UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


(Mark One)




		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
		ACT OF 1934
		For the fiscal period ended: March 31, 2001




		OR




		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
		ACT OF 1934
		For the transition period from ____________ to ____________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal period ended: September 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________

Commission file number: 0-20679

MECHANICAL DYNAMICS, INC.
(Exact name of registrant as specified in its charter)

Michigan		38-2163045
(State of incorporation)		(I.R.S. Employer Identification No.)


Michigan (State of incorporation)		38-2163045 (I.R.S. Employer Identification No.)

~~2301~~2300 ~~Commonwealth~~Traverwood ~~Blvd.~~Drive Ann Arbor, Michigan 48105 (734) 994-3800 (Address of principal executive offices, including zip code, and telephone number, including area code)

(Address of principal executive offices, including zip code, and telephone number, including area code)

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				No

The number of outstanding shares of the Registrant’s common stock, as of ~~November~~ May 67, ~~2000~~2001, was 6,~~155~~059,~~589~~344.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
PART I — FINANCIAL INFORMATION
~~Item 1. Financial Statements~~	Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
		Condensed Consolidated Balance Sheets March 31, 2001 and December 31, 2000
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
		Condensed Consolidated Statements of Income Three Months Ended March 31, 2001 and 2000
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
		Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2001 and 2000
		Notes to Condensed Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II — OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
Statement Re Computation of Per Share Earnings
Financial Data Schedule

MECHANICAL DYNAMICS, INC.

FORM 10-Q
TABLE OF CONTENTS

			Page
PART I -		FINANCIAL INFORMATION
PART I — FINANCIAL INFORMATION
~~Item 1.~~	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets September 30, 2000 and December 31, 1999		3
		Condensed Consolidated Balance Sheets March 31, 2001 and December 31, 2000		3
		Condensed Consolidated Statements of Income Three and Nine Months Ended September 30, 2000 and 1999		4
		Condensed Consolidated Statements of Income Three Months Ended March 31, 2001 and 2000		4
		Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2000 and 1999		5
		Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2001 and 2000		5
		Notes to Condensed Consolidated Financial Statements		6
~~Item 2.~~	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		8
~~Item 3.~~	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		1413
PART II –		OTHER INFORMATION
PART II — OTHER INFORMATION
~~Item 6.~~	Item 6.	Exhibits and Reports on Form 8-K		1514
SIGNATURES				1615
INDEX TO EXHIBITS				17

PART I — FINANCIAL INFORMATION

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS


			March 31,			December 31,
in thousands			2001			2000

Assets:			(Unaudited)
Current assets:




	Cash and cash equivalents		$	15,060		$	17,961




	Accounts receivable, net			13,215			11,442




	Prepaid and deferred expenses			2,908			3,255

		Total current assets		31,183			32,658

Property and equipment, net				4,324			4,462




Goodwill, net				6,684			6,768




Other assets				1,760			1,981

Total assets			$	43,951		$	45,869

Liabilities and Shareholders’ Equity:




Current liabilities:




	Borrowings under lines of credit		$	82		$	49




	Current portion of capital leases			406			406




	Accounts payable			1,470			2,466




	Accrued expenses			5,375			7,152




	Deferred revenue			8,372			6,936

		Total current liabilities		15,705			17,009

Capital lease obligation, less current portion				497			658




Minority interest				600			539




Shareholders’ equity:




	Common stock			21,818			21,998




	Preferred stock			0			0




	Retained earnings			6,040			5,819




	Accumulated other comprehensive income			(709	)		(154	)

		Total shareholders’ equity		27,149			27,663

Total liabilities and shareholders’ equity			$	43,951		$	45,869

				September 30,			December 31,
in thousands				2000			1999
Assets:					(Unaudited	)
Current assets:
	Cash and cash equivalents			$	20,620		$	17,741
	Accounts receivable, net				9,865			10,454
	Prepaid and deferred expenses				2,564			2,755
			Total current assets		33,049			30,950
Property and equipment, net					2,576			3,118
Goodwill, net					3,062			3,436
Other assets					942			685
Total assets				$	39,629		$	38,189
Liabilities and Shareholders’ Equity:
Current liabilities:
		Borrowings under lines of credit		$	50		$	14
		Accounts payable			1,576			1,447
		Accrued expenses			3,024			3,246
		Deferred revenue			6,895			5,832
			Total current liabilities		11,545			10,539
Minority interest					533			479
Shareholders’ equity:
		Common stock			22,275			22,586
		Preferred stock			0			0
		Retained earnings			5,252			4,168
		Accumulated other comprehensive income			24			417
			Total shareholders’ equity		27,551			27,171
Total liabilities and shareholders’ equity				$	39,629		$	38,189

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

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME


			Three Months Ended
			March 31,

in thousands except share and per share data			2001		2000

			(Unaudited)
Revenue:




	Software licenses		$	6,191	$	6,036




	Software maintenance services			3,013		2,253




	Professional services and other			4,637		2,450

		Total revenue		13,841		10,739

Cost of revenue:




	Software licenses			977		1,099




	Services			4,068		2,554

		Total cost of revenue		5,045		3,653

Gross profit				8,796		7,086

Operating expenses:




	Sales and marketing			4,935		4,203




	Research and development			1,698		1,446




	General and administrative			1,317		1,026




	Goodwill amortization			178		114

		Total operating expenses		8,128		6,789

Operating income				668		297




Other income, net				119		85

Income before income taxes and minority interest				787		382




Provision for income taxes				235		114

Net income before minority interest				552		268




Minority interest in net income of subsidiary				61		27

Net income			$	491	$	241

Basic net income per common share			$	0.08	$	0.04

Weighted average common shares				6,088,056		6,286,725

Diluted net income per common share			$	0.08	$	0.04

Weighted average common and common equivalent shares				6,220,446		6,287,077

(Unaudited)

			Three Months Ended					Nine Months Ended
			September 30,					September 30,
in thousands except share and per share data			2000		1999			2000		1999
Revenue:
	Software licenses		$	5,463	$	4,572		$	17,241	$	13,868
	Software maintenance services			3,147		2,097			7,868		5,696
	Professional services and other			2,971		3,060			8,292		9,689
		Total revenue		11,581		9,729			33,401		29,253
Cost of revenue:
	Software licenses			940		871			3,042		2,520
	Services			2,808		2,797			8,130		8,354
		Total cost of revenue		3,748		3,668			11,172		10,874
Gross profit				7,833		6,061			22,229		18,379
Operating expenses:
	Sales and marketing			4,344		3,631			12,698		11,416
	Research and development			1,528		1,362			4,448		4,118
	General and administrative			1,038		886			3,082		2,770
	Goodwill amortization			113		113			340		340
		Total operating expenses		7,023		5,992			20,568		18,644
Operating income (loss)				810		69			1,661		(265	)
Other income, net				181		116			396		415
Income before income taxes and minority interest				991		185			2,057		150
Provision (credit) for income taxes				297		(449	)		615		(459	)
Net income before minority interest				694		634			1,442		609
Minority interest in net income (loss) of subsidiary				26		(6	)		54		(2	)
Net income			$	668	$	640		$	1,388	$	611
Basic net income per common share			$	0.11	$	0.10		$	0.22	$	0.10
Weighted average common shares				6,208,463		6,260,443			6,251,996		6,247,778
Diluted net income per common share			$	0.11	$	0.10		$	0.22	$	0.10
Weighted average common and common equivalent shares				6,210,668		6,260,443			6,254,046		6,247,778

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

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


						Three Months Ended
						March 31,

in thousands						2001			2000

						(Unaudited)
Cash flows from operating activities:




	Net income					$	491		$	241




	Adjustments to reconcile net income to net cash




		provided by (used in) operating activities:




			Depreciation and amortization				595			413




			(Gain) loss on disposal of assets, net				16			(14	)




			Minority interest in net income of subsidiary				61			27




			Changes in assets and liabilities:




				Accounts receivable			(2,346	)		(815	)




				Prepaid and deferred expenses			222			516




				Other assets			211			(83	)




				Accounts payable			(771	)		156




				Accrued expenses			(1,579	)		(476	)




				Deferred revenue			1,666			312

					Net cash provided by (used in) operating activities		(1,434	)		277

Cash flows from investing activities:




	Proceeds from the sale of property and equipment						10			84




	Purchases of property and equipment						(489	)		(315	)

					Net cash used in investing activities		(479	)		(231	)

Cash flows from financing activities:




	Net borrowings under line of credit agreements						33			46




	Proceeds from the issuance of common stock						45			51




	Repurchases of Company common stock						(495	)		0




	Payments on capital lease obligations						(114	)		0

					Net cash provided by (used in) financing activities		(531	)		97

Effect of exchange rate changes on cash							(457	)		(71	)

Net increase (decrease) in cash and cash equivalents							(2,901	)		72




Cash and cash equivalents at beginning of period							17,961			17,741

Cash and cash equivalents at end of period						$	15,060		$	17,813

Supplemental disclosures of cash flow information:




	Cash paid during the period for:




			Interest			$	10		$	1




			Income taxes			$	504		$	240

(Unaudited)

				Nine Months Ended
				September 30,
in thousands				2000			1999
Cash flows from operating activities:
		Net income		$	1,388		$	611
		Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation and amortization		1,264			1,502
			(Gain) loss on disposal of assets, net		(22	)		63
			Minority interest in net income of subsidiary		54			(2	)
			Changes in assets and liabilities:
			Accounts receivable		(93	)		552
			Prepaid and deferred expenses		51			(603	)
			Other assets		(97	)		(359	)
			Accounts payable		551			(581	)
			Accrued expenses		3			(542	)
			Deferred revenue		1,287			466
			Net cash provided by operating activities		4,386			1,107
Cash flows from investing activities:
			Proceeds from the sale of property and equipment		124			0
			Purchases of property and equipment		(729	)		(1,046	)
			Net cash used in investing activities		(605	)		(1,046	)
Cash flows from financing activities:
			Repurchases of Company common stock		(770	)		0
			Net borrowings (payments) under line of credit agreements		36			(31	)
			Proceeds from the issuance of common stock		155			203
			Net cash provided by (used in) financing activities		(579	)		172
Effect of exchange rate changes on cash					(323	)		46
Net increase in cash and cash equivalents					2,879			279
Cash and cash equivalents at beginning of period					17,741			16,843
Cash and cash equivalents at end of period				$	20,620		$	17,122
Supplemental disclosures of cash flow information:
	Cash paid during the period for:
			Interest	$	5		$	13
			Income taxes	$	913		$	172

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

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Mechanical Dynamics, Inc. (“MDI” or the “Company”) and its subsidiaries, and have been prepared in accordance with generally accepted accounting principles for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Company believes all adjustments, consisting of ~~normal~~ normal recurring adjustments considered necessary for a fair presentation, have ~~been~~ been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, ~~1999~~2000.

Operating results for the three ~~and nine~~ month periods ended ~~September~~March 3031, ~~2000~~ 2001 and ~~1999~~ 2000 are not necessarily indicative of the results that may be expected for the full year.

(2) –— Comprehensive Income

Comprehensive income is the total of net income and all other non-owner changes in equity. ~~Total~~Comprehensive ~~comprehensive~~ income (loss) was ($~~493~~64,000) and $~~912~~169,000 for the three month periods ended ~~September~~March 3031, ~~2000~~2001 and ~~1999, respectively, and $995,000 and $771,000 for the nine month periods ended September 30,~~ 2000 ~~and 1999~~, respectively. The difference between net income, as reported in the accompanying condensed consolidated statements of income, and comprehensive income (loss) is the foreign currency translation adjustment for the respective periods.

(3) –— Earnings per Share

The following table reconciles the weighted average number of shares in the basic net income per common share calculation to the number of shares in the diluted net income per common share calculation:

		Three Months Ended								Nine Months Ended
				Three Months Ended March 31,
		September 30,								September 30,
				2001				2000
		2000				1999				2000		1999
Weighted average common shares used in basic net income per common
Weighted average common shares used in basic net income per common share			6,208,463				6,260,443				6,251,996		6,247,778
		share			6,088,056				6,286,725
~~Effect of stock options~~	Effect of stock options		~~2,205~~		132,390		—		352		~~2,050~~		—
Weighted average common and common equivalent shares used in diluted net income per common share			6,210,668				6,260,443				6,254,046		6,247,778
Weighted average common and common equivalent shares used in
	diluted net income per common share				6,220,446				6,287,077

For the three months ended March 31, 2001 and ~~nine~~2000, ~~month~~options ~~periods~~to ~~ended~~purchase shares ~~September 30~~of the Company’s common stock of 221,790 ~~1999~~and 700,364, ~~there~~respectively, were outstanding nobut were not included in the computations of diluted earnings per ~~dilutive~~share because the price of the options ~~outstanding~~was greater than the average market price of the common stock for the period reported.

(4) –— ~~New Accounting Pronouncements~~Derivatives

The ~~Financial~~Company ~~Accounting~~adopted ~~Standards~~Statement ~~Board issued Statements~~ of Financial Accounting Standards No. 133, ~~137, and 138,~~ “Accounting for Derivative Instruments and Hedging Activities” ~~(collectively~~in the ~~“SFAS~~first ~~133”)~~quarter of 2001. ~~These~~Derivatives ~~statements~~are financial instruments whose value is ~~establish~~derived ~~accounting~~from ~~and~~one ~~reporting~~or ~~standards~~more ~~for~~underlying ~~derivative~~financial instruments, such as foreign ~~including~~currency. ~~certain~~The Company enters into derivative ~~instruments~~transactions, ~~embedded~~specifically inforeign exchange ~~other~~forward contracts, ~~and~~to manage the Company’s exposure to fluctuations in ~~hedging~~foreign ~~activities~~exchange rates. The ~~statements~~contracts ~~require~~are ~~that~~primarily anin ~~entity~~European ~~record~~currencies ~~all~~and ~~derivatives~~Japanese asyen ~~either~~and ~~assets~~have ormaturities ~~liabilities~~less atthan ~~fair~~one ~~value~~year. ~~Under~~Any ~~certain conditions,~~derivative athe ~~derivative~~Company enters ~~may~~into beis designated at inception as a hedge of ~~(1) potential~~risks ~~changes~~associated with inspecific ~~the~~assets, ~~fair~~liabilities, ~~value~~or offuture ancommitments, ~~asset~~and oris ~~liability~~monitored orto determine ~~firm~~if ~~commitment, (2) the foreign~~it ~~currency~~

~~exposure~~remains ofan aeffective ~~forecasted~~hedge. ~~transaction,~~The oreffectiveness ~~(3) the foreign currency exposure~~ of the ~~net~~derivative as ~~investment in~~ a ~~foreign~~hedge ~~operation.~~is ~~The~~based ~~accounting~~on ~~for~~ changes in ~~the~~its ~~fair~~market value ofbeing ahighly ~~derivative~~correlated ~~instrument~~with changes ~~depends~~in onmarket ~~the~~value ~~intended use~~ of the ~~derivative~~underlying ~~and~~hedged ~~the resulting designation~~items. ~~These statements are effective for fiscal years beginning after June 15, 2000.~~ The Company~~’s derivative~~ ~~activities~~does ~~are~~not enter ~~currently limited to entering~~ into ~~forward~~or ~~contracts to~~hold ~~hedge~~derivatives ~~potential~~for ~~changes~~trading inor ~~the~~speculative ~~fair value of its receivables denominated in certain foreign currencies~~purposes.

~~Additionally,~~The ~~the~~Company ~~Securities~~uses ~~and~~forward ~~Exchange~~exchange ~~Commission~~contracts ~~has~~to ~~issued~~hedge ~~Staff~~specific foreign ~~Accounting~~currency ~~Bulletin~~denominated Noreceivables. ~~101,~~ ~~“Revenue~~These ~~Recognition~~contracts,” ~~(“SAB~~which ~~101”)~~are ~~which~~one ~~the~~year or less in length, require the Company ~~must~~to ~~adopt~~exchange noforeign ~~later~~currencies ~~than~~for ~~the~~U.S. ~~fourth~~dollars ~~quarter~~at maturity ofat ~~2000,~~rates ~~and~~agreed to at inception of the ~~Financial~~contracts. The Company enters ~~Accounting~~into ~~Standards~~transactions ~~Board~~denominated ~~has~~in ~~issued~~foreign ~~Interpretation~~currencies ~~No. 44,~~and ~~“Accounting~~includes ~~for~~the exchange ~~Certain~~gain ~~Transactions~~or ~~involving~~loss ~~Stock~~arising ~~Compensation~~from such transactions in other income, annet. ~~interpretation~~As of ~~APB~~March ~~Opinion No. 25~~31,” ~~(“FIN~~2001 ~~44”)~~and ~~which~~2000, ~~generally~~the isCompany ~~effective~~had ~~for~~approximately ~~all~~$800,000 ~~periods~~and ~~after~~$940,000, ~~July 1~~respectively, ~~2000~~of foreign exchange forward contracts outstanding. ~~Certain~~Net ~~conclusions~~unrealized and inrealized ~~FIN~~gains 44and ~~cover~~losses ~~specific~~associated ~~events~~with ~~that~~exchange ~~occur~~rate fluctuations on ~~after~~forward ~~either~~contracts ~~December 15,~~and ~~1998,~~the orunderlying ~~January 12,~~foreign ~~2000~~currency exposure being hedged were immaterial for all periods presented. Cash flows from forward contracts are classified with the related receivables.

~~The~~(5) ~~adoption~~— ofNew ~~FIN~~Accounting ~~44 had no impact on the Company’s financial statements~~Pronouncements ~~and management expects that adoption of SFAS 133 and SAB 101 will have little,~~ ~~if any, impact on the Company’s consolidated financial position or results of operations.~~

In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (5“SFAS 140”) ~~Geographic~~. SFAS ~~Operations~~140 provides accounting and ~~Segment~~reporting ~~Information~~standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS 140 replaces SFAS 125 but it carries over most of SFAS 125’s provisions. The statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management expects that adoption of SFAS 140 will have little, if any, impact on the Company’s consolidated financial position or results of operations.

~~The~~(6) Geographic ~~Company~~Operations ~~operates in one segment – the development, marketing~~ and ~~support~~ ofSegment ~~software products and services for the mechanical segment of the~~Information ~~computer-aided engineering industry. The Company licenses products to~~ customers on a worldwide basis. Sales and marketing operations outside the United States are conducted principally through the Company’s foreign subsidiaries and international distributors. Intercompany sales and transfers between geographic areas are accounted for at prices which are designed to be representative of third party transactions.

The Company operates in one segment — the development, marketing and support of software products and services for the mechanical segment of the computer-aided engineering industry. The Company licenses products to customers on a worldwide basis. Revenue is attributed to the country in which the sale originates. Sales and marketing operations outside the United States are conducted principally through the Company’s foreign subsidiaries and international distributors. Intercompany sales and transfers between geographic areas are accounted for at prices which are designed to be representative of third party transactions.

The following table summarizes selected financial information of the Company’s operations by geographic location:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

In thousands

~~2000~~2001

~~1999~~2000

~~2000~~

~~1999~~

Revenue:

North America

United States

32,~~150~~730

32,~~057~~781

~~8,786~~

~~8,765~~

Canada and Mexico

~~926~~841

~~856~~1,336

~~3,465~~

~~2,556~~

Europe

Germany

1,~~106~~162

1,~~181~~033

~~3,637~~

~~3,774~~

Other European countries

2,~~555~~539

2,~~084~~529

~~7,642~~

~~7,085~~

Asia/Pacific

Japan

35,~~028~~910

2,~~057~~661

~~7,991~~

~~5,545~~

Other Asian countries

~~816~~659

~~494~~399

~~1,880~~

~~1,528~~

Total revenue

1113,~~581~~841

910,~~729~~739

~~33,401~~

~~29,253~~

~~Total~~One ~~assets~~customer byaccounted ~~geographic~~for ~~location~~12% ~~have~~of ~~not~~total ~~changed~~revenue ~~significantly~~during ~~from~~the three month ~~December~~period ended March 31, ~~1999~~2001. No customer accounted for greater than 10% of total revenue during the three month period ended March 31, 2000. The

Company’s largest distributor, ISI-Dentsu, is located in Japan and accounted for approximately 15.5% and 20.6% of the Company’s total revenue for the three month periods ended March 31, 2001 and 2000, respectively. Total assets by geographic location have not changed significantly from December 31, 2000.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides an analysis of the Company’s financial condition and results of operations, and should be read in conjunction with the Company’s consolidated financial statements and the notes included in Item 1 of this Form 10-Q.

Overview

The Company develops, markets and supports virtual prototyping solutions. The Company’s virtual prototyping software allows an engineer or designer to design a complete product by simulating, both visually and mathematically, a product in motion. The Company’s principal software product, ADAMS Full Simulation Package, is used by customers to simulate mechanical systems. The Company’s revenue has in the past been, and is expected to be in the future, derived primarily from its ADAMS Full Simulation Package and related software products and services.

Forward-Looking Information is Subject to Risk and Uncertainty

Except for the historical information contained in this report, the matters herein contain “forward-looking” statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risk and uncertainty. These forward-looking statements include, but are not limited to, revenue levels, including the level of international revenue, certain costs and operating expense levels, the level of other income, the Company’s liquidity and capital needs and various business environment and trend information. Actual future results and trends may differ materially depending on a variety of factors, including:

• the volume and timing of orders received during the quarter; • the mix of and changes in distribution channels through which the Company’s products are sold; • the timing and acceptance of new products and product enhancements by the Company or its competitors; • changes in pricing; • the level of the Company’s sales of third-party products; • purchasing patterns of distributors and customers; • competitive conditions in the industry; • business cycles affecting the markets in which the Company’s products are sold; • extraordinary events, such as litigation; • risks inherent in seeking and consummating acquisitions, including the diversion of management attention to the assimilation of the operations and personnel of the acquired business; • fluctuations in foreign exchange rates; • the impact of undetected errors or defects, ~~including those associated with Year 2000 date functions,~~ on the Company’s current products, vendors and internal systems; and • economic conditions generally or in various geographic areas.

All of the foregoing factors are difficult to forecast. The future operating results of the Company may fluctuate as a result of these and other risk factors detailed from time to time in the Company’s Securities and Exchange Commission reports.

Due to all of the foregoing factors, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. It is likely that, in some future quarters, the Company’s operating results will be below the expectations of stock market analysts and investors. In such an event, the price of the Company’s common stock would likely be materially adversely affected.

Results of Operations

Revenue

		Three Months Ended September 30,									Nine Months Ended September 30,
		Three Months Ended March 31,
dollars in thousands		~~2000~~2001			~~1999~~2000			% Change			~~2000~~			~~1999~~			~~% Change~~
Software licenses		$	56,~~463~~191		$	46,~~572~~036			192.56	%	$	~~17,241~~		$	~~13,868~~			~~24.3~~	%
	% of total revenue		4744.27	%		4756.02	%					~~51.6~~	%		~~47.4~~	%
Software maintenance services		$	3,~~147~~013		$	2,~~097~~253			5033.17	%	$	~~7,868~~		$	~~5,696~~			~~38.1~~	%
	% of total revenue		2721.28	%		21.50	%					~~23.6~~	%		~~19.5~~	%
Professional services and other		$	24,~~971~~637		$	32,~~060~~450			(289.93	%)	$	~~8,292~~		$	~~9,689~~			~~(14.4~~	%)
	% of total revenue		2533.75	%		3122.58	%					~~24.8~~	%		~~33.1~~	%
Total revenue		$	1113,~~581~~841		$	910,~~729~~739			1928.09	%	$	~~33,401~~		$	~~29,253~~			~~14.2~~	%

The Company’s total revenue increased 1928.09% ~~and 14.2%~~ during the three ~~and nine~~ month ~~periods~~ period ended ~~September~~March 3031, ~~2000~~2001, ~~respectively,~~ as compared to the corresponding ~~periods~~period in ~~1999~~2000. The growth in revenue resulted from ~~increased sales~~an ofincrease ~~the~~in ~~Company’s~~professional services and software ~~products~~maintenance ~~including~~services ~~related~~provided ~~maintenance services~~to the Company’s customers, as well as ~~from~~an increase ~~increased~~in the sales of ~~third party software products licensed through~~ the Company’s ~~European~~software ~~and Canadian subsidiaries~~products. The ~~increase~~ increases in ~~software~~these components ~~sales~~of ~~was~~revenue were partially offset by a decrease in ~~professional~~the sales of ~~services~~third-party ~~provided~~software toproducts licensed through the Company’s ~~customers~~European and Canadian subsidiaries.

Revenue from international customers accounted for approximately 6474.82% and 5961.87% of the Company’s total revenue during the three months ended ~~September 30~~March 31, 2001 ~~2000~~ and ~~1999~~2000, respectively. ~~International~~The ~~revenue~~increase ~~accounted~~in ~~for approximately~~international ~~63.3%~~revenue ~~and~~as ~~61.3%~~a percent of total revenue ~~during~~in ~~the~~2001 ~~nine~~was ~~months~~due ~~ended September 30,~~primarily ~~2000~~to ~~and~~increased ~~1999,~~professional ~~respectively.~~services revenue ~~The~~generated ~~increase~~ in ~~international revenue~~Japan as a ~~percent~~result of ~~total~~the ~~revenue~~Company’s ~~was~~acquisition ~~due~~of ~~primarily~~ESTECH Corporation (“ESTECH”) in December 2000, and, to ~~increased~~a lesser extent, increased sales of ADAMS software licenses in Japan and the rest of Asia. ~~compared~~The toincrease ~~the corresponding periods~~ in ~~1999. This~~ ~~increase~~international revenue was partially offset by ~~a decline in~~ the ~~percent~~recent ~~of total revenue derived from European customers. The~~ strengthening of the U.S. dollar, which, relative to the European, ~~currencies~~Canadian and Japanese currencies, negatively impacted the Company’s first quarter revenue by approximately $~~570,000 during the three months ended September 30, 2000~~1.1 million. Since most of the Company’s ~~European~~international operating expenses were incurred in ~~local~~ foreign currencies, the net impact of exchange rate fluctuations on income from operations was considerably less than the impact on revenue. If the U.S. dollar continues to strengthen in ~~2000~~2001 relative to the European, Canadian and Japanese currencies, the Company’s international revenue will be negatively impacted, which could have a material adverse effect on the Company’s consolidated results of operations.

InSoftware ~~1999,~~licenses ~~the~~revenue ~~Company’s~~consists ~~international~~primarily ~~revenue~~of ~~was~~license ~~negatively~~fees ~~impacted~~for bythe ~~economic~~Company’s ~~weakness~~software inproducts ~~certain~~and, ~~countries~~to ina ~~Asia~~lesser extent, ~~including~~license ~~Japan.~~fees ~~During the~~for ~~nine~~third-party ~~month~~software ~~period~~products ~~ended~~licensed ~~September 30,~~through ~~2000,~~ the Company’s ~~achieved~~European 39and Canadian subsidiaries. Software licenses revenue increased 2.6% ~~revenue~~during the three ~~growth~~month inperiod ~~Asia~~ended March 31, 2001, as compared to the corresponding period in ~~1999~~ 2000. This ~~improvement~~ growth in revenue ~~was~~resulted ~~driven~~primarily ~~principally~~from byan ~~increased~~increase in sales of ~~ADAMS~~the ~~software~~Company’s ~~licenses~~ADAMS inand ~~Japan.~~Dynamic ~~Given~~Designer ~~the~~products, ~~uncertainty~~which ~~experienced~~was inpartially ~~the~~offset ~~Asian~~by ~~markets~~decreased ~~over~~sales ~~the~~of ~~past~~third-party ~~several~~software ~~years,~~products ~~the~~sold ~~Company~~worldwide. ~~continues~~Revenue tofrom third ~~remain~~party ~~cautious in~~software ~~its~~products ~~overall~~totaled ~~outlook~~approximately ~~for~~$970,000, ~~Asian~~or ~~revenue~~7.0% Ifof ~~the economies in Asia deteriorate~~total inrevenue during the ~~remainder~~three ofmonths ~~2000~~ended orMarch 31, in 2001, ~~the~~as ~~Company’s~~compared ~~overall~~to ~~Asian revenue could~~$1.3 ~~be adversely impacted~~million, ~~which~~or ~~could~~11.9% ~~have a material adverse effect on the Company’s consolidated results~~ of ~~operations.~~total ~~The Company nonetheless expects that international~~ revenue ~~will~~during ~~continue~~the tocorresponding ~~account~~period ~~for a significant portion of its total revenue~~ in ~~future periods~~2000.

Software ~~licenses~~maintenance services revenue consists ~~primarily~~ of ~~license~~revenue ~~fees~~generated ~~for the~~from ~~Company’s~~maintenance ~~software products~~ and, tosupport aagreements ~~lesser~~on ~~extent, license fees for third party software products licensed through~~ the Company’s ~~European~~software ~~and Canadian subsidiaries~~products. Software maintenance ~~licenses~~services revenue increased 1933.57% ~~and 24.3%~~ during the three ~~and nine~~ month ~~periods~~period ended ~~September~~ March 3031, ~~2000~~2001, ~~respectively,~~ as compared to the corresponding ~~periods~~period in ~~1999~~2000. ~~This~~The increase ~~resulted~~ ~~primarily~~reflects ~~from~~the acontinuing ~~higher~~growth ~~volume~~ of the Company’s ~~ADAMS~~customer ~~and Dynamic Designer products~~base, as well as ~~increased~~the strong ~~sales~~maintenance ofrenewal ~~third~~rate ~~party~~the ~~software~~Company ~~licenses~~has ~~sold worldwide.~~historically ~~Revenue~~experienced ~~from~~with respect ~~third~~to ~~party~~ software ~~products~~maintenance ~~totaled~~agreements.

~~approximately~~ Professional services and other revenue consists primarily of revenue from ~~$1.1 million~~consulting, ortraining ~~9.2%~~and offunded ~~total~~research and development projects. Professional services revenue increased 89.3% during the three month period ended ~~September~~ March 3031, ~~2000~~ 2001, as compared to ~~$864,000, or 8.9% of total revenue during~~ the corresponding period in ~~1999~~2000. ~~Revenue~~The ~~from~~increase ~~third~~in ~~party products totaled~~revenue ~~approximately~~was ~~$3.5 million,~~primarily ordue ~~10.3%~~to ofconsulting ~~total~~ revenue ~~during~~generated ~~the~~in ~~nine~~Japan ~~month period ended September 30, 2000,~~ as ~~compared~~a toresult ~~$2.9 million, or 9.8%~~ of ~~total~~the ~~revenue~~Company’s ~~during~~acquisition ~~the~~of ~~corresponding~~ESTECH ~~period~~ in ~~1999~~December 2000.

Software maintenance services revenue consists of revenue generated from maintenance and support agreements on the Company’s software products. Software maintenance services revenue increased 50.1% and 38.1% during the three and nine month periods ended September 30, 2000, respectively, as compared to the corresponding periods in 1999. The increase reflects the continuing growth of the Company’s customer base, as well as the strong maintenance renewal rate the Company has historically experienced with respect to software maintenance agreements. In addition, during the first nine months of 2000, the Company’s maintenance services revenue benefited from a price increase implemented in the second half of 1999, whereby fees for the Company’s maintenance services increased from 15% to 18% of paid-up license fees.

Professional services and other revenue consists primarily of revenue from consulting, training and funded research and development projects. Professional services revenue decreased 2.9% and 14.4% during the three and nine month periods ended September 30, 2000, respectively, as compared to the corresponding periods in 1999. The decrease in revenue was due to a combination of several factors, including: (i) a shift in spending during the first nine months of 2000 on the part of the Company’s large Japanese customers, whereby they invested less in consulting services and more in software licenses, (ii) a 16% decline in the number of employees deployed by the Company towards consulting services in the United States as of September 30, 2000, compared to September 30, 1999, and (iii) a decrease in funded development activities during the first nine months of 2000, as compared to the same period in 1999.

Cost of Revenue

				Three Months Ended September 30,											Nine Months Ended September 30,
			Three Months Ended March 31,
dollars in thousands			2001	~~2000~~			2000	~~1999~~			% Change	~~% Change~~			~~2000~~			~~1999~~			~~% Change~~
Cost of software licenses			$	$977	~~940~~		$	$1,099	~~871~~			11.1	~~7.9~~%	%	$	~~3,042~~		$	~~2,520~~			~~20.7~~	%
	Gross profit margin on software				82.8	%			80.9	%						82.4	%		81.8	%
Gross profit margin on software licenses revenue				84.2	%			81.8	%
		licenses revenue
Cost of services			$	4,068			$	2,554				59.3	%
Cost of services				$	2,808			$	2,797				0.4	%	$	8,130		$	8,354			(2.7	%)
Gross profit margin on services revenue				46.8	%			45.7	%
	Gross profit margin on services				54.1	%			45.8	%						49.7	%		45.7	%
		revenue

Cost of software licenses includes software royalty fees, media costs, payroll and other costs attributable to software documentation and distribution, and an allocation of depreciation, utilities and other overhead ~~expenses~~ expenses incurred by the Company. Cost of software licenses ~~revenue~~decreased ~~increased 7~~11.91% ~~and~~from ~~20.7% during~~ the first ~~three~~quarter ~~and~~of ~~nine~~2000 ~~month~~to ~~periods~~approximately ~~ended September 30~~$977, ~~2000,~~000 ~~respectively,~~in ~~as compared to~~ the ~~corresponding~~first ~~periods~~quarter inof ~~1999~~2001. ~~The~~ ~~increase~~The decrease in cost of software licenses was due to ~~higher~~lower royalties paid to ~~third~~ third parties whose products were licensed through the Company’s Canadian and European subsidiaries, aswhich ~~well~~is asconsistent ~~additional~~with ~~royalties~~the ~~paid~~decline toin ~~third~~revenue ~~parties~~from ~~whose~~third-party software products ~~are~~noted ~~embedded in the Company’s ADAMS software~~above.

Gross profit margin on software licenses revenue was 8284.82% and 8081.98% ~~during~~ during the three month periods ended ~~September~~March 3031, ~~2000~~2001 and ~~1999~~2000, respectively. The ~~Gross~~increase in gross profit margin onwas due to a decrease in revenue from third-party software products as a percent of total software licenses revenue. The ~~was~~gross ~~82.4%~~profit ~~and~~margin ~~81.8%~~realized ~~during~~from sales of third-party software products has historically been lower than the ~~nine~~gross ~~month~~profit ~~periods~~margin ~~ended~~realized ~~September 30,~~from ~~2000~~sales ~~and~~of ~~1999,~~the Company’s ~~respectively~~software products.

Cost of services includes payroll and overhead expenses attributable to hotline support, consulting, training and funded research and development. ~~Cost~~ Cost of services ~~revenue~~ increased 059.43% during the three month period ended ~~September~~ March 3031, ~~2000~~2001, as compared to the corresponding period in ~~1999~~2000. ~~Cost~~The increase in cost of services ~~revenue~~was ~~decreased~~primarily ~~2.7%~~due ~~during~~to the ~~nine~~costs ~~month~~associated ~~period~~with ~~ended~~professional ~~September~~services ~~30,~~revenue ~~2000,~~generated asby ~~compared~~ESTECH toin the ~~corresponding~~first ~~period~~quarter inof ~~1999~~2001. ~~The~~Gross ~~decrease~~profit inmargin ~~the~~on ~~absolute~~services ~~cost~~revenue ofwas ~~services~~46.8% and 45.7% during the ~~nine~~three month periods ended ~~September 30,~~March ~~2000~~31, as2001 ~~compared~~and to2000, respectively.

Operating Expenses


	Three Months Ended March 31,

dollars in thousands	2001			2000			% Change

Sales and marketing	$	4,935		$	4,203			17.4	%




% of total revenue		35.7	%		39.1	%




Research and development	$	1,698		$	1,446			17.4	%




% of total revenue		12.3	%		13.5	%




General and administrative	$	1,317		$	1,026			28.4	%




% of total revenue		9.5	%		9.6	%




Goodwill Amortization	$	178		$	114			56.1	%




% of total revenue		1.3	%		1.1	%

Sales and marketing expenses include costs associated with the ~~corresponding~~Company’s sales ~~period~~channels, insuch ~~1999~~as personnel, ~~was~~commissions, ~~primarily~~sales ~~due~~office tocosts, atravel, ~~decreased~~promotional ~~number~~events, sales order processing, including license administration and order fulfillment, and advertising and public relations programs. Sales and marketing expenses also include an allocation of ~~consultants~~overhead ~~employed~~expenses byincurred by the Company. The absolute dollar increase in sales and marketing expenses during the ~~United~~three ~~States~~month inperiod ended March 31, 2001, as compared to the corresponding period in 2000, resulted from an increase in commissions paid on the higher level of revenue, as well as the Company’s continued expansion of its worldwide sales and marketing organization.

~~Gross~~Research ~~profit~~and ~~margin~~development onexpenses ~~services~~include ~~revenue~~all ~~was~~payroll ~~54.1%~~costs ~~and~~attributable ~~45.8% during the~~to ~~three~~research ~~month~~and ~~periods~~development ~~ended~~activities. ~~September 30,~~Research ~~2000~~ and ~~1999,~~development ~~respectively.~~expenses ~~Gross~~also ~~profit~~include ~~margin~~an onallocation ~~services~~of ~~revenue~~overhead ~~was~~expenses ~~49.7%~~incurred ~~and~~by ~~45.7% during~~ the ~~nine~~Company. ~~month~~Costs ~~periods~~associated ~~ended~~with ~~September 30,~~funded ~~2000~~research and ~~1999,~~development ~~respectively.~~projects ~~Changes in the gross profit margin on services revenue~~ are ~~principally~~included ~~due to fluctuations~~ in ~~the mix~~cost of services. ~~revenue,~~The ~~the~~ increase in ~~the~~research ~~pricing~~and ofdevelopment ~~maintenance~~expenses ~~services~~during the three ~~referred~~month toperiod ~~above~~ended March 31, ~~and~~2001, toas acompared ~~lessor extent,~~ to ~~fluctuations~~corresponding period in ~~the profit~~2000, ~~margins~~resulted ~~realized~~from byan ~~the~~increase ~~Company~~in oncosts ~~consulting~~to ~~projects~~support ~~performed~~the ~~during~~Company’s ~~the respective~~expanded ~~periods~~development efforts. ~~Historically,~~The ~~revenue~~Company ~~from~~intends ~~software~~to ~~maintenance~~continue ~~agreements has~~to ~~generated~~invest ~~higher~~significant ~~profit~~resources ~~margins~~in research ~~than~~and ~~revenue~~development ~~from~~in ~~professional~~the ~~services~~future.

~~Operating~~ General ~~Expenses~~and administrative expenses include the cost of salaries, employee benefits and other payroll costs associated with the Company’s finance, accounting, human resources, information systems and executive management functions. General and administrative expenses also include an allocation of overhead expenses incurred by the Company. The absolute dollar increase in general and administrative expenses during the three month period ended March 31, 2001, as compared to corresponding period in 2000, was primarily due to additional expenses incurred to support the Company’s worldwide growth.

		Three Months Ended September 30,									Nine Months Ended September 30,
dollars in thousands		2000			1999			% Change			2000			1999			% Change
Sales and marketing		$	4,344		$	3,631			19.6	%	$	12,698		$	11,416			11.2	%
	% of total revenue		37.5	%		37.3	%					38.0	%		39.0	%
Research and development		$	1,528		$	1,362			12.2	%	$	4,448		$	4,118			8.0	%
	% of total revenue		13.2	%		14.0	%					13.3	%		14.1	%
General and administrative		$	1,038		$	886			17.2	%	$	3,082		$	2,770			11.3	%
	% of total revenue		9.0	%		9.1	%					9.2	%		9.5	%
Goodwill amortization		$	113		$	113			0.0	%	$	340		$	340			0.0	%
	% of total revenue		1.0	%		1.2	%					1.0	%		1.2	%

Goodwill amortization includes the amortization of purchase price in excess of net assets on the Company’s past acquisitions. Goodwill amortization increased 56.1% during the three month period ended March 31, 2001, as compared to the corresponding period in 2000. The increased goodwill amortization resulted from goodwill recorded in conjunction with the Company’s acquisition of ESTECH in December 2000. The Company amortizes goodwill over the periods estimated to be benefited from the acquisitions, after considering such factors as demand, competition, service lives of employees, and expected actions of competitors.

Sales and marketing expenses include costs associated with the Company’s sales channels, such as personnel, commissions, sales office costs, travel, promotional events, sales order processing, including license administration and order fulfillment, and advertising and public relations programs. Sales and marketing expenses also include an allocation of overhead expenses incurred by the Company. The absolute dollar increase in sales and marketing expenses during the three and nine month periods ended September 30, 2000, as compared to the corresponding periods in 1999, primarily resulted from increased sales commissions paid to the distributor of the Company’s software in Japan, based on the higher revenue realized from the region.

Research and development expenses include all payroll costs attributable to research and development activities. Research and development expenses also include an allocation of overhead expenses incurred by the Company. Costs associated with funded research and development projects are included in cost of services. The increase in research and development expenses during the three and nine month periods ended September 30, 2000, as compared to the corresponding periods in 1999, primarily resulted from an increase in costs to support the Company’s expanded development efforts. The Company intends to continue to invest significant resources in research and development in the future.

General and administrative expenses include the cost of salaries, employee benefits and other payroll costs associated with the Company’s finance, accounting, human resources, information systems and executive management functions. General and administrative expenses also include an allocation of overhead expenses incurred by the Company. General and administrative expenses increased 17.2% and 11.3% during the three and nine month periods ended September 30, 2000, respectively, as compared to the corresponding periods in 1999. The absolute dollar increase in these expenses was primarily due to additional expenses incurred to support the Company’s worldwide growth.

Goodwill amortization includes the amortization of purchase price in excess of net assets on the Company’s past acquisitions. Goodwill amortization was flat during the three and nine month periods ended September 30, 2000, respectively, as compared to the corresponding periods in 1999. No acquisitions were made by the Company during 1999 or during the first three quarters of 2000. The Company amortizes goodwill over the periods estimated to be benefited from the acquisitions, after considering such factors as demand, competition and service lives of employees.

Other Income, Net

		Three Months Ended September 30,									Nine Months Ended September 30,
		Three Months Ended March 31,
dollars in thousands		~~2000~~2001			~~1999~~2000			% Change			~~2000~~			~~1999~~			~~% Change~~
Other income, net		$	~~181~~119		$	~~116~~85			5640.0	%	$	~~396~~		$	~~415~~			~~(4.6~~	%)
	% of total revenue		10.69	%		10.28	%					~~1.2~~	%		~~1.4~~	%

Other income, net consists of net interest income (expense), foreign currency transaction gain (loss) and gain (loss) on the disposal of property ~~and~~ and equipment. The increase in other income, net ~~during the three month period ended September 30, 2000, as compared to the corresponding period in 1999,~~ primarily resulted from andecreased foreign ~~increase~~currency intransaction ~~interest~~losses ~~earned~~incurred ~~given~~by the Company~~’s higher~~ ~~cash and cash equivalents balance. The decrease in other income, net~~ during the ~~nine~~first quarter ~~month~~of ~~period ended September 30~~2001, ~~2000, as~~ compared to the corresponding period in ~~1999, primarily resulted from foreign currency transaction losses incurred by the Company during the first three quarters of~~ 2000. From time to time, the Company may enter into forward exchange contracts to hedge exposures related to significant foreign currency transactions. The Company does not use any other types of derivatives to hedge such exposures nor does it speculate in foreign currency.

Provision for Income Taxes

The Company’s effective income tax rate was 29.9% and ~~(306~~29.08%) for the ~~first~~ ~~nine~~ three months ofended ~~2000~~March 31, 2001 and ~~1999~~2000, respectively. The difference between the Company’s effective rate and the 34.0% statutory federal rate during ~~the~~each ~~nine month~~ period ~~ended September 30, 2000~~ resulted primarily from tax-exempt interest income earned by the Company as well as tax benefits gained from the Company’s foreign sales corporation. ~~The difference between the Company’s~~ ~~effective rate and the 34.0% statutory federal rate during the nine month~~ period ended September 30, 1999 resulted primarily from the recognition of research and development tax credits earned by the Company as a result of its investment in new technologies during 1999 as well as certain prior years. Excluding these credits, the Company’s effective tax rate for the nine month period was 30.0%.

Minority Interest in Net Income of Subsidiary

The Company owns a 66% interest in its Japanese subsidiary, Mechanical Dynamics Japan K.K. (“MDI-Japan”), through a joint venture agreement with ISI-Dentsu of Tokyo, Japan, the largest distributor of the Company’s software in Japan. Minority interest in net income ~~(loss)~~ of subsidiary of $5461,000 and ($227,000~~) for~~ for the ~~nine~~three month periods ended ~~September~~March 3031, ~~2000~~2001 and ~~1999~~2000, respectively, ~~represents~~ represents ISI-Dentsu’s 34% interest in the net income ~~(loss)~~ of MDI-Japan.

Employees

The number of the Company’s worldwide employees ~~decreased~~increased by21.1% ~~one employee~~ to ~~282~~345 at ~~September~~ March 3031, ~~2000~~2001, compared with ~~283~~285 at ~~September~~March 3031, ~~1999~~2000. OnReflected in this increase are 43 new employees who joined the Company as a result of the Company’s acquisition of ESTECH in December 2000. On a sequential basis, the Company’s workforce ~~decreased~~grew by 513 employees during the quarter, from ~~287~~332 employees at ~~June 30,~~the end of 2000.

Year 2000 Compliance

The Year 2000 issue is the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. Such computer programs are unable to interpret dates beyond the year 1999, which could cause a

system failure or other computer errors. The Company assessed and identified risks in four areas of its business: (1) the Company’s products, including third-party software embedded in the Company’s products, (2) business management and accounting systems, (3) computing and communications infrastructure, and (4) the Company’s suppliers.

The Company has not experienced any significant effects resulting from Year 2000 issues to date. The primary external costs related to the Year 2000 issue included replacement of the Company’s primary business management and accounting systems in January 1999. The cost of the new systems, including certain hardware upgrades, was approximately $150,000. These systems are based on third-party products that were certified for Year 2000 compliance.

While the Company believes that its efforts to address Year 2000 issues for which it is responsible were successful, it is possible that there could still be undetected errors or defects associated with Year 2000 date functions in the Company’s products and internal systems or those of its key suppliers. If a problem does still arise, it is possible that the Company could be involved in litigation. Further, although the Company does not believe that it has any obligation to continue to support prior versions of its products after the termination of maintenance contracts covering those products, nor any obligation to make prior versions of its products, including custom applications written by the Company, Year-2000 compliant, it is possible that its customers may take a contrary position and initiate litigation. In the event of such litigation or the occurrence of one or more problems associated with Year 2000 compliance, the Company’s business, financial condition, or results of operations could be materially adversely affected.

Euro Conversion

In January 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the Euro, making the Euro their common legal currency on that date. There is a transition period from January 1, 1999 to January 1, 2002, during which the old currencies will remain legal tender in the participating countries as denominations of the Euro.

The Company’s subsidiaries in France and Italy are currently reporting in Euros. The Company’s German subsidiary does not expect any interruptions or adverse effects as a result of its future conversion to Euros. The Company is also evaluating any other business implications of conversion to the Euro, including technical adaptation of information technology and other systems to accommodate Euro-denominated transactions, long-term competitive implications of the conversion, and the effect on market risk with respect to financial instruments. At this time, the Company does not expect that the Euro’s introduction will have a material adverse effect on its consolidated results of operations during or after the transition period.

Liquidity and Capital Resources

Cash and cash equivalents ~~increased~~decreased $2.9 million during the first ~~nine~~three months of ~~2000~~2001 to $2015.61 million at ~~September~~March 3031, ~~2000~~2001, compared with $1718.7 0 million at December 31, ~~1999~~2000. Through ~~September~~March 3031, ~~2000~~2001, cash and cash equivalents decreased ~~increased~~ primarily as a result of ~~the~~ $42.4 million in cash ~~provided~~ byused ~~operations.~~to ~~This~~pay ~~increase~~down year-end ~~was~~accounts ~~partially~~payable ~~offset~~and byaccrued expenses, $~~729~~479,000 in cash used tofor ~~purchase~~purchases ~~property~~of ~~and~~ equipment (net of proceeds from disposals), and $~~770~~495,000 in cash used to repurchase ~~129~~62,~~300~~400 shares of the Company’s common stock. These decreases were primarily offset by cash generated from the earnings of the Company during the first quarter.

At ~~September~~March 3031, ~~2000~~2001, the Company’s principal commitments consisted of obligations under capital and operating leases for facilities and equipment. The Company had $903,000 in capital lease obligations outstanding as of March 31, 2001, of which $497,000 was long-term. The Company had no other borrowings under long-term debt arrangements at ~~September~~March 3031, ~~2000~~2001.

The Company has an agreement with its principal bank for a $4.0 million ~~line~~ line of credit facility. No borrowings were outstanding under this agreement as of ~~September~~ March 3031, ~~2000~~2001. The Company’s subsidiaries in Germany, Italy, Sweden, and France also have line of credit and overdraft facilities that provide for ~~aggregate~~ aggregate borrowing availability of upapproximately to $~~510~~400,000. Approximately $5082,000 in borrowings was outstanding under these facilities as of ~~September~~March 3031, ~~2000~~2001.

13 Long-term cash requirements, other than for normal operating expenses, are anticipated for the development of new software products and enhancements of existing products, financing growth, repurchases of the Company’s common stock and the possible acquisition of software products, technologies and businesses complementary to the Company’s business. The Company believes that cash flows from operations, together with existing cash balances, and available borrowings will be adequate to meet the Company’s cash requirements for working capital, capital

~~Long-term cash requirements~~expenditures, ~~other than for normal operating expenses, are anticipated for the development of new software products~~ and ~~enhancements of existing products, financing growth, repurchases of the Company’s common~~ stock ~~and~~ the possible acquisition of software products, technologies and businesses complementary to the Company’s business. The Company believes that cash flows from operations, together with existing cash balances, and available borrowings will be adequate to meet the Company’s cash requirements for working capital, capital expenditures and stock repurchases for the next twelve months and the foreseeable future. The Company has not paid dividends during the period from 1996 through the ~~third~~first quarter of ~~2000~~2001 and intends to continue its policy of retaining earnings to finance future growth.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Other than as disclosed in this report on Form 10-Q, there have been no significant changes in our market risk exposure as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7a. on Form 10-K for the year ended December 31, ~~1999~~2000 and incorporated herein by reference.

1413

PART II — OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Number		Exhibit
(11) (27)		Statement Re Computation of Per Share Earnings Financial Data Schedule

None. For our documents incorporated by reference, references are to File No. 0-20679.

For our documents incorporated by reference, references are to File No. 0-20679.

(b) Reports on Form 8-K

NoAn ~~reports~~amended report on Form 8-K/A ~~were~~was filed byon ~~the~~March 5, ~~Company~~2001. ~~during~~The ~~the~~financial statements ~~three~~and ~~months~~pro forma financial information pertaining to the acquisition ~~ended~~were ~~September~~reported under Item ~~30,~~7 ~~2000~~of Form 8-K/A.

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SIGNATURES

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.

Dated: November 9, 2000		MECHANICAL DYNAMICS, INC. (Registrant)
Dated: May 11, 2001		MECHANICAL DYNAMICS, INC.
	By:	/s/ Michael E. Korybalski Michael E. Korybalski Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
		(Registrant)
	By:	/s/ ~~David~~Michael ~~Peralta~~E. ~~David Peralta Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)~~Korybalski
		Michael E. Korybalski
		Chairman of the Board and Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ David Peralta
		David Peralta
		Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS

Number		Exhibit Title
(11) (27)		Statement Re Computation of Per Share Earnings Financial Data Schedule

For our documents incorporated by reference, references are to File No. 0-20679.

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Filing Compare · MECHANICAL DYNAMICS INC \MI\