
     Option is fully vested. MSC agrees to extend the date by which you must
     exercise the Option from July 16, 2003 (90 days after the Separation Date)
     to the Plan expiration date of September 22, 2003. Other than as
     specifically set forth herein, the Option shall be subject to the terms and
     conditions contained in the 1992 Plan and the 1993 Agreement.

     Non-Qualified Stock Option Agreement Dated March 1, 1995. Under this
     Agreement (the "1995 Agreement"), you were granted an option (the "Option")
     to purchase up to 27,600 shares of common stock (the "Option Shares") at an
     exercise price of $16.25 per share. The Option is fully vested. MSC agrees
     to extend the date by which you must exercise the Option from July 16, 2003
     (90 days after the Separation Date) to October 17, 2003. Other than as
     specifically set forth herein, the Option shall be subject to the terms and
     conditions contained in the 1992 Plan and the 1995 Agreement.



Gerald G. Nadig
Page Three

     Non-Qualified Stock Option Agreement Dated March 1, 1996. Under this
     Agreement (the "1996 Agreement"), you were granted an option (the "Option")
     to purchase up to 27,600 shares of common stock (the "Option Shares") at an
     exercise price of $14.50 per share. The Option is fully vested. MSC agrees
     to extend the date by which you must exercise the Option from July 16, 2003
     (90 days after the Separation Date) to October 17, 2003. Other than as
     specifically set forth herein, the Option shall be subject to the terms and
     conditions contained in the 1992 Plan and the 1996 Agreement.

     Non-Qualified Stock Option Agreement Dated March 1, 1997. Under this
     Agreement (the "1997 Agreement"), you were granted an option (the "Option")
     to purchase up to 40,000 shares of common stock (the "Option Shares") at an
     exercise price of $16.375 per share. The Option is fully vested. MSC agrees
     to extend the date by which you must exercise the Option from July 16, 2003
     (90 days after the Separation Date) to October 17, 2003. Other than as
     specifically set forth herein, the Option shall be subject to the terms and
     conditions contained in the 1992 Plan and the 1997 Agreement.

     2001 Restricted Stock Award and Long Term Cash Award Agreement. Under this
     Agreement (the "2001 Agreement"), you were granted 86,800 shares of
     restricted common stock (the "Restricted Shares") and a cash award of
     $406,400 (the "Long Term Cash Award"). MSC agrees to accelerate the date on
     which you shall become fully vested in the Restricted Shares and the Long
     Term Cash Award from March 1, 2004 to April 17, 2003. Other than as
     specifically set forth herein, the Restricted Shares and Long Term Cash
     Award shall be subject to the terms and conditions contained in the 1992
     Plan and the 2001 Agreement.

     Non-Qualified Stock Option Agreement Dated March 1, 2002. Under this
     Agreement (the "2002 Agreement"), you were granted an option (the "Option")
     to purchase up to 330,030 shares of common stock (the "Option Shares") at
     an exercise price of $10.00 per share. The Option is vested on a pro-rata
     basis and 110,010 (12/36ths) fully vested on March 1, 2003. Under the 2002
     Agreement, 18,335 shares (2/36ths) will be vested effective April 17, 2003.
     MSC agrees to extend the date by which you must exercise the Option from
     July 16, 2003 (90 days after the Separation Date) to October 17, 2003.
     Other than as specifically set forth herein, the Option shall be subject to
     the terms and conditions contained in the 1992 Plan and the 2002 Agreement.

Long-Term Care

Your long-term care premium has been paid for the month of April. You will need
to take over that payment directly with the carrier, Trans America, if you wish
to continue this benefit. You may also want to continue the benefit for your
spouse, Nancy. Papers to make this conversion for direct payment will be
forwarded to you from the carrier.



Gerald G. Nadig
Page Four

Vacation

You shall continue to accrue vacation under MSC's vacation policy until
April 17, 2003. You shall not earn or accrue any additional vacation after this
date. You will be paid for all earned but unused and accrued vacation on May 16,
2003.

Outplacement Assistance

Effective April 17, 2003, MSC will make outplacement assistance available to
you, at the full executive level, from the John Joseph Group for a period of up
to 24 months.

Automobile Allowance

During the Salary Continuation Period, you will continue to receive your monthly
automobile allowance of $1,000.

Executive Financial Planning Assistance

The Company will provide you with up to $2,500 for expenses incurred in
preparing taxes and estate financial planning for calendar year 2003.

Country Club Membership

The Company will reimburse you for your yearly Biltmore Country Club membership
dues for calendar year 2004. The benefit excludes all special assessments or
other charges.

Taxes

Please note that for any compensation, including but not limited to, salary
continuation, automobile allowance, distribution of shares, cash or cash
investment, applicable taxes and/or authorized deductions will be withheld by
the Company.

General Release

In consideration of the promises of MSC described in this Agreement, the receipt
and sufficiency of which are hereby acknowledged, you, of your own free will,
hereby voluntarily covenant not to sue and to release and forever discharge MSC
and where applicable, its predecessors, successors, assigns, parent
corporations, affiliates, officers, directors, shareholders, agents and
attorneys, past and present, of and from any and all actions or causes of
action, suits, claims, debts, charges, complaints, contracts, (whether oral or
written, express or implied from any source) and promises whatsoever, in law or
equity, which you, your heirs, executors, administrators, successors and assigns
(referred to collectively through this Agreement as "you") may now have against
MSC for, upon, or by reason of any matter, cause or thing whatsoever, including
but not limited to any and all matters arising out of your employment by MSC,
its affiliated companies, or both, and the cessation of said employment, and
including but not limited to any alleged violation of Title VII of the Civil
Rights Act of 1964, Sections 1981 through 1988 of Title 42 of the United States
Code, the Age Discrimination in Employment Act of 1967, the Americans With
Disabilities Act, the National Labor Relations Act, the Fair Labor Standards
Act, the Illinois Human Rights Act, the Illinois Wage Payment and Collection
Act, and any other federal, state or local civil, labor, wage-hour or human
rights law, or any other alleged violation of any federal, state or local law,



Gerald G. Nadig
Page Five

regulation or ordinance, and/or public policy, contract or tort or common-law
having any bearing whatsoever on the terms and conditions and/or cessation of
your employment with MSC which you ever had, now have, or shall have as of the
date of this Agreement. This Agreement shall not be construed to waive any
rights or claims that you may have under the Age Discrimination and Employment
Act of 1967 which may arise after the date that you sign this Agreement. You
expressly acknowledge and agree that the release referred to in this paragraph
is an essential and material term of this Agreement and, without such
provisions, MSC would not have entered into this Agreement. The release as set
forth herein shall not be applicable to any claims you may have against the
Company for the Company's failure to perform in accordance with this Agreement.

Confidentiality

You agree that the terms and provisions of this Agreement have been and shall
continue to remain confidential and shall not be revealed by you to any other
person other than your attorney, accountant, members of your immediate family,
and federal and state taxing authorities.

Non-disparagement

You agree not to disrupt, disparage, damage, impair, or otherwise interfere with
the business of MSC, or its relationships with its employees, customers, agents,
representatives or vendors. In return, MSC will not disrupt, disparage, impair,
or otherwise interfere with the reputation and integrity of yourself.

Change in Control Agreement

You acknowledge and agree that, effective April 17, 2003, that certain Change in
Control Agreement you entered into with MSC dated June 30, 2001 shall become
null and void and shall have no further force or effect. MSC also acknowledges
that the non-compete clause of the Change In Control Agreement is also null and
void effective today.

Technology Agreement

You expressly acknowledge and agree that, notwithstanding any provision or
statement to the contrary contained in this Agreement, that certain Technology
Agreement you entered into with MSC dated June 20, 1990, a copy of which is
attached, shall remain in full force and effect according to its terms and shall
continue to be binding upon you. Please pay special note to paragraph #3,
"Confidential Information" and paragraph #9, "Non-Compete".

Voluntary and Knowledgeable Act

You acknowledge that you have read this Change in Status/Separation Agreement
and General Release, that MSC has advised you to review it with an attorney, and
that you execute this Agreement of your own free will and with full knowledge of
its meaning and consequences. You acknowledge and agree that you have been given
twenty-one (21) days from today within which to consider and sign this
Agreement. You further understand that you have seven (7) days following your
signing of this Agreement to revoke this Agreement and that the Agreement shall
not become effective or enforceable until the expiration of said seven (7) day
period.



Gerald G. Nadig
Page Six

Entire Agreement

This Agreement constitutes the entire Agreement between MSC and you with regard
to the matters described herein, and shall not be modified or amended in any
manner except by a supplemental written agreement jointly executed by the
parties. Notwithstanding the foregoing, you acknowledge and agree that, to the
extent you have entered into an Agreement to Arbitrate Employment Disputes
("Arbitration Agreement") with MSC, such Arbitration Agreement shall remain in
full force and effect and shall continue to be binding upon you with respect to
any matters arising under this Agreement.

Gerry, if you have any questions, or wish to discuss these terms any further,
please contact me. Again, you will have twenty-one (21) days from this date to
acknowledge your agreement with the terms of this letter by signing your name
and filling in the date where indicated below. If you do not revoke your
acceptance of this Agreement within seven (7) days after you sign it, it will
become effecting and binding.

Sincerely,




/s/ Michael J. Callahan
- --------------------------------------
Michael J. Callahan
President and Chief Executive Officer



Acknowledged and Accepted:



/s/ Gerald G. Nadig
- --------------------------------------
Gerald G. Nadig

4/28/03
- --------------------------------------
Date

EX-10.AA

                                                                  Exhibit 10(aa)

                               PURCHASE AGREEMENT

            PURCHASE AGREEMENT dated as of May 2, 2003 (this "Purchase
Agreement") among ISG VENTURE INC., a Delaware corporation ("ISG Sub"), ISG
ACQUISITION INC, a Delaware corporation ("ISG"); MSC WALBRIDGE COATINGS INC., a
Delaware corporation ("MSCWC") and MATERIAL SCIENCES CORPORATION, a Delaware
corporation ("MSC").

                              W I T N E S S E T H:

            WHEREAS, Walbridge Coatings, An Illinois Partnership (the
"Partnership") is a general partnership organized under the laws of the State of
Illinois for the purpose of owning and operating a facility designed primarily
to coat sheet steel with zinc or zinc alloys by an electroplating process and
also capable of coating sheet steel with Zincrometal (R) or other materials (the
"Walbridge Facility"); and

            WHEREAS, ISG and ISG Sub are soon to acquire with the consent of MSC
and MSCWC the "Partner's Interest" (as that term is defined in Appendix A) of
Bethlehem Steel Corporation, a Delaware corporation ("BSC"), and EGL Steel
Company, LLC, a Delaware limited liability company ("EGL"), in the Partnership
as part of BSC's bankruptcy court proceedings and to assume and agree in writing
to carry out all of BSC's and EGL's obligations under the Definitive Agreements
(as defined below) in accordance with Section 13.01 of the Amended Partnership
Agreement (as defined below) (the "ISG/BSC Transaction"); and

            WHEREAS, upon the closing of the ISG/BSC Transaction, MSCWC and ISG
Sub will be the only partners of the Partnership; and

            WHEREAS, ISG Sub desires to sell or cause ISG to sell to MSCWC all
of its interests in the Partnership, including without limitation the GP
Interest (as defined herein), and ISG desires to sell to MSCWC all of its
interests in the Partnership, including without limitation the Line Time Access,
and MSCWC desires to buy the same from ISG Sub and ISG, in each case on the
terms and conditions contained herein; and

            WHEREAS, MSC desires to enter into this Purchase Agreement in order
to induce ISG Sub and ISG Steel to enter into this Purchase Agreement;

            NOW, THEREFORE, the parties hereto agree as follows:

                                    ARTICLE I

                                   Definitions

                 (a) As used herein, the following terms shall have the
following meanings:



            "Affiliate" means, with respect to any person, any other Person
directly or indirectly controlling, controlled by or under common control with
such Person.

            "Amended ISG Coating Agreement" means the Amended and Restated
Coating Agreement dated a s of July 23, 1999 between ISG (as assignee of BSC)
and the Partnership.

            "Amended Operating Agreement" means the Amended and Restated
Operating Agreement dated as of July 23, 1999 between MSCWC and the Partnership.

            "Amended Parent Agreement" means the Amended and Restated Parent
Agreement dated as of July 23, 1999 between ISG (as assignee of BSC) MSCPFM and
MSC.

            "Amended Partnership Agreement" means the Amended and Restated
Partnership Agreement of the Partnership dated as of July 23, 1999 between ISG
Sub (as assignee of EGL) and MSCWC.

            "Appendix A" means Appendix A to the Definitive Agreements.

            "Definitive Agreements" means the Amended Parent Agreement, the
Amended Partnership Agreement, the Amended ISG Coating Agreement, the MSCWC
Coating Agreement, the Amended Operating Agreement, together in each case with
any and all changes therein or additions thereto evidenced by letter agreements
dated on or after July 23, 1999 or the minutes of the Management Committee of
the Partnership between July 23, 1999 and the date hereof.

            "Interest" means all of the interests of ISG and ISG Sub in the
Partnership including, without limitation, the GP Interest and the Line Time
Access.

            "ISG Transaction Documents" means this Purchase Agreement and each
of the Exhibits hereto to which ISG and/or ISG Sub is or is to be a party.

            "MSCWC Coating Agreement" means the Coating Agreement dated as of
July 23, 1999 between MSC and the Partnership.

            "MSC Transaction Documents" means this Purchase Agreement and each
of the Exhibits hereto to which MSC and/or MSCWC is or is to be a party.

            "Person" means any natural person, firm, trust, partnership, joint
venture, unincorporated association, corporation, limited liability company,
government or governmental agency.

            "Purchase Price" means the payment from MSCWC to ISG Sub and ISG
Steel pursuant to Section 2.02(b).

            "Scheduled Closing Date" means May 6, 2003.

            "Tolling Agreement" means the Tolling Agreement among ISG, MSCWC and
MSC in the form of Exhibit C attached hereto.

                                       2



            "Transactions" means all transactions contemplated by this Purchase
Agreement.

            (b) Each of the following terms is defined in the Section set forth
opposite such term:

             Term                                     Section
             ----                                     -------

             Closing                                  2.01
             Closing Date                             2.01
             EGL                                      Recitals
             GP Interest                              2.02(a)
             ISG                                      Caption
             ISG/BSC Transaction                      Recitals
             ISG Sub                                  Caption
             Line Time Access                         2.02(a)
             MSC Undertaking                          2.02(b)
             MSC                                      Caption
             MSCWC                                    Caption
             Partnership                              Recitals
             Walbridge Facility                       Recitals

                                   ARTICLE II

                                  The Purchase

            SECTION 2.01. Closing Date. The Transactions shall, subject to the
satisfaction or waiver of the conditions set forth in Article V hereof, be
consummated (the "Closing") at the offices of Sidley Austin Brown & Wood, 10
South Dearborn Street, Bank One Plaza, Chicago, Illinois on the Scheduled
Closing Date or at such other place or time (but not later than May 30, 2003) as
shall be agreed to by the parties (the "Closing Date"), effective as of the
opening of business, Chicago time, on the Closing Date.

            SECTION 2.02. The Transactions. Simultaneously on the Closing Date:

                 (a) (i) MSCWC shall purchase from ISG Sub and ISG Sub shall
sell to MSCWC all of ISG Sub's interests in the Partnership, including without
limitation a 33.5% general partner interest in the Partnership (including all
rights with respect thereto except as expressly otherwise provided herein (the
"GP Interest")), which GP Interest shall include a 33.5% Voting Interest (as
defined in Appendix A) and a 33.5% Financial Interest (as defined in Appendix
A), and (ii) ISG Steel shall assign to MSCWC, and MSCWC shall acquire from ISG
all of ISG's interests in the Partnership, including without limitation all of
ISG's interest in the Amended ISG Coating Agreement (ISG's interest therein
being referred to herein as the "Line Time Access"), but excluding all inventory
or other assets owned by ISG or ISG that are not included in the term "Partner's
Interest" (as defined in Appendix A).

                 (b) In consideration therefor, MSCWC (or MSC) shall pay to
ISG, on behalf of ISG and ISG Sub, in the aggregate, $3,600,000.00 on the
Closing Date and MSC shall

                                       3



assume and agree to pay or otherwise perform, or to cause one of its Affiliates
to pay or otherwise perform, and indemnify ISG and/or ISG Sub against any and
all liabilities, obligations, and commitments under the Definitive Agreements of
BSC (or ISG as successor to BSC under the Definitive Agreements) and/or EGL (or
ISG Sub as successor to EGL under the Definitive Agreements) that arise or
accrue with respect to any period beginning after the Closing Date or arise out
of events or circumstances occurring after the Closing Date, whether absolute,
contingent, known or unknown, disclosed or undisclosed in this Purchase
Agreement or otherwise (the "MSC Undertaking"). The form of the MSC Undertaking
is set forth in Exhibit A hereto.

                 (c) Effective as of the completion of the closing of the
ISG/BSC Transaction and the Closing hereunder, ISG and ISG Sub shall be jointly
and severally responsible for payment to MSCWC of (i) all "Allocated Fixed
Costs" (as defined in Section 5.02 of the Amended ISG Coating Agreement) owed by
BSC (or ISG as successor to BSC under the Definitive Agreements) for the period
from the last day for which such costs have been paid by BSC (currently February
28, 2003) to and including the Closing Date hereunder, and (ii) all unpaid
"Coating Fees" (as defined in Appendix A) owed by BSC (or ISG as successor to
BSC under the Definitive Agreements) under Section 5.01 of the Amended ISG
Coating Agreement for coating services rendered by the Partnership to BSC, ISG
or any of their respective Affiliates. Not later than five business days after
the Closing, MSCWC shall invoice ISG and ISG Sub for (i) such Allocated Fixed
Costs (currently estimated by MSC to be $514,051.92 for the period March 1, 2003
through May 6, 2003) and (ii) such Coating Fees (estimated by MSC as of 12:01
a.m. on April 25, 2003, after giving effect to funds received from BSC on April
25, 2003, to be $1,375,283.26), and ISG and/or ISG Sub shall pay the amount of
such invoice (in the absence of manifest error) to MSCWC within 30 days
thereafter.

                 (d) (i) ISG and ISG Sub and (ii) MSC, MSCWC and the
Partnership shall exchange mutual releases with respect to their respective
obligations under the Definitive Agreements in the form of Exhibit B hereto.

            SECTION 2.03. Payment Mechanics. The $3,600,000.00 payment on the
Closing Date referred to in Section 2.02(b) shall be paid in cash (in United
States dollars) by MSCWC by wire transfer of immediately available funds to an
account specified by ISG in a written notice to MSCWC delivered not less than
two business days prior to the Closing.

            SECTION 2.04. Excluded Liabilities. Except as otherwise provided in
this Purchase Agreement or the Amended Partnership Agreement, neither MSC nor
MSCWC shall assume or undertake to pay, perform, satisfy or discharge any
liabilities, obligations, agreements or commitments (i) of BSC, EGL, ISG, ISG
Sub, the Partnership or any of their respective Affiliates or (ii) relating to
the operation of the Partnership, the use of the Line Time Access or to the
ownership of the GP Interest and arising or accrued with respect to any period
ending on or before the Closing Date or arising out of events or circumstances
occurring or existing on or prior to the Closing Date, whether due or to become
due or whether accrued, absolute, contingent, known or unknown, disclosed or
undisclosed in this Purchase Agreement or otherwise.

                                       4



                                   ARTICLE III

                         Representations and Warranties

            SECTION 3.01. Representations and Warranties of ISG and ISG Sub. ISG
and ISG Sub each represents and warrants to MSC and MSCWC that:

                 (a) Corporate Existence and Power. Each of ISG and ISG Sub
is a corporation duly incorporated, validly existing and in good standing under
the laws of the jurisdiction of its incorporation and has all corporate powers
and all material governmental licenses, authorizations, consents and approvals,
if any, required to execute and deliver each of the ISG Transaction Documents to
which it is or will be a party and to perform its obligations thereunder.

                 (b) Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by each of ISG and ISG
Sub of this Purchase Agreement are within the corporate powers of ISG and/or ISG
Sub, as the case may be, have been duly authorized by all necessary corporate
action by ISG and ISG Sub, require no action by or in respect of, or filing
with, any governmental body, agency or official (except for such actions or
filings which, at the time of execution of this Purchase Agreement, have already
been taken or made or such actions or filings the failure of which to take or
make would not in the aggregate have a material adverse effect on the
transactions contemplated hereby and thereby) and do not or will not, as the
case may be, contravene, or constitute a default under, any provision of
applicable law or regulation or of the certificate of incorporation or by-laws
of ISG or ISG Sub, as applicable, or of any material agreement, judgment,
injunction, order, decree or other instrument binding upon ISG or ISG Sub, as
applicable.

                 (c) Title to Interest. On the Closing Date, ISG Sub will
have valid title to the GP Interest being sold to MSCWC pursuant to this
Purchase Agreement, and ISG will have valid title to the Amended ISG Coating
Agreement being assigned to MSCWC pursuant to this Purchase Agreement. Upon the
completion of the Closing, MSCWC will have acquired from ISG and ISG Sub all of
their respective interests in the Partnership, including without limitation (i)
the GP Interest and Line Time Access and (ii) all of the Partner's Interest
formerly owned by EGL or BSC, in each case free and clear of all liens, charges
and encumbrances.

                 (d) Binding Effect. Each of the ISG Transaction Documents,
when duly and validly executed by each of the other parties thereto, shall
constitute a valid and binding agreement of ISG and/or ISG Sub, as applicable.

                 (e) Limitation. ISG and ISG Sub acknowledge that MSC makes
no representation or warranty with respect to the assets, liabilities, business,
operations, condition (financial or otherwise) or prospects of the Partnership.

            SECTION 3.02. Representations and Warranties of MSC and MSCWC. MSC
and MSCWC each represents and warrants to ISG and ISG Sub that:

                 (a) Corporate Existence and Power. Each of MSCWC and MSC is
a corporation duly incorporated, validly existing and in good standing under the
laws of the

                                        5



jurisdiction of its incorporation and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to
execute and deliver each of the MSC Transaction Documents to which it is or is
to be a party and to perform its obligations thereunder.

                 (b) Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by each of MSCWC and MSC
of each of the MSC Transaction Documents to which it is or is to be a party are
within the corporate powers of MSCWC and/or MSC, as the case may be, have been
duly authorized by all necessary corporate action of MSC and/or MSCWC, require
no action by or in respect of, or filing with, any governmental body, agency or
official (except for such actions or filings which, at the time of execution of
this Purchase Agreement, have already been taken or made or such actions or
filings the failure of which to take or make would not in the aggregate have a
material adverse effect on the transactions contemplated hereby and thereby) and
do not or will not, as the case may be, contravene, or constitute a default
under, any provision of applicable law or regulation or of the certificate of
incorporation or by-laws (or other similar documents) of MSCWC or MSC, as
applicable, or of any material agreement, judgment, injunction, order, decree or
other instrument binding upon MSCWC or MSC, as applicable.

                 (c) Binding Effect. Each of the MSC Transaction Documents,
when duly and validly executed by each of the other parties thereto, shall
constitute a valid and binding agreement of MSCWC and/or MSC, as applicable.

                 (d) Limitation. MSC and MSCWC acknowledge that neither ISG nor
ISG Sub makes any representation or warranty with respect to the GP Interest
(except as provided in Section 3.01 hereof), their compliance or non-compliance
with any of the Definitive Agreements or the assets, liabilities, business,
operations, condition (financial or otherwise) or prospects of the Partnership.

                                   ARTICLE IV

                                    Covenants

            SECTION 4.01. Cooperation and Commercially Reasonable Efforts.
Subject to the terms and conditions of this Purchase Agreement, each of MSC,
MSCWC, ISG and ISG Sub shall cooperate with one another in timely giving all
notices, making all filings, seeking all regulatory clearances and obtaining all
consents of third parties, if any, necessary to consummate the Transactions, and
agrees to execute and deliver such other documents, certificates, agreements and
other writings and shall use commercially reasonable efforts to take, or cause
to be taken, such other actions and to do, or cause to be done, all things
necessary or desirable in order to satisfy the conditions set forth in Article V
(including, in the case of ISG and ISG Sub, the closing of the ISG/BSC
Transaction) hereof and to consummate the Transactions as soon as reasonably
practicable, and in any event not later than May 30, 2003. Notwithstanding
anything herein to the contrary, nothing contained herein shall require any
party to waive any of the conditions set forth in Article V hereof.

                                        6



            SECTION 4.02. Notice of Certain Events. Each of the parties hereto
shall promptly notify the other parties hereto of:

                 (a) any notice or other communication from any Person
alleging that the consent of such Person is or may be required in connection
with the consummation of any of the Transactions or otherwise asserting any
objection to any of the Transactions;

                 (b) to the extent permitted by applicable law, any notice or
other communication from any governmental or regulatory agency or authority in
connection with the consummation of the Transactions;

                 (c) any notice of any breach or inaccuracy of any of the
representations and warranties made in this Purchase Agreement by any of the
parties hereto; or

                 (d) any actions, suits, claims, investigations or
proceedings commenced or, to its knowledge, threatened against, relating to or
otherwise affecting any party hereto that relate to the consummation of the
Transactions.

            SECTION 4.03. Confidentiality. From and after the date hereof, each
of ISG and ISG Sub and its Affiliates will hold, and will cause their respective
officers, directors, employees, accountants, counsel, consultants, advisors and
agents to hold, in confidence, unless compelled to disclose by judicial or
administrative process or by other requirements of law, all confidential
documents and information concerning the Partnership except to the extent that
such information can be shown to have been (i) in the public domain through no
fault of ISG or ISG Sub, as the case may be, or their respective Affiliates or
(ii) later lawfully acquired on a nonconfidential basis by ISG or ISG Sub, as
the case may be, or their respective Affiliates. The obligation of ISG and ISG
Sub and their respective Affiliates to hold any such information in confidence
shall be satisfied if they exercise the same care with respect to such
information as they would take to preserve the confidentiality of their own
similar information.

            SECTION 4.04. Survival of Representations and Warranties. All of the
respective representations and warranties of MSC and MSCWC and of ISG and ISG
Sub set forth in Article III hereof shall survive the completion of the Closing.

                                    ARTICLE V

                               Closing Conditions

            SECTION 5.01. ISG's and ISG Sub's Conditions. Each of ISG's and ISG
Sub's obligations to take the actions contemplated by this Purchase Agreement to
be taken on the Closing Date are subject to the fulfillment, on or prior to the
Closing Date, of each of the following conditions, any or all of which may be
waived in whole or in part on or prior to the Closing Date by ISG or ISG Sub:

                 (a) Representations and Warranties. The representations and
warranties of MSC and MSCWC contained in this Purchase Agreement shall be true
in all material respects on and as of the Closing Date as though such
representations and warranties were made on and as of such date.

                                        7



                 (b) Covenants. Each of MSC and MSCWC shall have performed in
all material respects all of its obligations hereunder required to be performed
by it prior to or on the Closing Date.

                 (c) Receipt of Purchase Price. ISG shall have received the
full amount of the Purchase Price in accordance with Sections 2.02(b) and 2.03.

                 (d) MSC Undertaking. MSC shall have executed and delivered
to ISG the MSC Undertaking. The form of the MSC Undertaking is set forth in
Exhibit A hereto.

                 (e) Release. The Partnership shall have executed and
delivered to ISG and to ISG Sub a Mutual Release in the form of Exhibit B
hereto.

                 (f) Tolling Agreement. MSCWC shall have executed and
delivered to ISG the Tolling Agreement.

                 (g) Governmental Clearances. To the extent required by
applicable law or government regulations, all material regulatory clearances
shall have been obtained.

                 (h) Injunctions. No provision of any applicable law or
regulation and no judgment, injunction, order or decree shall prohibit or
restrain the consummation of the Transactions.

                 (i) ISG/BSC Transaction. The ISG/BSC Transaction shall have
been closed.

            SECTION 5.02. MSC's and MSCWC's Conditions. Each of MSC's and
MSCWC's obligations to take the actions contemplated by this Purchase Agreement
to be taken on the Closing Date are subject to the fulfillment, on or prior to
the Closing Date, of each of the following conditions, any or all of which may
be waived in whole or in part on or prior to the Closing Date by MSC or MSCWC:

                 (a) Representations and Warranties. The representations and
warranties of ISG and ISG Sub in this Purchase Agreement shall be true in all
material respects on and as of the Closing Date as though such representations
and warranties were made on and as of such date.

                 (b) Covenants. Each of ISG and ISG Sub shall have performed
in all material respects all of its obligations hereunder required to be
performed by it prior to or on the Closing Date.

                 (c) Release. ISG and ISG Sub shall have executed and
delivered to the Partnership a Mutual Release in the form of Exhibit B hereto.

                 (d) Assignment by ISG Sub. ISG Sub shall have assigned to
MSCWC all of its Interest, including without limitation the GP Interest, in
accordance with Section 2.02(a)(i). The form of such assignment is set forth in
Exhibit D hereto.

                                       8



                 (e) Assignment by ISG. ISG shall have assigned to MSCWC all
of its Interest, including without limitation the Line Time Access, in
accordance with Section 2.02(a)(ii). The form of such assignment is set forth in
Exhibit E hereto.

                 (f) Tolling Agreement. ISG shall have executed and delivered
to MSCWC the Tolling Agreement.

                 (g) Governmental Clearances. To the extent required by
applicable law or government regulations, all material regulatory clearances
shall have been obtained.

                 (h) Injunctions. No provision of any applicable law or
regulation and no judgment, injunction, order or decree shall prohibit or
restrain the consummation of the Transactions.

                 (i) ISG/BSC Transaction. The ISG/BSC Transaction shall have
been closed.

                                   ARTICLE VI

                                   Termination

            SECTION 6.01. Termination. This Purchase Agreement may be terminated
prior to the Closing Date:

                 (a) by the written agreement of all of the parties hereto;

                 (b) by any party if the Transactions shall not have been
consummated on or before May 30, 2003; provided that no party may terminate this
Purchase Agreement pursuant to this Section 6.01(b) if the Transactions shall
have been delayed due in whole or in material part to the intentional, willful
or grossly negligent breach in a material respect by such party of any of its
representations or warranties or the intentional, willful or grossly negligent
failure of such party to fulfill a condition to the performance of the
obligations of any other party or to perform a covenant of this Purchase
Agreement; or

                 (c) by any party if there shall be any law or regulation
that makes the consummation of the Transactions illegal or otherwise prohibited,
or materially alters the Transactions, or if consummation of the Transactions
would violate any nonappealable final judgment, injunction, order or decree of
any court or governmental body having competent jurisdiction.

The party or parties desiring to terminate this Purchase Agreement pursuant to
clauses (b) or (c) of this Section 6.01 shall give notice of such desire to
terminate to the other parties hereto.

            SECTION 6.02. Effect of Termination. If this Purchase Agreement is
terminated as permitted by Section 6.01, such termination shall be without
liability of any party (or any shareholder, director, officer, employee, agent,
consultant or representative of such party) to any other party to this Purchase
Agreement. The provisions of Section 4.03 and Section 7.01 shall survive any
termination of this Purchase Agreement pursuant to Section 6.01 hereof.

                                        9



                                   ARTICLE VII

                                  Miscellaneous

            SECTION 7.01. Expenses. Each of the parties hereto shall pay its own
expenses (including legal and accounting fees) incurred in connection with the
negotiation and execution of this Purchase Agreement and the documents to be
executed on the Closing Date and the consummation of the Transactions.

            SECTION 7.02. Notices. All notices hereunder shall be in writing and
shall be personally delivered or sent via reputable overnight courier or
facsimile. Such notices shall be addressed respectively:

            if to MSC or MSCWC, to:

                     Material Sciences Corporation
                     2200 Pratt Boulevard
                     Elk Grove Village, IL  60007

                     Attention of Chief Financial Officer
                     Telecopier:  847-718-8643

            with a copy to:

                     Sidley Austin Brown & Wood
                     10 South Dearborn Street
                     Bank One Plaza
                     Chicago, IL  60603

                     Attention of Jon M. Gregg
                     Telecopier:  312-853-7036

            if to ISG or ISG Sub, to each of them:

                     C/O International Steel Group Inc.
                     3250 Interstate Drive, 2nd Floor
                     Richmond, Ohio 44286-9000

                     Attention of Mr. Gordon Spelich
                     Telecopier:  330-659-9132

            with a copy to:

                     Jones, Day, Reavis & Pogue
                     North Point, 901 Lakeside Avenue
                     Cleveland, Ohio  44114-1190

                     Attention of David Watson

                                       10



                     Telecopier:  216-579-0212

or to such other address or telecopier number as such party may hereafter
specify for the purpose of providing notice to the other parties. Each such
notice, request or other communication shall be effective (i) if given by
facsimile, when such facsimile is transmitted to the telecopier number specified
in this Section 7.02 and the transmission of the appropriate number of pages is
confirmed or (ii) if given by any other means, when delivered at the address
specified in this Section.

            SECTION 7.03. Third Parties. Nothing in this Purchase Agreement,
whether express or implied, is intended to confer any rights or remedies under
or by reason of this Purchase Agreement on any persons other than the parties
hereto and their respective successors and permitted assigns.

            SECTION 7.04. Successors and Assigns. This Purchase Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
successors and permitted assigns; provided that in no event shall any party
hereto be permitted to assign any of its obligations under this Purchase
Agreement to any other Person without the written consent of each other party
hereto.

            SECTION 7.05. Headings. Headings are for ease of reference only and
shall not form a part of this Purchase Agreement.

            SECTION 7.06. Governing Law; Entire Agreement.

                 (a) This Purchase Agreement shall be construed in accordance
with and governed by the law of the State of Illinois without giving effect to
the principles of conflicts of laws thereof which might cause the laws of any
other jurisdiction to govern this Purchase Agreement.

                 (b) This Purchase Agreement, the Exhibits hereto and the
documents referred to herein to be executed contemporaneously herewith on or
before the Closing embody the entire agreement of the parties hereto with
respect to the subject matter hereof and supersede all prior agreements with
respect thereto.

            SECTION 7.07. Incorporation of Exhibits. The Exhibits identified in
this Purchase Agreement are incorporated herein by reference and made a part
hereof.

            SECTION 7.08. Amendments and Waivers.

                 (a) Any provision of this Purchase Agreement may be amended
or waived if, but only if, such amendment or waiver is in writing and is signed,
in the case of an amendment, by each party to this Purchase Agreement, or in the
case of a waiver, by the party against whom the waiver is to be effective.

                 (b) No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or

                                       11



privilege. The rights and remedies herein provided shall be cumulative and not
exclusive of any rights or remedies provided by law.

            SECTION 7.09. Counterparts. This Purchase Agreement may be executed
in one or more counterparts, each of which shall be deemed an original and all
of which taken together shall constitute a single agreement. This Purchase
Agreement shall become a binding agreement when each party hereto shall have
received a counterpart hereof signed by each of the other parties hereto.

            IN WITNESS WHEREOF, the parties hereto have caused this Purchase
Agreement to be duly executed as of the day and year first above written.

                           ISG VENTURE INC.


                           By:      /s/ Gordon Spelich
                                    --------------------------------------------
                                    Name:    Gordon Spelich
                                    Title:   Vice President

                           ISG ACQUISITION INC.


                           By:      /s/ Gordon Speclich
                                    --------------------------------------------
                                    Name:    Gordon Spelich
                                    Title:   Vice President

                           MSC WALBRIDGE COATINGS INC.

                           By:      /s/ James J. Waclawik, Sr.
                                    --------------------------------------------
                                    Name:    James J. Waclawik, Sr.
                                    Title:   Vice President, Chief
                                             Financial Officer and Secretary

                           MATERIAL SCIENCES CORPORATION

                           By:      /s/ James J. Waclawick, Sr.
                                    --------------------------------------------
                                    Name:    James J. Waclawik, Sr.
                                    Title:   Vice President, Chief
                                             Financial Officer and Secretary

                                       12



                                 Exhibit Index


Exhibit A            MSC Undertaking

Exhibit B            Mutual Release

Exhibit C            Tolling Agreement

Exhibit D            Assignment of GP Interest

Exhibit E            Assignment of ISG Coating Agreement

EX-10.BB

                                                                  Exhibit 10(bb)

                                TOLLING AGREEMENT

          TOLLING AGREEMENT (the "Agreement") dated as of May 6, 2003 among
INTERNATIONAL STEEL GROUP INC. ("ISG"), a Delaware corporation, MSC WALBRIDGE
COATINGS, INC., a Delaware corporation ("MSCWC"), and MATERIAL SCIENCES
CORPORATION, a Delaware corporation ("MSC").

                              W I T N E S S E T H :

          WHEREAS, MSCWC is now the sole owner and operator of an
electrogalvanizing and coil coating facility for cold rolled steel ("Substrate")
located at 30610 East Broadway, Walbridge, Ohio 43465 (the "Facility"), formerly
operated by MSCWC on behalf of Walbridge Coatings, An Illinois Partnership (the
"Partnership"), the previous owner of the Facility; and

          WHEREAS, MSCWC utilizes an electrogalvanization process to place a
free zinc coating on Substrate (the "Zinc Process") or to place a free zinc and
nickel coating on Substrate (the "Zinc-Nickel Process") and a roll application
process to place other coatings on Substrate (the "Roll Process" and,
collectively with the Zinc Process and the Zinc-Nickel Process, the "Processes")
at the Facility;

          WHEREAS, ISG and MSCWC desire that upon request by ISG, MSCWC will, at
the facility, coat ISG Substrate (as hereinafter defined) utilizing one of the
Processes in the same manner as conducted by MSCWC on behalf of the Partnership
prior to the date hereof (the "Core Services") and perform slitting, inspection
and other services ("Ancillary Services" and, collectively with the Core
Services, "Coating Services") on such coated ISG Substrate in exchange for the
payment of tolls, all on the terms and conditions as set forth herein; and

          NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein set forth and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:

                                   ARTICLE I

                                   Definitions

          SECTION 1.01. Definitions. As used herein, the following terms shall
have the following meanings:

          "Affiliate" means, with respect to any Person at any time, any other
Person directly or indirectly Controlling, Controlled by or under common Control
with such specified Person.

          "Bankruptcy" means, as to any Person, the Person's taking or
acquiescing to the taking of any action seeking relief under, or advantage of,
any applicable debtor relief,



liquidation, receivership, conservatorship, bankruptcy, moratorium,
rearrangement, insolvency, reorganization or similar law affecting the rights or
remedies of creditors generally, as in effect from time to time. For purposes of
this definition, the term "acquiescing" shall include, without limitation, the
failure to file, within thirty (30) days after its entry, a petition, answer or
motion to vacate or to discharge any order, judgment or decree providing for any
relief under such law.

          "Business Day" shall mean any day that the Facility is open for
business.

          "Coated ISG Substrate" means ISG Substrate that has been coated
pursuant to one of the Processes at the Facility.

          "Coating Weight" means the amount of free zinc required to be applied
by the Zinc Process to ISG Substrate, expressed in grams per square meter of
coated substrate surface area.

          "Control" means, with respect to any Person, the power to, directly or
indirectly, direct the management and policies of such Person, whether through
ownership of voting securities (or pledge of voting securities if the pledgee
thereof may on the date of determination exercise or control the exercise of the
voting rights of the owner of such voting securities), by contract or otherwise;
and the terms "Control" (when used as a verb), "Controlling" and "Controlled"
have meanings correlating to the foregoing.

          "EDI" means electronic data interchange.

          "Finished Substrate" means ISG Substrate or Coated ISC Substrate on
which Ancillary Services have been performed.

          "Firm Order" has the meaning set forth in Section 6.03.

          "Floor Space" means the square footage of the Facility as of April 30,
2003.

          "Hot-Dip Galvanizing" means a process by which molten zinc is applied
to Substrate other than through electrogalvanizing.

          "ISG Inventory" means ISG Substrate, Coated ISG Substrate and Finished
Substrate.

          "ISG Line Time" means production time on the Line necessary to fulfill
the current Firm Order.

          "ISG Substrate" means Substrate owned by ISG or its Affiliates.

          "Line" means the production line of the Facility commonly referred to
as Line 6.

          "Line Time" has the meaning set forth in Section 3.02.

          "LME" means London Metal Exchange.



          "Person" means any natural person, firm, trust, partnership, joint
venture, unincorporated association, corporation, limited liability company,
government or governmental agency or other entity.

          "Prior Agreement" means the Amended and Restated Coating Agreement
dated as of July 23, 1999, between Bethlehem Steel Corporation and the
Partnership.

          "Prime Rate" means the rate of interest published in The Wall Street
Journal as the "prime rate" on the most recent Business Day.

          "Purchase Order" shall have the meaning set forth in Section 6.04.

          "Reference Strip" means (a) a 60-inch wide, 0.030-inch minimum
thickness steel coil to which a minimum Coating Weight of 100 grams of free zinc
per square meter has been applied on one side only by the Zinc Process or (b) a
49-inch wide, 0.030-inch minimum thickness steel coil to which a minimum coating
weight of 30 grams of zinc-nickel alloy per square meter has been applied on
both sides by the zinc-nickel process.

          "Scheduled Line Time" means all time on the Line available to perform
Core Services.

          "Term" shall have the meaning set forth in Section 3.01.

          "Trip Title" means title passes to the customer at the Facility prior
to shipment from the Facility.

          "Yield Loss means ISG Substrate scrap losses and rejections of Coated
ISG Substrate or Finished Substrate caused by quality failures in the operation
of the Zinc Process or the Zinc-Nickel Process at the Facility and shall be
calculated based upon the difference between the weight of the Substrate
delivered to the Facility and the weight of the Coated ISG Substrate or Finished
Substrate shipped from the Facility; provided, however, that all losses and
rejections due to any reason beyond the control of MSCWC, including; without
limitation, defects in ISG Substrate, requests by ISG to trim coils and requests
by ISG to process overweight coils, shall not be included in Yield Loss.
Responsibility for rejected Coated ISG Substrate and Finished Substrate shall be
determined in good faith by the technical representatives of ISG and MSCWC
designated by each to determine such matters.

                                   ARTICLE II

                                Scrap Attachment

          SECTION 2.01. Attachment I. In addition to the schedules attached
hereto, Attachment I hereto entitled "Scrap Policy" shall be a part of this
Agreement and the parties hereto shall comply with the requirements of such
attachment in carrying out their respective obligations hereunder.



                                  ARTICLE III

                   Term; Purchase and Sale of Coating Services

          SECTION 3.01. Term. Subject to Article IX hereof, the term of this
Agreement shall be from May 7, 2003 through December 31, 2004 (the "Term").

          SECTION 3.02. Core Services. Subject to the terms and conditions of
this Agreement, MSCWC shall provide ISG, as requested by ISG in accordance with
this Agreement, with a maximum 163 hours of scheduled production time (but not
more than 25% of the available hours of scheduled production time) during each
month of the Term (the "Line Time") for MSCWC's performance of Core Services on
ISG Substrate; provided, however, that for the month of May, 2003, production
time through May 6, 2003 for BSC and its Affiliates under the Prior Agreement
shall reduce the maximum hours available to ISG hereunder for that month.

          SECTION 3.03. Sole Provider. Subject to the availability of time on
the Line, ISG agrees that MSCWC shall be the sole provider of Core Services
(excluding Hot-Dip Galvanizing) on all Substrate produced or processed in, or
shipped from, ISG's Burns Harbor facilities, provided that the provision of the
Core Services at the Facility continue to meet the current acceptable level of
quality, capability and service thereat. Any new quality, capability and service
requirements will be negotiated in good faith.

          SECTION 3.04. Ancillary Services. During the Term, ISG may request
and, following such request, MSCWC shall provide Ancillary Services on ISG
Substrate or Coated ISG Substrate. MSCWC shall perform Slitting Services in
accordance with Schedule 4.02 hereto.

          SECTION 3.05. Yield Loss. MSCWC will periodically report to ISG the
amount of Yield Loss on all ISG Substrate coated using the Zinc Process and the
Zinc-Nickel Process. If the total Yield Loss on such ISG Substrate during any
fiscal quarter (March through May, June through August, September through
November and December through February) shall exceed 4% of the total tons of ISG
Substrate coated using the Zinc Process or the Zinc-Nickel Process during such
quarter, MSCWC shall promptly reimburse ISG for its cost to manufacture the
Yield Loss tons during such quarter in excess of 4% of such total, plus an
allowance for freight on such excess tons to the Facility and minus the scrap
value (as defined in Section 6.08) of such excess tons.

                                   ARTICLE IV

                            Toll for Coating Services

          SECTION 4.01. Toll for Core Services. During the Term, ISG shall pay
MSCWC the tolls for requested Core Services set forth on Schedule 4.01, subject
to adjustment pursuant to Section 4.03. Invoicing shall be rendered on "coated"
weight and shall include the weight of coatings applied on each individual coil
but shall not include the weights of protective wrappings and shipping
materials. Tolls for Core Services other than Reference Strip shall be
proportionately adjusted in accordance with the past practices of the
Partnership, as illustrated



for four products in Exhibits I through IV of Schedule 4.01. Except as otherwise
expressly stated in this Agreement, the prices specified in Schedule 4.01
include all of MSCWC's charges for electrogalvanizing materials and processing
costs.

          SECTION 4.02. Toll for Ancillary Services. ISG shall pay fees to MSCWC
for Ancillary Services as set forth on Schedule 4.02 hereto. Schedule 4.02 also
sets forth the fees that MSCWC may charge ISG for the idle Line Time required to
(a) switch from the Zinc Process to the Zinc-Nickel Process (a "Mode Change") or
(b) interrupt at ISG's request the existing schedule of production to run an
urgent order from ISG (a "Schedule Break").

          SECTION 4.03. Adjustment to Toll for Coating Services. If during the
Term ISG makes a request of MSCWC for Core Services different from those
previously provided by the Partnership under the Prior Agreement, the parties
shall negotiate in good faith the terms under which MSCWC would perform such
Core Services under this Agreement.

          SECTION 4.04. Electricity, Taxes and Insurance Costs. MSCWC has
informed ISG that the price provisions applicable during the Term hereof exclude
certain fixed electricity, taxes and insurance costs and that any pricing
subsequent to the Term will include such costs.

          SECTION 4.05. Utility Curtailment. Whenever during the Term MSCWC is
notified by a utility provider of a utility curtailment that will affect the
Facility, MSCWC shall promptly notify ISG of such utility curtailment, whereupon
ISG shall have the option to require MSCWC to continue to produce in accordance
with Firm Orders previously received. If ISG elects to exercise such option, the
higher utility rates related to such utility curtailment shall be borne by ISG.
If ISG elects not to exercise such option, 25% of all idle Line Time related to
such utility curtailment shall be deducted from the maximum amount of time on
the Line set forth in Section 3.02 hereof for the month in which the utility
curtailment occurs and to the extent necessary to treat all customers fairly, an
appropriate adjustment shall be made in any applicable Firm Order previously
received by MSCWC pursuant to Section 6.03 hereof.

                                   ARTICLE V

                      Substrate Quantity; Substrate Quality

          SECTION 5.01. Substrate Quantity. With respect to each Firm Order, ISG
shall provide MSCWC with the amount of ISG Substrate sufficient to utilize the
ISG Line Time. If the Line becomes idle as a result of ISG's failure to deliver
ISG Substrate sufficient to utilize the ISG Line Time and a corresponding
Purchase Order to MSCWC, ISG shall pay MSCWC $2,200 per such unused hour of ISG
Line Time (which shall be MSCWC's exclusive remedy).

          SECTION 5.02. Substrate Quality. MSCWC shall promptly advise ISG if
all or part of any shipment of ISG Substrate is obviously damaged or defective.
MSCWC shall have no obligation to perform Coating Services on any damaged or
defective ISG Substrate.



                                   ARTICLE VI

                                   Operations

          SECTION 6.01. Operation of the Facility. MSCWC currently maintains and
shall maintain the capability of the Facility to receive ISG Substrate and to
ship Coated ISG Substrate and Finished Substrate via rail and/or truck as
requested by ISG.

          SECTION 6.02. Communication of ISG Inventory Information. MSCWC will
electronically communicate inventory information regarding ISG Inventory using
the same EDI systems as used under the Prior Agreement. If ISG determines to
change to a different system or different procedures under the same system, any
additional costs will be passed on to ISG.

          SECTION 6.03. Firm Orders. Ninety (90) days prior to the beginning of
each calendar month during the Term, ISG shall deliver to MSCWC a firm order
(each, a "Firm Order") for the amount of time on the Line to be used during such
month to provide Core Services for ISG (with the amount of time on the Line
required for Core Services utilizing each of the Zinc Process, the Zinc-Nickel
Process or the Roll Process set forth separately therein); provided, that
without the written consent of MSCWC, the ISG Line Time with respect to each
such Firm Order shall not exceed the maximum amount of time on the Line set
forth in Section 3.02 hereof for the respective month; and provided, further,
that for the month of May and June, 2003, the "firm orders" that MSCWC has
received from Bethlehem Steel Corporation under the Prior Agreement shall be
deemed to be the Firm Orders of ISG hereunder and for the month of July, 2003,
ISG need not deliver its Firm Order to MSCWC until May 31, 2003.

          SECTION 6.04. Purchase Orders. At least thirty (30) days prior to the
performance by MSCWC of any Core Services, ISG shall deliver to MSCWC a purchase
order (each, a "Purchase Order") for the performance of such Core Services. Each
Purchase Order shall set forth the specifications for Core Services (which
specifications shall be within the reasonable capabilities of the Line) and the
delivery points and scheduled delivery dates for Coated ISG Substrate. In the
event that ISG requests MSCWC to perform Ancillary Services on all or part of
such Coated ISG Substrate, the delivery points and dates set forth in the
Purchase Order shall, absent written notification by ISG to MSCWC, also apply to
the delivery of Finished Substrate. In the event of any inconsistency between
the terms of a Purchase Order and this Agreement, this Agreement shall govern.
ISG shall order Core Services in a reasonably level manner so that excessive
productivity demands will not be placed on the MSCWC's operation of the Facility
during any unit of time. ISG acknowledges that such scheduled delivery dates
will necessarily be approximate, and MSCWC may make such adjustments from time
to time as are reasonably necessary or advisable to achieve economic and
efficient order sizes, to make efficient use of available Substrate and raw
materials and otherwise to maximize efficiency and levels of production.

          SECTION 6.05. Priority of Firm Orders; Modification of Purchase Orders

               (a) ISG may at any time notify MSCWC of any priority within any
Firm Order or Purchase Order and MSCWC shall, to the extent reasonably
practicable, utilize the



Processes requested by ISG to process ISG Substrate in accordance with the
priority set forth in any such notification and shall allocate production time
on the Line in an equitable manner between Core Services and the coating of
other Substrate.

               (b) ISG may, at any time prior to the commencement of coating ISG
Substrate, notify MSCWC of changes in the specifications for all or part of a
Purchase Order, which specifications shall be within the reasonable capabilities
of the Line and otherwise in accordance herewith, and MSCWC shall, to the extent
reasonably possible, utilize the Processes requested by ISG to coat such ISG
Substrate in accordance with such changed specifications.

               (c) In utilizing the Processes requested by ISG to coat ISG
Substrate, MSCWC will comply, to the extent reasonably possible, with any
reasonable request (including, without limitation, changes to delivery points
and scheduled delivery dates) made by ISG provided that MSCWC shall not be
required: (i) to comply with any request that would result in unfair or
inequitable treatment of others who have ordered time on the Line or (ii) to
follow any practices which are not commercially reasonable or consistent with
the effective utilization of the Line.

          SECTION 6.06. Shipment, Handling of ISG Substrate.

               (a) ISG shall be responsible for arranging and paying for the
shipment of ISG Substrate to the Facility and for any risk of loss associated
with such shipments.

               (b) MSCWC shall be responsible for unloading (after removal of
bracing materials and covers, if any) all ISG Substrate delivered by or on
behalf of ISG to the Facility and so shall unload ISG Substrate in accordance
with customary industry practices. MSCWC shall load and unload carriers
expeditiously to avoid delays and shall be liable for the detention of ISG
trucks caused by MSCWC; provided that carriers comply with their scheduled
appointment times. MSCWC shall be liable for all rail demurrage charges which
result from delays caused by MSCWC that extend beyond its free time. The parties
shall work together to avoid delivery or shipping schedules that will over-tax
the normal capacity and operation of the Facility. If any request is made by ISG
for MSCWC to depart from the customary industry practices referred to in this
Section 6.06(b), the parties shall negotiate in good faith toward fulfilling
such request.

          SECTION 6.07. Shipment, Handling of Coated and Finished ISG Substrate.

               (a) MSCWC shall be responsible for arranging, and ISG shall be
responsible for paying for, all shipments of Coated ISG Substrate and/or
Finished Substrate from the Facility pursuant to the following procedures:

               (1) ISG shall furnish MSCWC with written carrier routing
                   instructions for delivery of Coated ISG Substrate and
                   Furnished Substrate, which instructions shall list the
                   routings numerically in order of dispatch priority along with
                   the carrier's phone number. Unless modified by such
                   instructions, MSCWC shall ship Coated ISG Substrate and/or
                   Finished Substrate to the address stated on the relevant
                   Purchase Order. If ISC changes such instructions, ISG



                         shall reimburse MSCWC for any demurrage charges for
                         rail cars ordered by MSCWC in accordance with the
                         original instructions.

                    (2)  Unless ISG instructs MSCWC otherwise, all Coated ISG
                         Substrate and Finished Substrate shall be shipped on a
                         per coil basis, oldest coils first. In the event that
                         MSCWC does not so ship Coated ISG Substrate or Finished
                         Substrate, MSCWC shall be liable to ISG for losses
                         caused by deterioration of aged Coated ISG Substrate
                         and/or Finished Substrate.

                    (3)  In the event that all approved carriers refuse ISG's
                         freight of Coated ISG Substrate and/or Finished
                         Substrate, MSCWC shall contact ISG's external
                         transportation department and such department shall
                         give MSCWC alternative carriers to call. If MSCWC is
                         unable to reach such department to obtain alternative
                         carriers, then MSCWC may use such other carriers as
                         necessary to meet ISG's delivery requirements.

                    (4)  MSCWC shall invoice ISG on a timely basis.

                    (5)  MSCWC shall allocate sufficient storage at the Facility
                         to accommodate ISG Inventory, which storage space shall
                         be approximately equal to the product of (i) the
                         percentage of all Scheduled Line Time subject to Firm
                         Orders from ISG for the following quarter and (ii) the
                         Floor Space available for the storage of Substrate.
                         MSCWC shall store, and provide protection for, such ISG
                         Inventory stored at the Facility in accordance with
                         customary industry practice; provided, however, that
                         when the ISG Inventory stored at the Facility equals
                         the storage space allocated to ISG Inventory pursuant
                         to the immediately preceding sentence, MSCWC shall
                         immediately provide written notice to ISG and,
                         forty-eight hours after delivery of such notice, shall
                         have the right to refuse receipt of additional ISG
                         Substrate for so long as the ISG Inventory stored at
                         the Facility equals the storage space allocated to ISG
                         Inventory pursuant to the immediately preceding
                         sentence.

                    (6)  Coated ISG Substrate and/or Finished Substrate not
                         shipped after 90 days will be subject to the storage
                         fees at the rate of $10 per ton per month.

                    (b)  MSCWC shall execute Trip Title of Coated ISG Substrate
and/or Finished Substrate, subject to any mechanic's, serviceman's, bailee's or
similar liens to which MSCWC is entitled, within twenty-four hours of the date
such information is provided by ISG to MSCWC.

                SECTION 6.08. Scrap. Scrap allowance will be credited at the
beginning of each month for line scrap generated the previous month using the
price for #1 dealer bundles as



quoted by American Metal Market for the month the scrap was generated as the
average of Detroit, Chicago and Pittsburgh, less a $40.00 per ton handling fee.
In the event American Metal Market no longer publishes such information, the
parties shall mutually agree on an appropriate source for such scrap price.
MSCWC shall maintain records of scrap sales and shall, upon ISG's reasonable
request, grant ISG access to all such records.

          SECTION 6.09. Claim Policy. In the event that: (a) due to a breach by
MSCWC of the warranty set forth in Section 7.02, ISG or a customer of ISG
rejects, in whole or in part, any Coated ISG Substrate or Finished Substrate;
(b) MSCWC damages, destroys or loses ISG Inventory (other than normal scrap);
(c) improper processing, storage, clerical or other error on the part of MSCWC
causes ISG Inventory (other than normal scrap) to lose value; or (d) MSCWC fails
to correct or report to ISG any defects in or affecting ISG Inventory that are
reasonably discoverable by MSCWC in the course of its operations, whether such
defects are caused by ISG, MSCWC or another party; then MSCWC shall reimburse
ISG for all fees for Coating Services associated with such Coated ISG Substrate,
Finished Substrate or ISG Inventory ("Claim Product"). The parties shall, with
due diligence, work amicably together to resolve disputes over the underlying
cause of such Claim Product defects. MSCWC's obligation as set forth herein
shall not terminate until a buyer has accepted such Claim Product or has waived
such acceptance as a condition for payment for such Claim Product by such buyer.
ISG's rights under this Section 6.09 shall be its exclusive remedy for Claim
Product and in no event shall MSCWC be liable for any consequential damages or
lost profits.

          SECTION 6.10. Insurance. MSCWC shall maintain in force at its sole
cost and expense general comprehensive liability insurance in an amount not less
than $2,000,000 in the aggregate, $1,000,000 per occurrence and excess liability
coverage in the form of a $4,000,000 umbrella policy (per occurrence and in the
aggregate). If requested by ISG, MSCWC shall provide ISG with a certificate of
insurance covering MSCWC's insurance obligations. Such certificate shall name
ISG as an additional insured and shall contain a statement that ISG will be
notified by the insurer in writing at least thirty (30) days before any material
policy change or cancellation or non-renewal is effected.

          SECTION 6.11. ISG Inventory. For the Term and for a period of six (6)
months thereafter, MSCWC shall provide ISG reasonable access to its records
relating to ISG Inventory. MSCWC shall perform a physical inventory of ISG
Inventory at least once every calendar year. In addition, MSCWC shall, upon
request of ISG during the Term (made not more than once in any calendar year),
permit ISG (or its designees) to conduct a physical inventory of all ISG
Inventory then held by MSCWC. In the event that ISG and MSCWC disagree as to the
amount of ISG Inventory, then the general manager of purchasing of ISG and the
Plant Manager of MSCWC shall meet and in good faith attempt to equitably
determine the amount of ISG Inventory.

          SECTION 6.12. Inspection. MSCWC shall employ customary inspection
techniques on ISG Substrate, Coated ISG Substrate and Finished Substrate during
the performance of the Coating Services, unless directed by ISG in a Purchase
Order or other written instruction; provided that in any event, MSCWC shall not
be responsible for failure to detect any defect in any Coated ISG Substrate or
Finished Substrate which could not have been reasonably discovered during
inspection of such Substrate using its practices under the Prior Agreement.



          SECTION 6.13. Customer Service. ISG shall be responsible for rendering
advice and providing other assistance to ISG customers relating to Coated ISG
Substrate and/or Finished Substrate. At the reasonable request of ISG, MSCWC
shall make qualified personnel available at any location reasonably specified by
ISG or any ISG customer to assist ISG or such customer with respect to the
provision of advice and assistance relating to Coated ISG Substrate or Finished
Substrate. To the extent that ISG or an ISG customer reasonably specifies the
number and/or qualifications of such personnel, MSCWC shall use its reasonable
efforts to provide such personnel to ISG or such ISG customer. Services to be
provided by such personnel may include the investigation of claims or complaints
relating to the coating and/or the slitting of Finished Substrate.

          SECTION 6.14. Compliance with Laws. MSCWC warrants that: (i) no
infringement of any patents shall arise from MSCWC's use of the Processes and
the performance of Core or Ancillary Services; and (ii) subject to Section 7.03
hereof, as of the date of shipment all Coated ISG Substrate or Finished
Substrate supplied to ISG or to an ISG customer will have been processed and
loaded for shipment in accordance with all applicable laws, ordinances, rules
and regulations relating thereto. Without limiting the generality of the
foregoing, MSCWC warrants that any Coated ISG Substrate and Finished Substrate
processed and loaded for shipment by it will be processed and loaded for
shipment in accordance with the Fair Labor Standards Act of 1938, as amended.

          SECTION 6.15. Indemnification.

               (a) MSCWC shall indemnify ISG and its Affiliates against, and
hold them harmless from, any losses, damages, liabilities, costs or expenses,
including, without limitation, the reasonable fees and out-of-pocket expenses of
attorneys retained by MSCWC to defend ISG, arising out of or relating to: (i) a
breach by MSCWC of any of its representations or warranties in this Agreement;
or (ii) any breach by MSCWC of this Agreement; provided that ISG may also be
represented in any action, at its own expense, by attorneys of its own choice.

               (b) ISG shall indemnify MSCWC, MSC and their Affiliates against,
and hold them harmless from, any losses, damages, liabilities, costs or
expenses, including, without limitation, the reasonable fees and out-of-pocket
expenses of attorneys retained by ISG to defend MSCWC, arising out of or
relating to: (i) any breach by ISG of any of its representations and warranties
in this Agreement; or (ii) any breach by ISG of this Agreement; provided that
MSCWC may also be represented in any action, at its own expense, by attorneys of
its own choice.

                                  ARTICLE VII

                          General Terms and Conditions

          SECTION 7.01. Force Majeure. Neither party shall be liable or
responsible to the other party for any delay in or failure of performance of its
obligations under this Agreement to the extent such delay or failure is
attributable to any cause beyond its control, including, without limitation, any
act of God, fire, accident, strike or other labor difficulties, war,



embargo or other governmental act, riot or economic conditions that make
continued operation of the Facility commercially unreasonable; provided,
however, that the party affected thereby gives the other party prompt written
notice of the occurrence of any event which is likely to cause any delay or
failure and sets forth its best estimate of the length of any delay and any
possibility that it shall be unable to resume performance; and provided,
further, that said affected party shall use reasonable commercial efforts to
expeditiously overcome the effects of that event and resume performance.

          SECTION 7.02. Warranty. MSCWC warrants to ISG that all Coated ISG
Substrate and Finished Substrate shipped by MSCWC pursuant to this Agreement
shall be in conformity with the specifications set forth by ISG in the related
Purchase Order (as such Purchase Order may be modified from time to time
pursuant to Section 6.05 hereof) which sp ecifications shall be within the
reasonable capabilities of the Line; provided, however, that ISG's payment for
services provided hereunder shall not be deemed to waive any such warranty.
MSCWC further warrants that, subject to Section 7.05 hereof, all Coated ISG
Substrate and Finished Substrate shipped by MSCWC pursuant to this Agreement
shall be delivered free from any security interest, lien or other encumbrance
created by MSCWC, other than any liens of the carrier to whom MSCWC delivers
such ISG Substrate for shipment. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION
7.02, MSCWC MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED
WARRANTY OF MERCHANTABILITY, OF FITNESS FOR A PARTICULAR PURPOSE OR ARISING FROM
USAGE OF TRADE. In no event will MSCWC be liable for damage to Coated ISG
Substrate or Finished Substrate caused by customer storage practices.

          SECTION 7.03. Trademarks, etc. All ISG Substrate coated by MSCWC
pursuant to this Agreement shall bear the trademark or brand name requested by
ISG. ISG represents and warrants to MSCWC that the application of each such
trademark or brand name by MSCWC has been duly authorized and will not violate
the trademark or other rights of any other Person.

          SECTION 7.04. Title to Substrate and Products. Subject to Section
6.07(b), Section 6.08 and Section 6.09 hereof, ISG shall at all times retain
title to all ISG Inventory (other than normal line scrap). MSCWC agrees that
under no circumstances shall it hold itself out as being the owner of any ISG
Inventory on its premises, including, without limitation, on MSCWC's books and
records. Risk of loss shall pass to ISG upon delivery of the Coated or Finished
Substrate to the carrier.

          SECTION 7.05. UCC Filings. Notwithstanding Section 7.04 hereof, the
parties hereto intend to create in MSCWC the relationship of bailee and
processor with respect to any ISG Inventory in the possession of MSCWC and agree
that upon the request of ISG, an informational or precautionary filing shall be
made pursuant to the Uniform Commercial Code in effect in each jurisdiction
where any ISG Inventory is being held by MSCWC. Following any such request, ISG
and MSCWC shall execute and file such instruments, including financing
statements and related amendments or continuation statements, and take such
other actions as may be deemed by either of them to be necessary or desirable in
order to fully protect the rights of ISG in and to the ISG Inventory. Nothing in
this Section 7.05 or in any instrument executed, delivered or filed pursuant
hereto, and no action or omission on the part of any party hereto, shall



change the fact than the ISG Inventory is legally and equitably owned by ISG and
is held by MSCWC as a bailee and processor only. MSCWC shall inform ISG, in
writing and within thirty (30) days of becoming so aware, of any financing
statement filed by a creditor of MSCWC against the ISG Inventory held by MSCWC
at the Facility.

          SECTION 7.06. Liens. The parties understand and agree that MSCWC shall
have a processor's and bailee's lien on all ISG Substrate that is located at the
Facility and has been processed under this Agreement to secure the payment of
any and all amounts due from ISG or any of its Affiliates hereunder; provided,
however, that MSCWC hereby waives any lien rights it may have with respect to
ISG Substrate located at the Facility until such time as it is processed under
this Agreement.

                                  ARTICLE VIII

                             Procedures for Payment

          SECTION 8.01. Method of Payment. All amounts payable hereunder shall
be paid at such place or to such account as the party entitled to such payment
shall reasonably specify in writing. Each payment shall be made in immediately
available funds prior to 12:00 noon local time at the place of payment, on the
scheduled date when such payment shall be due, unless such scheduled date shall
not be a Business Day, in which case such payment shall be made on the next
succeeding Business Day.

          SECTION 8.02. Late Payment. If any amount payable hereunder is not
paid when due, the paying party shall pay interest (to the extent permitted by
law) on such overdue amount from and including the due date thereof to but
excluding the date of payment thereof (unless such payment shall be made after
12:00 noon local time at the place of payment, on such date of payment, in which
case such date shall be included) at a rate per annum equal to the Prime Rate
plus 3 percent per annum. If any amount payable hereunder is paid on the date
when due, but after 12:00 noon local time at the place of payment, interest
shall be payable as aforesaid for one day.

          SECTION 8.03. Timing of Payments. ISG shall pay MSCWC for Coating
Services provided hereunder net thirty (30) days from the date the Coated ISG
Substrate and/or Finished Substrate has been produced, subject to the following:
All shipments and delivery of Coated ISG Substrate and/or Finished Substrate are
at all times subject to credit approval by MSCWC. Whenever MSCWC for any reason
shall be in doubt as to the responsibility of ISG, MSCWC may decline to make
shipments except on receipt of cash in advance or upon conditions and security
satisfactory to MSCWC. Invoices not paid within terms specified herein shall be
cause to withhold current shipments or defer processing of open orders.

                                   ARTICLE IX

                                   Termination

          SECTION 9.01. Termination Due to Bankruptcy. Notwithstanding Section
7.01 hereof, either party may immediately terminate this Agreement upon the
Bankruptcy of the



other party by written notice to the other party; provided that in the event of
the Bankruptcy of MSCWC, ISG may enter the Facility and take possession of all
ISG Inventory and, without limiting any rights granted hereunder, take such
actions as are permitted by law to protect ISG's interest and to enforce MSCWC's
obligations hereunder.

          SECTION 9.02. Termination Due to Material Breach. If either party
materially defaults in the performance of any of its obligations under this
Agreement, which default is not substantially cured within fifteen (15) days
after notice is given to the defaulting party specifying the default and
referencing this Section 9.02, then the party not in default may, by giving
notice to the defaulting party, terminate this Agreement as of a date specified
in such notice of termination. Notwithstanding the foregoing, with respect to
material defaults that cannot reasonably be cured within fifteen (15) days, it
will not be a default under this Section 9.02 if the defaulting party in good
faith submits a corrective action plan to cure such default, reasonably
acceptable to the other party, within fifteen (15) days of receipt of the notice
of default, and thereafter proceeds with due diligence to carry out such plan to
conclusion; provided that the Term shall not be suspended or extended by any
such cure period.

                                   ARTICLE X

                                     Audits

          SECTION 10.01. Audits. ISG has the right to hire a firm of independent
certified accountants of recognized standing to monitor, investigate and verify
the proper performance of the MSCWC's obligations hereunder. MSCWC shall permit
such accountants to inspect records relating to such obligations during normal
business hours and shall make available in a reasonably timely manner all
current data reasonably deemed necessary by the auditors to perform their task.

                                   ARTICLE XI

                                  MSC Guarantee

          SECTION 11.01. Guarantee. MSC unconditionally guarantees the
performance by MSCWC of all of MSCWC's obligations under this Tolling Agreement
(subject to the conditions thereto set forth herein).



                                  ARTICLE XII

                                  Miscellaneous

          SECTION 12.01. Independent Contractor. MSCWC is an independent
contractor and this Agreement will not create a principal-agent,
employee-employee, partnership or joint venture relationship between MSCWC and
ISG. Each party shall be solely responsible for all of its acts and the acts of
their respective agents, employees and subcontractors. Without limiting the
generality of the foregoing, ISG shall be solely responsible for any personal
injuries or property damage caused or incurred by ISG's employees at the
Facility.

          SECTION 12.02. Confidentiality. Each party and its Affiliates shall
treat the existence of this Agreement, the schedules and attachments hereto and
all data and information furnished by a party or an Affiliate to the other party
hereto or its Affiliates which is marked "Confidential", or contains a similar
proprietary notice clause, as confidential and shall take or cause to be taken
such reasonable precautions as such party takes to safeguard its own
confidential information to prevent disclosure of the existence of this
Agreement and all such data and information to others for a period of three
years from the termination of this Agreement; provided, however, that this
obligation shall not be applicable:

                 (a)  to disclosure to public authorities to the extent required
by applicable law, including, without limitation, any applicable securities laws
or stock exchange rules; provided, however, that the party required to disclose
the existence of this Agreement or any confidential data or information shall
have given the other party prompt written notice thereof so that the other party
may seek a protective order or other appropriate remedy;

                 (b)  to the extent the existence of this Agreement or such data
or information was part of the public domain at the time of its disclosure to
such party;

                 (c)  to the extent the existence of this Agreement or such data
or information became generally available to the public or otherwise part of the
public domain after its disclosure other than through any act or omission of a
party or its Affiliate in breach of this Agreement;

                 (d)  to the extent the existence of this Agreement or such data
or information was subsequently disclosed to such party by a third party on a
non-confidential basis who had no obligation to either party (whether directly
or indirectly) not to disclose the existence of this Agreement or such data or
information; or

                 (e)  to the extent that a party can demonstrate that such data
or information was in such party's possession at the time of disclosure and was
not acquired, directly or indirectly, from the other party or an Affiliate on a
confidential basis.

          SECTION 12.03. Notices. All notices hereunder shall be in writing and
shall be personally delivered or sent via reputable overnight courier or
facsimile. Such notices shall be addressed respectively: All notices hereunder
shall be in writing and shall be personally delivered or sent via reputable
overnight courier or facsimile. Such notices shall be addressed respectively:



           if to MSC or MSCWC, to:

                 Material Sciences Corporation
                 2200 Pratt Boulevard
                 Elk Grove Village, IL 60007

                 Attention of Chief Financial Officer
                 Telecopier:  847-718-8643

           with a copy to:

                 Sidley Austin Brown & Wood
                 10 South Dearborn Street
                 Bank One Plaza
                 Chicago, IL 60603

                 Attention of Jon M. Gregg
                 Telecopier: 312-853-7036

           if to ISG or ISG Sub, to:

                 International Steel Group Inc.
                 3250 Interstate Drive, 2/nd/ Floor
                 Richmond, Ohio 44286-9000

                 Attention of Mr. Gordon Spelich
                 Telecopier: 330-659-9132

           with a copy to:

                 Jones, Day, Reavis & Pogue
                 North Point, 901 Lakeside Avenue
                 Cleveland, Ohio 44114-1190

                 Attention of David Watson
                 Telecopier:  216-579-0212

or to such other address or telecopier number as such party may hereafter
specify for the purpose of providing notice to the other parties. Each such
notice, request or other communication shall be effective (i) if given by
facsimile, when such facsimile is transmitted to the telecopier number specified
in this Section 12.03 and the transmission of the appropriate number of pages is
confirmed or (ii) if given by any other means, when delivered at the address
specified in this Section 12.03.

          SECTION 12.04. Third Parties. Nothing in this Agreement, whether
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons other than the parties hereto and their
respective successors and permitted assigns.



          SECTION 12.05. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their successors and
permitted assigns; provided that except in the case of an assignment of this
Agreement by MSCWC to a Person who is the purchaser of the Facility, no party
hereto shall be permitted to assign any of its obligations under this Agreement
to any other Person without the written consent of each of the other parties
hereto.

          SECTION 12.06. Headings. Headings are for ease of reference only and
shall not form a part of this Agreement.

          SECTION 12.07. Survival. Articles I, II and XIII and Sections 6.09,
7.02, 12.02, 12.07, 12.09 and 12.11 shall survive the termination of this
Agreement.

          SECTION 12.08. Extension of Time for Performance. If this Agreement
calls for any action to be taken on or by a date which is not a Business Day,
such action shall be deemed to be required to be taken on or by the next
succeeding Business Day.

          SECTION 12.09. Governing Law; Entire Agreement.

                 (a)   This Agreement shall be construed in accordance with and
governed by the law of the State of Illinois without giving effect to the
principles of conflicts of laws thereof which might cause the laws of any other
jurisdiction to govern this Agreement.

                 (b)   This Agreement, the schedules and attachments hereto and
the documents referred to herein to be executed contemporaneously herewith
embody the entire agreement of the parties hereto with respect to the subject
matter hereof and supersede all prior agreements with respect thereto.

          SECTION 12.10. Incorporation of Schedules. The schedules identified in
this Agreement are incorporated herein by reference and made a part hereof.

          SECTION 12.11. Amendments and Waivers.

                 (a)   Any provision of this Agreement may be amended or waived
if, but only if, such amendment or waiver is in writing and is signed, in the
case of an amendment, by each party to this Agreement, or in the case of a
waiver, by the party against whom the waiver is to be effective.

                 (b)   No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.

          SECTION 12.12. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original and all of which
taken together shall constitute a single agreement. This Agreement shall become
a binding agreement when



each party hereto shall have received a counterpart hereof signed by each of the
other parties hereto.

          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.

                                  INTERNATIONAL STEEL GROUP INC.


                                  By:  /s/ Gordon Spelich
                                       ------------------
                                       Name:  Gordon Spelich
                                       Title: Vice President



                                  MSC WALBRIDGE COATINGS INC.


                                  By:  /s/ James J. Waclawik, Sr.
                                       --------------------------
                                       Name:  James J. Waclawik, Sr.
                                       Title: Vice President, Chief
                                              Financial Officer and Secretary


                                  MATERIAL SCIENCES CORPORATION


                                  By:  /s/ James J. Waclawik, Sr.
                                       --------------------------
                                       Name:  James J. Waclawik, Sr.
                                       Title: Vice President, Chief
                                              Financial Officer and Secretary




                                 Exhibit Index

Attachment I          Scrap Policy

Schedule 4.01         Tolls for Core Services

Schedule 4.02         Tolls for Ancillary Services

EX-10.CC

                                                                  Exhibit 10(cc)
















                          MATERIAL SCIENCES CORPORATION

                          SUPPLEMENTAL RETIREMENT PLAN

                       (as amended through June 17, 1998)



                                    ARTICLE I
                                    ---------
                                   Definitions
                                   -----------

     When used in this Plan, the terms defined below shall be construed in
accordance with the definitions herein set forth unless the context clearly
requires otherwise:

     1.01 Actuarial Equivalent. A benefit is the actuarial equivalent of any
other benefit if the actuarial reserve required to provide the benefit is equal
to the actuarial reserve required to provide such other benefit, computed on the
basis of the following assumptions: an interest rate of 7% and mortality based
upon the 1971 Group Annuity Tables for Males with respect to Participants, and
the 1971 Group Annuity Table for Females with respect to Beneficiaries. Once
determined, no adjustment for an Actuarial Equivalent shall be made because such
rates, tables and procedures are changed subsequent to such determination.

     1.02 Committee. Committee means the Administrative Committee appointed to
administer and interpret the Plan pursuant to Article V.

     1.03 Company. Material Sciences Corporation, a Delaware corporation, and
any Related Employer which adopts this Plan with the consent of Material
Sciences Corporation.

     1.04 Compensation. Compensation shall mean all compensation (including
bonus pay and commissions, but excluding any Participant's share in any Company
contributions to any employee benefit plan or insurance program maintained by
the Company) paid during the Plan Year by the Company or a Related Entity to the
Participant for services performed for the Company. Compensation shall also
include Participant contributions made pursuant to a salary reduction agreement
which is not includable in the gross income of the Participant under Internal
Revenue Code Section 125 or 402 (a) (8).

     1.05 Disability. Disability shall mean the termination of the Participant's
employment because of his total and permanent disability which, in the opinion
of a physician selected by the Committee, will render the Participant unable to
perform the material duties of his employment with the Company for a substantial
indefinite period of time.

     1.06 Final Average Compensation shall mean the aggregate Compensation paid
to the Participant for the five consecutive calendar years of the ten full
calendar years preceding his Termination of Service or Retirement during which
the Participant's compensation was the highest divided by 60.

     1.07 Participant. Any individual who is selected for participation
hereunder and agrees to be bound by the Plan's terms and provisions in
accordance with Article II.

     1.08 Related Entity. Related Entity shall mean the Company and any
corporation, firm or other enterprise on or after the date such corporation or
business is along with the Company a member of a controlled group of
corporations as defined in Section 414(b) of the Internal Revenue Code or a
member of a group of trades or businesses under common control as defined in
Section 414(c) of the Code.



     1.09 Retirement. Severance of the Participant's employment with the Company
on or after the later of (a) the Participant's 60th birthday or (b) the tenth
anniversary of his date of hire; provided, however, nothing in this Plan shall
require a Participant to retire at any particular time, retirement being subject
to the basic personnel policies of the Company. To the extent a Participant
continues his employment with the Company beyond his 60th birthday, he may
continue to participate in this Plan.

     1.10 Social Security Benefit. The Social Security Benefit shall mean the
estimated monthly amount available to a Participant at age 65 (or upon actual
retirement, if later) under the provisions of Title II of the Social Security
Act in effect at the time of his termination of employment, without regard to
any increases in the wage base or benefit levels that take effect after the date
of termination of employment, subject to the following: If the Participant
actually retires prior to age 65, his Social Security Benefit shall be estimated
for assuming continuation of his current annual Compensation until age 65 at the
same rate in effect at the date of determination. The fact that a Participant
does not actually receive such amount because of a failure to apply or
continuance of work, or for any other reason, shall be disregarded.

     1.11 Spouse. The Spouse of the Participant to whom the Participant was
legally married for a period of one year at the time of the Participant's death.

     1.12 Termination of Service. The severance of the Participant's employment
with the Company prior to his Retirement other than by reason of his death or
Disability.

     1.13 Year of Service. A Participant shall be credited with one year of
service on each anniversary of his date of hire provided he has been
continuously employed by the Company or a Related Entity during the preceding 12
months.

                                   ARTICLE II
                                   ----------
                          Eligibility for Participation
                          -----------------------------

     2.01 Participation. Participation in the Plan shall be limited to those
employees of the Company who are designated as Participants by the Board of
Directors of the Company in their complete and absolute discretion; provided the
employee so designated elects to participate in accordance with Section 2.02.

     2.02 Agreement to Participate. Each employee who is selected for
participation in the Plan in accordance with Section 2.01 shall become a
Participant upon the filing of a written agreement to abide by the terms and
provisions of the Plan and to cooperate in providing information, availability
for physical examinations and other action necessary to the proper
administration of the Plan as required under Section 7.07.

                                  ARTICLE III
                                  -----------
                                    Benefits
                                    --------

     3.01 Normal Retirement Benefit. A Participant who terminates his employment
at or after the later of his attainment of age 65 or completion of 10 Years of
Service shall be entitled to a monthly "Normal Retirement Benefit" for the
benefit period set forth in Section 4.01 equal to the product obtained by
multiplying (a) his Final Average Compensation times (b) the number of

                                       3



his Years of Service (not to exceed thirty) times (c) his Benefit Percentage (as
described below), such product to be reduced by the sum of (i) and (ii):

               (i) The amount of his Social Security Benefit at the time his
          Normal Retirement Benefit becomes payable, reduced by 5/9 of 1% for
          each full month by which the benefit commencement date precedes his
          attainment of age 65 but not to exceed 36 months; and

               (ii) The monthly amount payable, determined at the time his
          Normal Retirement Benefit under the Plan would commence to the
          Participant, under any tax-qualified pension or retirement plan
          (including any Retirement Account under the Company's Savings and
          Investment Plan (the "SIP Plan") but not including the Employee's
          Regular (Matching), Before-Tax and After-Tax Accounts under the SIP
          Plan) maintained by the Company or by any other employer in the past
          or future. If the benefit under any such pension or retirement plan is
          payable in a form other than a single life annuity or commences
          earlier or later than the date the Normal Retirement Benefit commences
          hereunder, such benefit shall be adjusted to the Actuarial Equivalent
          of a single life annuity commencing on the date the Normal Retirement
          Benefit commences hereunder, reduced by 5/9 of 1% for each month by
          which the benefit commencement date precedes his attainment of age 65.

The Benefit Percentage applicable in computing the Normal Retirement Benefit
shall be determined by the age of the Participant on his date of hire in
accordance with the following schedule:


           Age at Date of Hire                      Benefit Percentage
           -------------------                      ------------------

           Under 40                                       2.00%
           40 through 49                                  2.25%
           50 or older                                    2.50%

     3.02 Early Retirement Benefit. A Participant who terminates his employment
before he is entitled to a Normal Retirement Benefit, but after his
qualification for Retirement shall be entitled to an Early Retirement Benefit
equal to his Normal Retirement Benefit (computed in accordance with Section
3.01) reduced by a percentage based upon his age at benefit commencement payable
for the period specified in Section 4.01:



                  Age at Benefit           Early Retirement Benefit
                   Commencement              Reduction Percentage
                 -----------------        ---------------------------
                        60                          25.0%
                        61                          20.5%
                        62                          16.0%
                        63                          11.5%
                        64                           7.0%

                                        4



     3.03 Termination of Service Benefit. If the Participant terminates his
employment with the Company prior to his attainment of age 60 for a reason other
than death or Disability but after completion of 10 Years of Service, the
Participant shall be entitled to the Normal Retirement Benefit set forth in
Section 3.01 commencing upon his attainment of age 65 or with the consent of the
Committee, such a Participant may request earlier commencement of his benefit
(but not earlier than his qualification for Retirement), subject to the
reduction provided in Section 3.02, provided the Participant is living on the
benefit commencement date.

     3.04 Disability Benefit. If the Participant's termination of employment
occurs as a result of a Disability, the Participant shall be entitled to the
Normal Retirement Benefit provided under Section 3.01 commencing at age 65 or,
at the election of the Participant, an Early Retirement Benefit provided under
Section 3.02 commencing prior to his attainment of age 65, but not earlier than
his attainment of age 60, provided the Participant is living on the benefit
commencement date.

     3.05 Death Benefit. In the event of the death of the Participant prior to
his completion of 10 Years of Service, the Participant's Spouse shall be
entitled to an amount equal to 50% of the Normal Retirement Benefit to which the
Participant would have been entitled based upon his Years of Service prior to
death, commencing on the earliest date on which the Participant would have been
eligible for Retirement had he lived.

                                   ARTICLE IV
                                   ----------
                             Distribution of Benefit
                             -----------------------

     4.01 Benefit Commencement. The benefits payable under Article III shall
commence as of the first day of the month following the Participant's Retirement
in the case of a benefit payable under Section 3.01 or 3.02; the Participant's
attainment of age 65 in the case of a benefit payable under Section 3.03 or
3.04, unless the Participant elects an earlier commencement date permitted under
such sections; or the earliest date on which the Participant would have been
eligible for Retirement in the case of a benefit payable under Section 3.05.

     4.02 Benefit Period.

          (a) The benefits payable under Sections 3.01, 3.02, 3.03 and 3.04
     shall be paid to the Participant (or the Participant's Spouse in the event
     of the Participant's death after payments have commenced to the
     Participant) for a period ending on the earliest of the following:

               (i) the date on which a total of 120 monthly payments have been
          paid to the Participant or his Spouse;

               (ii) the date of death of the Participant, if the Participant has
          no surviving Spouse; or

               (iii) the date of death of the Participant's surviving Spouse.

          (b) The benefits payable under Section 3.05 shall be paid to the
     Participant's surviving Spouse for a period ending on the earlier of the
     following:


                                        5



          (i) the date on which 120 monthly payments have been paid to the
     Participant's surviving Spouse; or

          (ii) the date of death of the Participant's surviving Spouse.

     4.03 Lump-Sum Payment. In the sole discretion of the Committee, a benefit
payable in accordance with Article III may be paid to the Participant or his
surviving Spouse in a single lump sum payment which is the Actuarial Equivalent
of the benefit to which the Participant or his surviving Spouse is entitled.

     4.04 Withholding: Payroll Taxes. To the extent required by the law in
effect at the time payments. of benefits are made, the Company shall withhold
from such payments any federal or state taxes or other amounts required by law
to be withheld.

                                   ARTICLE V
                                   ---------
                                 Administration
                                 --------------

     5.01 Committee. The Board of Directors of the Company shall appoint a
Committee of one or more members to administer and interpret the Plan. Members
of the Committee shall be selected by the Board in its sole discretion and any
member of the Committee may be removed by the Board at any time, with or without
cause. A Committee member may also be a Participant under the Plan, but no
Committee member may be involved with any matter relating to his own benefits
under the Plan or any other financial interest he may have under the Plan. The
Committee shall have the authority to adopt, amend, interpret and enforce rules
and regulations for the operation and administration of the Plan and decide or
resolve any and all questions relating to the Plan.

     5.02 Agents. In the administration of the Plan, the Committee may from time
to time, employ agents and delegate to them such administrative duties as it
sees fit and consult with counsel who may also be counsel to the Company.

     5.03 Binding Effect. Any decision or action of the Committee relating to
the Plan shall be final, conclusive and binding upon all Participants, their
Spouses and any other person having any interest in the Plan.

     5.04 Claims Procedure.

          (a) If a Participant or a surviving Spouse files a claim for benefits
     under the Plan and such claim is wholly or partially denied, notice of the
     decision denying such claim shall be furnished to the claimant within 60
     days of the receipt of such claim by the Committee. The notice provided
     shall be in writing and state the specific reasons for the denial,
     including specific references to the Plan document where relevant and
     provide a description of any additional material or information necessary
     for the claimant to perfect his claim, and an explanation of the Plan's
     review procedure.

          (b) A claimant or his duly authorized representative shall have the
     right to request a review of the decision of the Committee by delivering
     written notice to the Board of Directors of the Company within 30 days
     after the claimant receives notice of

                                        6



     the Committee's decision. The claimant or his duly authorized
     representative shall also have the right to review pertinent documents and
     to submit issues and comments in writing within 30 days of receipt by the
     claimant of the Committee's notice denying his claim. Requests for review
     shall be considered by the Board of Directors of the Company, who shall
     render their decision within 90 days of the date the request for review is
     filed with it. The Board shall deliver its decision in writing to the
     claimant providing the specific reasons for the decision.

                                   ARTICLE VI
                                   ----------
                      Amendment and Termination of the Plan
                      -------------------------------------

     6.01 Amendment. The Board of Directors of the Company may at any time, and
from time to time, amend the Plan in whole or in part, provided, however, that
no amendment shall be effective to decrease any benefit accrued under the Plan
as of the later of the effective date or date of adoption of such amendment.

     6.02 Termination. The Board of Directors of the Company may, at any time,
in its sole discretion, terminate the Plan, provided, however, no such
termination shall be effective to decrease any benefit accrued under the Plan as
of the date of such termination. In the event of any termination of the Plan,
the Participant or his surviving Spouse shall be entitled to a lump sum payment
equal to the Actuarial Equivalent of the Normal Retirement Benefit payable
pursuant to Section 3.01.

                                   ARTICLE VII
                                   -----------
                                  Miscellaneous
                                  -------------

     7.01 ERISA. The Plan will be maintained by the Company primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees and, therefore, is intended to be exempt from Parts
2, 3 and 4 of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). It is further intended that this Plan will not cause the interest of
a Participant in the Plan to be includable in his (or his surviving Spouse's)
gross income prior to actual receipt of Plan benefits for purposes of the
Internal Revenue Code of 1986, as amended. If the Plan is held to be subject to
Parts 2, 3 or 4 of ERISA or to create current taxation of Plan Participants
under the Code, by a federal court, and appeals from that holding are no longer
timely or have been exhausted, this Plan shall terminate.

     7.02 Unsecured Creditor. Participants and their surviving Spouses, heirs,
successors and assigns shall have no legal or equitable rights, interests or
claims in any property or assets of the Company. The assets of the Company shall
not be held under any trust for the benefit of Participants, their surviving
Spouses, heirs, successors or assigns or held in any way as collateral for the
fulfilling of the obligations of the Company under this Plan. Any and all of the
Company's assets shall be and remain, the general, unpledged, unrestricted
assets of the Company. The Company's obligation under the Plan shall be merely
that of an unfunded and unsecured promise of the Company to pay money in the
future.

     7.03 Obligation to Employer. If a Participant becomes entitled to a
distribution of a benefit under the Plan, and if at such time the Participant
has outstanding any debt, obligation, or

                                        7



other liability representing an amount owing to the Company, or any direct or
indirect parent, subsidiary or affiliate of the Company, then the Company may
offset such amount owing against the amount of the benefit otherwise payable
under the Plan to the Participant. Such determination shall be made by the
Committee.

     7.04 Non-Competition. Notwithstanding anything contained in this Plan to
the contrary, the Company shall not be obligated to make any payments under this
Plan to the Participant or his surviving Spouse after the date on which (a) the
Participant shall engage in or take part in any activity, whether as an
employer, proprietor, partner, stockholder (other than the holder of less than
5% of the stock of a corporation the securities of which are traded on a
national securities exchange or in an over-the-counter market), director,
officer or otherwise, in competition with any business conducted by the Company
or a Related Entity while the Participant was employed by the Company or (b) the
Participant solicits, in competition with the Company or any Related Entity, any
person who is a customer of any business conducted by the Company or a Related
Entity while the Participant is employed by the Company or the Participant
divulges any trade secrets, customer lists or other confidential business
information of the Company or a Related Entity.

     7.05 Non-Assignability. Neither a Participant nor any other person shall
have any right to sell, assign, transfer, pledge, mortgage or otherwise
encumber, transfer, hypothecate or convey in advance of actual receipt the
benefit payable under the Plan, or any part thereof, which are expressly
declared to be unassignable and nontransferable. No part of the benefit shall,
prior to actual payment, be subject to seizure or sequestration for the payment
of any debt, judgments, alimony, or separate maintenance owed by the Participant
or any other person, nor be transferable by operation of law in the event of a
Participant' s or any other person's bankruptcy or insolvency.

     7.06 Not a Contract of Employment. The terms and conditions of the Plan
shall not be deemed to constitute a contract of employment between the Company
and the Participant, and the Participant or his surviving Spouse shall not have
any rights against the Company except as may be otherwise specifically provided
herein. Moreover, nothing in the Plan shall be deemed to give a Participant the
right to be retained in the employ of the Company or to limit in any way the
right of the Company to discipline or discharge the Participant at any time.

     7.07 Cooperation. A Participant will cooperate with the Company by
furnishing any and all information requested by the Company, by taking such
physical examinations as the Company may request and by taking such other action
as may be requested by the Company.

     7.08 Terms. Whenever any words are used herein in the masculine, they shall
be construed as though they were used in the feminine in all cases where they
would so apply; and whenever any words are used herein in the singular or in the
plural, they shall be construed as though they were used in the plural or the
singular, as the case may be, in all cases where they would so apply.

     7.09 Captions. The captions of the Articles and Sections of the Plan are
for convenience only and shall not control or affect the meaning or construction
of any of its provisions.

                                       8



     7.10 Governing Law. The provisions of the Plan shall be construed and
interpreted according to the laws of the State of Delaware.

     7.11 Validity. In case any provision of the Plan shall be held illegal or
invalid for any reason, such illegality or invalidity shall not affect the
remaining parts, but the Plan shall be construed and enforced as if such illegal
or invalid provision had never been a part hereof.

     7.12 Notice. Any notice or filing required or permitted to be given to the
Committee under the Plan shall be sufficient if in writing and hand delivered,
or sent by Registered or Certified Mail, to the principal office of the Company.
Such notice shall be deemed given as of the date of delivery or, if delivery is
made by mail, as of the date shown on the postmark or the. receipt for
registration or certification.

     7.13 Successors. The provisions of the Plan shall be binding and inure to
the benefit of the Company and its successors and assigns. The term "successors"
as used herein shall include any corporate or other business entity which shall,
by merger, consolidation, purchase or otherwise acquire all or substantially all
of the business and assets of the Company and successors of any such corporation
or other business entity.

                                  ARTICLE VIII
                                Change in Control

     8.01 (a) Change in Control Benefits. If there is a Change in Control (as
defined in Section 8.01(b) (i)) and the Participant's employment by the Company
is terminated for reasons other than Cause (as defined in Section 8.01(b) (ii)),
disability, death or voluntary termination by the Participant, then the
Participant shall be entitled to a Normal Retirement Benefit even though the
Participant may not have yet completed 10 Years of Service and the Participant's
termination shall be deemed to have occurred after the Participant's 65th
birthday and the Participant shall be credited with two additional Years of
Service for purposes of determining the amount of the Participant's Normal
Retirement Benefit under Section 3.01 and the date on which such benefit shall
begin to be paid to the Participant pursuant to Section 4.01.

     (b) Definitions.

          (i) "Change in Control" means the occurrence of any one of the
     following events:

               (A) there is an acquisition by any individual, entity or group
          (within the meaning of Section 13 (d) (3) or 14 (d) (2) of the
          Exchange Act) of beneficial ownership (within the meaning of Rule
          13d-3 promulgated under the Exchange Act) of 20% or more of the
          combined voting power of the then outstanding voting securities of the
          Company entitled to vote generally in the election of directors;

               (B) during any period of two consecutive years, individuals who
          at the beginning of such period constitute the Board of Directors of
          the Company and any new director (other than a director designated by
          a person who has entered into an agreement with the Company to effect
          a

                                       9



          transaction described in subparagraphs (A) or (C) of this definition)
          whose election by the Board of Directors of the Company or nomination
          for election by the Company's stockholders was approved by a vote of
          at least two-thirds (2/3) of the directors then still in office who
          either were directors at the beginning of the period or whose election
          or nomination for election was previously so approved, cease for any
          reason to constitute a majority thereof; or

               (C) the stockholders of the Company approve (I) a merger or
          consolidation of the Company with any other entity, other than a
          merger or consolidation which would result in the voting securities of
          the Company outstanding immediately prior thereto continuing to
          represent (either by remaining outstanding or through the surviving
          entity) at least 50% of the combined voting power of the voting
          securities of the Company or such surviving entity outstanding
          immediately after such merger or consolidation, or (II) a plan of
          complete liquidation of the Company or an agreement for the sale or
          disposition of Directors called and held for such purpose (after
          reason able notice to Participant and an opportunity for Participant,
          together with counsel, to be heard before the Board of Directors),
          finding that in the good faith opinion of the Board of Directors,
          Participant was guilty of conduct set forth above in clauses (A) or
          (B) of the first sentence of this definition and specifying the
          particulars thereof in detail.

                                             Material Sciences Corporation

                                             By:
                                                --------------------------------
                                                    Chairman, President and
                                                    Chief Executive Officer


                                       10

EX-21

                                                                     Exhibit 21

Subsidiaries of the Registrant



Name of Subsidiary                                                State or Jurisdiction of Incorporation
- ------------------                                                --------------------------------------
                                                               
Material Sciences Corporation, Engineered Materials and Solutions
  Group, Inc. (formerly known as MSC Pre Finish Metals Inc.)      Illinois

Material Sciences Corporation, Electronic Materials and Devices
  Group, Inc.                                                     Delaware

MSC Pre Finish Metals (EGV) Inc.                                  Delaware

MSC Pre Finish Metals (MV) Inc.                                   Delaware

MSC Pre Finish Metals (MT) Inc.                                   Delaware

MSC Walbridge Coatings Inc.                                       Delaware

MSC San Diego Holding Company Inc. (formerly known as MSC
  Specialty Films, Inc.)                                          California

MSC Laminates and Composites Inc.                                 Delaware

MSC Laminates and Composites (EGV) Inc.                           Delaware

Material Sciences Foreign Sales Corporation                       U. S. Virgin Islands

MSC Richmond Holding Company Inc. (formerly known as MSC
  Pinole Point Steel Inc.)                                        Delaware

MSC Pre Finish Metals (PP) Inc.                                   Delaware

MSC/GAC Laminates and Composites Holding GmbH                     Germany

MSC/GAC Laminates and Composites GmbH & Co.                       Germany

MSC/GAC Beteiligungs GmbH                                         Germany

MSC/TEKNO Laminates and Composites LTDA                           Brazil

EX-23.A

                                                                  Exhibit 23(a)

Consent of Deloitte & Touche LLP

   We consent to the incorporation by reference in Registration Statements on
Form S-8 of Material Sciences Corporation (No.'s 33-00067, 33-40610, 33-41310,
33-57648, 33-81064, 333-15679, 333-15677, 333-33885, 333-33897 and 333-88387)
of our report dated April 16, 2003 (which report expresses an unqualified
opinion and includes explanatory paragraphs relating to (i) the Company's
change in its method of accounting for goodwill and intangible assets, (ii)
disclosures, related to the aforementioned accounting change, of financial
statement amounts related to the 2002 and 2001 financial statements and (iii)
the change in the composition of reportable segments in 2003 and
reclassifications of financial statement amounts related to the 2002 and 2001
financial statements; the 2002 and 2001 financial statements were audited by
other auditors who have ceased operations and for which we have expressed no
opinion or other form of assurance other than with respect to such disclosures
and reclassifications) appearing in this Annual Report on Form 10-K of Material
Sciences Corporation for the year ended February 28, 2003.


 /S/  DELOITTE & TOUCHE LLP
- ---------------------------
    Deloitte & Touche LLP

Chicago, Illinois
May 15, 2003

EX-23.B

                                                                   Exhibit 23(b)

                 NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP


     Arthur Andersen LLP audited the balance sheets of Material Sciences
Corporation and its subsidiaries (collectively, "MSC") as of February 28, 2002
and 2001, and the related statements of income (loss), cash flows, shareowners'
equity and comprehensive income (loss) for each of the three years in the period
ended February 28, 2002. These financial statements are included in MSC's Annual
Report on Form 10-K for the year ended February 28, 2003 and incorporated by
reference into MSC's previously filed Registration Statements on Form S-8 (File
Nos. 33-00067, 33-40610, 33-31310, 33-57648, 33-81064, 333-15679, 333-15677,
333-33885, 333-33897 and 333-88387). After reasonable efforts, MSC has not been
able to obtain the consent of Arthur Andersen LLP to the incorporation by
reference of its audit report dated April 29, 2002 into the above-referenced
Registration Statements. The absence of an updated consent may limit recovery by
investors from Arthur Andersen LLP, particularly under Section 11(a) of the
Securities Act of 1933, as amended.

EX-99

                                                                     EXHIBIT 99

         CERTIFICATIONS OF THE REGISTRANT'S CHIEF EXECUTIVE OFFICER AND
         CHIEF FINANCIAL OFFICER 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 Material Sciences Corporation (the
"Company") on Form 10-K for the fiscal year ending February 28, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Michael J. Callahan, President and Chief Executive Officer of the Company,
certify pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that to my knowledge:

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

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




May 15, 2003                         By:  /s/ Michael J. Callahan
                                          ------------------------------------
                                          Michael J. Callahan
                                          President and Chief Executive Officer


     In connection with the Report, I, James J. Waclawik, Sr., Vice President,
Chief Financial Officer and Secretary of the Company, certify pursuant to 18
U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that to my knowledge:

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

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



May 15, 2003                         By:  /s/ James J. Waclawik, Sr.
                                          -------------------------------------
                                          James J. Waclawik, Sr.
                                          Vice President,
                                          Chief Financial Officer and Secretary