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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended
August 31, 2006

Commission File Number 1-8803



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MATERIAL SCIENCES CORPORATION

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 95-2673173                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS employer identification number)
|2200 East Pratt Boulevard Elk Grove Village, Illinois          |  | 60007                               
|(Address of principal executive offices)                       |  | (Zip code)                          

Registrants telephone number, including area code: (847) 439-2210



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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 whether the registrant is a large accelerated filer, an
accelerated filer or a non accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated
filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

As of October 3, 2006, there were 14,603,974 outstanding shares of common stock, $.02 par value.



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MATERIAL SCIENCES CORPORATION

FORM 10-Q

For The Quarter Ended August 31, 2006

(In thousands, except per share data)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements



|(a) | Financial statements of Material Sciences Corporation and Subsidiaries
|--- | ----------------------------------------------------------------------



2



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Condensed Consolidated Statements of Income (Unaudited)

Material Sciences Corporation and Subsidiaries



|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ------ | - | --------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                           |  | Three Months Ended August 31, |        |   | Six Months Ended August 31, |  
|(In thousands, except per share data)                                                                      |  | 2006                          |        |   | 2005                        |   |        | 2006 |  |   | 2005    |  
|Net Sales                                                                                                  |  | $                             | 67,313 |   |                             | $ | 73,975 |      |  | $ | 143,077 |   |  | $ | 147,403 |  
|Cost of Sales                                                                                              |  |                               | 54,012 |   |                             |   | 60,961 |      |  |   | 116,685 |   |  |   | 119,315 |  
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Gross Profit                                                                                               |  |                               | 13,301 |   |                             |   | 13,014 |      |  |   | 26,392  |   |  |   | 28,088  |  
|Selling, General and Administrative Expenses                                                               |  |                               | 8,588  |   |                             |   | 9,154  |      |  |   | 17,198  |   |  |   | 18,005  |  
|Restructuring Expenses                                                                                     |  |                               | 14     |   |                             |   | 52     |      |  |   | 592     |   |  |   | 248     |  
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Income from Operations                                                                                     |  |                               | 4,699  |   |                             |   | 3,808  |      |  |   | 8,602   |   |  |   | 9,835   |  
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Other (Income) and Expense:                                                                                |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Interest (Income) Expense, Net                                                                             |  |                               | (268   | ) |                             |   | 29     |      |  |   | (394    | ) |  |   | 45      |  
|Equity in Results of Joint Venture                                                                         |  |                               | (32    | ) |                             |   | (65    | )    |  |   | (56     | ) |  |   | (118    | )
|Other, Net                                                                                                 |  |                               | (39    | ) |                             |   |       |      |  |   | (63     | ) |  |   |        |  
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Total Other Income, Net                                                                                    |  |                               | (339   | ) |                             |   | (36    | )    |  |   | (513    | ) |  |   | (73     | )
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Income from Continuing Operations Before Provision for Income Taxes                                        |  |                               | 5,038  |   |                             |   | 3,844  |      |  |   | 9,115   |   |  |   | 9,908   |  
|Provision for Income Taxes                                                                                 |  |                               | 2,318  |   |                             |   | 1,809  |      |  |   | 4,141   |   |  |   | 4,324   |  
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Income from Continuing Operations                                                                          |  |                               | 2,720  |   |                             |   | 2,035  |      |  |   | 4,974   |   |  |   | 5,584   |  
|Loss on Discontinued Operations (Net of Benefit for Income Taxes of $0, $707, $0 and $1,204, Respectively) |  |                               |       |   |                             |   | (1,150 | )    |  |   |        |   |  |   | (1,960  | )
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Net Income                                                                                                 |  | $                             | 2,720  |   |                             | $ | 885    |      |  | $ | 4,974   |   |  | $ | 3,624   |  
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Basic Net Income Per Share:                                                                                |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Income from Continuing Operations                                                                          |  | $                             | 0.19   |   |                             | $ | 0.14   |      |  | $ | 0.34    |   |  | $ | 0.38    |  
|Loss on Discontinued Operations                                                                            |  |                               |       |   |                             |   | (0.08  | )    |  |   |        |   |  |   | (0.13   | )
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Basic Net Income Per Share                                                                                 |  | $                             | 0.19   |   |                             | $ | 0.06   |      |  | $ | 0.34    |   |  | $ | 0.25    |  
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Diluted Net Income Per Share:                                                                              |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Income from Continuing Operations                                                                          |  | $                             | 0.19   |   |                             | $ | 0.14   |      |  | $ | 0.34    |   |  | $ | 0.38    |  
|Loss on Discontinued Operations                                                                            |  |                               |       |   |                             |   | (0.08  | )    |  |   |        |   |  |   | (0.13   | )
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Diluted Net Income Per Share                                                                               |  | $                             | 0.19   |   |                             | $ | 0.06   |      |  | $ | 0.34    |   |  | $ | 0.25    |  
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Weighted Average Number of Common Shares Outstanding Used for Basic Net Income Per Share                   |  |                               | 14,655 |   |                             |   | 14,641 |      |  |   | 14,689  |   |  |   | 14,634  |  
|Dilutive Shares                                                                                            |  |                               | 5      |   |                             |   | 52     |      |  |   | 8       |   |  |   | 45      |  
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Weighted Average Number of Common Shares Outstanding Plus Dilutive Shares                                  |  |                               | 14,660 |   |                             |   | 14,693 |      |  |   | 14,697  |   |  |   | 14,679  |  
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Outstanding Common Stock Options Having No Dilutive Effect                                                 |  |                               | 286    |   |                             |   | 140    |      |  |   | 286     |   |  |   | 140     |  
|                                                                                                           |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



3



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Condensed Consolidated Balance Sheets (Unaudited)

Material Sciences Corporation and Subsidiaries



|                                                                   |  |                 |          |   |                   |   |          |  
|------------------------------------------------------------------ |  | --------------- | -------- | - | ----------------- | - | -------- | -
|(In thousands)                                                     |  | August 31, 2006 |          |   | February 28, 2006 |  
|Assets:                                                            |  |                 |          |   |                   |   |          |  
|Current Assets:                                                    |  |                 |          |   |                   |   |          |  
|Cash and Cash Equivalents                                          |  | $               | 11,400   |   |                   | $ | 13,600   |  
|Receivables, Less Reserves of $3,848 and $5,264, Respectively      |  |                 | 33,890   |   |                   |   | 36,419   |  
|Income Taxes Receivable                                            |  |                 | 373      |   |                   |   | 2,687    |  
|Prepaid Expenses                                                   |  |                 | 2,062    |   |                   |   | 1,234    |  
|Inventories                                                        |  |                 | 51,844   |   |                   |   | 40,058   |  
|Deferred Income Taxes                                              |  |                 | 2,599    |   |                   |   | 2,599    |  
|Current Assets of Discontinued Operation - EMD                     |  |                 |         |   |                   |   | 4        |  
|                                                                   |  |                 |          |   |                   |   |          |  
|Total Current Assets                                               |  |                 | 102,168  |   |                   |   | 96,601   |  
|                                                                   |  |                 |          |   |                   |   |          |  
|Property, Plant and Equipment                                      |  |                 | 239,516  |   |                   |   | 233,606  |  
|Accumulated Depreciation and Amortization                          |  |                 | (165,823 | ) |                   |   | (160,468 | )
|                                                                   |  |                 |          |   |                   |   |          |  
|Net Property, Plant and Equipment                                  |  |                 | 73,693   |   |                   |   | 73,138   |  
|                                                                   |  |                 |          |   |                   |   |          |  
|Other Assets:                                                      |  |                 |          |   |                   |   |          |  
|Investment in Joint Venture                                        |  |                 | 2,235    |   |                   |   | 2,153    |  
|Goodwill                                                           |  |                 | 1,319    |   |                   |   | 1,319    |  
|Deferred Income Taxes                                              |  |                 | 254      |   |                   |   | 813      |  
|Other                                                              |  |                 | 521      |   |                   |   | 544      |  
|                                                                   |  |                 |          |   |                   |   |          |  
|Total Other Assets                                                 |  |                 | 4,329    |   |                   |   | 4,829    |  
|                                                                   |  |                 |          |   |                   |   |          |  
|Total Assets                                                       |  | $               | 180,190  |   |                   | $ | 174,568  |  
|                                                                   |  |                 |          |   |                   |   |          |  
|Liabilities:                                                       |  |                 |          |   |                   |   |          |  
|Current Liabilities:                                               |  |                 |          |   |                   |   |          |  
|Accounts Payable                                                   |  | $               | 33,440   |   |                   | $ | 30,492   |  
|Accrued Payroll Related Expenses                                   |  |                 | 5,179    |   |                   |   | 5,877    |  
|Accrued Expenses                                                   |  |                 | 6,662    |   |                   |   | 5,896    |  
|Current Liabilities of Discontinued Operation - EMD                |  |                 | 6        |   |                   |   | 467      |  
|Current Liabilities of Discontinued Operation - Pinole Point Steel |  |                 | 121      |   |                   |   | 216      |  
|                                                                   |  |                 |          |   |                   |   |          |  
|Total Current Liabilities                                          |  |                 | 45,408   |   |                   |   | 42,948   |  
|                                                                   |  |                 |          |   |                   |   |          |  
|Long-Term Liabilities:                                             |  |                 |          |   |                   |   |          |  
|Other                                                              |  |                 | 9,450    |   |                   |   | 9,748    |  
|                                                                   |  |                 |          |   |                   |   |          |  
|Total Long-Term Liabilities                                        |  |                 | 9,450    |   |                   |   | 9,748    |  
|                                                                   |  |                 |          |   |                   |   |          |  
|Shareowners Equity:                                               |  |                 |          |   |                   |   |          |  
|Preferred Stock                                                    |  |                 |         |   |                   |   |         |  
|Common Stock                                                       |  |                 | 380      |   |                   |   | 378      |  
|Additional Paid-In Capital                                         |  |                 | 78,923   |   |                   |   | 78,573   |  
|Treasury Stock at Cost                                             |  |                 | (48,757  | ) |                   |   | (46,528  | )
|Retained Earnings                                                  |  |                 | 93,105   |   |                   |   | 88,131   |  
|Accumulated Other Comprehensive Income                             |  |                 | 1,681    |   |                   |   | 1,318    |  
|                                                                   |  |                 |          |   |                   |   |          |  
|Total Shareowners Equity                                          |  |                 | 125,332  |   |                   |   | 121,872  |  
|                                                                   |  |                 |          |   |                   |   |          |  
|Total Liabilities and Shareowners Equity                          |  | $               | 180,190  |   |                   | $ | 174,568  |  
|                                                                   |  |                 |          |   |                   |   |          |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



4



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Condensed Consolidated Statements of Cash Flow (Unaudited)

Material Sciences Corporation and Subsidiaries



|                                                                    |  |                            |         |   |      |   |         |  
|------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                    |  | Six Months EndedAugust 31, |        
|(In thousands)                                                      |  | 2006                       |         |   | 2005 |  
|Cash Flows From:                                                    |  |                            |         |   |      |   |         |  
|Operating Activities:                                               |  |                            |         |   |      |   |         |  
|Net Income                                                          |  | $                          | 4,974   |   |      | $ | 3,624   |  
|Adjustments to Reconcile Net Income to Net Cash                     |  |                            |         |   |      |   |         |  
|Provided by Operating Activities:                                   |  |                            |         |   |      |   |         |  
|Depreciation and Amortization                                       |  |                            | 5,332   |   |      |   | 5,847   |  
|Provision for Deferred Income Taxes                                 |  |                            | 756     |   |      |   | 3,761   |  
|Compensatory Effect of Stock Plans                                  |  |                            | 114     |   |      |   | 203     |  
|Other, Net                                                          |  |                            | (56     | ) |      |   | (118    | )
|Changes in Assets and Liabilities:                                  |  |                            |         |   |      |   |         |  
|Receivables                                                         |  |                            | 2,631   |   |      |   | 3,961   |  
|Income Taxes Receivable                                             |  |                            | 2,314   |   |      |   | (136    | )
|Prepaid Expenses                                                    |  |                            | (821    | ) |      |   | (858    | )
|Inventories                                                         |  |                            | (11,631 | ) |      |   | (8,204  | )
|Accounts Payable                                                    |  |                            | 4,581   |   |      |   | 5,402   |  
|Accrued Expenses                                                    |  |                            | (171    | ) |      |   | (6,539  | )
|Other, Net                                                          |  |                            | (292    | ) |      |   | 212     |  
|                                                                    |  |                            |         |   |      |   |         |  
|Net Cash Provided by Continuing Operations                          |  |                            | 7,731   |   |      |   | 7,155   |  
|Net Cash Provided by (Used in) Discontinued Operations              |  |                            | (552    | ) |      |   | 1,464   |  
|                                                                    |  |                            |         |   |      |   |         |  
|Net Cash Provided by Operating Activities                           |  |                            | 7,179   |   |      |   | 8,619   |  
|                                                                    |  |                            |         |   |      |   |         |  
|Investing Activities:                                               |  |                            |         |   |      |   |         |  
|Capital Expenditures                                                |  |                            | (7,513  | ) |      |   | (3,165  | )
|                                                                    |  |                            |         |   |      |   |         |  
|Net Cash Used in Investing Activities                               |  |                            | (7,513  | ) |      |   | (3,165  | )
|                                                                    |  |                            |         |   |      |   |         |  
|Financing Activities:                                               |  |                            |         |   |      |   |         |  
|Payments of Long-Term Debt                                          |  |                            |        |   |      |   | (20,100 | )
|Proceeds Under Line of Credit                                       |  |                            |        |   |      |   | 19,000  |  
|Purchases of Treasury Stock                                         |  |                            | (2,080  | ) |      |   |        |  
|Issuance of Common Stock                                            |  |                            | 238     |   |      |   | 450     |  
|                                                                    |  |                            |         |   |      |   |         |  
|Net Cash Used in Financing Activities                               |  |                            | (1,842  | ) |      |   | (650    | )
|                                                                    |  |                            |         |   |      |   |         |  
|Effect of Exchange Rate Changes on Cash                             |  |                            | (24     | ) |      |   | (4      | )
|                                                                    |  |                           
|Net Increase (Decrease) in Cash                                     |  |                            | (2,200  | ) |      |   | 4,800   |  
|Cash and Cash Equivalents at Beginning of Period                    |  |                            | 13,600  |   |      |   | 1,774   |  
|                                                                    |  |                            |         |   |      |   |         |  
|Cash and Cash Equivalents at End of Period                          |  | $                          | 11,400  |   |      | $ | 6,574   |  
|                                                                    |  |                            |         |   |      |   |         |  
|Non-Cash Transactions:                                              |  |                            |         |   |      |   |         |  
|Change in Capital Expenditures in Accounts Payble During the Period |  | $                          | (1,819  | ) |      | $ |        |  
|                                                                    |  |                           
|Supplemental Cash Flow Disclosures:                                 |  |                            |         |   |      |   |         |  
|Interest Paid                                                       |  | $                          | 73      |   |      | $ | 67      |  
|Income Taxes Paid                                                   |  |                            | 1,079   |   |      |   | 395     |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



5



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MATERIAL SCIENCES CORPORATION and SUBSIDIARIES

(In thousands, except per share data)

The data as of August 31, 2006 and for the three and six months ended August 31, 2006 and
2005 has not been audited by our independent registered public accounting firm. In the opinion of Material Sciences Corporation (the Company or MSC), the data reflects all adjustments (consisting of only normal, recurring
adjustments) necessary for a fair presentation of the information at those dates and for those periods. The financial information contained in this report should be read in conjunction with the Companys Annual Report on Form 10-K filed with
the Securities and Exchange Commission on May 19, 2006 (as amended on May 23, 2006) for the fiscal year ended February 28, 2006.



|(1) | Sale of Business. On June 20, 2005, the Company completed a transaction for the sale of substantially all of the assets (including fixed assets, intellectual
property and other assets) of its Electronic Materials and Devices Group (EMD) to TouchSensor Technologies, LLC (TST) in consideration of the release from current and future contractual commitments to TST and the assumption
of certain contractual obligations of EMD. As a result of the transaction, the Company was relieved of the fee obligations under the license agreement with TST in fiscal 2006 of $2,750 as well as approximately $825 of obligations related to certain
cost sharing agreements between the Company and TST projected for the 18 months ending in November 2006. The Company no longer reports EMD as a separate segment, rather it reports EMD as a discontinued operation in all periods presented. See Note 15
for a discussion of the Companys discontinued operations.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Joint Venture. In November 2000, a subsidiary of MSC formed a joint venture partnership with Tekno S.A. (Tekno) for the manufacture and sale of Quiet
Steel® and disc brake noise damper material for the
South American market. The Company includes its portion of Teknos results in the Condensed Consolidated Statements of Income under Equity in Results of Joint Venture. The Equity in Results of Joint Venture was income of $32 and $56 for the
three and six months ended August 31, 2006, respectively, compared to income of $65 and $118 in the comparable periods of 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Preferred Stock. Preferred Stock, $1.00 Par Value; 10,000,000 Shares Authorized; 1,000,000 Designated Series B Junior Participating Preferred; None Issued.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Common Stock. Common Stock, $.02 Par Value; 40,000,000 Shares Authorized; 19,015,622 Shares Issued and 14,599,974 Shares Outstanding as of August 31, 2006 and
18,912,582 Shares Issued and 14,723,934 Shares Outstanding as of February 28, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Treasury Stock. Treasury Stock at Cost; 4,415,648 Shares as of August 31, 2006 and 4,188,648 Shares as of February 28, 2006. In February 2006, the
Companys Board of Directors authorized the repurchase of up to one million shares of common stock. The shares may be repurchased from time-to-time on the open market at the Companys discretion, subject to market conditions, existing
financial covenants associated with the Companys credit facility and other factors, generally funded with internally generated cash. During the fiscal quarter ended August 31, 2006, the Company repurchased 227,000 shares of common stock
on the open market at a total cost of $2,229, including $149 in accounts payable at August 31, 2006 related to trades that had not settled.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



6



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|(6) | Comprehensive Income.
|--- | ---------------------



|                                         |  |                               |       |   |                             |   |      |      |  |      |       |  |   |       |  
|---------------------------------------- |  | ----------------------------- | ----- | - | --------------------------- | - | ---- | ---- |  | ---- | ----- |  | - | ----- | -
|                                         |  | Three Months Ended August 31, |       |   | Six Months Ended August 31, |  
|                                         |  | 2006                          |       |   | 2005                        |   |      | 2006 |  | 2005 |      
|Net Income                               |  | $                             | 2,720 |   |                             | $ | 885  |      |  | $    | 4,974 |  | $ | 3,624 |  
|Other Comprehensive Income (Loss):       |  |                               |       |   |                             |   |      |      |  |      |       |  |   |       |  
|Foreign Currency Translation Adjustments |  |                               | (42   | ) |                             |   | (174 | )    |  |      | 363   |  |   | (202  | )
|                                         |  |                               |       |   |                             |   |      |      |  |      |       |  |   |       |  
|Comprehensive Income                     |  | $                             | 2,678 |   |                             | $ | 711  |      |  | $    | 5,337 |  | $ | 3,422 |  
|                                         |  |                               |       |   |                             |   |      |      |  |      |       |  |   |       |  



|(7) | Indebtedness. The Company entered into an amended and restated $30,000 committed line of credit (New Line) on April 30, 2004. The agreement expires on
October 11, 2007. There were no borrowings outstanding under the New Line as of August 31, 2006. Borrowing capacity reserved for the Companys outstanding letters of credit was $1,864, and the amount remaining available to be borrowed
was $28,136 as of August 31, 2006. At the Companys option, interest is at the banks prime rate (8.25% as of August 31, 2006) or at LIBOR plus a margin based on the ratio of funded debt to EBITDA (as defined in the agreement).
The financial covenants include a fixed charge coverage ratio of not less than 1.25 to 1.0 commencing May 31, 2004; a maximum leverage ratio (3.0 to 1.0); and minimum net worth of $80,000 plus 50% of positive consolidated net income ending on
or after May 31, 2004, or $86,936, on August 31, 2006. As of August 31, 2006, the Company was in compliance with all debt covenants. There are restrictions on the Companys use of its cash and cash equivalents related to
repurchase of stock, dividends and acquisitions. The New Line is secured by specific personal property (including receivables, inventory and property, plant and equipment) of the Company.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | Inventory. Inventories consist of the following:
|--- | ------------------------------------------------



|                  |  |                 |        |                   |   |       
|----------------- |  | --------------- | ------ | ----------------- | - | ------
|                  |  | August 31, 2006 |        | February 28, 2006
|Raw Materials     |  | $               | 20,630 |                   | $ | 15,840
|Finished Goods    |  |                 | 31,214 |                   |   | 24,218
|                  |  |                 |        |                   |   |       
|Total Inventories |  | $               | 51,844 |                   | $ | 40,058
|                  |  |                 |        |                   |   |       

The Companys inventory balances increased from February 28, 2006, primarily due to a
build up of finished goods inventory at the Companys Walbridge, Ohio plant in anticipation of the expiration of the union contract at the plant in September 2006. However, a new four-year contract was ratified by the union in September, so
management expects that inventories will decrease in the third and fourth quarters as shipments should exceed new production. Inventories also increased, to a lesser extent, due to a change in the pricing model from toll to package for a key
customer.



7



---

|(9) | Significant Customers. Due to the concentration in the automotive industry, the Company believes that sales to individual automotive customers are significant. The
following table shows sales to the Companys significant customers as a percentage of consolidated net sales for the three and six months ended August 31, 2006 and 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                |  |                                                                   |   |  |                                                                 |   |  |      |   |  |      |  
|--------------- |  | ----------------------------------------------------------------- | - |  | --------------------------------------------------------------- | - |  | ---- | - |  | ---- | -
|                |  | % of Consolidated Net Sales for the Three Months Ended August 31, |   |  | % of Consolidated Net Sales for the Six Months Ended August 31, |  
|Customer        |  | 2006                                                              |   |  | 2005                                                            |   |  | 2006 |   |  | 2005 |  
|Ford            |  | 16                                                                | % |  | 7                                                               | % |  | 18   | % |  | 8    | %
|DaimlerChrysler |  | 12                                                                | % |  | 12                                                              | % |  | 14   | % |  | 14   | %
|General Motors  |  | 12                                                                | % |  | 11                                                              | % |  | 12   | % |  | 9    | %

The following table shows gross accounts receivable from the Companys significant customers
as a percentage of total consolidated gross accounts receivable as of August 31, 2006 and February 28, 2006.



|                |  |                                             |   |  |                   |  
|--------------- |  | ------------------------------------------- | - |  | ----------------- | -
|                |  | % of Consolidated Gross Accounts Receivable |  
|Customer        |  | August 31, 2006                             |   |  | February 28, 2006 |  
|Ford            |  | 16                                          | % |  | 21                | %
|DaimlerChrysler |  | 12                                          | % |  | 11                | %
|General Motors  |  | 12                                          | % |  | 14                | %

MSCs domestic and foreign net sales are presented in the table below. Of the foreign sales,
no one country comprised greater than 10% of consolidated net sales.



|          |  |                               |        |                             |   |        |  |      |         |  |   |        
|--------- |  | ----------------------------- | ------ | --------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|          |  | Three Months Ended August 31, |        | Six Months Ended August 31,
|Net Sales |  | 2006                          |        | 2005                        |   | 2006   |  | 2005
|Domestic  |  | $                             | 64,822 |                             | $ | 71,180 |  | $    | 137,357 |  | $ | 141,924
|Foreign   |  |                               | 2,491  |                             |   | 2,795  |  |      | 5,720   |  |   | 5,479  
|          |  |                               |        |                             |   |        |  |      |         |  |   |        
|Total     |  | $                             | 67,313 |                             | $ | 73,975 |  | $    | 143,077 |  | $ | 147,403
|          |  |                               |        |                             |   |        |  |      |         |  |   |        



|(10) | Intangible Assets. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, goodwill and intangible assets that are not
amortized are subject to assessment for impairment by applying a fair-value based test on an annual basis or more frequently if circumstances indicate potential impairment. The Companys policy is to perform its required annual impairment
assessment during the fourth quarter of the fiscal year.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Apart from $1,319 of goodwill, the Company has no other identified
intangible assets recorded on the Condensed Consolidated Balance Sheets. There was no change in the carrying amount of goodwill for the three and six months ended August 31, 2006.



8



---

|(11) | Interest (Income) Expense. The table presented below analyzes the components of interest (income) expense, net.
|---- | ---------------------------------------------------------------------------------------------------------------



|                                |  |                               |      |   |                             |   |     |      |  |   |      |   |  |   |     |  
|------------------------------- |  | ----------------------------- | ---- | - | --------------------------- | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                |  | Three Months Ended August 31, |      |   | Six Months Ended August 31, |  
|Interest (Income) Expense, Net: |  | 2006                          |      |   | 2005                        |   |     | 2006 |  |   | 2005 |  
|Interest Expense                |  | $                             | 79   |   |                             | $ | 39  |      |  | $ | 105  |   |  | $ | 70  |  
|Interest Income                 |  |                               | (347 | ) |                             |   | (10 | )    |  |   | (499 | ) |  |   | (25 | )
|                                |  |                               |      |   |                             |   |     |      |  |   |      |   |  |   |     |  
|Interest (Income) Expense, Net  |  | $                             | (268 | ) |                             | $ | 29  |      |  | $ | (394 | ) |  | $ | 45  |  
|                                |  |                               |      |   |                             |   |     |      |  |   |      |   |  |   |     |  



|(12) | Restructuring. The production employees at the Companys Morrisville, Pennsylvania facility were covered by a union contract that expired in March 2006. The
Company implemented new terms and conditions of employment which included a voluntary severance package. The Company commenced hiring employees to replace those who elected the severance package in April 2006. The employees are currently working
under the terms and conditions of employment implemented by the Company. The Company recorded restructuring expenses of $578 in severance and related expenses during the first six months of fiscal 2007 related to this restructuring. A total of 31
employees accepted the voluntary severance package. As part of this restructuring, a total of $521 was paid during the first six months of fiscal 2007 and $57 is recorded as Accrued Payroll Related Expenses in the Condensed Consolidated Balance
Sheet as of August 31, 2006.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the first quarter of fiscal 2005, the Company announced the closing of its
Middletown, Ohio coil coating facility. In conjunction with this announcement and other restructuring actions, MSC recorded restructuring expenses of $2,657 for the fiscal year ended February 28, 2005. A total of 97 employees were affected by
this restructuring. The Company also recorded $269 in restructuring expenses for the fiscal 2005 restructuring plan during the first six months of fiscal 2006 primarily to cover medical-related expenses that were higher than originally planned. This
restructuring liability was fully paid as of February 28, 2006 and there was no activity for these restructuring actions in the first six months of fiscal 2007.

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 President and Chief Executive Officer. A separation arrangement was
entered into resulting in a pretax charge to earnings of $1,821 in the first quarter of fiscal 2004. Of this amount, $1,543 was paid out over two years and the remainder related to the executives non-contributory supplemental pension plan to
be paid out in accordance with the plan. The Company recorded additional restructuring expenses of $143 in the first quarter of fiscal 2004. Total restructuring expenses in the first quarter of fiscal 2004 were $1,964. The Company reduced these
restructuring reserves by $21 during the first quarter of fiscal 2006 and increased these reserves by $14 during the second quarter of fiscal 2007 based on revisions to the total amounts expected to be paid out for the fiscal 2004 restructuring
primarily related to medical expenses. Net cash of $2 was paid during the first six months of fiscal 2007 related to the fiscal 2004 restructuring. A total of $6 is recorded as Accrued Expenses and $33 is recorded as Other Long-Term Liabilities in
the Condensed Consolidated Balance Sheet as of August 31, 2006.



9



---

The restructuring reserve as of August 31, 2006 is presented in the chart below (which includes the
fiscal 2004 and 2007 restructuring plans):



|                                                                           |  |           |      |   |       |   |      |       |  |   |      |  
|-------------------------------------------------------------------------- |  | --------- | ---- | - | ----- | - | ---- | ----- |  | - | ---- | -
|                                                                           |  | Severance |      |   | Other |   |      | Total | 
|Restructuring Reserve as of February 28, 2006                              |  | $         | 5    |   |       | $ | 22   |       |  | $ | 27   |  
|Restructuring Reserve Recorded During the Six Months Ended August 31, 2006 |  |           | 320  |   |       |   | 272  |       |  |   | 592  |  
|Cash Payments                                                              |  |           | (325 | ) |       |   | (198 | )     |  |   | (523 | )
|                                                                           |  |           |      |   |       |   |      |       |  |   |      |  
|Restructuring Reserve as of August 31, 2006                                |  | $         |     |   |       | $ | 96   |       |  | $ | 96   |  
|                                                                           |  |           |      |   |       |   |      |       |  |   |      |  



|(13) | Income Taxes. MSCs effective income tax provision rate for continuing operations was 46.0% and 45.4% for the three and six months ended August 31, 2006,
respectively, compared to 47.1% and 43.6% for the same periods last year. The variance in the effective rate compared to the statutory rate was due to valuation allowances for net operating losses for certain foreign subsidiaries and certain states
as well as other permanent items relative to income before income taxes.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(14) | Retirement Plans. MSC has qualified and nonqualified defined benefit and defined contribution pension plans and other postretirement plans for certain of its
employees. The following table provides the components of net periodic benefit cost for its defined benefit plans and other postretirement plans.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                      |  |                               |      |   |                |   |     |      |  |   |      |   |  |   |    |  
|------------------------------------- |  | ----------------------------- | ---- | - | -------------- | - | --- | ---- |  | - | ---- | - |  | - | -- | -
|                                      |  | Pension Benefits              |      |   | Other Benefits |  
|                                      |  | Three Months Ended August 31, |     
|                                      |  | 2006                          |      |   | 2005           |   |     | 2006 |  |   | 2005 |  
|Service Cost                          |  | $                             | 9    |   |                | $ | 42  |      |  | $ | 22   |   |  | $ | 18 |  
|Interest Cost                         |  |                               | 202  |   |                |   | 125 |      |  |   | 35   |   |  |   | 30 |  
|Expected Return on Plan Assets        |  |                               | (152 | ) |                |   | (56 | )    |  |   | (1   | ) |  |   | (1 | )
|Amortization of Net (Gain) or Loss    |  |                               | 48   |   |                |   | 5   |      |  |   | 10   |   |  |   | 3  |  
|Amortization of Prior Service Cost    |  |                               | 13   |   |                |   | 22  |      |  |   |     |   |  |   |   |  
|Curtailment Charges                   |  |                               |     |   |                |   |    |      |  |   |     |   |  |   |   |  
|Amortization of Transition Obligation |  |                               |     |   |                |   | 1   |      |  |   |     |   |  |   |   |  
|                                      |  |                               |      |   |                |   |     |      |  |   |      |   |  |   |    |  
|Total Net Periodic Benefit Cost       |  | $                             | 120  |   |                | $ | 139 |      |  | $ | 66   |   |  | $ | 50 |  
|                                      |  |                               |      |   |                |   |     |      |  |   |      |   |  |   |    |  



10



---

|                                      |  |                             |      |   |                |   |      |      |  |   |      |   |  |   |    |  
|------------------------------------- |  | --------------------------- | ---- | - | -------------- | - | ---- | ---- |  | - | ---- | - |  | - | -- | -
|                                      |  | Pension Benefits            |      |   | Other Benefits |  
|                                      |  | Six Months Ended August 31, |     
|                                      |  | 2006                        |      |   | 2005           |   |      | 2006 |  |   | 2005 |  
|Service Cost                          |  | $                           | 35   |   |                | $ | 84   |      |  | $ | 45   |   |  | $ | 36 |  
|Interest Cost                         |  |                             | 404  |   |                |   | 250  |      |  |   | 70   |   |  |   | 60 |  
|Expected Return on Plan Assets        |  |                             | (303 | ) |                |   | (112 | )    |  |   | (2   | ) |  |   | (2 | )
|Amortization of Net (Gain) or Loss    |  |                             | 95   |   |                |   | 11   |      |  |   | 19   |   |  |   | 5  |  
|Amortization of Prior Service Cost    |  |                             | 37   |   |                |   | 44   |      |  |   |     |   |  |   |   |  
|Curtailment Charges                   |  |                             | 215  |   |                |   |     |      |  |   |     |   |  |   |   |  
|Amortization of Transition Obligation |  |                             |     |   |                |   | 2    |      |  |   |     |   |  |   |   |  
|                                      |  |                             |      |   |                |   |      |      |  |   |      |   |  |   |    |  
|Total Net Periodic Benefit Cost       |  | $                           | 483  |   |                | $ | 279  |      |  | $ | 132  |   |  | $ | 99 |  
|                                      |  |                             |      |   |                |   |      |      |  |   |      |   |  |   |    |  

MSC previously disclosed in its financial statements for the year ended February 28, 2006,
that it expected to contribute $952 toward its qualified and nonqualified defined benefit pension plans and $96 toward its postretirement benefit plans other than pensions in fiscal 2007. As of August 31, 2006, $499 of contributions/payments
has been made toward the pension plans and $101 of contributions/payments have been made to the other postretirement plans.

Effective
June 30, 2006, the Company has frozen the defined benefit pension plan at its Morrisville, Pennsylvania plant. In conjunction with this action, which was announced during the first quarter, the Company recorded $215 in pension expenses related
to the curtailment of this plan during the quarter ended May 31, 2006.



|(15) | Discontinued Operations. As discussed in Note 1, the Company sold substantially all of the assets of its EMD business in June 2005. The results of EMD operations have
been reported as discontinued operations for all periods presented. The Company recorded losses on discontinued operations for EMD of $1,068 and $1,861, net of income taxes, for the three and six months ended August 31, 2005, respectively,
including $2,207 in severance and related costs incurred in preparation for the disposal of the EMD business. In addition, the Company recorded a loss on the sale of the EMD assets of $139, net of income tax benefit of $86, during the quarter ended
August 31, 2005. The Company had no discontinued operations activity for EMD during the three and six months ended August 31, 2006. There were $6 of EMD liabilities remaining as of August 31, 2006, all of which relate to severance and
related costs that are expected to be paid in fiscal 2007. The following table shows the results of discontinued operations of the Company for the three and six months ended August 31, 2005.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11



---

|                                                                                               |  |                               |        |   |                             |   |        |  
|---------------------------------------------------------------------------------------------- |  | ----------------------------- | ------ | - | --------------------------- | - | ------ | -
|                                                                                               |  | Three Months Ended August 31, |        |   | Six Months Ended August 31, |  
|                                                                                               |  | 2005                          |        |   | 2005                        |  
|EMD Operations:                                                                                |  |                               |        |   |                             |   |        |  
|Net Sales                                                                                      |  | $                             | 737    |   |                             | $ | 1,132  |  
|Gross Profit                                                                                   |  |                               | 673    |   |                             |   | 890    |  
|SG&A and Other Expenses                                                                        |  |                               | 2,397  |   |                             |   | 3,893  |  
|Loss Before Income Taxes                                                                       |  |                               | (1,724 | ) |                             |   | (3,003 | )
|Income Tax Benefit                                                                             |  |                               | (656   | ) |                             |   | (1,142 | )
|                                                                                               |  |                               |        |   |                             |   |        |  
|Loss on Discontinued Operations  EMD                                                          |  |                               | (1,068 | ) |                             |   | (1,861 | )
|Loss on Sale of EMD (Net of Tax Benefit of $86 and $86, Respectively)                          |  |                               | (139   | ) |                             |   | (139   | )
|Income on Discontinued Operations - Pinole (Net of Tax Provision of $35 and $24, Respectively) |  |                               | 57     |   |                             |   | 40     |  
|                                                                                               |  |                               |        |   |                             |   |        |  
|Loss on Discontinued Operations  Total                                                        |  | $                             | (1,150 | ) |                             | $ | (1,960 | )
|                                                                                               |  |                               |        |   |                             |   |        |  

On May 31, 2002, the Company completed the sale of substantially all of the assets of its
Pinole Point Steel business. As of August 31, 2006, there was $121 in net liabilities remaining. The remaining net liabilities consist primarily of accrued expenses not assumed by the purchaser of Pinole Point Steel, Grupo IMSA S.A. de C.V.
Pinole Point Steel is reported as a discontinued operation.

There was no activity related to the discontinued operations of Pinole Point
Steel in the first six months of fiscal 2007. The Company recorded income on discontinued operations, net of income taxes, of $57 and $40 for the three and six months ended August 31, 2005, respectively, primarily related to the recovery of a
previously written-off receivable balance partially offset by workers compensation expenses.



|(16) | Equity and Compensation Plans. Effective March 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) (SFAS 123(R)),
Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, restricted stock and restricted stock units
based on estimated fair values at date of grant. SFAS 123(R) supersedes the Companys previous disclosure only provisions of SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure,
and Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Company has one active equity award plan, the Material Sciences Corporation 1992 Omnibus Awards Plan for Key Employees (1992 Plan). There are 3,262,500 shares authorized under the 1992 Plan to provide stock options, restricted stock and
other equity awards under various programs. Non-qualified stock options generally vest over three years from the date of grant and expire between five and ten years from the date of grant. Restricted stock and cash awards generally vest over three
to five years from the date of grant. Restricted stock and cash awards have been issued with restrictions based upon time and Company earnings performance or a combination thereof.



12



---

The Company also has one inactive equity award plan, the Material Sciences Corporation 2001 Compensation
Plan for Non-Employee Directors (2001 Directors Plan). The 2001 Directors Plan expired on February 29, 2004, and no additional grants will be made under the plan. There were 56,840 stock options outstanding and exercisable under
this plan as of August 31, 2006.

Effective March 1, 2006, the Company adopted the fair value recognition provisions of SFAS
123(R) using the modified prospective method, and thus did not restate any prior period amounts. The Company recorded $69 of compensation expense, net of applicable taxes, in its statement of operations for the three and six months ended
August 31, 2006.

In accordance with SFAS 123(R), excess tax benefits from stock awards are presented as financing cash flows rather
than operating cash flows. The Company recorded no excess tax benefits during the six months ended August 31, 2006 and 2005.

Stock Option Activity

The Company granted 150,000 stock options during the quarter ended August 31, 2006. The
Black-Scholes weighted average value of options granted was $2.73. There were no options granted during fiscal 2006. The Company recorded compensation expense related to this grant of $27, net of related taxes, during the quarter. As of
August 31, 2006, there was $364 of total unrecognized pretax compensation expense related to unvested stock option grants which is expected to be recognized ratably over a period ending May 31, 2009.

The following table summarizes stock option activity for the six months ended August 31, 2006:



|                                  |  |                     |  |               |   |  |                                 |       |                           |   |      
|--------------------------------- |  | ------------------- |  | ------------- | - |  | ------------------------------- | ----- | ------------------------- | - | -----
|                                  |  | Options Outstanding |  |              
|                                  |  | Directors           |  | Key Employees |   |  | Weighted Average Exercise Price |       | Aggregate Intrinsic Value
|Outstanding as of March 1, 2006   |  | 56,840              |  | 171,959       |   |  | $                               | 13.04 |                           |   |      
|Granted                           |  |                    |  | 150,000       |   |  | $                               | 12.75 |                           |   |      
|Exercised                         |  |                    |  | (17,604       | ) |  | $                               | 10.00 |                           |   |      
|Cancelled                         |  |                    |  | (62,081       | ) |  | $                               | 15.08 |                           |   |      
|                                  |  |                     |  |               |   |  |                                 |       |                           |   |      
|Outstanding as of August 31, 2006 |  | 56,840              |  | 242,274       |   |  | $                               | 12.65 |                           | $ | 1,411
|                                  |  |                     |  |               |   |  |                                 |       |                           |   |      
|Exercisable as of August 31, 2006 |  | 56,840              |  | 92,274        |   |  | $                               | 12.55 |                           | $ | 1,001
|                                  |  |                     |  |               |   |  |                                 |       |                           |   |      

The Company has elected to continue to use the Black-Scholes option pricing model and
straight-line amortization of compensation expense over the requisite service period of the grant. The Company will reconsider use of this pricing model if additional information becomes available in the future that indicates another model would be
more appropriate, or if grants in future periods have characteristics that cannot be reasonably estimated using this model.



13



---

The following assumptions were used for the option grant:



|                         |  |       |  
|------------------------ |  | ----- | -
|Dividend Yield           |  | 0.0   | %
|Risk-Free Interest Rate  |  | 5.13  | %
|Expected Volatility      |  | 36.64 | %
|Expected Life (in Years) |  | 4.0   |  

The Company has not paid dividends in the past nor does it expect to pay dividends in the future.
As such, the Company uses a dividend yield percentage of zero. The Company uses a risk-free interest rate consistent with the yield available on a U.S. Treasury Note with a term equal to the expected term of the underlying grant. The expected
volatility was estimated based upon the historical volatility of the Companys share price. The expected life was an average of the vesting period and the life of the grant.

The following table shows stock options outstanding and stock options exercisable at August 31, 2006:



|                         |  |                     |  |                                        |  |                                 |       |        |         |                                 |   |      
|------------------------ |  | ------------------- |  | -------------------------------------- |  | ------------------------------- | ----- | ------ | ------- | ------------------------------- | - | -----
|                         |  | Options Outstanding |  | Exercisable Options                   
|Range of Exercise Prices |  | Shares              |  | Weighted Average Remaining Life(Years) |  | Weighted Average Exercise Price |       | Shares |         | Weighted Average Exercise Price
|$ 6.80 - $ 9.90          |  | 19,181              |  | 3.53                                   |  | $                               | 8.34  |        | 19,181  |                                 | $ | 8.34 
|$10.00 - $11.71          |  | 57,226              |  | 2.63                                   |  | $                               | 10.26 |        | 57,226  |                                 | $ | 10.26
|$12.34 - $14.50          |  | 172,907             |  | 4.52                                   |  | $                               | 12.81 |        | 22,907  |                                 | $ | 13.18
|$16.38 - $18.00          |  | 49,800              |  | 0.46                                   |  | $                               | 16.52 |        | 49,800  |                                 | $ | 16.52
|                         |  |                     |  |                                        |  |                                 |       |        |         |                                 |   |      
|$ 6.80 - $18.00          |  | 299,114             |  | 3.42                                   |  | $                               | 12.65 |        | 149,114 |                                 | $ | 12.55
|                         |  |                     |  |                                        |  |                                 |       |        |         |                                 |   |      

Restricted Stock Activity

A summary of restricted stock transactions for the six months ended August 31, 2006 was as follows:



|                               |  |        |  |                                       |      
|------------------------------ |  | ------ |  | ------------------------------------- | -----
|                               |  | Shares |  | Weighted Average Fair Value Per Share
|Unvested as of March 1, 2006   |  |       |  |                                       |     
|Granted                        |  | 80,400 |  | $                                     | 10.00
|Vested                         |  |       |  |                                       |     
|Canceled                       |  |       |  |                                       |     
|                               |  |        |  |                                       |      
|Unvested as of August 31, 2006 |  | 80,400 |  | $                                     | 10.00
|                               |  |        |  |                                       |      

The Company granted 80,400 shares of restricted stock during the quarter ended August 31,
2006. The Company recorded compensation expense related to this grant



14



---

of $42, net of related taxes, during the quarter. There were no restricted stock grants in fiscal 2006.
The total unrecognized pretax compensation expense related to the restricted stock was $735 as of August 31, 2006, and is expected to be recognized ratably over a period ending April 30, 2009. The shares vest by meeting certain performance
measures based on earnings.

Pro Forma Disclosures

MSC accounted for all grants prior to March 1, 2006 in accordance with the intrinsic value method of APB 25, under which no compensation cost has
been recognized. Had compensation cost for employee stock purchases under the Employee Stock Purchase Plan and for prior stock options awarded under the stock option plans been determined using the fair value-based accounting method, the
Companys net income and basic and diluted net income per share would have been as shown in the following pro forma amounts:



|                                                                                                                                     |  |                                    |      |   |                                 |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------- | ---- | - | ------------------------------- | - | ----- | -
|                                                                                                                                     |  | Three Months Ended August 31, 2005 |      |   | Six Months Ended August 31,2005 |  
|Net Income:                                                                                                                          |  |                                    |      |   |                                 |   |       |  
|As Reported                                                                                                                          |  | $                                  | 885  |   |                                 | $ | 3,624 |  
|Add: Stock Based Employee Compensation Expense Included in Reported Net Income , Net of Income Taxes                                 |  |                                    | 84   |   |                                 |   | 126   |  
|Deduct: Total Stock Based Employee Compensation Expense Determined Under Fair Value Based Method for All Awards, Net of Income
Taxes |  |                                    | (91  | ) |                                 |   | (140  | )
|                                                                                                                                     |  |                                    |      |   |                                 |   |       |  
|Pro Forma                                                                                                                            |  | $                                  | 878  |   |                                 | $ | 3,610 |  
|                                                                                                                                     |  |                                    |      |   |                                 |   |       |  
|Basic Net Income Per Share:                                                                                                          |  |                                    |      |   |                                 |   |       |  
|As Reported                                                                                                                          |  | $                                  | 0.06 |   |                                 | $ | 0.25  |  
|                                                                                                                                     |  |                                    |      |   |                                 |   |       |  
|Pro Forma                                                                                                                            |  | $                                  | 0.06 |   |                                 | $ | 0.25  |  
|                                                                                                                                     |  |                                    |      |   |                                 |   |       |  
|Diluted Net Income Per Share:                                                                                                        |  |                                    |      |   |                                 |   |       |  
|As Reported                                                                                                                          |  | $                                  | 0.06 |   |                                 | $ | 0.25  |  
|                                                                                                                                     |  |                                    |      |   |                                 |   |       |  
|Pro Forma                                                                                                                            |  | $                                  | 0.06 |   |                                 | $ | 0.25  |  
|                                                                                                                                     |  |                                    |      |   |                                 |   |       |  



|(17) | Segments. MSC operates in one business segment based on how management views its business for evaluating performance and making operating decisions. MSC focuses on
providing material-based solutions for acoustical and coated applications. The acoustical material-based solutions include multilayer composites consisting of metals, polymeric coatings and other materials used to manage noise and vibration. The
coated material-based solutions include coil coated and electrogalvanized 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, heating, ventilation and air conditioning, lighting and appliance markets.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



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|(18) | New Accounting Pronouncements. Effective March 1, 2006, the Company adopted SFAS No. 151, Inventory Costs  an amendment of ARB No. 43,
which requires abnormal amounts of idle facility expense, handling costs and wasted material (spoilage) to be recognized as current period charges. In addition, it requires that allocation of fixed production overhead costs to inventory be based on
the normal capacity of the production facility. The adoption of this standard had no material impact on the Companys financial position, results of operations and cash flows.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. FIN 48 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not
threshold should be measured in order to determine the tax benefit to be recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 on
its results of operations, financial position and cash flows.



|(19) | Contingencies. MSC is a party to various legal proceedings in connection with the remediation of certain environmental matters. The most significant proceeding relates
to the Companys involvement in a Superfund site in Gary, Indiana. MSC has been named as a potentially responsible party (PRP) for the surface, soil and ground water contamination at this site.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
the remediation work at the Gary site. The Company receives periodic updates on the projected costs of the remediation work from the environmental consultant employed by certain PRPs (including the Company) to manage the remediation project. In late
December 2005, the Company received an update indicating that the projected remediation costs would increase significantly primarily due to additional efforts required to complete the remediation project, higher energy costs associated with certain
remediation techniques employed and increased oversight costs of the United States Environmental Protection Agency (USEPA). Accordingly, the Company treated this cost update as a change in estimate and increased its reserves related to
this matter by $467 as of the end of the second quarter of fiscal 2006. The estimated range of the Companys remaining liability for this site is $800 to $840. Remediation work is ongoing and MSC maintains a letter of credit for approximately
$1,200 to secure its obligation to pay its currently estimated share of the remediation expenses at this site.

In November 2003, MSC, along
with many other companies, was named as a PRP by the USEPA under CERCLA at the Lake Calumet Cluster Site in Chicago, Illinois for allegedly sending certain waste from its Elk Grove Village facility to the site. The Illinois EPA has assumed the role
of lead agency for the site and will conduct soil grading work,



16



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capping and a cost analysis at the site with funds made available by the state. The USEPA will likely
pursue reimbursement of its past costs. Initial estimates showed the Companys potential range of liability to be $25 to $35, but the information provided to date has been limited.

In May 2002, the Company sold substantially all of the assets of its Pinole Point Steel business. In December 2004, the purchaser of the facility received
a letter from the California Regional Water Quality Control Board requesting an investigation of the contamination of the soil and groundwater at the facility. Depending on the results of the investigation, remediation efforts may be required. The
Company believes that the contamination occurred prior to its acquisition of the Pinole Point Steel facility in 1997, and that the sellers of the facility in the 1997 transaction are responsible for the funding of any necessary remediation. In the
event that the sellers fail to fund the remediation, the Company may be required to do so. The Company is unable to estimate the potential liability, if any, in this matter due to the limited information provided to date.

The Companys environmental reserves, based on managements best estimate, were approximately $1,000 and $1,100 as of August 31, 2006 and
February 28, 2006, respectively. The Company does not believe the outcome of its environmental legal proceedings will have a material adverse effect on the Companys income statement, financial position or cash flows, given the reserves
recorded as of August 31, 2006 and, where applicable, taking into account contributions from other PRPs. There are, however, a number of uncertainties, including without limitation, the costs of site cleanup, the discretionary authority of
federal and state regulatory authorities in bringing enforcement actions and other factors, which affect the Companys range of exposure. MSC believes its range of exposure for all known environmental exposures, based on allocations of
liability among PRPs and the most recent estimate of remedial work and other information available, is $1,000 to $1,500.

On May 8,
2006, the Company received a notice from the Securities and Exchange Commission (SEC) requesting that the Company voluntarily produce information regarding the material weaknesses in the internal control over financial reporting
disclosed in the Companys Annual Report on Form 10-K/A for the fiscal year ended February 28, 2005. The Company cooperated fully with the SECs request. On June 30, 2006, the SEC notified the Company that it had concluded its
review related to this matter.

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



17



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MATERIAL SCIENCES CORPORATION and SUBSIDIARIES

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (in thousands)

The following managements discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements and notes thereto, included in Item 1 of this Form 10-Q, and the audited Consolidated Financial Statements and notes thereto and the MD&A included in the Companys Annual Report on
Form 10-K for the year ended February 28, 2006 filed on May 19, 2006 (as amended on May 23, 2006) (Form 10-K), as well as the Companys other filings with the Securities and Exchange Commission.

Executive Summary

Material Sciences Corporation
(MSC or the Company) focuses on providing material-based solutions for acoustical and coated applications. The acoustical material-based solutions include multilayer composites consisting of metals, polymeric coatings and
other materials used to manage noise and vibration. The coated 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, heating, ventilation and air conditioning (HVAC), appliance and lighting
markets. The Company utilizes a significant level of shared assets and management across each of its product categories. It is common for a single customer to purchase products from several different product categories.

As discussed in more detail in the Companys Form 10-K, the general state of the principal industries in which the Company operates presents the following risks:
overcapacity, uncertainty in the North American automobile industry, pricing and availability of materials, and shifts in the supply models. Overcapacity in the coil coating industry continues to have an impact on pricing, facility utilization and
the need for competitive terms of sale. The three largest North American automobile manufacturers represent MSCs three largest customers and their recently announced production cuts for the second half of calendar 2006 are expected to have a
negative impact on the Companys revenues and profits during the second half of fiscal 2007. The pricing of materials includes the cost of steel and zinc as well as, but not limited to, the cost of energy and the cost of petroleum-based
products. As discussed in more detail below under Results of Operations, the Company has lost a majority of its disk drive business which is also expected to have a negative impact on revenues and profits in the second half of fiscal
2007.

On June 20, 2005, MSC completed a transaction for the sale of substantially all of the assets (including fixed assets, intellectual property
and other assets) of its Electronic Materials and Devices Group (EMD) to TouchSensor Technologies, LLC (TST) in consideration of the release from current and future contractual commitments to TST and the assumption of certain



18



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contractual obligations of EMD. As a result of the transaction, the Company was relieved of the fee obligations under the
license agreement with TST in fiscal 2006 of $2,750 as well as approximately $825 of obligations related to certain cost sharing agreements between the Company and TST projected for the 18 months ending in November 2006. EMD is reported as a
discontinued operation in all periods presented.

Results of Operations

A summary of the Companys consolidated financial performance is as follows:



|                                    |  |                               |        |   |                             |   |        |                      |  |      |      |  |   |         |   |  |                      |         |   |  |      |   
|----------------------------------- |  | ----------------------------- | ------ | - | --------------------------- | - | ------ | -------------------- |  | ---- | ---- |  | - | ------- | - |  | -------------------- | ------- | - |  | ---- | --
|                                    |  | Three Months Ended August 31, |        |   | Six Months Ended August 31, |  
|                                    |  | 2006                          |        |   | 2005                        |   |        | % Fav(Unfav)Variance |  |      | 2006 |  |   | 2005    |   |  | % Fav(Unfav)Variance |        
|Net Sales                           |  | $                             | 67,313 |   |                             | $ | 73,975 |                      |  | (9.0 | )%   |  | $ | 143,077 |   |  | $                    | 147,403 |   |  | (2.9 | )%
|                                    |  |                               |        |   |                             |  
|Gross Profit                        |  | $                             | 13,301 |   |                             | $ | 13,014 |                      |  | 2.2  | %    |  | $ | 26,392  |   |  | $                    | 28,088  |   |  | (6.0 | )%
|% of Net Sales                      |  |                               | 19.8   | % |                             |   | 17.6   | %                    |  |      |      |  |   | 18.4    | % |  |                      | 19.1    | % |  |      |   
|                                    |  |                               |        |   |                             |  
|Selling, General and Administrative |  | $                             | 8,588  |   |                             | $ | 9,154  |                      |  | 6.2  | %    |  | $ | 17,198  |   |  | $                    | 18,005  |   |  | 4.5  | % 
|% of Net Sales                      |  |                               | 12.8   | % |                             |   | 12.4   | %                    |  |      |      |  |   | 12.0    | % |  |                      | 12.2    | % |  |      |   

Sales



|            |  |                                                 |        |      |   |            |  |   |            |   |  |       |   
|----------- |  | ----------------------------------------------- | ------ | ---- | - | ---------- |  | - | ---------- | - |  | ----- | --
|            |  | Net Sales for the Three Months Ended August 31, |        |      |   |            |  |  
|Application |  | 2006                                            |        | 2005 |   | $ Variance |  |   | % Variance |  
|Acoustical  |  | $                                               | 31,870 |      | $ | 35,963     |  | $ | (4,093     | ) |  | (11.4 | )%
|Coated      |  |                                                 | 35,443 |      |   | 38,012     |  |   | (2,569     | ) |  | (6.8  | )%
|            |  |                                                 |        |      |   |            |  |   |            |   |  |       |   
|Total       |  | $                                               | 67,313 |      | $ | 73,975     |  | $ | (6,662     | ) |  | (9.0  | )%
|            |  |                                                 |        |      |   |            |  |   |            |   |  |       |   



|            |  |                                               |         |      |   |            |  |   |            |   |  |      |   
|----------- |  | --------------------------------------------- | ------- | ---- | - | ---------- |  | - | ---------- | - |  | ---- | --
|            |  | Net Sales for the Six Months Ended August 31, |         |      |   |            |  |  
|Application |  | 2006                                          |         | 2005 |   | $ Variance |  |   | % Variance |  
|Acoustical  |  | $                                             | 71,046  |      | $ | 74,171     |  | $ | (3,125     | ) |  | (4.2 | )%
|Coated      |  |                                               | 72,031  |      |   | 73,232     |  |   | (1,201     | ) |  | (1.6 | )%
|            |  |                                               |         |      |   |            |  |   |            |   |  |      |   
|Total       |  | $                                             | 143,077 |      | $ | 147,403    |  | $ | (4,326     | ) |  | (2.9 | )%
|            |  |                                               |         |      |   |            |  |   |            |   |  |      |   

Net sales for the three and six months ended August 31, 2006 decreased 9.0% and 2.9% to $67,313 and $143,077
from $73,975 and $147,403 in the same periods last year. During the first quarter of fiscal 2007, the Company began reporting sales under two types of applications, acoustical and coated, to better reflect its business mix. Sales of electronic
products are reported as acoustical sales when sold for disk drive applications and as coated sales



19



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when sold for all other electronic applications. The Company has also reclassified $226 and $516 of other sales for the
three and six months ended August 31, 2005 from acoustical applications to coated applications to more accurately reflect a certain products application. Significant changes in certain markets within each application are included in the
following commentary about sales fluctuations during the period. This commentary does not necessarily reflect the fluctuations of all markets within each application, only those markets considered to have a significant impact on sales during the
period.

Sales of acoustical materials of $31,870 and $71,046 for the three and six months ended August 31, 2006 decreased 11.4% and 4.2%,
respectively, from $35,963 and $74,171 in the same periods last year. Body panel laminate (Quiet Steel®) sales for the three months ended August 31, 2006 decreased 5.3% (from $18,047 to $17,085) primarily due to the economic condition associated with the overall softness of the North
American auto industry. The significant reduction in automobile sales and production has reduced the demand for body panel laminate. Body panel laminate sales for the six months ended August 31, 2006 increased 2.3% (from $38,218 to $39,103) as
the introduction of this product into new vehicle models during the second half of fiscal 2006 and shipments of a new four-sided EG laminate product during the first quarter of fiscal 2007 have helped to offset the overall softness of the industry.
Sales in the brake market for the three and six months ended August 31, 2006 decreased 20.7% (from $10,786 to $8,552) and 13.6% (from $20,704 to $17,878), respectively, primarily due to softness in the auto industry and an overall reduction in
the quantity of inventory carried by our customers. The Company has also lost a majority of its disk drive business due to changes in customer demand. Disk drive sales for the three and six months ended August 31, 2006 decreased $875 (from
$1,706 to $831) and $878 (from $3,424 to $2,546), respectively, as a customer decided to reduce the quality of the noise, vibration and harshness in its disk drive products in order to save on its production costs. The Company is working to regain a
portion of the lost business as it focuses its sales efforts on the high-performance section of the disk drive market. Additionally, the Company reduced acoustical sales in the second quarter of fiscal 2007 by $505 to correct customer billing
issues, of which $308 related to billings made in prior years. These amounts are not material to the current or prior fiscal quarters or fiscal years.

Sales of coated materials of $35,443 and $72,031 for the three and six months ended August 31, 2006 decreased 6.8% and 1.6%, respectively, from $38,012 and $73,232 in the same periods last year. Gas tank sales for the three months
ended August 31, 2006 decreased $730 (from $10,179 to $9,449) also due to the softness of the auto industry, particularly sport-utility vehicles. However, gas tank sales for the six months ended August 31, 2006 increased nearly 30% (from
$17,306 to $22,433) primarily due to the change in the pricing model from toll to package made during the first quarter of fiscal 2006, in which sales now include the pass-through cost of steel with little or no associated profit, increased sales
volume and changes in the product formulation. Appliance/HVAC sales for the three and six months ended August 31, 2006 decreased $4,396 (from $13,348 to $8,952) and $7,154 (from $24,065 to $16,911), respectively, primarily due to some lost
business and general market fluctuations. Lighting sales for the three and six months ended August 31, 2006 increased $1,015 (from $802 to $1,817) and $1,694 (from $2,077 to $3,771), respectively, primarily due to new business.



20



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Gross Profit

The
gross profit for the three and six months ended August 31, 2006 was $13,301 (19.8% of net sales) and $26,392 (18.4% of net sales), respectively, compared with $13,014 (17.6% of net sales) and $28,088 (19.1% of net sales), respectively, in the
same periods of fiscal 2006. Although sales in the second quarter of fiscal 2007 have decreased from the comparable quarter of fiscal 2006, the gross profit and the gross margin (gross profit as a percent of sales) have increased. The improvement in
the gross margin was primarily due to the improvements in quality the Company has experienced, an increase in scrap prices and a gain recorded on a raw material contract. Returns and allowances related to quality issues have decreased $1,663 in the
second quarter of fiscal 2007 from the levels of the comparable quarter last year and scrap sales have increased $881 over the same period. The Company has entered into a contract to purchase a raw material commodity over the next 26 months. The
Company recorded a pre-tax gain of $647 in the second quarter related to the mark-to-market value of this contract. This gain reduced cost of sales in the quarter and will be amortized back into cost of sales over the next 26 months. These favorable
variances were offset by changes in the product mix and a significant increase in the cost of zinc. Changes in the product mix and higher variable labor and overhead costs such as wages, variable energy costs and production supplies, reduced gross
profit in the quarter by $2,233. The cost of zinc, which is a critical element in the production of certain Quiet Steel® parts, has nearly tripled from the cost in fiscal 2006 causing an $820 decrease in the gross profit during the quarter.

Gross profit and gross margin for the six months ended August 31, 2006 have decreased due to a number of factors including changes in the product mix and a
significant increase in the cost of zinc. Changes in the product mix reduced gross profit by $4,503 during the six months ended August 31, 2006 from the same period last year. Increases in the cost of zinc caused a $1,777 decrease in the gross
profit during the first six months of fiscal 2007. The unfavorable variances in product mix and zinc for the first six months of fiscal 2007 were partially offset by decreases in quality-related returns and allowances of $3,235, increased scrap
sales of $748 and the gain on the raw material contract mentioned above. MSC continues to look for ways to improve its processes and better manage its production costs.

Selling, General and Administrative Expenses

SG&A expenses for the three and six months ended August 31,
2006 were $8,588 (12.8% of net sales) and $17,198 (12.0% of net sales), respectively, compared with $9,154 (12.4% of net sales) and $18,005 (12.2% of net sales), respectively, in the same periods last year. The decrease in SG&A expenses during
the second quarter and on a year-to-date basis was primarily due to the collection of a $341 account receivable in the second quarter of fiscal 2007 that had been previously written off and environmental expenses of $467 recorded in the second
quarter of fiscal 2006 that did not repeat this year. These favorable expenses were partially offset by increased management incentive accruals of approximately $600 in fiscal 2007.



21



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Restructuring

The
production employees at the Companys Morrisville, Pennsylvania facility were covered by a union contract that expired in March 2006. The Company implemented new terms and conditions of employment which included a voluntary severance package.
The Company commenced hiring employees to replace those who elected the severance package in April 2006. The employees are currently working under the terms and conditions of employment implemented by the Company. The Company recorded restructuring
expenses of $578 in severance and related expenses during the first quarter of fiscal 2007 related to this restructuring. A total of 31 employees accepted the voluntary severance package. As part of this restructuring, a total of $521 was paid
during the first six months of fiscal 2007 and $57 is recorded as Accrued Payroll Related Expenses in the Condensed Consolidated Balance Sheet as of August 31, 2006.

During the first quarter of fiscal 2005, the Company announced the closing of its Middletown, Ohio coil coating facility. In conjunction with this announcement and other restructuring actions, MSC recorded
restructuring expenses of $2,657 for the fiscal year ended February 28, 2005. A total of 97 employees were affected by this restructuring. The Company also recorded $269 in restructuring plan expenses during the first six months of fiscal 2006
primarily to cover medical-related expenses that were higher than originally planned. This restructuring liability was fully paid as of February 28, 2006 and there was no activity for these restructuring actions in the first six months of
fiscal 2007.

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 President and Chief Executive Officer. A separation arrangement was entered into resulting in a pretax charge to earnings of $1,821 in the first quarter of fiscal 2004. Of this amount, $1,543 was paid out over two years and the remainder
related to the executives non-contributory supplemental pension plan to be paid out in accordance with the plan. The Company recorded additional restructuring expenses of $143 in the first quarter of fiscal 2004. Total restructuring expenses
in the first quarter of fiscal 2004 were $1,964. The Company reduced these restructuring reserves by $21 during the first quarter of fiscal 2006 and increased these reserves by $14 during the second quarter of fiscal 2007 based on revisions to the
total amounts expected to be paid out for these plans, primarily related to medical expenses. Net cash of $2 was paid during the first six months of fiscal 2007 related to these restructuring plans. A total of $6 is recorded as Accrued Expenses and
$33 is recorded as Other Long-Term Liabilities in the Condensed Consolidated Balance Sheet as of August 31, 2006.



22



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The restructuring reserve as of August 31, 2006 is presented in the chart below (which includes the fiscal 2004 and
2007 restructuring plans):



|                                                                           |  |           |      |   |       |   |      |       |  |   |      |  
|-------------------------------------------------------------------------- |  | --------- | ---- | - | ----- | - | ---- | ----- |  | - | ---- | -
|                                                                           |  | Severance |      |   | Other |   |      | Total | 
|Restructuring Reserve as of February 28, 2006                              |  | $         | 5    |   |       | $ | 22   |       |  | $ | 27   |  
|Restructuring Reserve Recorded During the Six Months Ended August 31, 2006 |  |           | 320  |   |       |   | 272  |       |  |   | 592  |  
|Cash Payments                                                              |  |           | (325 | ) |       |   | (198 | )     |  |   | (523 | )
|                                                                           |  |           |      |   |       |   |      |       |  |   |      |  
|Restructuring Reserve as of August 31, 2006                                |  | $         |     |   |       | $ | 96   |       |  | $ | 96   |  
|                                                                           |  |           |      |   |       |   |      |       |  |   |      |  

Total Other (Income) and Expense, Net

Total other income, net for the three and six months ended August 31, 2006 was $339 and $513, respectively, compared with $36 and $73 in the same periods of fiscal 2006. The increase is primarily due to interest
income earned on the Companys cash balances which are significantly higher than they were in fiscal 2006 as well as $135 in interest received on the collection of an account receivable which had been previously written off.

Income Taxes

MSCs effective income tax provision rate for
continuing operations was 46.0% and 45.4% for the three and six months ended August 31, 2006, respectively, compared to 47.1% and 43.6% for the same periods last year. The variance in the effective tax rate compared to the statutory rate was
due to valuation allowances for net operating losses for certain foreign subsidiaries and certain states as well as other permanent items relative to income before income taxes.

Results of Discontinued Operations

As discussed in Note 1 of the Notes to the Condensed Consolidated
Financial Statements and in the Executive Summary of this Managements Discussion and Analysis of Financial Condition and Results of Operations, the Company sold substantially all of the assets of its EMD business in June 2005 and reclassified
all results of EMD operations to discontinued operations for all periods presented. The Company recorded losses on discontinued operations for EMD of $1,068 and $1,861, net of income taxes, for the three and six months ended August 31, 2005,
respectively, including $2,207 in severance and related costs incurred in preparation for the disposal of the EMD business. In addition, the Company recorded a loss on the sale of the EMD assets of $139, net of income tax benefit of $86, during the
quarter ended August 31, 2005. The Company had no discontinued operations activity for EMD during the three and six months ended August 31, 2006. There were $6 of EMD liabilities remaining as of August 31, 2006, all of which relate to
severance and related costs that are expected to be paid in fiscal 2007. The following table shows the results of discontinued operations of the Company for the three and six months ended August 31, 2005.



23



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|                                                                                               |  |                                    |        |   |                                  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | - | -------------------------------- | - | ------ | -
|                                                                                               |  | Three Months Ended August 31, 2005 |        |   | Six Months Ended August 31, 2005 |  
|EMD Operations:                                                                                |  |                                    |        |   |                                  |   |        |  
|Net Sales                                                                                      |  | $                                  | 737    |   |                                  | $ | 1,132  |  
|Gross Profit                                                                                   |  |                                    | 673    |   |                                  |   | 890    |  
|SG&A and Other Expenses                                                                        |  |                                    | 2,397  |   |                                  |   | 3,893  |  
|Loss Before Income Taxes                                                                       |  |                                    | (1,724 | ) |                                  |   | (3,003 | )
|Income Tax Benefit                                                                             |  |                                    | (656   | ) |                                  |   | (1,142 | )
|                                                                                               |  |                                    |        |   |                                  |   |        |  
|Loss on Discontinued Operations  EMD                                                          |  |                                    | (1,068 | ) |                                  |   | (1,861 | )
|Loss on Sale of EMD (Net of Tax Benefit of $86 and $86, Respectively)                          |  |                                    | (139   | ) |                                  |   | (139   | )
|Income on Discontinued Operations  Pinole (Net of Tax Provision of $35 and $24, Respectively) |  |                                    | 57     |   |                                  |   | 40     |  
|                                                                                               |  |                                    |        |   |                                  |   |        |  
|Loss on Discontinued Operations  Total                                                        |  | $                                  | (1,150 | ) |                                  | $ | (1,960 | )
|                                                                                               |  |                                    |        |   |                                  |   |        |  

On May 31, 2002, the Company completed the sale of substantially all of the assets of its Pinole Point Steel
business. As of August 31, 2006, there was $121 in net liabilities remaining. The remaining net liabilities consist primarily of accrued expenses not assumed by the purchasers of Pinole Point Steel, Grupo IMSA S.A. de C.V. Pinole Point Steel is
reported as a discontinued operation.

There was no activity related to the discontinued operations of Pinole Point Steel in the first six months of fiscal
2007. The Company recorded income on discontinued operations, net of income taxes, of $57 and $40 for the three and six months ended August 31, 2005, respectively, primarily related to workers compensation expenses.

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, cash generated from operations and
availability under its credit facility will be sufficient to fund its operations and meet its working capital needs.

During the first six months of fiscal
2007, MSC generated $7,179 of cash from operating activities compared to $8,619 during the first six months of last fiscal year. The decrease from fiscal 2006 was primarily due to increased inventories partially offset by higher net income and
income tax refunds received during the period. The Companys inventory balances increased from February 28, 2006, primarily due to a build up of finished goods inventory at the Companys Walbridge, Ohio plant in anticipation of the
expiration of the union contract at the plant in September 2006. However, a new four-year contract was ratified by the union in September, so management expects that inventories will decrease in the third and fourth quarters as shipments should
exceed new production. Inventories also increased, to a lesser extent, due to a change in the pricing model from toll to package for a key customer.



24



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Additionally, the Company has experienced increased cash outflow related to purchases of raw materials used in certain
production applications due to price increases.

In the first six months of fiscal 2007, MSC invested $7,513 in capital improvement projects, compared to
$3,165 in the same period last year. The increase was primarily attributable to the construction costs of finishing the Application Research Center and included $2,698 in capital improvements that were in accounts payable as of February 28,
2006 less $879 in capital improvements that were in accounts payable as of August 31, 2006.

The Company entered into an amended and restated $30,000
committed line of credit (New Line) on April 30, 2004. The agreement expires on October 11, 2007. There were no borrowings outstanding under the New Line as of August 31, 2006. Borrowing capacity reserved for the
Companys outstanding letters of credit was $1,864, and the amount remaining available to be borrowed was $28,136 as of August 31, 2006. At the Companys option, interest is at the banks prime rate (8.25% as of August 31,
2006) or at LIBOR plus a margin based on the ratio of funded debt to EBITDA (as defined in the agreement). The financial covenants include a fixed charge coverage ratio of not less than 1.25 to 1.0 commencing May 31, 2004; a maximum leverage
ratio (3.0 to 1.0); and minimum net worth of $80,000 plus 50% of positive consolidated net income ending on or after May 31, 2004, or $86,936, on August 31, 2006. As of August 31, 2006, the Company was in compliance with all debt
covenants. There are restrictions under the New Line on the Companys use of its cash and cash equivalents related to repurchase of stock, dividends and acquisitions. The New Line is secured by specific personal property (including receivables,
inventory and property, plant and equipment) of the Company.

In February 2006, the Companys Board of Directors approved a new share repurchase
program whereby the Company may repurchase up to one million shares of the Companys common stock. The shares may be repurchased from time-to-time on the open market at the Companys discretion, subject to market conditions, existing
financial covenants associated with the Companys credit facility and other factors, generally funded with internally generated cash. MSC repurchased 227,000 shares during the fiscal quarter ended August 31, 2006 at a total cost of $2,229
(including $149 in accounts payable related to transactions that occurred during the quarter, but settled subsequent to August 31, 2006).

The Company
is 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, was $1,000 to $1,500 as of August 31, 2006. Refer to Note 19 of the Notes to the Condensed Consolidated Financial Statements in Item 1 of this
Form 10-Q for additional information.

Contractual Obligations

The only significant change to the contractual obligations table presented in the Companys Form 10-K was that the Company made commitments for additional purchases of $10,148 of raw materials pro ratably over a period ending in
October 2008.



25



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Critical Accounting Policies

The Company has identified significant accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved could result in
material changes to its financial condition or results of operations under different conditions or using different assumptions. The Companys most critical accounting policies are related to the following areas: revenue recognition, long-lived
assets, goodwill, income taxes, environmental reserves and defined benefit retirement plans. Details regarding the Companys use of these policies and the related estimates are described fully in MSCs Form 10-K. In addition, the Company
adopted Statement of Financial Accounting Standards No. 123(R) (SFAS 123(R)), Share-Based Payment, effective March 1, 2006, which requires the measurement and recognition of compensation expense for all share-based
payment awards made to employees and directors. The Company adopted the fair value recognition provisions of SFAS 123(R) using the modified prospective method, and thus did not restate any prior period amounts. The Company granted stock options and
restricted stock during the second quarter of fiscal 2007 and recorded $69 of compensation expense, net of applicable taxes, related to these grants during the quarter. See Note 16 of the Notes to the Condensed Consolidated Financial Statements for
more detail on the grants and the related stock-based compensation recorded. There have been no other material changes to the Companys critical accounting policies that affected MSCs financial condition or results of operations in the
first six months of fiscal 2007.

Cautionary Statement Concerning Forward-Looking Statements

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors and shareowners can better understand a
companys future prospects and make informed investment decisions. This Form 10-Q 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-Q, 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 including domestic and foreign competition for both acoustical and coated applications as well as changes in industry capacity;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



26



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| |  |  | The Companys ability to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations adopted under them;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in laws, regulations, policies or other activities of governments, agencies and similar organizations;
| | - |  | --------------------------------------------------------------------------------------------------------------



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



| |  |  | Acts of war or terrorism;
| | - |  | -------------------------



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



| |  |  | The successful operation of the Application Research Center;
| | - |  | ------------------------------------------------------------



| |  |  | Increases in the prices as well as availability of raw and other material inputs used by the Company, especially steel and zinc;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | The impact of future warranty expenses;
| | - |  | ---------------------------------------



| |  |  | Environmental risks, costs, recoveries and penalties associated with the Companys past and present manufacturing operations; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other factors, risks and uncertainties identified in Part I, Item 1A of the Companys Form 10-K.
| | - |  | ------------------------------------------------------------------------------------------------

MSC undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. This discussion of
potential risks and uncertainties is by no means complete but is designed to highlight important factors that may impact the Companys financial condition or results of operations. Other sections of this Form 10-Q may include additional factors
which could adversely affect 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 3. Quantitative and Qualitative Disclosures about Market Risk

There has been no material change in the Companys
assessment of its sensitivity to market risk since its presentation set forth in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in its Annual Report on Form 10-K, filed with the Securities and Exchange
Commission On May 19, 2006 (as amended on May 23, 2006) for the year ended February 28, 2006.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys reports under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated to management, including the Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow
timely decisions regarding required disclosure. The



27



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Company periodically reviews the design and effectiveness of its disclosure controls and internal control over financial
reporting. The Company makes modifications to improve the design and effectiveness of its disclosure controls and internal control over financial reporting, and may take other corrective action, if its reviews identify a need for such modifications
or actions.

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

In connection with the preparation of the Companys 2006 Annual Report on Form 10-K as filed with the SEC on
May 19, 2006 (as amended on May 23, 2006), as of February 28, 2006 (Form 10-K), an evaluation was performed under the supervision and with the participation of the Companys management, including the CEO and CFO, of
the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Management concluded that control deficiencies existed as of
February 28, 2006 in its internal control over financial reporting related to accounting for income taxes. These control deficiencies constituted a material weakness within the meaning of the Public Company Accounting Oversight Boards
Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. The material weakness related to accounting for income taxes identified by management was
disclosed in Item 9A of the Form 10-K. Based on that evaluation, management concluded that the Companys system of internal control over financial reporting was not effective as of February 28, 2006. As part of its evaluation of the
effectiveness of the design and operation of the Companys internal control over financial reporting as of the end of the period covered by this report, management has (i) identified no material weaknesses other than the weakness described
in the Form 10-K and (ii) evaluated whether the material weakness described above continues to exist.

Management believes that the Company has made
progress in addressing this material weakness by identifying additional enhancements to the related control procedures. However, the improvements in controls have not all been implemented and operating effectively for a sufficient period of time.
Additionally, certain internal controls over the accounting for income taxes are annual controls associated with the preparation of the Companys year-end financial statements and, therefore, cannot be established as fully remediated until that
time. Accordingly, management has concluded that the Companys disclosure controls and procedures were not effective as of August 31, 2006. Management has performed additional analysis and other post-closing procedures to ensure the
Companys condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles.

The required
certifications of our principal executive officer and principal financial officer are included as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our
disclosure controls and procedures and changes in internal control over financial reporting referred to in those certifications. Those certifications should be read in conjunction with this Item 4 and Item 9 of the Companys Form 10-K
for a more complete understanding of the matters covered by the certifications.



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Changes in internal control over financial reporting. During the quarter ended August 31, 2006, there were no
changes in internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

Management, with oversight from the Audit Committee, continues to focus on addressing the material weakness disclosed in its Form 10-K and is committed to remediate the
material weakness as expeditiously as possible. Although the Companys remediation efforts are underway, control weaknesses will not be considered remediated until: (i) the new or enhanced internal controls are implemented and operational
for a sufficient period of time; (ii) these new or enhanced controls are tested for effectiveness; and (iii) management concludes that these controls are operating effectively.



29



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MATERIAL SCIENCES CORPORATION

FORM 10-Q

For the Quarter Ended August 31, 2006

PART II. OTHER INFORMATION

Item 1. Legal
Proceedings

The Company is party to various legal actions arising in the ordinary course of its business. These legal actions cover
a broad variety of claims spanning the Companys entire business. The Company believes that the resolution of these legal actions will not, individually or in the aggregate, have a material adverse effect on the Companys financial
statements. See Note 19 to the Condensed Consolidated Income Statement, Balance Sheet and Statement of Cash Flows included in Part I, Item 1 of this Form 10-Q.

Item 1A. Risk Factors

As discussed in Note 19 to the Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Form 10-Q, the Securities and Exchange Commission has notified the Company that it concluded its review of the material weaknesses in internal control over financial reporting disclosed in the
Companys Annual Report on Form 10-K/A for the fiscal year ended February 28, 2005, eliminating this review as a risk factor. All the other risk factors listed in the Annual Report on Form 10-K for the fiscal year ended February 28,
2006 are still applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



| | (a) | None
| | --- | ----



| | (b) | None
| | --- | ----



| | (c) | The following table shows the repurchases of common stock made by the Company during the fiscal quarter ended August 31, 2006:
| | --- | ------------------------------------------------------------------------------------------------------------------------------



|                  |  |                                  |  |                              |      |                                                                                  |         |                                                                                    |          
|----------------- |  | -------------------------------- |  | ---------------------------- | ---- | -------------------------------------------------------------------------------- | ------- | ---------------------------------------------------------------------------------- | ---------
|Period            |  | Total Number of Shares Purchased |  | Average Price Paid Per
Share |      | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |         | Maximum Number of Shares that may Yet Be Purchased Under the Plans or Programs (1)
|June 130, 2006   |  |                                 |  |                              |     |                                                                                  |        |                                                                                    | 1,000,000
|July 131, 2006   |  | 143,400                          |  | $                            | 9.97 |                                                                                  | 143,400 |                                                                                    | 856,600  
|August 131, 2006 |  | 83,600                           |  | $                            | 9.57 |                                                                                  | 83,600  |                                                                                    | 773,000  
|                  |  |                                  |  |                              |      |                                                                                  |         |                                                                                    |          
|Total             |  | 227,000                          |  | $                            | 9.82 |                                                                                  | 227,000 |                                                                                    | 773,000  
|                  |  |                                  |  |                              |      |                                                                                  |         |                                                                                    |          

---

|(1) | These shares are under an open market stock repurchase program for up to an aggregate amount of one million shares of common stock, which was previously announced on
February 8, 2006 and which has no set termination date.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



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

The Company held its Annual Meeting of Shareholders on June 22, 2006. An aggregate of 13,947,069 shares of Common Stock, or 94.58% of the
Companys outstanding shares, were represented at the meeting either in person or by voting proxy and, accordingly, a quorum was present for the meeting. The following proposals were adopted by a majority of the shares voting for each proposal
as follows:

Proposal One: Election of the following seven directors to serve until the annual meeting in 2007:



|                      |  |            |  |       |   |  |          |  |      |  
|--------------------- |  | ---------- |  | ----- | - |  | -------- |  | ---- | -
|NOMINEE               |  | FOR        |  | %     |   |  | WITHHELD |  | %    |  
|Avrum Gray            |  | 13,299,668 |  | 95.36 | % |  | 647,401  |  | 4.64 | %
|Frank L. Hohmann III  |  | 13,335,655 |  | 95.62 | % |  | 611,414  |  | 4.38 | %
|Samuel Licavoli       |  | 13,334,395 |  | 95.61 | % |  | 612,674  |  | 4.39 | %
|Dr. Ronald A. Mitsch  |  | 12,990,860 |  | 93.14 | % |  | 956,209  |  | 6.86 | %
|Clifford D. Nastas    |  | 13,335,694 |  | 95.62 | % |  | 611,375  |  | 4.38 | %
|John P. Reilly        |  | 12,992,136 |  | 93.15 | % |  | 954,933  |  | 6.85 | %
|Curtis G. Solsvig III |  | 12,992,236 |  | 93.15 | % |  | 954,833  |  | 6.85 | %

Proposal Two: Ratification of Deloitte & Touche LLP as the Companys independent,
registered public accounting firm for the fiscal year ending February 28, 2007. Deloitte & Touche LLP was ratified as the Companys independent, registered public accounting firm with 13,146,672 votes cast for, 795,842 votes cast
against and 4,555 votes abstaining.

Item 6. Exhibits

Reference is made to the attached Index to Exhibits.



31



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SIGNATURES

Pursuant to the requirements 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, in Elk Grove Village, State of Illinois, on the 10th
day of October 2006.



MATERIAL SCIENCES CORPORATIONBy:

/s/ Clifford D. NastasClifford D. Nastas Chief Executive
OfficerBy:

/s/ James M. FroislandJames M. FroislandSenior Vice President, ChiefFinancial Officer, Chief InformationOfficer and Corporate Secretary




32



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MATERIAL SCIENCES CORPORATION

Quarterly Report on Form 10-Q

For the Quarter Ended August 31, 2006

Index to Exhibits



|               |  |                                                                                   
|-------------- |  | ----------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                            
|31.1           |  | Rule 13a-14(a)/ 15(d)-14(a) Certification of Chief Executive Officer              
|               | 
|31.2           |  | Rule 13a-14(a)/ 15(d)-14(a) Certification of Chief Financial Officer              
|               | 
|32             |  | Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer