MECHANICAL DYNAMICS INC \MI\, S-1/A, 1996-05-07

MECHANICAL DYNAMICS INC \MI\
S-1/A, 1996-05-07
COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1996

REGISTRATION NO. 333-2900
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------

AMENDMENT NO. 2

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

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

<TABLE>
<S> <C> <C>
MICHIGAN 5045 38-2163045
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

2301 COMMONWEALTH BLVD.
ANN ARBOR, MICHIGAN 48105
(313) 994-3800
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)

MICHAEL E. KORYBALSKI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MECHANICAL DYNAMICS, INC.
2301 COMMONWEALTH BLVD.
ANN ARBOR, MICHIGAN 48105
(313) 994-3800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------

Copies to:

<TABLE>
<S> <C>
ALAN STUART SCHWARTZ, ESQ. THOMAS W. FURLONG, ESQ.
HONIGMAN MILLER SCHWARTZ AND COHN GRAY CARY WARE & FREIDENRICH
2290 FIRST NATIONAL BUILDING A PROFESSIONAL CORPORATION
DETROIT, MICHIGAN 48226 400 HAMILTON AVENUE
(313) 256-7800 PALO ALTO, CALIFORNIA 94301
(415) 328-6561
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------

PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE(3)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Common Stock........................... 2,731,250 $11.00 $30,043,750 $109.00
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes 356,250 shares subject to an option granted to the Underwriters to
cover over-allotments. See "Underwriting."

(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 of the Securities Act of 1933, as amended.

(3) Represents the filing fee of $10,360 covering 2,731,250 shares of Common
Stock minus the amount of $10,251 paid with the Registration Statement filed
on March 29, 1996.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH THE PROVISIONS OF
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

MECHANICAL DYNAMICS, INC.

CROSS REFERENCE SHEET PURSUANT TO
ITEM 501(B) OF REGULATION S-K

<TABLE>
<CAPTION>
ITEM NUMBER IN FORM S-1 AND CAPTION LOCATION IN PROSPECTUS
-------------------------------------------- ------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus...... Forepart of Registration Statement; Cross-
Reference Sheet; Outside Front Cover
Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................. Inside Front and Outside Back Cover Pages;
Additional Information
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges................ Prospectus Summary; The Company; Risk
Factors
4. Use of Proceeds............................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............. Outside Front Cover Page; Prospectus
Summary; Underwriting
6. Dilution.................................... Dilution
7. Selling Security Holders.................... Principal and Selling Shareholders
8. Plan of Distribution........................ Outside Front Cover Page; Prospectus
Summary; Underwriting
9. Description of Securities to be
Registered.................................. Description of Capital Stock; Prospectus
Summary; Underwriting
10. Interests of Named Experts and Counsel...... Legal Matters; Experts
11. Information with respect to the Registrant:
(a) Description of Business................ The Company; Business
(b) Description of Property................ Properties
(c) Legal Proceedings...................... *
(d) Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters.................... Outside Front Cover Page; Risk Factors;
Certain Transactions; Description of
Capital Stock; Common Stock Eligible for
Future Sale
(e) Financial Statements................... Consolidated Financial Statements
(f) Selected Financial Data................ Selected Consolidated Financial Data
(g) Supplementary Financial Information.... *
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(i) Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................. *
(j) Directors and Executive Officers...... Management
(k) Executive Compensation................ Management; Executive Compensation
(l) Security Ownership of Certain
Beneficial Owners and Management...... Principal and Selling Shareholders
(m) Certain Relationships and Related
Transactions.......................... Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. *
</TABLE>

- ---------------
* Not applicable or answer is negative.
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MAY 7, 1996

PROSPECTUS

2,375,000 SHARES

MECHANICAL DYNAMICS, INC.

COMMON STOCK

MECHANICAL DYNAMICS, INC. LOGO
------------------------

Of the 2,375,000 shares of Common Stock offered hereby, 1,500,000 shares are
being sold by Mechanical Dynamics, Inc. ("MDI" or the "Company") and 875,000
shares are being sold by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders. Prior to this Offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price per share will be between $9.00 and
$11.00. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. Application has been made for
quotation of the Common Stock on The Nasdaq National Market under the symbol
"MDII."

After the Offering, the Company's officers, directors and affiliates will
beneficially own 39.9% of the Company's Common Stock. See "Principal and Selling
Shareholders."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
================================================================================================
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
- ------------------------------------------------------------------------------------------------
Total(3)................ $ $ $ $
================================================================================================
</TABLE>

(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $880,000.

(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 356,250
additional shares of Common Stock solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."

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

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Wessels, Arnold & Henderson, L.L.C. ("Wessels, Arnold & Henderson"),
Minneapolis, Minnesota, on or about , 1996.

Wessels, Arnold & Henderson SoundView Financial Group, Inc.

The date of this Prospectus is , 1996
<PAGE> 4

[TRADITIONAL DESIGN PHOTO]

[CONCEPT PHOTO]

[DESIGN PHOTO]

[PHYSICAL PROTOTYPE PHOTO]

[FINISHED DESIGN PHOTO]

[VIRTUAL PROTOTYPING PHOTO]

[CONCEPT PHOTO]

[VIRTUAL PROTOTYPING PHOTO]

[DESIGN VERIFICATION PHOTO]

[PHYSICAL PROTOTYPE & TESTING PHOTO]

[FINISHED DESIGN PHOTO]

Traditionally, an engineering team
would build and test a series of
physical prototypes before arriving at a
satisfactory design -- typically a long
labor-intensive effort. Using Mechanical
Dynamics' ADAMS(R) software, an
engineering team can cut time from this
process. By modeling and testing their
designs using Mechanical Dynamics'
software, users can quickly examine
multiple design iterations and arrive at
a superior design before building
physical prototypes.

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

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 5
VIRTUAL PROTOTYPING FOR
VIRTUALLY ANYTHING THAT MOVES

ADAMS(R)
In Industry

AUTOMOTIVE [GRAPHIC]
ADAMS/CAR IS A SPECIAL
TRUCK & BUS [GRAPHIC] VERSION OF MECHANICAL DYNAMICS'
[GRAPHIC] SOFTWARE, CUSTOMIZED FOR
OFF-HIGHWAY [GRAPHIC] USE IN VEHICLE
SIMULATION.
MILITARY [GRAPHIC]

RAIL [GRAPHIC]

SHIPBUILDING [GRAPHIC]
[GRAPHIC] [GRAPHIC]
AIRCRAFT [GRAPHIC]

SPACE [GRAPHIC]

MACHINERY [GRAPHIC]

MECHATRONICS [GRAPHIC] ADAMS/RAIL,
ANOTHER
BIOMECHANICS [GRAPHIC] INDUSTRY-SPECIFIC
[GRAPHIC] PACKAGE, HIGH-
CONSULTING [GRAPHIC] LIGHTS FUNCTIONS
ALREADY FAMILIAR
ENTERTAINMENT [GRAPHIC] TO RAIL
ENGINEERS.

<PAGE> 6
[GRAPHIC] [GRAPHIC]

WHAT USED
TO TAKE WEEKS
[GRAPHIC] OR MONTHS TO
PHYSICALLY MODEL
AND TEST CAN NOW
BE DONE MUCH
[GRAPHIC] [GRAPHIC] FASTER WITH
VIRTUAL PROTO-
TYPING.

VIRTUAL
PROTOTYPING
LETS USERS VIEW
THEIR DESIGNS AT
THE SYSTEMS LEVEL [GRAPHIC] [GRAPHIC]
SO THEY KNOW THE
FULL INTERRELATED
EFFECTS OF
MOTION.

[GRAPHIC]
<PAGE> 7

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Except as otherwise noted herein, all
information in this Prospectus assumes that (1) the Company's capital structure
was restructured as follows: (a) each outstanding share of Preferred Stock was
converted into 1.36585 shares of Class A Common Stock (the "Preferred
Conversion"); (b) each outstanding share of Class B Common Stock was converted
into one share of Class A Common Stock (the "Class B Conversion"); (c) the
"Class A" designation on the Common Stock was eliminated; and (d) a 1.5 for 1
share stock split of the Common Stock was completed (the "Stock Split"); and (2)
the Underwriters' over-allotment option has not been exercised. See
"Underwriting."

THE COMPANY

Mechanical Dynamics, Inc. ("MDI" or the "Company") is a leader in
developing, marketing and supporting virtual prototyping solutions. MDI's
virtual prototyping software allows the engineer or designer to design a
complete product by simulating, both visually and mathematically, a product in
motion. The Company's software products help engineers and designers create
optimal designs before the physical testing process begins, improving the
engineer's or designer's ability to create a design that will meet or exceed the
initial product specifications. MDI's virtual prototyping software can reduce
the requirement of building and testing numerous physical prototypes and can
lead to significant cost savings as well as critical reductions in
time-to-market.

The traditional product development process consists of the design of a
product followed by physical prototyping to test whether the product performs
according to design specifications. Physical prototypes are constructed, tested
under expected operating conditions to assist the engineer or designer in the
visualization and validation of the product in motion and redesigned based on
test data. The process is repeated until the performance of the physical
prototype is acceptable to the engineer or designer, at which point the design
is finalized and full scale production can commence. Companies typically find
the physical prototyping process to be costly, time consuming and unreliable.

MDI's virtual prototyping software simulates the many varied and complex
component interactions and operating environments that companies face when
designing their products, reducing the need for multiple physical prototypes.
The Company's primary software product is the ADAMS Full Simulation Package,
which can be used as self-contained software or with additional modules
developed by the Company or with third party software. The Company also provides
consulting, training and technical support services to assist its customers in
integrating the Company's virtual prototyping software into their design and
quality control processes.

MDI's objective is to remain a leader in providing virtual prototyping
solutions. The Company intends to maintain its core technology leadership,
institutionalize virtual prototyping within companies, address vertical markets
with customized packages and leverage its existing customer base and established
distribution channels.

The Company markets its products through direct sales in North America and
in Europe, approximately 15 value-added resellers throughout North America, a
group of international distributors in over 20 countries and through reselling
alliances with certain computer-aided design, computer-aided manufacturing and
computer-aided engineering software vendors. The Company's customers are from a
wide variety of industries, including automotive, aerospace, electronics,
biomechanical, general machinery and automobile racing. The following are
customers from each of these categories from whom the Company received the most
revenue in 1995: BMW, Borg-Warner Automotive, Inc., Ford Motor Company, The
Goodyear Tire & Rubber Company, Lockheed Martin Corp., TRW Inc., Hitachi, Ltd.,
Mitsubishi Electric Corp., Johnson & Johnson, Komatsu and Williams Grand Prix
Engineering, Ltd.

The Company's principal offices are located at 2301 Commonwealth Blvd., Ann
Arbor, Michigan 48105, and its telephone number at that address is (313)
994-3800. The Company can be reached on the World Wide Web at
http://www.adams.com.

3
<PAGE> 8

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company...................................... 1,500,000 shares
Common Stock offered by the Selling Shareholders......................... 875,000 shares
Common Stock outstanding after the Offering(1)(2)........................ 5,379,637 shares
Use of Proceeds.......................................................... For working capital and
general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market Symbol................................... MDII
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED
DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenue:
Software licenses.................... $10,133 $ 8,980 $10,394 $ 9,478 $12,338 $2,688 $3,841
Services............................. 1,690 2,588 4,480 6,789 8,918 1,957 2,207
------- ------- ------- ------- ------- ------ ------
Total revenue................. 11,823 11,568 14,874 16,267 21,256 4,645 6,048
Gross profit........................... 10,671 10,013 12,194 11,859 15,334 3,264 4,487
Operating income (loss)................ 667 (281) 1,804 635 1,666 194 573
Net income (loss)...................... $ 277 $ (686) $ 1,354 $ 450 $ 1,381 $ 163 $ 371
Accretion of value of warrants......... -- -- -- 664 234 51 --
Net income (loss) available to common
shareholders......................... $ 277 $ (686) $ 1,354 $ (214) $ 1,147 $ 112 $ 371
======= ======= ======= ======= ======= ====== ======
Pro forma net income (loss) per common
share(2)............................. $ 0.09 $ (0.20) $ 0.38 $ (0.06) $ 0.30 $ 0.03 $ 0.10
======= ======= ======= ======= ======= ====== ======
Pro forma weighted average common and
common equivalent shares(2).......... 3,241 3,438 3,576 3,694 3,850 3,823 3,879
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------ ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash.................................................... $1,518 $1,518 $ 14,588
Total assets............................................ 9,609 9,609 22,679
Long-term debt, less current portion.................... -- -- --
Redeemable common stock................................. 859 859 334
Total shareholders' equity.............................. 1,776 1,776 15,371
</TABLE>

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

(1) Based on the number of shares outstanding as of March 31, 1996. Does not
include 76,671 shares issuable upon exercise of outstanding stock options,
at exercise prices ranging from $0.25 to $0.93 per share, with a weighted
average exercise price of $0.80 per share, under the Company's 1995 Amended
and Restated Stock Purchase Plan and the Company's 1993 Stock Option Plan.
All but 7,500 shares subject to options are immediately exercisable. The
remaining 7,500 shares subject to options will become exercisable in April
1997. In April 1996, all four non-employee directors of the Company each
received options to purchase 5,000 shares of the Company's Common Stock at
an exercise price equal to the per share price to the public in connection
with the Offering. These options all become fully exercisable and fully
vested in April 1997 and expire in April 2001. In addition, in April 1996,
43 employees of the Company were granted options to purchase an aggregate of
82,500 of the Company's Common Stock. These options all become fully
exercisable and fully vested in April 1997 at $9.00 per share and expire in
April 2001.

(2) Assumes completion of (i) the Preferred Conversion, (ii) the Class B
Conversion, and (iii) the Stock Split. See Note 1 of Notes to Consolidated
Financial Statements for an explanation of the method used to determine the
number of shares used to compute per share amounts.

(3) Adjusted to give effect to (i) the sale by the Company of the 1,500,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $10.00 per share and the application of the estimated net proceeds
therefrom and (ii) the termination of redemption privileges for 65,644
shares of redeemable common stock upon the sale of this stock in the
Offering. These shares were received by the holder in connection with the
acquisition of certain European subsidiaries. See "Use of Proceeds."

4
<PAGE> 9

RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered by this
Prospectus.

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly
operating results have in the past varied and may vary in the future depending
on factors such as mix of direct and indirect sales, product mix, service mix,
increased competition, size and timing of significant orders, seasonal factors
and budgeting cycles of customers, product releases and pricing changes by the
Company or its competitors, timing of new product announcements, market
acceptance or delays in the introduction of new or enhanced versions of the
Company's products and general economic conditions. A significant portion of the
Company's revenue in recent quarters has been derived from sales to a limited
number of customers, and the Company currently anticipates that future quarters
will continue to reflect this trend. In addition, like many software companies,
the Company has generally recognized a substantial portion of its revenue in the
last month of each quarter, with this revenue concentrated in the last weeks of
the quarter. Accordingly, the cancellation or deferral of even a small number of
purchases of the Company's products could have a material adverse effect on the
Company's business, results of operations and financial condition in any
particular quarter. To the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may fail to keep pace or
even decline. The Company's quarterly operating results have also fluctuated as
a result of seasonality of customer buying patterns. Revenue is typically lower
or constant in the first quarter of the year in relation to the previous year's
last quarter due primarily to budgeting cycles of customers. The Company's third
quarter revenue is also typically lower or constant in relation to the second
quarter of the year due to the decreased level of sales from its European
operations in the third quarter. Revenue from quarter to quarter is difficult to
forecast, as minimal order backlog exists at the end of any quarter because the
Company's products typically are shipped and revenue recognized promptly after
receipt of customers' orders. The Company's expense levels are based, in part,
on its expectations as to future revenue. If revenue levels are below
expectations, operating results are likely to be adversely affected. In
particular, net income may be disproportionately affected by a reduction in
revenue because only a small portion of the Company's expenses varies with its
revenue. There can be no assurance that the Company will be able to grow in
future periods, that it will be able to sustain its historical rate of revenue
growth or that its operations will remain profitable. As a result of the
foregoing and other 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 indications of future performance. Fluctuations in
operating results may also result in volatility in the price of the shares of
the Company's Common Stock. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."

DEPENDENCE ON ADAMS(R). The Company's revenue has in the past been, and is
expected in the future to be, derived almost exclusively from its ADAMS Full
Simulation Package software product, related software products and consulting
and maintenance services related to these software products. In the future, the
Company intends to offer additional products as part of its ADAMS software
product line. Accordingly, a decline in demand for ADAMS software and services
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and "Business -- Products"
and "-- Services."

DEPENDENCE ON GROWTH OF VIRTUAL PROTOTYPING MARKET; ACCEPTANCE OF THE
COMPANY'S PRODUCTS. The Company's products address the market for virtual
prototyping software. Because this market is relatively new and evolving, it is
difficult to assess or predict with any assurance the growth rate, if any, and
size of this market. Also, as is typical in the case of a new and evolving
industry, demand and market acceptance for virtual prototyping software products
and services are subject to a high level of uncertainty. The Company's future
financial performance will depend in large part on growth in the virtual
prototyping market and upon its ability to successfully market its ADAMS
products and services. There can be no assurance the virtual prototyping market
will grow in the future or that the Company's products and services will achieve
wider market acceptance. There are certain prototyping applications to which the
Company's products may not provide an effective solution due to limitations in
the capabilities of the Company's products and, as such, the

5
<PAGE> 10

Company's products may not be accepted by certain customers. If the virtual
prototyping market fails to grow or grows more slowly than anticipated, or if
the Company's products do not achieve significant market acceptance, the
Company's business, financial condition and results of operations will be
materially adversely affected. See "Business."

DEPENDENCE UPON AUTOMOTIVE INDUSTRY. The Company's business is dependent
upon the automotive industry, which is highly cyclical. In 1993, 1994, 1995 and
the three months ended March 31, 1996, the percentages of the Company's total
revenue from sales to automotive-related markets were approximately 51.4%,
52.2%, 50.7% and 50.6%, respectively. Ford Motor Company accounted for
approximately 16.1%, 13.4%, 13.2% and 11.1% of the Company's total revenue in
1993, 1994, 1995 and the three months ended March 31, 1996, respectively. No
other customer accounted for greater than 10% of the Company's total revenue in
such periods. Segments of the auto industry, in each of the United States,
Europe and Japan, have from time to time experienced significant economic
downturns characterized by decreased product demand, reductions in capital
expenditures, production over-capacity, price erosion, work slowdowns and
layoffs. The Company's operations may in the future reflect substantial
fluctuations from period to period as a consequence of such industry patterns,
general economic conditions affecting the timing of orders from major customers
and other factors affecting capital spending. There can be no assurance that
such factors will not have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

INTERNATIONAL SALES AND OPERATIONS. International revenue (i.e., revenue
from sales outside of North America) represented approximately 53.1%, 54.4%,
62.7% and 65.3% of the Company's total revenue in 1993, 1994, 1995 and the three
months ended March 31, 1996, respectively. The Company expects that
international sales will continue to account for a significant portion of its
total revenue in future periods. The Company intends to continue to expand its
operations outside of the United States, which will require significant
management attention and financial resources. International operations are
subject to inherent risks, including unexpected changes in regulatory
requirements, tariffs and taxes, difficulties in staffing and managing foreign
operations, longer payment cycles, greater difficulty in accounts receivable
collection, compliance with applicable export licensing requirements and other
trade barriers and political and economic instability. Moreover, gains and
losses on the conversion to U.S. dollars of receivables and payables arising
from international operations may contribute to fluctuations in the Company's
results of operations. The Company does not currently engage in hedging
transactions. In addition, if for any reason exchange or price controls or other
restrictions on foreign currencies were imposed, the Company's business,
financial condition and results of operations could be materially adversely
affected. The Company generally prices its products in Europe and Japan in local
currencies and in U.S. dollars in other countries. Currency exchange
fluctuations in countries in which the Company licenses its products in U.S.
dollars could have a material adverse effect on the Company's business,
financial condition and results of operations by resulting in pricing that is
not competitive with products priced in local currencies. In addition, the laws
of certain countries do not protect the Company's products and intellectual
property rights to the same extent as do the laws of the United States. Because
the Company's software products are used by manufacturers to design systems and
are not embedded in manufacturers' products, the Company does not currently
intend to qualify under ISO 9000. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's future
international operations and sales and, consequently, on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Sales and Marketing."

COMPETITION. The markets for the Company's products and services are
highly competitive and subject to rapid change. The Company believes the
principal competitive factors in this market are product quality, ease of use,
quality of support, performance and price, functionality and features, ease of
integration with customers' design processes, strategic alliances and vendor and
product reputation. In general, the Company's current competition comes from two
sources: other virtual prototyping software vendors, including Parametric
Technology Corporation ("PTC"), and the internal software development groups of
its current or potential customers. Many companies have their own internal
software development groups that historically have developed their own software
design tools. This has required the Company and other vendors to compete

6
<PAGE> 11

against these internal groups to sell their products into these companies. A
number of the Company's competitors have longer operating histories, greater
financial, technical, sales, marketing and other resources, greater name
recognition, more extensive distribution and sales networks and a larger, more
established customer bases. Among the Company's current and potential
competitors are also a number of large hardware and software companies that may
develop or acquire products that compete with the Company's products. Current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
is likely to result in price reductions, reduced operating margins and loss of
market share, any of which could materially adversely affect the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will be able to compete successfully in the future or
that competitive pressures will not have a material adverse effect the Company's
business, financial condition and results of operations. See "Business --
Competition."

DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE. The virtual
prototyping industry is characterized by rapid technological changes, frequent
new product introductions and evolving industry standards that may render
existing products and services obsolete. Consequently, to maintain its
competitive position, the Company must enhance its existing software products
and develop and introduce new products on a timely basis. In addition, in order
to maintain and broaden the market for its software products, the Company must
support a variety of computer systems and graphics devices. There can be no
assurance that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of new or
enhanced products, or that such new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable to develop and introduce products in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, financial condition and results of
operations would be materially and adversely affected. See
"Business -- Products," "-- Services," "-- Competition" and "-- Research and
Development."

DEPENDENCE UPON DISTRIBUTORS AND SALES REPRESENTATIVES. The Company relies
primarily on distributors and sales representatives for licensing and support of
its products outside of North America and Europe ("Third Party Sellers"). Prior
to the Company's acquisition of its European distributors in April 1994, the
Company relied upon Third Party Sellers in Europe for licensing and support of
its products. Third Party Sellers accounted for approximately 53.1%, 29.2%,
25.9% and 28.7% of the Company's total revenue in 1993, 1994, 1995 and the three
months ended March 31, 1996, respectively. The Company's Japanese distributor,
Information Services International-Dentsu, Ltd. ("ISI-Dentsu"), accounted for
approximately 29.4%, 20.7%, 19.3% and 21.3% of the Company's total revenue in
1993, 1994, 1995 and the three months ended March 31, 1996, respectively. There
can be no assurance that in the future the Company's current Third Party Sellers
will choose or be able to market or service and support the Company's products
effectively, that economic conditions or industry demand will not adversely
affect Third Party Sellers or that such Third Party Sellers will not devote
greater resources to marketing and supporting products of other companies.
Additionally, because the Company's products are typically used by skilled
professionals, in order to be effective, a Third Party Seller must possess
sufficient technical, marketing and sales resources and must devote these
resources to a lengthy sales cycle, customer training and product service and
support. Only a limited number of Third Party Sellers possess such resources.
The loss of, or a significant reduction in revenue from, a Third Party Seller
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."

DEPENDENCE ON KEY PERSONNEL; MANAGEMENT OF EXPANDING OPERATIONS. The
Company's success depends in large part upon the continued service of its key
technical and senior management personnel. The Company's success also depends on
its continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain its key managerial and technical
employees or that it can attract, assimilate or retain other highly qualified
personnel in the future. If the Company is unable to hire the necessary
technical

7
<PAGE> 12

personnel, the development of new products could be impaired. The Company's
inability to attract, assimilate or retain personnel in the future on a timely
basis could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's ability to manage expanded
operations successfully will require the Company to continue to improve its
operational, management and financial systems and controls, and to continue to
train and manage its employees. There can be no assurance that the Company will
be able to do so successfully. Failure to manage such expanded operations could
have a material adverse effect upon the Company's business, financial condition
and results of operations. A portion of the Company's consulting services is
provided pursuant to fixed fee contracts, rather than time and materials
contracts. From time to time the Company has incurred losses in connection with
fixed price contracts. If the Company underestimates the expenses required to
perform under fixed fee contracts, it could incur losses on these contracts. The
Company has not incurred a material loss from underestimating the expenses on
any fixed fee contract during 1993, 1994, 1995 or the three months ended March
31, 1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Employees."

LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS. The Company's success depends in large part upon its proprietary
software technology. The Company currently relies on trade secret, copyright and
trademark laws, and license agreements with all of its customers to protect its
proprietary rights in its software products. The Company also ships its software
with either an encoded password scheme or a security device. The Company's
software copies are locked to a specific central processing unit and contain
codes that prohibit the user from running the software after a certain date. The
Company generally enters into proprietary information and confidentiality
agreements with its employees and distributors, and limits access to and
distribution of its software, documentation and other proprietary information.
The Company generally does not license or release the source code for its
proprietary software to third parties. Despite these precautions, there can be
no assurance that a third party will not copy or otherwise obtain and use the
Company's products or technology without authorization, or develop similar or
superior technology independently. The Company distributes demonstration copies
of its products in North America, Europe and Japan pursuant to "shrink-wrap"
licenses. There can be no assurance that such licenses are enforceable. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. Litigation may be necessary in the future
to enforce the Company's intellectual property rights, to protect the Company's
trade secrets, to determine the validity and scope of the proprietary rights of
others or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. Although the Company believes that its
products do not infringe on the proprietary rights of third parties, and
although the Company has received no communications from third parties alleging
the infringement of the proprietary rights of such parties, there can be no
assurance that infringement claims will not be asserted against the Company in
the future or that any such claims will not require the Company to enter into
costly litigation. Irrespective of the validity or the successful assertion of
such claims, any such litigation could result in substantial costs and a
significant diversion of management's attention and resources, and these
consequences as well as any adverse judgment that might be rendered could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, if any claims or actions are asserted
against the Company, the Company may choose or be required to obtain a license
under a third party's intellectual property rights. There can be no assurance
that under such circumstances a license would be available upon reasonable terms
or at all. See "Business -- Proprietary Rights."

DEPENDENCE UPON THIRD PARTY LICENSING. Certain technology used by the
Company's products is licensed from third parties, generally on a nonexclusive
basis. The Company believes that there are alternative sources for each of the
material components of technology licensed by the Company from third parties.
However, the termination of any of such licenses, the failure of the third party
licensors to adequately maintain or update their products or substantial
increase in the license fee associated with such licenses could result in delay
in the Company's ability to deliver certain of its products while it seeks to
implement technology offered by alternative sources and may adversely affect the
Company's business, financial condition and results of operations. Any required
replacement licenses could prove costly. Also, any such delay, to the extent it
becomes extended or occurs at or near the end of a quarter, could result in a
material adverse effect on the Company's quarterly results of operations. While
it may be necessary or desirable in the future to obtain other

8
<PAGE> 13

licenses relating to one or more of the Company's products or relating to
current or future technologies, there can be no assurance that the Company will
be able to do so on reasonable terms or at all. See "Business -- Proprietary
Rights."

RISK OF PRODUCT DEFECTS. Software products as complex as those offered by
the Company may contain defects or failures that may be detected at any point in
the products' life cycle. The Company has in the past discovered software
defects in certain of its products. The Company's standard warranty provides
that if the software does not function to published specifications, the Company
will, within a limited time period following delivery, use its best efforts to
repair or replace the defective software without charge. To date, the Company
has not experienced significant technical errors or other product performance
issues and warranty costs have been insignificant. There can be no assurance
that, despite testing by the Company, errors will not be found in current or new
products after commencement of commercial shipments, resulting in injury to the
Company's reputation, increased warranty and service costs, loss of market share
or failure to achieve market acceptance. Any such occurrence could have a
material adverse effect upon the Company's business, financial condition and
results of operations.

CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS. Immediately following this
Offering, the directors and executive officers of the Company, as a group, will
beneficially own approximately 39.8% of the outstanding shares of the Company's
Common Stock (37.4% if the Underwriters' over-allotment option is exercised in
full). Accordingly, the directors and executive officers, if acting together,
will have the ability to control the affairs of the Company, including the
election of a majority of the directors and, except as otherwise provided by
law, other matters submitted to a vote of the shareholders. A significant
disposition of stock by such persons, whether voluntary or otherwise, could
result in a transfer of control of the Company to a third party.

SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON PRICE OF COMMON
STOCK. Sales of substantial amounts of Common Stock in the public market after
the Offering, or the possibility of such sales occurring, could adversely affect
prevailing market prices for the Common Stock or the future ability of the
Company to raise capital through an offering of equity securities. Of the
5,379,637 shares to be outstanding after the Offering, the 2,375,000 shares of
Common Stock offered hereby will be freely tradeable without restriction in the
public market unless such shares are held by "affiliates" of the Company, as
that term is defined in Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). The remaining 3,004,637 shares will be "restricted
securities" as such term is defined in Rule 144 ("Restricted Securities").
Restricted Securities may be sold in the public market only if they are
registered or if they qualify for exemption from registration under Rules 144 or
701 under the Securities Act. Pursuant to certain "lock-up" agreements, certain
of the Company's shareholders and employees and all of its executive officers
and directors, who collectively hold an aggregate of approximately 2,746,816
shares, have agreed not to offer, sell or otherwise dispose of any of their
Restricted Securities for a period of 180 days from the date of this Prospectus.
The Company has also entered into an agreement with the representatives of the
Underwriters that it will not offer, sell or otherwise dispose of Common Stock
for a period of 180 days from the date of this Prospectus other than pursuant to
existing stock option plans. Wessels, Arnold & Henderson, L.L.C. may, in its
sole discretion and at any time without notice, release all or any portion of
the shares subject to such lock-up agreements. As a result of these securities
law restrictions and lock-up agreements, the following Restricted Securities
will be eligible for sale in the public market following this Offering: (i)
6,000 shares will become saleable immediately following the Offering pursuant to
Rule 144(k); (ii) 118,426 shares commencing on the date 90 days after the date
of this Prospectus; (iii) 2,746,816 shares commencing on the date 180 days after
the date of this Prospectus; and (iv) 133,395 shares will become saleable,
subject to various restrictions under Rule 144, beginning June 1997. The Company
intends to file one or more registration statements on Form S-8 after the date
of this Prospectus to register the 850,000 shares of Common Stock reserved for
issuance under its Employee Stock Purchase Plan, 1996 Stock Incentive Plan for
Key Employees and Non-Employee Director Stock Option Plan as well as the 76,761
shares subject to options under the Company's 1995 Amended and Restated Stock
Purchase Plan and the 1993 Stock Option Plan. See "Common Stock Eligible for
Future Sale" and "Underwriting."

9
<PAGE> 14

EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of the
Company's Restated Articles of Incorporation (the "Restated Articles") and
Restated Bylaws, and of Michigan law, could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company through either a tender offer or a
proxy contest for the election of directors. Such provisions could also limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. The Restated Articles and the Restated
Bylaws contain provisions which (i) classify the Board of Directors into three
classes as nearly equal in numbers as possible, and provide that each director,
after an interim arrangement, will serve for three years with directors in only
one class being elected each year, and (ii) upon the closing of the sale of the
shares of Common Stock offered pursuant to this Prospectus, permit the Board of
Directors to issue up to 1,000,000 shares of Preferred Stock in one or more
series and to fix the number of shares and the voting powers and all other
rights and preferences of any such series, without any further vote or action by
the Company's shareholders. In particular, the Preferred Stock could be issued
with voting, liquidation, dividend and other rights superior to the rights of
the Common Stock. The approval by at least 80% of the outstanding shares of the
Company's voting stock is required to amend or repeal the provision in the
Restated Articles for the classified Board of Directors. In addition, the
Company's Restated Bylaws provide that: (i) special meetings of shareholders may
be called by the Chief Executive Officer, the Board of Directors or a majority
of the shareholders entitled to vote at the meeting; and (ii) directors may be
removed only with cause, by a vote of the holders of a majority of the shares
entitled to vote at an election of directors. All of the above-described
provisions may have the effect of delaying or preventing a change of control,
which could adversely affect the market price of the Company's Common Stock.
Chapters 7A and 7B of the Michigan Business Corporation Act (the "MBCA") may
affect attempts to acquire control of the Company. In general, under Chapter 7A
of the MBCA, business combinations between a Michigan corporation and a holder
of 10% or more of the corporation's stock can only be consummated if approved by
a supermajority of each class of the corporation's shares entitled to vote.
Under Chapter 7B of the MBCA, the acquisition of voting control of a Michigan
corporation requires the approval of a majority of the pre-acquisition
disinterested shareholders. See "Description of Capital Stock."

NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK
PRICE. Prior to this Offering, there has been no public market for the
Company's Common Stock, and there can be no assurance that an active public
market for the shares offered pursuant to this Prospectus will develop or be
sustained after the Offering. The initial public offering price will be
determined by negotiation between the Company and the Underwriters based upon
several factors and may not be indicative of future market prices. The trading
price of the Company's Common Stock could be subject to wide fluctuations in
response to quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or pricing changes
by the Company or its competitors, proprietary rights or other litigation,
changes in earnings estimates by analysts and other events or factors. In
addition, the stock market has from time to time experienced extreme price and
volume fluctuations that have been unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has sometimes occurred against the issuing company. There can
be no assurance that such litigation will not occur in the future with respect
to the Company. Such litigation could result in substantial costs and a
significant diversion of management's attention and resources, and could have a
material adverse effect on the Company's business, financial condition and
results of operations. Any adverse determination in such litigation could also
subject the Company to significant liabilities. See "Underwriting."

DILUTION; NO DIVIDENDS. The estimated initial public offering price is
substantially higher than the net tangible book value per share of the Company's
Common Stock. Investors participating in this Offering will therefore incur
immediate, substantial dilution. To the extent outstanding options to purchase
the Company's Common Stock are exercised or further stock is issued by the
Company at prices less than the then current book value, there will be further
dilution. The Company has not declared or paid cash dividends since converting
from an S corporation under Subchapter S of the Internal Revenue Code (the
"Code") in the late 1970's. See "Dilution" and "Dividend Policy."

10
<PAGE> 15

THE COMPANY

Since the Company was incorporated in Michigan in 1977, the Company has
developed, marketed and supported virtual prototyping solutions. On April 1,
1994, the Company acquired five European entities that previously had
distributed the Company's products in Europe and are now wholly-owned
subsidiaries: Mechanical Dynamics GmbH, a German corporation; Mechanical
Dynamics Sarl, a French corporation; Mechanical Dynamics International Ltd., a
United Kingdom corporation; Mechanical Dynamics Sweden AB, a Swedish
corporation; and Mechanical Dynamics Italy srl, an Italian corporation.
Mechanical Dynamics Italy srl owns a majority interest in MEC.Design srl, an
Italian corporation. Pursuant to the terms of the acquisition of the European
subsidiaries, the Company paid to the subsidiaries' shareholders stock of the
Company as well as cash. See Note 2 of Notes to Consolidated Financial
Statements.

ADAMS(R) and the Company's logo are registered trademarks of the Company.
ADAMS/Android, ADAMS/Animation, ADAMS/Car, ADAMS/Driver, ADAMS/FEA, ADAMS/IGES,
ADAMS/Linear, ADAMS/Rail, ADAMS/Solver, ADAMS/Tire, ADAMS/Vehicle, ADAMS/View
and MECHANISM/Pro are trademarks of the Company. All rights reserved. All other
trade names and trademarks appearing in this Prospectus are the property of
their respective holders.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $10.00 per share are estimated to be $13.1 million (approximately $16.4
million if the Underwriters' over-allotment option is exercised in full) after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses. The Company will not receive any proceeds from the sale of
Common Stock by the Selling Shareholders. See "Principal and Selling
Shareholders."

The Company expects to use the net proceeds of the Offering for working
capital and other general corporate purposes. A portion of the net proceeds may
also be used to acquire or invest in complementary businesses, products or
otherwise to obtain the right to use complementary technologies which broaden or
enhance the Company's current product offerings. There are no current agreements
or negotiations with respect to any acquisitions, investments or other
transactions. As of the date of the Prospectus, the Company has no specific
plans as to the use of the net proceeds from this Offering and will have broad
discretion in the application of the proceeds. Pending any such uses, the net
proceeds will be invested in interest bearing securities.

DIVIDEND POLICY

The Company has not declared or paid cash dividends on its Common Stock
since converting from an S corporation under Subchapter S of the Code in the
late 1970's. The Company currently intends to retain the earnings from
operations for use in the operation and expansion of its business and does not
anticipate paying cash dividends with respect to the Common Stock in the
foreseeable future.

11
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1996 (i) on an actual basis, (ii) on a pro forma basis to give effect
to the Preferred Conversion, the Class B Conversion and the elimination of the
Class A designation, and (iii) on a pro forma as adjusted basis to give effect
to the termination of redemption privileges for 65,644 shares of redeemable
common stock upon the sale of this stock being sold in this Offering. These
shares were received by the holder in connection with the acquisition of certain
European subsidiaries. Also, the receipt by the Company of the net proceeds from
the sale of the 1,500,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $10.00 per share. This table should be read in
conjunction with the Consolidated Financial Statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Redeemable common stock:
Redeemable common stock, 107,329 shares actual and pro forma,
41,685 shares as adjusted(1)............................... $ 859 $ 859 $ 334
Shareholders' equity:
Convertible preferred stock:
shares authorized -- 1,000,000 actual, pro forma, and as
adjusted shares issued and outstanding -- 354,932 actual,
no shares pro forma and as adjusted........................ 265 -- --
Common stock:
shares authorized -- 15,000,000 actual, pro forma and as
adjusted shares issued and outstanding -- 3,287,550 actual,
3,772,308 pro forma, 5,337,952 as adjusted(2).............. 9 900 14,495
Additional paid-in capital.................................... 626 -- --
Retained earnings............................................. 846 846 846
Cumulative translation adjustment............................. 30 30 30
------ ------ -------
Total shareholders' equity................................. 1,776 1,776 15,371
------ ------ -------
Total capitalization....................................... $2,635 $ 2,635 $15,705
====== ====== =======
</TABLE>

- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements.

(2) Based on the number of shares outstanding as of March 31, 1996. Does not
include 76,671 shares issuable upon exercise of outstanding stock options at
exercise prices ranging from $0.25 to $0.93 per share, with a weighted
average exercise price of $0.80 per share, under the Company's 1995 Amended
and Restated Stock Purchase Plan and the Company's 1993 Stock Option Plan.
All but 7,500 shares subject to options are immediately exercisable. The
remaining 7,500 shares subject to options will become exercisable in April
1997. In April 1996, all four of non-employee directors of the Company each
received options to purchase 5,000 shares of the Company's Common Stock at
an exercise price equal to the per share price to the public in connection
with the Offering. These options all become fully exercisable and fully
vested in April 1997 and expire in April 2001. In addition, in April 1996,
43 employees of the Company were granted options to purchase an aggregate of
82,500 shares of the Company's Common Stock. These options all become fully
exercisable and fully vested in April 1997 at $9.00 per share and expire in
April 2001.

12
<PAGE> 17

DILUTION

As of March 31, 1996, the Company had a pro forma net tangible book value
of approximately $1.5 million or $0.38 per share of Common Stock. "Pro forma net
tangible book value per share" represents the amount of total tangible assets
less total liabilities divided by the number of shares of Common Stock and
redeemable Common Stock outstanding, including shares of Common Stock resulting
from the Preferred Conversion and the Class B Conversion. Without taking into
account any other changes in pro forma net book value after March 31, 1996,
other than to give effect to the receipt by the Company of the estimated net
proceeds from the sale of 1,500,000 shares of Common Stock offered by the
Company hereby at the assumed initial public offering price of $10.00 per share,
the pro forma net tangible book value of the Company as of March 31, 1996 would
have been approximately $14.6 million or $2.71 per share. This represents an
immediate increase in net tangible book value of $2.33 per share to existing
shareholders and an immediate dilution of $7.29 per share to new investors. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $10.00
Pro forma net tangible book value per share before the Offering... $0.38
Increase per share attributable to new investors.................. $2.33
-----
Pro forma net tangible book value per share after the Offering...... $ 2.71
------
Dilution per share to new investors................................. $ 7.29
======
</TABLE>

The following table summarizes on a pro forma basis, as of March 31, 1996,
the difference between existing shareholders and the purchasers of Common Stock
in this Offering (at the assumed initial public offering price of $10.00 per
share) with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid
(before deducting underwriting discounts and commissions and estimated offering
expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT (%) AMOUNT($) PERCENT (%) PER SHARE($)
--------- ----------- ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)............... 3,879,637 72.1 1,827 10.9 0.47
New investors(1)....................... 1,500,000 27.9 15,000 89.1 10.00
--------- ----- ------ -----
Total........................ 5,379,637 100.0 16,827 100.0
========= ===== ====== =====
</TABLE>

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

(1) Sales by Selling Shareholders in this Offering will reduce the number of
shares held by existing shareholders to 3,004,637 or approximately 55.9% of
the total number of shares of Common Stock to be outstanding following the
Offering (approximately 52.4% if the Underwriters' over-allotment option is
exercised in full) and will increase the number of shares held by new
investors to 2,375,000 or approximately 44.1% of the total number of shares
of Common Stock to be outstanding following the Offering (2,731,250 shares
or approximately 47.6% if the Underwriters' over-allotment option is
exercised in full).

Other than as noted above, the foregoing computations assume that no stock
options have been exercised after March 31, 1996. As of March 31, 1996, options
to purchase 76,671 shares of Common Stock were outstanding with a weighted
average exercise price of $0.80 per share. All but 7,500 shares subject to
options are immediately exercisable. The remaining 7,500 shares subject to
options will become exercisable in April 1997. In addition, in April 1996, 43
employees of the Company were granted options to purchase an aggregate of 82,500
of the Company's Common Stock. These options all become fully exercisable and
fully vested in April 1997 at $9.00 per share and expire in April 2001. To the
extent these options are exercised, there will be further dilution to new
investors. See "Management" and Note 5 of Notes to Consolidated Financial
Statements.

13
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated statements of income data for the years ended December 31,
1993, 1994 and 1995 and the consolidated balance sheet data as of December 31,
1994 and 1995 presented below are derived from the Company's Consolidated
Financial Statements audited by Arthur Andersen LLP and included elsewhere in
this Prospectus. The selected consolidated financial data for each of the two
years ended December 31, 1991 and 1992 and as of December 31, 1991, 1992 and
1993 have been derived from unaudited financial statements of the Company not
included herein. The selected consolidated financial data set forth below for
the three months ended March 31, 1995 and 1996 and as of March 31, 1996 have
been derived from unaudited financial statements that, in management's opinion,
include all necessary adjustments (consisting only of normal recurring
adjustments) to present fairly the financial condition and results of operations
for such periods and dates. The results of operations for the three months ended
March 31, 1995 and 1996 are not necessarily indicative of results to be expected
for the full fiscal year. Historical results are not necessarily indicative of
future results. The data set forth below should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenue:
Software licenses...................... $10,133 $ 8,980 $10,394 $ 9,478 $12,338 $2,688 $3,841
Services............................... 1,690 2,588 4,480 6,789 8,918 1,957 2,207
------- ------- ------- ------- ------- ------ ------
Total revenue................... 11,823 11,568 14,874 16,267 21,256 4,645 6,048
Cost of revenue:
Software licenses...................... 133 134 142 570 728 219 200
Services............................... 1,019 1,421 2,538 3,838 5,194 1,162 1,361
------- ------- ------- ------- ------- ------ ------
Total cost of revenue........... 1,152 1,555 2,680 4,408 5,922 1,381 1,561
------- ------- ------- ------- ------- ------ ------
Gross profit............................. 10,671 10,013 12,194 11,859 15,334 3,264 4,487
Operating expenses:
Sales and marketing.................... 6,150 6,137 6,523 6,465 8,118 1,838 2,344
Research and development............... 2,614 2,810 2,107 2,442 2,940 675 886
General and administrative............. 1,240 1,347 1,760 2,317 2,610 557 684
------- ------- ------- ------- ------- ------ ------
Total operating expenses........ 10,004 10,294 10,390 11,224 13,668 3,070 3,914
------- ------- ------- ------- ------- ------ ------
Operating income (loss).................. 667 (281) 1,804 635 1,666 194 573
Other income (expense)................... (187) (209) (115) 27 9 3 1
------- ------- ------- ------- ------- ------ ------
Income (loss) before income taxes and
cumulative effect of accounting
change................................. 480 (490) 1,689 662 1,675 197 574
Provision for income taxes............... 203 196 496 212 294 34 203
------- ------- ------- ------- ------- ------ ------
Income (loss) before cumulative effect of
accounting change...................... 277 (686) 1,193 450 1,381 163 371
Cumulative effect of change in accounting
for income taxes....................... -- -- 161 -- -- -- --
------- ------- ------- ------- ------- ------ ------
Net income (loss)........................ $ 277 $ (686) $ 1,354 $ 450 $ 1,381 $ 163 $ 371
======= ======= ======= ======= ======= ====== ======
Accretion of value of warrants........... -- -- -- 664 234 51 --
Net income (loss) available to common
shareholders........................... $ 277 $ (686) $ 1,354 $ (214) $ 1,147 $ 112 $ 371
Pro forma net income (loss) per
common share........................... $ 0.09 $ (0.20) $ 0.38 $ (0.06) $ 0.30 $ 0.03 $ 0.10
======= ======= ======= ======= ======= ====== ======
Pro forma weighted average common and
common equivalent shares............... 3,241 3,438 3,576 3,694 3,850 3,823 3,879
======= ======= ======= ======= ======= ====== ======
</TABLE>

DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash..................................... $ 273 $ 19 $ 60 $ 817 $ 1,141 $1,518
Total assets............................. 3,229 2,441 4,626 7,334 9,338 9,609
Long-term debt, less current portion..... 701 395 67 79 -- --
Redeemable stock......................... -- -- -- 1,191 859 859
Shareholders' equity (deficit)........... (957) (1,627) (236) (77) 1,334 1,776
</TABLE>

14
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company's principal software product, ADAMS Full Simulation Package, is
used by customers to simulate mechanical systems. The Company's software
products also include a number of modular packages for use with ADAMS Full
Simulation Package, including ADAMS/Car and ADAMS/Rail. These modular packages
are designed to address specific market applications. In addition to revenue
from software licenses, the Company also generates revenue from services
including consulting, maintenance, training and funded research and development
services. The Company's revenue has in the past been, and is expected in the
future to be, derived almost exclusively from its ADAMS Full Simulation Package
and related software products and services. In each of 1993, 1994, 1995 and the
three months ended March 31, 1996, ADAMS-related revenue comprised substantially
all of the Company's revenue. Because the Company intends to continue to offer
additional products as part of the ADAMS product line, a decline in the demand
for ADAMS could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Dependence
on ADAMS," "Business -- Products" and "-- Services."

The Company's revenue consists of software licenses revenue and services
revenue. Software licenses revenue consists primarily of license fees for the
Company's software products and, to a much lesser extent, license fees from
other companies' software products licensed through the Company's European
subsidiaries. Revenue under paid-up software licensing agreements, including
licenses generated through distributors, is recognized when a customer contract
is fully executed and the software is delivered. Revenue under annual software
licensing agreements is deferred and amortized over the terms of the agreements.
In either instance, revenue is recognized only when no significant remaining
obligations to the customer exist. Services revenue consists of revenue from
software maintenance agreements as well as consulting, training, and funded
research and development. Revenue related to advance payments received under
software maintenance agreements is deferred and amortized over the terms of the
agreements. Revenue from other services is recognized upon performance of the
service.

The Company's business is dependent upon the automotive industry, which is
highly cyclical. In 1993, 1994, 1995 and the three months ended March 31, 1996,
the percentages of the Company's total revenue from sales to automotive-related
markets were approximately 51.4%, 52.2%, 50.7% and 50.6%, respectively. Ford
Motor Company accounted for approximately 16.1%, 13.4%, 13.2% and 11.1% of the
Company's total revenue in 1993, 1994, 1995 and the three months ended March 31,
1996, respectively. No other customer accounted for greater than 10% of the
Company's total revenue in such periods. Segments of the auto industry, in each
of the United States, Europe and Japan, have from time to time experienced
significant economic downturns characterized by decreased product demand,
reductions in capital expenditures, production over-capacity, price erosion,
work slowdowns and layoffs. The Company's operations may in the future reflect
substantial fluctuations from period to period as a consequence of such industry
patterns, general economic conditions affecting the timing of orders from major
customers and other factors affecting capital spending. There can be no
assurance that such factors will not have a material adverse effect upon the
Company's business, financial condition and results of operations. See "Risk
Factors -- Dependence on Automotive Industry."

15
<PAGE> 20

greater difficulty in accounts receivable collection, compliance with applicable
export licensing requirements and other trade barriers and political and
economic instability. Moreover, gains and losses on the conversion to U.S.
dollars of receivables and payables arising from international operations may
contribute to fluctuations in the Company's results of operations. The Company
does not currently engage in hedging transactions. In addition, if for any
reason exchange or price controls or other restrictions on foreign currencies
were imposed, the Company's business, financial condition and results of
operations could be materially adversely affected. The Company generally prices
its products in Europe and Japan in local currencies and in U.S. dollars in
other countries. Currency exchange fluctuations in countries in which the
Company licenses its products in U.S. dollars could have a material adverse
effect on the Company's business, financial condition and results of operations
by resulting in pricing that is not competitive with products priced in local
currencies. In addition, the laws of certain countries do not protect the
Company's products and intellectual property rights to the same extent as do the
laws of the United States. Because the Company's software products are used by
manufacturers to design systems and are not embedded in manufacturers' products,
the Company does not currently intend to qualify under ISO 9000. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's future international operations and sales and, consequently, on
the Company's business, financial condition and results of operations. See "Risk
Factors -- International Sales and Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

The Company relies primarily on Third Party Sellers for licensing and
support of its products outside of North America and Europe. Prior to the
Company's acquisition of its European distributors in April 1994, the Company
relied upon Third Party Sellers in Europe for licensing and support of its
products. Third Party Sellers accounted for approximately 53.1%, 29.2%, 25.9%
and 28.7% of the Company's total revenue in 1993, 1994, 1995 and the three
months ended March 31, 1996, respectively. The Company's Japanese distributor,
ISI-Dentsu, accounted for approximately 29.4%, 20.7%, 19.3% and 21.3% of the
Company's total revenue in 1993, 1994, 1995 and the three months ended March 31,
1996, respectively. There can be no assurance that in the future the Company's
current Third Party Sellers will choose or be able to market or service and
support the Company's products effectively, that economic conditions or industry
demand will not adversely affect Third Party Sellers or that such Third Party
Sellers will not devote greater resources to marketing and supporting products
of other companies. Additionally, because the Company's products are typically
used by skilled professionals, in order to be effective, a Third Party Seller
must possess sufficient technical, marketing and sales resources and must devote
these resources to a lengthy sales cycle, customer training and product service
and support. Only a limited number of Third Party Sellers possess such
resources. The loss of, or a significant reduction in revenue from, a Third
Party Seller could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Dependence
Upon Distributors and Sales Representatives."

16
<PAGE> 21

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentages
of revenue represented by certain line items from the Company's Consolidated
Statements of Income.

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue:
Software licenses...................................... 69.9% 58.3% 58.0% 57.9% 63.5%
Services............................................... 30.1 41.7 42.0 42.1 36.5
----- ----- ----- ----- -----
Total revenue.................................. 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Software licenses...................................... 1.0 3.5 3.4 4.7 3.3
Services............................................... 17.0 23.6 24.4 25.0 22.5
----- ----- ----- ----- -----
Total cost of revenue.......................... 18.0 27.1 27.8 29.7 25.8
----- ----- ----- ----- -----
Gross profit............................................. 82.0 72.9 72.2 70.3 74.2
Operating expenses:
Sales and marketing.................................... 43.9 39.8 38.2 39.6 38.8
Research and development............................... 14.2 15.0 13.8 14.5 14.6
General and administrative............................. 11.8 14.2 12.3 12.0 11.3
----- ----- ----- ----- -----
Total operating expenses....................... 69.9 69.0 64.3 66.1 64.7
Operating income......................................... 12.1 3.9 7.9 4.2 9.5
Other income (expense)................................... (0.8) 0.2 -- -- --
----- ----- ----- ----- -----
Income before income taxes and cumulative effect of
accounting change...................................... 11.3 4.1 7.9 4.2 9.5
Provision for income taxes............................... 3.3 1.3 1.4 0.7 3.4
----- ----- ----- ----- -----
Income before cumulative effect of accounting change..... 8.0 2.8 6.5 3.5 6.1
Cumulative effect of change in accounting for income
taxes.................................................. 1.1 -- -- -- --
----- ----- ----- ----- -----
Net income............................................... 9.1% 2.8% 6.5% 3.5% 6.1%
===== ===== ===== ===== =====
</TABLE>

THREE MONTHS ENDED MARCH 31, 1995 AND 1996

REVENUE

Revenue increased 30.2% from $4.6 million for the three months ended March
31, 1995 to $6.0 million for the three months ended March 31, 1996. This
increase was due to growth in both software licenses and services. As a
percentage of the Company's revenue, software licenses revenue increased from
57.9% for the three months ended March 31, 1995 to 63.5% for the three months
ended March 31, 1996. Conversely, services revenue declined from 42.1% for the
three months ended March 31, 1995 to 36.5% for the three months ended March 31,
1996.

Software licenses revenue increased 42.9% from $2.7 million for the three
months ended March 31, 1995 to $3.8 million for the three months ended March 31,
1996. This increase was due to growth in software licenses revenue generated by
both the Company's direct sales channels in North America and Europe, as well as
by the Company's Third Party Sellers, particularly in the Asia-Pacific region.
Services revenue increased 12.8% from $2.0 million for the three months ended
March 31, 1995 to $2.2 million for the three months ended March 31, 1996. The
increase was primarily due to an increase in consulting, training and funded
research and development revenue from Europe and an increase in maintenance fees
revenue.

17
<PAGE> 22

COST OF REVENUE

Software Licenses

The cost of software licenses revenue 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 incurred by the Company. Software royalty fees include royalties paid
to third parties for their products licensed through the Company's European
subsidiaries as well as royalties paid to third parties whose products are
incorporated in certain of the Company's products. The cost of software licenses
revenue decreased from $219,000, or 8.1% of software licenses revenue, for the
three months ended March 31, 1995 to $200,000, or 5.2% of software licenses
revenue for the three months ended March 31, 1996. The higher cost of software
licenses revenue in the first quarter of 1995 was primarily due to costs which
were incurred to support a software release.

Services

The cost of services revenue includes payroll and overhead expenses
attributable to hotline support, consulting, training and funded research and
development. The margin on services revenue may vary from period to period with
fluctuations in the mix of services revenue. The margin on maintenance revenue
has been higher than the margin on other services revenue. The cost of services
revenue increased from $1.2 million, or 59.4% of services revenue for the three
months ended March 31, 1995, to $1.4 million, or 61.7% of services revenue, for
the three months ended March 31, 1996. The increase in cost of services revenue
was primarily due to an increased headcount of consultants in both North America
and Europe.

OPERATING EXPENSES

Sales and Marketing

Sales and marketing expenses include the 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. Sales and marketing expenses increased from
$1.8 million, or 39.6% of total revenue, for the three months ended March 31,
1995 to $2.3 million, or 38.8% of total revenue, for the three months ended
March 31, 1996. The increase in sales and marketing expenses was primarily due
to an increase in commissions paid to Third Party Sellers as a result of
increases in software licenses revenue through this sales channel.

Research and Development

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. Software
development costs that could have been capitalized under Statement of Financial
Accounting Standards No. 86 were immaterial and, therefore, no costs have been
capitalized by the Company. See Note 1 of Notes to Consolidated Financial
Statements. Research and development expenses increased from $675,000, or 14.5%
of total revenue, for the three months ended March 31, 1995 to $886,000, or
14.6% of total revenue, for the three months ended March 31, 1996. The increase
in research and development expenses was primarily due to an increase in
personnel.

General and Administrative

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 operations functions.
General and administrative expenses also include an allocation of overhead
expenses incurred by the Company. General and administrative expenses increased
from $557,000, or 12.0% of total revenue, for the three months ended March 31,
1995 to $684,000, or 11.3% of total revenue, for the three months ended March
31, 1996. The increase in general and administrative expenses was primarily due
to increased expenses associated with managing the Company's European
operations.

18
<PAGE> 23

OTHER INCOME (EXPENSE)

Other income (expense) consists of net interest income, foreign currency
gains and losses and gains or losses on the disposal of property and equipment.
The Company's other income for the three months ended March 31, 1995 consisted
primarily of a foreign currency transaction gain of $22,000, offset by net
interest expenses of $17,000. Other income for the three months ended March 31,
1996 consisted primarily of a foreign currency transaction loss of $27,000,
offset by net interest and other income of approximately $28,000.

PROVISION FOR INCOME TAXES

The Company's income tax provision was $34,000, or 17.3% of pretax income,
for the three months ended March 31, 1995, and was $203,000, or 35.4% of pretax
income, for the three months ended March 31, 1996. The lower rate for the three
months ended March 31, 1995 was due to the realization of certain tax credits
and deferred tax assets. The income tax provision for the three months ended
March 31, 1996 was primarily the result of United States income taxes and
foreign withholding taxes.

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

REVENUE

Revenue increased 9.4% from $14.9 million in 1993 to $16.3 million in 1994.
Revenue increased 30.7% from $16.3 million in 1994 to $21.3 million in 1995. The
increase in revenue from 1993 to 1994 was due to an increase in services revenue
and from 1994 to 1995 was due to the growth in both software licenses revenue
and services revenue. As a percentage of the Company's revenue, software
licenses revenue declined from 69.9% in 1993 to 58.3% in 1994 and to 58.0% in
1995. Conversely, services revenue, derived principally from the Company's
consulting services groups in North America and Europe, and also from
maintenance fees, increased as a percentage of revenue from 30.1% in 1993 to
41.7% in 1994 and to 42.0% in 1995.

Software Licenses

Software licenses revenue decreased 8.8% from $10.4 million in 1993 to $9.5
million in 1994. Software licenses revenue increased 30.2% from $9.5 million in
1994 to $12.3 million in 1995. The decrease in software licenses revenue from
1993 to 1994 was primarily related to a decrease in software licenses revenue
resulting from a slowdown in the Japanese economy and lower international
pricing of the Company's products. The increase in software licenses revenue
from 1994 to 1995 was primarily due to an increased volume of software licenses
across product lines worldwide.

Services

Services revenue increased 51.5% from $4.5 million in 1993 to $6.8 million
in 1994. Services revenue increased 31.4% from $6.8 million in 1994 to $8.9
million in 1995. The increase in services revenue from 1993 to 1994 was
primarily due to increased consulting services generated by the Company's
European subsidiaries acquired in April 1994, an increase in maintenance fees
revenue, as well as an overall increase in other services revenue. The increase
in services revenue from 1994 to 1995 was primarily due to an increase in
maintenance fees revenue and other services revenue in North America and Europe,
as well as the inclusion of four quarters of services revenue from the Company's
European subsidiaries. These increases in services revenue resulted in large
part from growth in the Company's consulting services and reflect the Company's
growing emphasis on providing total solutions to its customers.

COST OF REVENUE

Software Licenses

The cost of software licenses revenue increased from $142,000 in 1993 to
$570,000 in 1994. The cost of software licenses revenue increased from $570,000
in 1994 to $728,000 in 1995. The cost of software licenses revenue increased
from 1.4% of software licenses revenue in 1993 to 6.0% of software licenses
revenue in 1994 and decreased slightly to 5.9% of software licenses revenue in
1995. The increase in cost of software licenses revenue from 1993 to 1994 was
primarily due to royalties paid to third parties whose products were licensed

19
<PAGE> 24

through the Company's European subsidiaries and, to a lesser extent, to
increased costs associated with documentation, media and distribution. The
increase in cost of software licenses revenue from 1994 to 1995 was primarily
due to increased costs of documentation, media and distribution resulting from
increases in the volume of shipments of the Company's products.

Services

The cost of services revenue increased from $2.5 million in 1993 to $3.8
million in 1994. The cost of services revenue increased from $3.8 million in
1994 to $5.2 million in 1995. The cost of services revenue decreased slightly
from 56.7% of services revenue in 1993 to 56.5% of services revenue in 1994 and
increased to 58.2% of services revenue in 1995. The increase in cost of services
revenue from 1993 to 1994 was primarily due to the increase in costs associated
with consulting services provided by the Company's European subsidiaries. The
increase in cost of services revenue from 1994 to 1995 reflected the growth in
services provided to the Company's customers.

OPERATING EXPENSES

Sales and Marketing

Sales and marketing expenses remained unchanged at $6.5 million in 1993 and
1994, principally due to the fact that commission expenses remained unchanged in
these periods. Sales and marketing expenses increased from $6.5 million in 1994
to $8.1 million in 1995, principally due to increased commissions associated
with increased software licenses revenue and, to a lesser extent, to the opening
of new sales offices. Sales and marketing expenses as a percentage of revenue
decreased from 43.9% to 39.8% to 38.2% in 1993, 1994 and 1995, respectively. The
decrease in sales and marketing expenses as a percentage of revenue for both
1994 and 1995 reflected lower relative sales commission expenses in Europe as a
result of the Company moving from distributor to direct sales starting in April
1994.

Research and Development

Research and development expenses increased from $2.1 million in 1993 to
$2.4 million in 1994. Research and development expenses increased from $2.4
million in 1994 to $2.9 million in 1995. The increase in research and
development expenses from 1993 to 1994 was primarily due to increased personnel
costs, including costs associated with increased head count. The increase in
research and development costs from 1994 to 1995 was primarily caused by an
increase in personnel costs in support of an organizational focus on new and
advanced technology and expanded product development efforts. Research and
development expenses as a percentage of revenue varied from 14.2% to 15.0% to
13.8%, in 1993, 1994, and 1995, respectively. Funded research and development
expenses, which are not included in research and development expenses but are
included in cost of services revenue, were 1.7%, 2.2%, and 3.2% of total revenue
in 1993, 1994 and 1995, respectively. The majority of the revenue received and
expenses incurred for funded research and development during 1994 and 1995 was
directly related to projects that led to the development of the Company's
ADAMS/Car product. The Company intends to continue to invest significant
resources in research and development.

General and Administrative

General and administrative expenses increased from $1.8 million in 1993 to
$2.3 million in 1994. General and administrative expenses increased from $2.3
million in 1994 to $2.6 million in 1995. The increases from 1993 to 1994 and
also from 1994 to 1995 were primarily due to an increase in expenses associated
with the addition of administrative infrastructure in connection with the
acquisition of the Company's European subsidiaries in April 1994 . As a
percentage of revenue, general and administrative expenses varied from 11.8% to
14.2% to 12.3% in 1993, 1994 and 1995, respectively. The Company expects general
and administrative expenses to increase in absolute dollars, but these expenses
may continue to vary as a percentage of revenue.

20
<PAGE> 25

OTHER INCOME (EXPENSE)

Other expense in 1993 consisted primarily of an interest expense of $81,000
and a foreign currency transaction loss of $25,000. Other income in 1994
consisted primarily of an interest expense of $57,000, offset by a gain on
disposal of equipment of $56,000 and a foreign currency transaction gain of
$28,000. Other income in 1995 consisted of a foreign currency transaction loss
of $44,000, offset by a gain on disposal of equipment of $41,000 and interest
income of $12,000.

PROVISION FOR INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
INCOME TAXES

The effective tax rates for the provision for income taxes before the
cumulative effect of the change in accounting for income taxes were 29.4%,
32.0%, and 17.6% for 1993, 1994, and 1995, respectively. The differences between
the income tax provision calculated at the United States Federal statutory rate
and the consolidated tax provision are summarized in Note 4 of Notes to
Consolidated Financial Statements.

During 1993, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The statement
requires a change in the method of financial accounting and reporting for income
taxes from the deferral method to an asset and liability approach. The
cumulative effect on prior years of this change in accounting principle
increased 1993 net income by $161,000. See Note 4 of Notes to Consolidated
Financial Statements.

21
<PAGE> 26

QUARTERLY RESULTS

The following table sets forth certain unaudited quarterly financial data
for each of the three-month periods in 1995 and for the three-month period ended
March 31, 1996. In the opinion of the Company's management, this unaudited
information has been prepared on the same basis as the audited financial
statements contained herein and includes all adjustments (consisting only of
normal recurring adjustments) which management believes are necessary to present
fairly the information set forth therein. The operating results for any quarter
are not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1995 1995 1995 1996
--------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses........................... $2,688 $3,326 $2,992 $3,332 $3,841
Services.................................... 1,957 1,962 2,332 2,667 2,207
------ ------ ------ ------ ------
Total revenue............................ 4,645 5,288 5,324 5,999 6,048
Cost of revenue:
Software licenses........................... 219 190 115 204 200
Services.................................... 1,162 1,324 1,189 1,519 1,361
------ ------ ------ ------ ------
Total cost of revenue.................... 1,381 1,514 1,304 1,723 1,561
------ ------ ------ ------ ------
Gross profit.................................. 3,264 3,774 4,020 4,276 4,487
Operating expenses:
Sales and marketing......................... 1,838 1,911 2,137 2,232 2,344
Research and development.................... 675 750 719 796 886
General and administrative.................. 557 664 696 693 684
------ ------ ------ ------ ------
Total operating expenses................. 3,070 3,325 3,552 3,721 3,914
------ ------ ------ ------ ------
Operating income.............................. 194 449 468 555 573
Other income (expense)........................ 3 13 (30) 23 1
------ ------ ------ ------ ------
Income before income taxes.................... 197 462 438 578 574
Provision for income taxes.................... 34 82 77 101 203
------ ------ ------ ------ ------
Net income.................................... $ 163 $ 380 $ 361 $ 477 $ 371
====== ====== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1995 1995 1995 1996
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue:
Software licenses........................... 57.9% 62.9% 56.2% 55.5% 63.5%
Services.................................... 42.1 37.1 43.8 44.5 36.5
------ ------ ------ ------ ------
Total revenue............................ 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Software licenses........................... 4.7 3.6 2.2 3.4 3.3
Services.................................... 25.0 25.0 22.3 25.3 22.5
------ ------ ------ ------ ------
Total cost of revenue.................... 29.7 28.6 24.5 28.7 25.8
------ ------ ------ ------ ------
Gross profit.................................. 70.3 71.4 75.5 71.3 74.2
Operating expenses:
Sales and marketing......................... 39.6 36.1 40.1 37.2 38.8
Research and development.................... 14.5 14.2 13.5 13.3 14.6
General and administrative.................. 12.0 12.6 13.1 11.6 11.3
------ ------ ------ ------ ------
Total operating expenses................. 66.1 62.9 66.7 62.1 64.7
------ ------ ------ ------ ------
Operating income.............................. 4.2 8.5 8.8 9.2 9.5
Other income (expense)........................ 0.0 0.2 (0.6) 0.4 0.0
------ ------ ------ ------ ------
Income before income taxes.................... 4.2 8.7 8.2 9.6 9.5
Provision for income taxes.................... 0.7 1.5 1.4 1.6 3.4
------ ------ ------ ------ ------
Net income.................................... 3.5% 7.2% 6.8% 8.0% 6.1%
====== ====== ====== ====== ======
</TABLE>

22
<PAGE> 27

Software licenses revenue declined from $3.3 million in the second quarter
of 1995 to $3.0 million in the third quarter of 1995. This decline, primarily
due to a decline in software licenses revenue from Europe in the third quarter,
reflects a seasonal pattern which the Company has experienced in prior years.
Services revenue declined from $2.7 million in the fourth quarter of 1995 to
$2.2 million in the first quarter of 1996, primarily due to lower services
revenue from Europe.

The cost of software licenses revenue declined from $219,000, or 8.1% of
software licenses revenue, during the first quarter of 1995 to $190,000, or 5.7%
of software licenses revenue, in the second quarter of 1995 to $115,000, or 3.8%
of software licenses revenue, in the third quarter of 1995. This decline in the
cost of software licenses revenue from quarter to quarter was primarily due to a
decrease in royalties paid to third parties as a result of the Company's
European subsidiaries licensing fewer third-party software products,
particularly during the third quarter. The cost of software licenses revenue
increased to $204,000, or 6.1% of software licenses revenue, during the fourth
quarter of 1995. This increase in cost of software licenses was principally due
to increased royalties paid to third parties as a result of the Company's
subsidiaries licensing more third-party software products.

The cost of services revenue declined from $1.3 million, or 67.5% of
services revenue, in the second quarter of 1995 to $1.2 million, or 51.0% of
services revenue, in the third quarter of 1995. This decline as a percentage of
services revenue was primarily due to lower funded research and development
activities, which typically yield lower gross margins than other services,
during the third quarter of 1995. The cost of services revenue declined from
$1.5 million, or 57.0% of services revenue, in the fourth quarter of 1995 to
$1.4 million, or 61.7% of services revenue, in the first quarter of 1996. The
decrease in cost of services revenue was primarily due to lower funded research
and development activities during the first quarter of 1996, leading to a
decline in funded research and development costs that are allocated to cost of
services revenue. The increase in cost of services revenue as a percentage of
services revenue was primarily due to lower services revenue during the first
quarter of 1996. Sales and marketing expenses increased from $1.9 million, or
36.1% of revenue, in the second quarter to $2.1 million, or 40.1% of revenue, in
the third quarter of 1995. This increase as a percentage of revenue was
primarily due to higher commission expenses resulting from the Company having
received in the third quarter a higher percentage of its sales through its
indirect distributor channel, which typically result in higher relative sales
and marketing expenses compared with direct sales, and a decrease in software
licenses revenue.

The Company's quarterly operating results have in the past varied and may
vary in the future depending on factors such as mix of direct and indirect
sales, product mix, service mix, increased competition, size and timing of
significant orders, seasonal factors and budgeting cycles of customers, product
releases and pricing changes by the Company or its competitors, timing of new
product announcements, market acceptance or delays in the introduction of new or
enhanced versions of the Company's products and general economic conditions. A
significant portion of the Company's revenue in recent quarters has been derived
from a limited number of customers, and the Company currently anticipates that
future quarters will continue to reflect this trend. In addition, like many
software companies, the Company has generally recognized a substantial portion
of its revenue in the last month of each quarter, with this revenue concentrated
in the last weeks of the quarter. Accordingly, the cancellation or deferral of
even a small number of purchases of the Company's products could have a material
adverse effect on the Company's business, results of operations and financial
condition in any particular quarter. To the extent that significant sales occur
earlier than expected, operating results for subsequent quarters may fail to
keep pace or even decline. The Company's quarterly operating results have also
fluctuated as a result of seasonality of customer buying patterns. Revenue is
typically lower or constant in the first quarter of the year in relation to the
previous year's last quarter due primarily to budgeting cycles of customers. The
Company's third quarter revenue is also typically lower or constant in relation
to the second quarter of the year due to the decreased level of sales from its
European operations in the third quarter. Revenue from quarter to quarter is
difficult to forecast, as minimal order backlog exists at the end of any quarter
because the Company's products typically are shipped and revenue recognized
promptly after receipt of customers' orders. The Company's expense levels are
based, in part, on its expectations as to future revenue. If revenue levels are
below expectations, operating results are likely to be adversely affected. In
particular, net income may be disproportionately affected by a reduction in
revenue because only a small portion of the Company's expenses varies with its
revenue. There can be no assurance that the Company will be able to grow in
future periods, that it will be able to sustain its historical rate of revenue
growth or that its operations will remain profitable. As a result of the
foregoing and other 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 indications of future performance. Fluctuations in
operating results may also result in volatility in the price of

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<PAGE> 28

the shares of the Company's Common Stock. See "Risk Factors -- Potential
Fluctuations in Quarterly Results" and "Selected Consolidated Financial Data."

LIQUIDITY AND CAPITAL RESOURCES

Since inception in 1977, the Company has primarily financed its activities
through internally generated cash flow. At December 31, 1993, 1994 and 1995 and
at March 31, 1996, the Company had $60,000, $817,000, $1.1 million and $1.5
million, respectively, in cash and cash equivalents. These cash balances
represented increases of $757,000, $324,000 and $377,000 over the balances at
December 31, 1993, 1994 and 1995, respectively.

Net cash provided by operating activities was $684,000 in 1993, $939,000 in
1994, $2.1 million in 1995, and $376,000 during the three months ended March 31,
1996. Net cash provided by operating activities in 1993 consisted primarily of
net income plus an increase in accrued expenses offset in part by an increase in
accounts receivable and a decrease in deferred revenue. Net cash provided by
operating activities in 1994 was comprised primarily of net income, a decrease
in prepaid and deferred expenses, and a decrease in accounts receivable, offset
in part by a decrease in deferred revenue. In 1995, net cash provided by
operating activities resulted primarily from net income and increases in accrued
expenses and deferred revenue, offset in part by an increase in accounts
receivable. The increase in accrued expenses was primarily due to accruals for
employee commissions and bonuses based on higher sales. The increase in accounts
receivable was primarily due to an increase in sales from the last three months
of 1994 to the last three months of 1995. Accounts receivable turnover ratios
are affected by the geographic mix of sales because the Company typically
experiences longer payment cycles with international customers. For the three
months ended March 31, 1996, net cash provided by operating activities resulted
primarily from net income before depreciation and amortization expense and a
decrease in accounts receivable, partially offset by a decrease in accrued
expenses and an increase in other assets.

Net cash used in investing activities was $30,000 in 1993, consisting
primarily from purchases of property and equipment. Net cash used in investing
activities was $10,000 in 1994, consisting primarily of purchases of property
and equipment, offset in part by the Company's acquisition of its foreign
subsidiaries. Net cash used in investing activities was $550,000 in 1995,
consisting primarily of purchases of property and equipment, offset in part by
proceeds from the sale of property and equipment. Net cash used for investing
activities was $84,000 during the three months ended March 31, of 1996,
consisting primarily of purchases of property and equipment.

Net cash used in financing activities was $613,000, $150,000 and $1.2
million in 1993, 1994 and 1995, respectively. Net cash provided by financing
activities during the three months ended March 31, 1996 was $85,000. Net cash
used in financing activities in 1993 and 1994 primarily consisted of payments of
long-term debt, offset in part by net borrowings under line of credit
agreements. Net cash used in financing activities in 1995 primarily consisted of
payments of long-term debt and payments under line of credit agreements. Net
cash provided by financing activities during the three months ended March 31,
1996 primarily consisted of proceeds from issuance of common stock pursuant to
the exercise of certain common stock warrants. See Note 5 of Notes to
Consolidated Financial Statements.

The Company has a line of credit secured by eligible accounts receivable
which expires on April 30, 1996 with a maximum borrowing capacity of $1.5
million and is subject to annual renewal. Borrowings on the line of credit bear
interest at 0.75% in excess of the bank's prime rate of interest. There were no
borrowings outstanding against the line of credit as of March 31, 1996.

The Company's subsidiaries in Germany, Italy, Sweden and France also have
line of credit and overdraft facilities that provide for aggregate, additional
borrowing availability of approximately $600,000 at various fixed and variable
interest rates. Borrowings are collateralized by certain assets of the
subsidiaries. There were approximately $94,000 of borrowings outstanding at
March 31, 1996. The weighted average interest rate on the borrowings outstanding
at March 31, 1996 was 12.5%.

The Company currently has no significant capital commitments, except for
its obligation of $449,000 in connection with the redemption of certain common
stock warrants, which the Company expects to pay in July 1996. See Note 5 of
Notes to Consolidated Financial Statements. It is the Company's opinion that, as
of the date of this Prospectus, the cash generated internally by operations and
the availability under its lines of credit are sufficient to satisfy the
Company's working capital requirements for at least the next twelve months.

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<PAGE> 29

BUSINESS

MDI is a leader in developing, marketing and supporting virtual prototyping
solutions. The Company's software helps engineers and designers create optimal
designs before the physical testing process begins, improving the engineer's or
designer's ability to create a design that will meet or exceed the initial
product specifications. The use of MDI's virtual prototyping software can reduce
the requirement of building and testing numerous physical prototypes and can
lead to significant cost savings as well as critical reductions in
time-to-market.

INDUSTRY BACKGROUND

During the past several decades, companies worldwide have encountered
increasing competition as they market their products. Many companies have
responded by improving the performance, safety, quality and functionality of
their products (e.g., anti-lock brake systems) to gain a competitive advantage.
Improving a product often increases the product's technical complexity and
complicates the product development process. Competitive pressures, however,
require companies to reduce both the time required to bring their products to
market and engineering and manufacturing costs.

The traditional product development process consists of the design of a
product followed by physical prototyping to test whether the product performs
according to design specifications. Physical prototypes are constructed,
instrumented with sensors and then tested under expected operating conditions to
assist the designer or engineer in the visualization and validation of the
product in motion. Data are collected and compared to initial design objectives
and design revisions are made to improve the actual performance of the product.
Redesigned physical prototypes reflecting these design revisions are then
constructed and tested. The process is repeated until the performance of the
physical prototype is acceptable to the designer or engineer, at which point the
design is finalized and full scale production can commence.

TRADITIONAL DESIGN PROCESS

Concept

Design

Physical Prototype

Design Verification

Testing

-
-
-

Re-design

Physical Prototype

Design Verification

Testing

Designed

Product

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<PAGE> 30

Companies often find the physical prototyping process to be deficient in
several ways. First, the process is costly. For instance, automotive
manufacturers may construct anywhere from 20 to 200 different physical
prototypes of a vehicle during a new vehicle development program at a cost of
between $200,000 and $1,000,000 per physical prototype. Second, physical
prototyping typically consumes a large amount of the time allotted to a new
product development project. This can force a company to make trade-offs between
a timely market launch and improving a product's design to enhance quality or
lower cost. Third, testing physical prototypes does not always provide the data
required to make valid design decisions. Often results cannot be replicated due
to uncontrollable fluctuations in test conditions (e.g., weather), while in some
instances the physical prototype itself does not accurately represent the design
due to manual manufacturing defects. Finally, testing of a physical prototype in
realistic operating conditions can be unsafe, infeasible or too costly.

The problems associated with physical prototyping have led designers and
engineers to seek more flexible, less expensive, more accurate and safer methods
to design, test and validate their products. Beginning in the 1960's, modeling
software programs were created to assist engineers in the design of certain
discrete components of their products. These component modeling software
programs automated the time-consuming task of mathematically describing product
components, yielding efficiencies in designing and testing components.
Initially, these programs required large, up-front investments in hardware,
software and training, were difficult to use, were available only on large
remote computers and lacked graphical and computing capabilities to allow
engineers and designers to easily and quickly visualize the effect of design
changes. Recent advances in desktop UNIX and PC computing platforms, which
combine powerful microprocessors, advanced graphics capabilities and improved
memory capabilities at reduced costs, have enabled more widespread use of
component modeling software packages.

Component modeling software focuses on component behavior rather than
overall product or system performance. Component modeling is limited to
examining a component at rest and is not capable of modeling the relative motion
and dynamic forces among components within a system. Companies have discovered
that optimizing component performance rarely leads to optimal system, or
assembled product, performance. Physical prototypes of the entire system
typically still need to be constructed and tested prior to proceeding to full
scale production. Companies require virtual prototyping software that enables
them to quickly and cost-effectively recreate, both visually and mathematically,
the effects of motion on systems to assess the performance of the entire
product. This ability to create and test virtual prototypes of a product enables
a company to design superior products by testing multiple designs in different
environments. Recent advances in computing technology and the widespread use of
solids modeling software now enable the widespread adoption of virtual
prototyping software.

THE MDI SOLUTION

MDI is a leader in developing, marketing and supporting virtual prototyping
solutions. MDI's virtual prototyping software allows the designer or engineer to
design a complete product by simulating, both visually and mathematically, a
product in motion. Companies are increasingly finding the ability to simulate
mechanical system performance under different environments through the use of
MDI's virtual prototyping software to be an important element in product design,
evaluation and refinement. The use of MDI's virtual prototyping software can
reduce the requirement of building and testing numerous physical prototypes and
can lead to significant cost savings as well as critical reductions in
time-to-market.

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<PAGE> 31

VIRTUAL PROTOTYPING PROCESS

CAE CAD/CAM

Virtual Prototyping

Design Verification

Solids Modeling PDM

Physical Prototype

Testing

Designed

Product

MDI's virtual prototyping software helps its customers create optimal
designs before the physical testing process begins, improving the engineer's or
designer's ability to create a design that will meet or exceed the initial
product specifications. The advances previously made in modeling and analyzing
component behaviors through component modeling software, such as finite element
models, control system models or geometric solids models, are enhanced by
integrating these tools into MDI's virtual prototyping software. To complement
MDI's software product line, the Company provides consulting services, software
implementation services, software training, technical support and custom
software development services to assist customers in achieving the most
cost-effective solutions to their enterprise-wide design, engineering,
manufacturing and product validation problems.

MDI believes that its products and services benefit its customers in the
following ways:

Improved Product Quality, Reliability and Safety. In traditional product
design processes that rely solely on physical prototypes, companies are limited
in the number of design variations and the amount of design refinement that can
be considered due to the time and expense required to test physical prototypes.
The Company's virtual prototyping software typically makes it easier to assess
product quality, reliability and safety earlier in the design cycle, and allows
for consideration and review of multiple refinements at reduced costs. In
addition, the Company's software may be used to perform failure analyses of
products after production and can assist companies in evaluating and
reconfiguring existing designs.

Reduced Design Cycle Time. The Company's software reduces the design cycle
time by enabling rapid, multiple design iterations and by reducing the need to
build and test multiple physical prototypes. Companies are also able to test and
validate a design's feasibility throughout the development cycle. This shortened
product cycle reduces the time it takes to deliver a product to market.

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Reduced Development Costs. The Company's virtual prototyping software
reduces the need for building, instrumenting, testing and redesigning expensive
physical prototypes. Industries with relatively expensive physical prototyping
costs, including aerospace, automotive and general machinery, benefit from the
reduction in numbers of physical prototypes.

Protects Customers' Investments Via Integration. MDI's virtual prototyping
software is easily integrated with products from leading software and hardware
vendors, thereby protecting its customers' hardware and software investments.
The Company customizes its software as appropriate to integrate with specialized
in-house software tools and commercial computer-aided design ("CAD"),
computer-aided manufacturing ("CAM") and computer-aided engineering ("CAE")
software. The Company's products are written in industry-standard languages for
cross-platform portability and are designed with an open, object-oriented
architecture to provide extensibility. Many of the leading commercial software
products, including certain geometric solids modeling software products, finite
element analysis ("FEA") software products, product document management ("PDM")
software and control system design products, can be integrated with the
Company's software.

STRATEGY

MDI's strategy is to remain a leader in developing, marketing and
supporting virtual prototyping technology that assists companies in their
product development processes. The key elements of the Company's strategy for
achieving this objective are as follows:

Maintain Core Technology Leadership. The Company has developed numerous
advanced proprietary mathematical techniques and software algorithms that form
the foundation of its flagship ADAMS product line and its service offerings. The
Company's products have been widely deployed and are recognized as productive
virtual prototyping design tools. The Company's focus is to continue to develop
and expand the Company's products and expertise in virtual prototyping to
maintain its market leadership position.

Institutionalize Virtual Prototyping and Provide Total Solutions. The
Company assists its customers in creating an enterprise-wide virtual prototyping
environment, linking together lab test data, field test data and simulation. In
an effort to provide a total solution to its customer's needs, the Company works
closely with its customers to integrate the Company's products and services with
the existing internal processes of its customers. The Company's products are
designed to facilitate integration with existing hardware and software products
and its consultants are trained to help customers effectively bring in-house
tools, commercial software and internal processes together to form a complete
virtual prototyping design environment.

Address Vertical Markets with Customized Packages. The Company intends to
continue to develop products customized for particular industries. Products such
as ADAMS/Car and ADAMS/Rail capitalize upon the Company's existing technology
and customer relationships, and the Company believes that there are significant
opportunities to develop products for other vertical markets.

Leverage Existing Customer Base and Establish Consortia with
Customers. The Company's products are currently used in various applications
within a number of large, well-established organizations. The Company believes
that there are additional opportunities for its products and services through
increased penetration within its existing customer base. The Company intends to
continue participating in product development consortia with its customers and
working with its customers to continually improve the Company's products and
services.

Leverage Established Distribution Channels. The Company markets its
products through direct sales in North America and in Europe, approximately 15
value-added resellers throughout North America, a group of international
distributors in over 20 countries and through reselling alliances with certain
OEMs. The Company continuously looks for ways to further develop its direct
sales and distributor channels both domestically and abroad.

Leverage and Expand Strategic Alliances. The Company has formed strategic
alliances with several leading hardware vendors, including Hewlett-Packard and
Silicon Graphics. Through these strategic alliances, the Company and the vendor
participate in various projects which enhance both the visibility and acceptance

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<PAGE> 33

of the Company's products, such as joint presentations, joint marketing efforts,
conferences and, in certain instances, product development. The Company also has
alliances with certain software vendors, including ANSYS, Inc. and the
MacNeal-Schwendler Corporation. With these alliances, the Company seeks to
satisfy the needs of its customers across a wide range of mechanical computer
aided engineering applications. The product offerings of these companies are
complementary to the Company's product offerings and customers often use many of
these products simultaneously. The Company and its partners jointly participate
in trade shows, user conferences, customer presentations, customer proposals
and, in certain instances, joint marketing and development efforts. The Company
has also formed alliances with several OEMs, including EDS/Unigraphics and
Structural Dynamics Research Corporation. Through these alliances, the Company
jointly develops and markets software products. The Company believes that
strategic alliances are important to its long-term success and intends to
continue to pursue such alliances in the future. See "Business -- Sales and
Marketing."

TECHNOLOGY

MDI is a leader in developing, marketing and supporting virtual prototyping
solutions. MDI's virtual prototyping software solutions allow the designer or
engineer to design a complete product by simulating, both visually and
mathematically, a product in motion.

The ADAMS line of products is based upon the principles of dynamics and is
implemented as automated computer tools. A user defines a system in terms of its
physical properties -- masses, geometry, component connectivity and
environmental forces. The system physical description is then verified for
correctness. The principles of dynamics are then used to convert the physical
description to a mathematical description that consists of a set of nonlinear
differential algebraic equations. Sophisticated numerical methods, including
stiffly-stable backward-differentiation formulae integration methods and
efficient symbolic sparse matrix algebra methods, are used to solve these
difficult numerical problems. These methods are well suited for single or
multiple processor computers. The result of such a simulation is an accurate
characterization of the system motion, i.e., a time-based description of how the
system's various assemblies move through space and the forces that are necessary
to effect the motion.

Graphical methods are used to facilitate the system modeling so that the
user can see the system as it is built. Object-oriented methods are used to
simplify both the user interface and the software architecture. System motion is
observed as the simulation progresses, so that the user receives almost
instantaneous feedback about the model's behavior. Simulation results can be
processed and plotted using the Company's plotting tools and the system motion
can be visualized using the Company's high quality real-time animation tools.

The ADAMS virtual prototyping technology is critical to mechanical
computer-aided engineering and works cooperatively with many other technologies:

- CAD creates the geometry and mass properties for virtual prototyping and
can graphically display results from ADAMS;

- FEA provides component flexibility description for use in virtual
prototyping, and uses loading conditions computed by ADAMS as input to
detailed component design;

- Electro-mechanical and hydraulic systems modeled in actuation modeling
software are input as components into system-level ADAMS models;

- Control system behavior is validated with the high fidelity system models
from ADAMS; simplified plant models are provided to control system design
software; and

- Optimization methods are coupled with ADAMS virtual prototyping to more
efficiently create better designs.

PRODUCTS

MDI develops, markets and supports virtual prototyping software packages
capable of simulating the many varied and complex component interactions and
operating environments that companies face when

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<PAGE> 34

designing their products. The Company's primary software line is the ADAMS
Professional Series. The principal product in this line, the ADAMS Full
Simulation Package, is comprised of ADAMS/Solver and ADAMS/View, and can be used
as a self-contained software package or with additional modules developed by the
Company as well as with third party software. In addition, certain OEMs license
the Company's kinematic motion simulation software in order to embed the
Company's software in the OEM's design software packages. The U.S. list price
for the ADAMS Full Simulation Package is approximately $24,000 per license
depending upon configuration. The U.S. list prices for the Company's additional
software products typically range from $2,000 to $15,000.

ADAMS and the modular packages of ADAMS software are available on a number
of platforms, including UNIX-based workstations and servers from Silicon
Graphics, Hewlett-Packard, Sun Microsystems, IBM and Digital Equipment. ADAMS is
also available on Cray and NEC supercomputers and near supercomputers. Recently,
the Company has developed ADAMS for Intel Pentium-based PCs running the DOS and
Microsoft Windows NT operating systems. In addition, the Company also plans to
replace its DOS-based PC version with a Windows 95 version of the ADAMS software
during late 1996.

ADAMS Professional Series

FULL SIMULATION PACKAGE

- ADAMS/Solver is the underlying solution "engine." ADAMS/Solver
automatically formulates and solves the equations of motion to provide complete
kinematic, static and dynamics analysis of mechanical systems.

- ADAMS/View is an interactive graphical environment for the full ADAMS
product line. ADAMS/View combines simple iconic, point-and-click operation with
advanced model-building, simulation, animation and xy plotting capabilities.

MODELING OPTIONS

- ADAMS/Vehicle is used for the design and analysis of automobile and truck
suspensions or for simulating full vehicle dynamics. A user chooses from a wide
variety of suspension templates to quickly and easily build vehicle models.

- ADAMS/Tire is a comprehensive set of tools for simulating the complex
force interactions between rubber tires and driving surfaces. This can be
important input for understanding vehicle behavior under a variety of
conditions.

- ADAMS/Driver allows the user to add the element of human driver response
to vehicle simulations. ADAMS/Driver can simulate the actions and reactions of a
vehicle's operator under a variety of driving conditions.

- ADAMS/Android allows a user to model and simulate human bodies in motion.
ADAMS/Android is used to study the complex dynamic interaction between humans
and mechanical systems, without risking the comfort and safety of live subjects.

SOLUTION AND INTEGRATION OPTIONS

- ADAMS/FEA automates the exchange of data between ADAMS and FEA software,
including ANSYS and MSC/NASTRAN. This two-way interface provides for accurate
loading conditions for FEA and a more complete understanding of flexible effects
on mechanical systems.

- ADAMS/IGES provides an industry-standard, two-way interface for
exchanging model geometry between ADAMS and many other CAD/CAE/CAM packages.
This saves time in data transfer, while enhancing the accuracy and realism of
mechanical system simulations.

- ADAMS/Linear simplifies the non-linear equations of motion calculated by
ADAMS. Having these data in linear form can significantly enhance the ability to
study the stability and vibratory behavior of

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mechanical system models. ADAMS/Linear can also provide easy link to popular
control system design packages such as MATRIX(x) and MATLAB.

VISUALIZATION OPTION

- ADAMS/Animation allows a user to see the complete system in motion -- in
real time, fully shaded and rendered. ADAMS/Animation checks and reports
potential collision of parts and components and shows important measurements on
screen. ADAMS/Animation also allows for multiple light sources, texture mapping,
detailed color specifications and multiple or moving-camera perspectives. These
enhance the understanding of the design and can result in more successful design
reviews.

INDUSTRY-SPECIFIC PACKAGES

- ADAMS/Car was developed by the Company in collaboration with AB Volvo,
Audi AG, BMW, Ford Motor Company and Renault. ADAMS/Car is a special version of
ADAMS designed specifically for advanced vehicle simulation. Embedded within the
software are the specialized design and analytical expertise of automotive
industry leaders. A custom menu-driven user interface highlights capabilities
familiar to vehicle designers so customers can use ADAMS/Car with little formal
training.

- ADAMS/Rail was developed by the Company in collaboration with Dutch Rail
and provides virtual prototyping capabilities specifically tailored to the needs
of the worldwide railcar manufacturing industry. The software combines
specialized railcar design and analytical know-how with custom menus and
functions developed specifically for railcar engineers.

ADAMS Designer Series

- ADAMS/Designer is a product that is designed for the Windows 95
environment. ADAMS/Designer is targeted to the design engineer and the
non-engineer user, particularly in small- and medium-sized companies, and is a
subset of the ADAMS Professional Series. The anticipated release of
ADAMS/Designer is late 1996.

ADAMS CAD-Embedded Products

- CAD-Embedded Products are products specifically designed for the CAD/CAM
environments. Assemblies created within the Company's partners' software
environments are converted into realistic, fully three-dimensional mechanical
system models. These software environments then verify and evaluate motion
paths, locate lock-up positions, detect interferences, establish work-space
envelopes and calculate joint reaction forces.

- OEM Products are kinematic motion simulation products that are embedded
in several OEMs' design software packages. These products provide limited
virtual prototyping capabilities, which can be upgraded by licensing
ADAMS/Solver from the Company. The Company has entered into license agreements
with several OEMs, including Structural Dynamics Research Corporation,
EDS/Unigraphics, Computervision, Intergraph and Applicon.

- MECHANISM/Pro is a program specifically designed for PTC's Pro/ENGINEER
environment. MECHANISM/Pro converts assemblies created within PTC's Pro/ASSEMBLY
software into realistic, fully three-dimensional mechanical system models.
MECHANISM/Pro can verify and evaluate motion paths, locate lock-up positions,
detect interferences, establish work-space envelopes and calculate joint
reaction forces.

SERVICES

The Company provides consulting, training and technical support services to
customers in connection with a wide range of product design and engineering
projects. MDI's primary objectives with regard to its services include: (1)
providing total solutions to its customers' problems; (2) leveraging software
sales; (3) enhancing customer loyalty and repeat and renewal business; (4)
growing the services business of the

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Company profitably; (5) aggressively exploring and penetrating new markets; and
(6) obtaining customer feedback on its products.

The Company strives to identify key companies within various industries
with whom it seeks to develop close working relationships. The Company seeks to
foster technological partnerships with these companies by providing a
comprehensive service package, which addresses the particular virtual
prototyping needs of the companies. By doing this, MDI provides a total solution
for the customer, which can lead to increased acceptance of virtual prototyping
in the applicable industry.

In addition to its consulting services, the Company also provides training
to enable its customers to more easily integrate virtual prototyping technology
into their design and quality control processes.

The Company's services staff provides these services on either a time and
materials or a fixed fee basis depending on the project and the requirements of
the customer. Contract fees range from a few thousand dollars to several hundred
thousand dollars depending upon the scope of the project, and contract durations
range from a few weeks to several years. As of March 31, 1996, the Company had a
backlog of consulting service contracts in excess of $600,000.

A critical component of MDI's strategy is to provide a wide range of
customer support services. These services include hotline support and on-site
support and training. Product support is provided pursuant to renewable annual
maintenance contracts. Customers who purchase maintenance agreements receive
product enhancement releases and hotline support without additional charge.
On-site support and training are priced separately. Approximately 14.1%, 17.5%,
16.3% and 15.0% of the Company's total revenue was realized from maintenance
contracts in 1993, 1994, 1995 and for the three months ended March 31, 1996,
respectively.

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CUSTOMERS

The Company's customers include companies in a wide variety of industries.
Historically, the Company's largest customers have been automobile manufacturers
and automotive suppliers. During 1993, 1994, 1995 and for the three months ended
March 31, 1996, automotive-related customers accounted for approximately 51.4%,
52.2%, 50.7% and 50.6% of the Company's total revenue, respectively. Ford Motor
Company accounted for approximately 16.1%, 13.4%, 13.2% and 11.1% of the
Company's total revenue in 1993, 1994, 1995 and for the three months ended March
31, 1996, respectively. No other customer accounted for greater than 10% of the
Company's total revenue in 1993, 1994, 1995 and for the three months ended March
31, 1996.

The following were some of the customers from whom the Company received
more than $20,000 in revenue in 1995:

<TABLE>
<S> <C>
AUTOMOBILE AEROSPACE
MANUFACTURERS Bombardier, Inc.
AB Volvo Deutsche Aerospace AG
Audi AG Dornier GmbH
Automobiles Peugeot Giat Industries S.A.
BMW Lockheed Martin Corp.
Chrysler Corp. McDonnell Douglas Corp.
Daewoo Corporation Northrop Grumman Corp.
Daimler-Benz AG Sikorsky Aircraft Corporation
Fiat S. P. A. TRW Inc.
Ford Motor Company United Technologies Corporation
General Motors Corp. Vickers P.L.C.
Honda Motor Co., Ltd.
Isuzu Motors Limited ELECTRONICS
Jaguar Motor Cars Ltd.
Kia Motors Corp. AT&T Corp.
Mazda Motor Corporation Fuji Photo Film Co., Ltd.
Mitsubishi Motors Corp. Fujitsu, Ltd.
Nissan Motor Co. Ltd. Hitachi, Ltd.
Regie Nationale des Usines Renault Minolta Camera Co. Ltd.
Rover Group P.L.C. Mitsubishi Electric Corp.
Saab Automobile, AB Motorola, Inc.
Suzuki Motor Corporation Samsung Electronics Co., Ltd.
Toyota Motor Corp. Sanyo Electric Co., Ltd.
Volkswagen AG Toshiba Corporation

AUTOMOBILE BIOMECHANICAL
SUPPLIERS Failure Analysis Associates
AlliedSignal Inc. Howmedica, Inc.
Borg-Warner Automotive, Inc. Johnson & Johnson
Bridgestone/Firestone, Inc.
Cummins Engine Company, Inc. GENERAL MACHINERY
Eaton Corporation
The Goodyear Tire & Rubber Company Caterpillar
Michelin Corp. Deere & Company
New Venture Gear, Inc. General Electric Company
Rockwell International Corp. Komatsu
United Technologies Corporation Owens-Corning Company
Whirlpool Corporation

AUTOMOBILE RACING
Benetton Formula One
McLaren International Ltd.
Penske Cars Limited
Williams Grand Prix Engineering Ltd.
</TABLE>

33
<PAGE> 38

SALES AND MARKETING

The Company markets its products through direct sales in North America and
in Europe, approximately 15 value-added resellers throughout North America, a
group of international distributors in over 20 countries and through reselling
alliances with certain integrated mechanical CAD/CAM/CAE software vendors. The
Company conducts sales activities from its headquarters in Ann Arbor, Michigan,
sales offices in Atlanta, Chicago, Cincinnati, Los Angeles and Londonderry, New
Hampshire as well as its six European subsidiaries' offices in England, France,
Germany, Italy (two offices) and Sweden. The Company employs engineers and
technically proficient salespersons capable of serving the technology needs of
current and prospective customers' engineering, design and manufacturing staffs.

The Company has formed strategic alliances with several leading hardware
vendors, including Hewlett-Packard, Silicon Graphics and Sun Microsystems.
Through these strategic alliances, the Company and the vendor participate in
various projects which enhance both the visibility and acceptance of the
Company's products, such as joint presentations to customers and the trade
press, joint advertising and promotion, conference presentations and displays
and, in certain instances, product development.

The Company also has alliances with vendors of complementary computer-aided
engineering technology, such as ANSYS, Inc., Integrated Systems, Inc., The
MacNeal-Schwendler Corporation and The Mathworks, Inc. These relationships
entail collaborative development to support interfaces between the software
products of the Company and each partner, as well as cooperative marketing and
selling activity. By working with these vendors, the Company seeks to satisfy
the needs of its customers across a wide range of computer-aided engineering
applications. The Company and its partners jointly participate in joint
promotional activities, trade shows, user conferences, customer presentations
and customer proposals.

The Company has also formed OEM relationships with several CAE/CAD/CAM
companies, including Applicon, Inc., Bentley Systems, Inc., Computervision
Corporation, Electronic Data Systems Corporation (Unigraphics Division),
Intergraph Corporation, The MacNeal-Schwendler Corporation and Structural
Dynamics Research Corporation. Through these alliances, the Company collaborates
with its partners to develop and support embedded, add-on software modules for
each CAD environment. These CAD-embedded modules enable CAD users to model and
simulate mechanical systems and interface with the Company's full ADAMS product
line.

The Company has agreements with several of these companies although the
Company has minimal obligations under these agreements. The Company believes
that strategic alliances are important to its long-term success and intends to
continue to pursue such alliances in the future.

In Asia, the Company primarily markets its products and services through
contractual relationships with distributors in Japan, Singapore, Korea, Taiwan,
India and China. The Company's largest distributor, ISI-Dentsu, is located in
Japan and accounted for approximately 29.4%, 20.7%, 19.3% and 21.3%, or $4.4
million, $3.4 million, $4.1 million and $1.3 million, of total revenue in 1993,
1994, 1995 and for the three months ended March 31, 1996, respectively. The
Company's non-exclusive distribution agreement with ISI-Dentsu extends through
December 31, 1996 and is automatically renewed on a year-to-year basis unless
terminated by written notice by either party not less than 180 days' prior to
expiration of the term. ISI-Dentsu is currently the only distributor of the
Company's products in Japan.

International revenue (i.e., revenue from sales outside of North America)
represented approximately 53.1%, 54.4%, 62.7% and 65.3% of the Company's total
revenue in 1993, 1994, 1995 and the three months ended March 31, 1996,
respectively. The Company expects that international sales will continue to
account for a significant portion of its total revenue in future periods. The
Company intends to continue to expand its operations outside of the United
States, which will require significant management attention and financial
resources. International operations are subject to inherent risks, including
unexpected changes in regulatory requirements, tariffs and taxes, difficulties
in staffing and managing foreign operations, longer payment cycles, greater
difficulty in accounts receivable collection, compliance with applicable export
licensing requirements and other trade barriers and political and economic
instability. Moreover, gains and losses on the conversion to U.S. dollars of
receivables and payables arising from international operations may contribute to
fluctuations in

34
<PAGE> 39

the Company's results of operations. The Company does not currently engage in
hedging transactions. In addition, if for any reason exchange or price controls
or other restrictions on foreign currencies were imposed, the Company's
business, financial condition and results of operations could be materially
adversely affected. The Company generally prices its products in Europe and
Japan in local currencies and in U.S. dollars in other countries. Currency
exchange fluctuations in countries in which the Company licenses its products in
U.S. dollars could have a material adverse effect on the Company's business,
financial condition and results of operations by resulting in pricing that is
not competitive with products priced in local currencies. In addition, the laws
of certain countries do not protect the Company's products and intellectual
property rights to the same extent as do the laws of the United States. Because
the Company's software products are used by manufacturers to design systems and
are not embedded in manufacturers' products, the Company does not currently
intend to qualify under ISO 9000. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's future
international operations and sales and, consequently, on the Company's business,
financial condition and results of operations. See "Risk
Factors -- International Sales and Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

RESEARCH AND DEVELOPMENT

The Company's success depends in large part upon its ability to enhance
current products and to develop and introduce new products on a timely and
cost-effective basis. The Company's current software development efforts are
focused on developing additional products and services to complement its core
competencies of developing, marketing and supporting mechanical system modeling
and simulation software packages. The Company's product development efforts also
emphasize enhancement, integration and extensibility of its virtual prototyping
software.

The Company has historically released one new version of its software to
its customers per year and intends to continue such releases. The Company also
provides periodic releases to its OEM software partners. As part of this release
process, the Company continually communicates with its customers and partners
and solicits comments for improved ease of use and general customer
satisfaction.

The Company's software developers work as a team with the Company's sales,
marketing and consulting personnel to achieve a robust, high-quality product
line.

The Company also sponsors and maintains a network of academic and
commercial research affiliates to promote recognition and commercialization of
applicable emerging technology. Some of the technology areas currently under
exploration include: kinematics, elastodynamics, numerical methods, design
sensitivity, design-of-experiments, optimization, symbolic computing, advance
graphics and visualization, user interfaces, tire dynamics, biomechanics,
ergonomics, controls design and hydraulics.

As of March 31, 1996, the Company's research and development group
consisted of 37 full-time employees. During 1993, 1994, 1995 and the three
months ended March 31, 1996, the Company's research and development expenses
were approximately $2.1 million, $2.4 million, $2.9 million and $886,000,
respectively. The Company anticipates that it will commit substantial resources
to research and development in the future.

The virtual prototyping industry is characterized by rapid technological
changes, frequent new product introductions and evolving industry standards that
may render existing products and services obsolete. Consequently, to maintain
its competitive position, the Company must enhance its existing software
products and develop and introduce new products on a timely basis. In addition,
in order to maintain and broaden the market for its software products, the
Company must support a variety of computer systems and graphics devices. There
can be no assurance that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of these
products, or that such new products and product enhancements will adequately
meet the requirements of the marketplace and achieve market acceptance. If the
Company is unable to develop and introduce products in a timely manner in
response to changing market conditions or customer requirements, the Company's
business, financial condition and results of operations would be materially and
adversely affected. See "Risk Factors -- Dependence on New Products; Rapid
Technological Change" and "-- Competition."

35
<PAGE> 40

COMPETITION

The markets for the Company's products and services are highly competitive
and subject to rapid change. The Company believes the principal competitive
factors in this market are product quality, ease of use, quality of support,
performance and price, functionality and features, ease of integration with
customers' design processes, strategic alliances and vendor and product
reputation. In general, the Company's current competition comes from two
sources: other virtual prototyping software vendors, including PTC, and the
internal software development groups of its current or potential customers. Many
companies have their own software development groups that historically have
developed their own software design tools. This has required the Company and
other vendors to compete against these internal groups to sell their products
into these companies. A number of the Company's competitors have longer
operating histories, greater financial, technical, sales, marketing and other
resources, greater name recognition, more extensive distribution and sales
networks and a larger, more established customer base. Among the Company's
current and potential competitors are also a number of large hardware and
software companies that may develop or acquire products that compete with the
Company's products. Current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition is likely to result in price reductions, reduced
operating margins and loss of market share, any of which could materially
adversely affect the Company's business, results of operations and financial
condition. There can be no assurance that the Company will be able to compete
successfully in the future or that competitive pressures will not have a
material adverse effect the Company's business, financial condition and results
of operations. See "Risk Factors -- Competition."

PROPRIETARY RIGHTS

The Company's success depends in large part upon its proprietary software
technology. The Company currently relies on trade secret, copyright and
trademark laws, and license agreements with all of its customers to protect its
proprietary rights in its software products. The Company also ships its software
with either an encoded password scheme or a security device. The Company's
software copies are locked to a specific central processing unit and contain
codes that will prohibit the user from running the software after a certain
date. The Company generally enters into proprietary information and
confidentiality agreements with its employees and distributors, and limits
access to and distribution of its software, documentation and other proprietary
information. The Company generally does not license or release the source code
for its proprietary software to third parties. Despite these precautions, there
can be no assurance that a third party will not copy or otherwise obtain and use
the Company's products or technology without authorization, or develop similar
or superior technology independently. The Company distributes demonstration
copies of its products in North America, Europe and Japan pursuant to
"shrink-wrap" licenses. There can be no assurance that such licenses are
enforceable. In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. Litigation may be necessary
in the future to enforce the Company's intellectual property rights, to protect
the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company believes
that its products do not infringe on the proprietary rights of third parties,
and although the Company has received no communications from third parties
alleging the infringement of the proprietary rights of such parties, there can
be no assurance that infringement claims will not be asserted against the
Company in the future or that any such claims will not require the Company to
enter into costly litigation. Irrespective of the validity or the successful
assertion of such claims, any such litigation could result in substantial costs
and a significant diversion of management's attention and resources, and these
results as well as any adverse judgment that might be rendered could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, if any claims or actions are asserted
against the Company, the Company may choose or be required to obtain a license
under a third party's intellectual property rights. There can be no assurance
that under such

36
<PAGE> 41

circumstances a license would be available upon reasonable terms or at all. See
"Risk Factors -- Limitations on Protection of Intellectual Property and
Proprietary Rights."

Certain technology used by the Company's products is licensed from third
parties, generally on a nonexclusive basis. The Company believes that there are
alternative sources for each of the material components of technology licensed
by the Company from third parties. However, the termination of any of such
licenses, the failure of the third party licensors to adequately maintain or
update their products, or the substantial increase in the license fee associated
with such licenses, could result in delay in the Company's ability to deliver
certain of its products while it seeks to implement technology offered by
alternative sources and may adversely affect the Company's business, financial
condition and results of operations. Any required replacement licenses could
prove costly. Also, any such delay, to the extent it becomes extended or occurs
at or near the end of a quarter, could result in a material adverse effect on
the Company's quarterly results of operations. While it may be necessary or
desirable in the future to obtain other licenses relating to one or more of the
Company's products or relating to current or future technologies, there can be
no assurance that the Company will be able to do so on reasonable terms or at
all. See "Risk Factors -- Dependence upon Third Party Licensing."

EMPLOYEES

As of March 31, 1996, the Company had 144 employees, consisting of 42 in
engineering services, 45 in sales and marketing, 37 in research and development
and 20 in general and administrative capacities. Of these, 93 are located at the
Company's headquarters in Ann Arbor, Michigan, 12 are located at the Company's
offices in Atlanta, Chicago, Cincinnati, Los Angeles, Londonderry, New Hampshire
and Phoenix and 39 are located at the Company's European subsidiaries. None of
the Company's employees is represented by a labor union or is subject to a
collective bargaining agreement. The Company believes that its relations with
its employees are good.

The Company's success depends in large part upon the continued service of
its key technical and senior management personnel. The Company's success also
depends on its continuing ability to attract and retain highly qualified
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that the Company can retain its key managerial and
technical employees or that it can attract, assimilate or retain other highly
qualified personnel in the future. If the Company is unable to hire the
necessary technical personnel, the development of new products could be
impaired. The Company's inability to attract, assimilate or retain personnel in
the future on a timely basis could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Dependence on Key Personnel; Management of Expanding Operations."

FACILITIES

The Company occupies approximately 36,000 square feet of space at its
headquarters in Ann Arbor, Michigan under a lease expiring in 1999 (subject to
the Company's right to extend the lease for one successive term of five years).
The Company also leases sales offices in Chicago, Cincinnati, Los Angeles,
Londonderry, New Hampshire, France, Sweden, England, Germany and Italy. The
Company believes that its existing facilities are adequate for its current needs
and that suitable additional space will be available as needed.

37
<PAGE> 42

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The directors, executive officers and key employees of the Company are
listed below. Directors are elected by the shareholders to staggered three year
terms subject to the provisions of the Company's Bylaws.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Michael E. Korybalski............. 49 President, Chief Executive Officer and Chairman of the
Board
Robert R. Ryan.................... 38 Executive Vice President and Chief Operating Officer
James E. Vincke................... 40 Vice President and Chief Financial Officer
John C. Angell.................... 47 Vice President, Chief Technical Fellow and Director
James D. Price.................... 41 Vice President -- Marketing
Patrick Ryan Turner............... 37 Vice President -- Product Development
H. Allan Larkin................... 50 Vice President -- North American Sales
Raymond J. Gaynor................. 47 Managing Director, Asia-Pacific Operations
Michael Hoffmann.................. 39 Managing Director, European Operations
Herbert S. Amster(1)(2)........... 61 Director
Joseph F. Gloudeman(2)............ 60 Director
David E. Cole(1).................. 58 Director
Mitchell I. Quain................. 44 Director
</TABLE>

- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

Michael E. Korybalski, a co-founder of MDI, has served as President, Chief
Executive Officer and as a member of the Board of Directors of the Company since
1984. From 1977 to 1984, Mr. Korybalski served as Vice President and General
Manager of the Company. From 1973 to 1977, he was employed as a product engineer
with Ford Motor Company. Mr. Korybalski holds B.S.E. and M.S.E. degrees in
mechanical engineering, as well as an M.B.A., from the University of Michigan.

Robert R. Ryan has served as the Company's Executive Vice President and
Chief Operating Officer since 1991. From 1988 through 1991, Dr. Ryan served as
the Company's Vice President of Product Development. Dr. Ryan was an Assistant
Professor at the University of Michigan from 1986 to 1988, and was a project
engineer at Structural Dynamics Research Corporation, a design software company
from 1981 to 1983. He holds a B.S. from the University of Cincinnati and a M.S.
and Ph.D. in applied mechanics from Stanford University.

James E. Vincke has served as a Vice President and as Chief Financial
Officer of the Company since February 1989 and has served in various positions
with the Company since 1979. Mr. Vincke holds B.S.E. and M.S.E. degrees in
mechanical engineering, as well as an M.B.A., from the University of Michigan.

John C. Angell, a co-founder of MDI, has served as a Vice President and as
Chief Technical Fellow of the Company since 1977. Mr. Angell holds B.S.E. and
M.S.E. degrees in mechanical engineering from the University of Michigan.

James D. Price has served as Vice President -- Marketing of the Company
since 1988. Mr. Price was a Manager of Marketing at NEC Information Systems, a
computer company, from 1987 to 1988 and a Director of Third Party Marketing at
Computervision Corporation, a design software company, from 1983 to 1987. He
holds a B.A. from Oberlin College and an M.B.A. from Stanford University.

Patrick Ryan Turner has served as Vice President -- Product Development of
the Company since 1993. From 1989 to 1993, Mr. Turner was employed by the
Company as the Manager of the Preview Group and, more recently, the Director of
Interface Products. Mr. Turner holds a B.S. in Mechanical Engineering from

38
<PAGE> 43

Michigan Technological University and a M.S. in Mechanical Engineering from the
Massachusetts Institute of Technology.

H. Allan Larkin has served as the Company's Vice President -- North
American Sales since 1994. From 1978 through 1994, Mr. Larkin was an employee at
Schlumberger Technologies, Inc., a design software company (now Applicon, Inc.),
most recently serving as regional director of sales.

Raymond J. Gaynor has served as the Company's Managing Director,
Asia/Pacific Operations since 1995. From 1989 through 1995, Mr. Gaynor served as
the Company's Director of International Sales. From 1983 through 1988, he was an
employee at Schlumberger Technologies, Inc. (now Applicon, Inc.) serving as
Manager of Major Accounts Marketing and as Product Marketing Manager.

Michael Hoffmann has served as the Company's Managing Director, European
Operations since 1994. From 1993 through 1994, Dr. Hoffmann served as Managing
Director of TEDAS Mechanical Systems GmbH, a shareholder of the Company. From
1991 through 1992, he served as Technical Director of TEDAS GmbH. Dr. Hoffmann
holds bachelor and doctorate degrees in civil engineering from the Technological
University of Darmstadt.

Herbert S. Amster has served as a member of the Company's Board of
Directors since 1990. He is now an independent management consultant. Mr. Amster
was Chairman of the Board and Chief Executive Officer of Irwin Magnetic Systems,
Inc., a manufacturer of minicartridge tape drives, from 1985 through 1989;
Senior Vice President Corporate Development, and a director, of Cipher Data
Products Incorporated, from 1989 through 1990; and Senior Vice President
Corporate Development, of Archive Corporation, since 1990. He is currently also
a director of Jacobson Stores, Inc., TriMas Corporation and First of America
Bank -- Michigan.

Joseph F. Gloudeman has served as a member of the Company's Board of
Directors since 1993. Dr. Gloudeman has served as President of Gloudeman
Consulting, a high-tech consulting firm, since 1992; as Chairman of the Board,
since 1992, and President, USA Operations, since 1994, of R.O.S.E. Informatik
GmbH, a German software company; as President and Chief Executive Officer of
MacNeal Schwendler Corporation; and as Vice President, Marketing for CRAY
Research-Supercomputer, in 1992.

David E. Cole has served as a member of the Company's Board of Directors
since 1995. Dr. Cole has served as the President of Applied Theory Inc., an
automotive consulting firm since 1979, as Director of the Office for the Study
of Automotive Transportation, University of Michigan Transportation Research
Institute, since 1978 and as an Associate Professor of Mechanical Engineering
and Applied Mechanics at the University of Michigan since 1971. He is currently
also a director of APX International and Thyssen U.S., a subsidiary of Thyssen
AG.

Mitchell I. Quain has served as a member of the Company's Board of
Directors since 1996. He has been employed at Schroder Wertheim & Company, an
investment banking company, since 1975 where he currently serves as Managing
Director, Head of Equity Capital Markets. Mr. Quain is also a director of Allied
Products Corporation and Strategic Distribution.

BOARD COMMITTEES

The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee, currently composed of Mr. Amster and Dr. Gloudeman,
makes recommendations to the Board concerning salaries and incentive
compensation for the Company's officers and employees and administers the
Company's Employee Stock Purchase Plan and the Company's 1996 Stock Incentive
Plan for Key Employees. The Audit Committee, currently composed of Mr. Amster
and Dr. Cole, makes recommendations to the Board of Directors concerning the
appointment of independent auditors and reviews the Company's accounting
principles, policies and reporting practices, aids management in the
establishment and supervision of the Company's financial controls, discusses the
Company's financial controls with the independent auditors and reviews the scope
and results of audits and other accounting-related services and fees.

39
<PAGE> 44

DIRECTOR COMPENSATION

Each non-employee member of the Company's Board of Directors is paid $1,000
per month and reimbursed for out-of-pocket expenses incurred in attending Board
meetings. Each non-employee director is also eligible to receive annual stock
option awards for 5,000 shares of the Company's Common Stock under the Company's
Non-Employee Director Stock Option Plan. See "Management -- Stock Incentive
Plans."

CLASSIFIED BOARD OF DIRECTORS

The Company's Restated Articles and Restated Bylaws provide that there are
three classes of directors and that directors will serve three-year terms, with
approximately one-third of the Board of Directors standing for election each
year. Class I is composed of Mr. Korybalski and Mr. Quain whose terms expire at
the annual meeting of shareholders in 1997; Class II is composed of Mr. Angell
and Dr. Cole whose terms expire at the annual meeting of shareholders in 1998;
and Class III is composed of Mr. Amster and Dr. Gloudeman whose terms expire at
the annual meeting of shareholders in 1999. The term of office of one class of
directors expires each year in rotation so that one class is elected at each
annual meeting of shareholders for a full three-year term. Directors may be
removed with cause by vote of the holders of a majority of the shares of the
Company's stock entitled to vote at an election of directors. Approval by at
least 80% of the outstanding shares of the Company's voting stock is required to
amend or repeal this provision.

With a classified Board of Directors, it will generally take the
shareholders two annual meetings to elect a majority of the Board of Directors.
As a result, the classified Board of Directors may discourage attempts to
acquire significant minority interests in the Company because these provisions
could operate to prevent other people from obtaining control of the Board of
Directors in a relatively short period of time. For the same reasons, the
classified Board of Directors may also deter tender offers or other takeover
attempts which some or a majority of holders of shares of the Common Stock may
deem to be in their best interests. See "Risk Factors--Effect of Certain
Anti-Takeover Provisions."

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Company's Restated Articles generally limit the personal liability of
directors for monetary damages for breaches of fiduciary duty. If a director
were to breach such duty in performing his or her duties as a director, neither
the Company nor its shareholders could recover monetary damages from the
director, and the only course of action available to the Company's shareholders
would be to seek equitable remedies, such as an action to enjoin or rescind a
transaction involving a breach of fiduciary duty. To the extent claims against
directors are limited to equitable remedies, the provision in the Restated
Articles may reduce the likelihood of derivative litigation and may discourage
shareholders or management from initiating litigation against directors for
breach of their fiduciary duty. In addition, the Company's Restated Articles
generally limit the personal liability of directors for monetary damages for
breaches of fiduciary duty. The Company also maintains directors' and officers'
liability insurance providing coverage in the amount of $5 million. The Company
also has agreements with its directors providing for indemnification and
advancement of expenses.

The Company's Restated Bylaws generally provide that the Company will
indemnify its and its subsidiaries' directors and officers to the fullest extent
authorized or permitted under the MBCA and that the Company will make
advancements of expenses at the request of a director or officer.

40
<PAGE> 45

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation of
the Company's Chief Executive Officer and the Company's four other most highly
compensated executive officers whose total annual salary and bonus in 1995
exceeded $100,000:

SUMMARY COMPENSATION TABLE
FOR YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($)*
- ---------------------------------------------------------- ---------- --------- -----------------
<S> <C> <C> <C>
Michael E. Korybalski..................................... 158,000 57,916 3,678
President and Chief Executive Officer
Robert R. Ryan............................................ 135,000 35,368 2,565
Executive Vice President and Chief Operating Officer
James D. Price............................................ 85,000 80,959 2,107
Vice President -- Marketing
H. Allan Larkin........................................... 95,000 54,224 2,779
Vice President -- North American Sales
Patrick Ryan Turner....................................... 90,000 37,058 2,485
Vice President -- Product Development
</TABLE>

- ---------------
* Consists of matching contributions by the Company under the Company's 401(k)
plan and life insurance premiums paid by the Company for the benefit of the
named executive officer. The amounts representing 401(k) plan contributions
are $2,310 for Mr. Korybalski, $2,141 for Dr. Ryan, $1,522 for Mr. Price,
$1,657 for Mr. Larkin and $1,690 for Mr. Turner. The amounts representing life
insurance premiums are $1,368 for Mr. Korybalski, $424 for Dr. Ryan, $585 for
Mr. Price, $1,122 for Mr. Larkin and $795 for Mr. Turner.

OPTION GRANTS

There were no grants of stock options by the Company in 1995 to any of the
individuals named in the Summary Compensation Table.

YEAR-END OPTION TABLE

The following table sets forth information regarding stock options
exercised during 1995 and stock options held as of December 31, 1995 by the
individuals named in the Summary Compensation Table:

AGGREGATED OPTION EXERCISES IN 1995
AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON OPTIONS AT OPTIONS AT
EXERCISE VALUE DECEMBER 31, 1995 DECEMBER 31, 1995
NAME (#) REALIZED ($)(1) EXERCISABLE/UNEXERCISABLE (#) EXERCISABLE/UNEXERCISABLE ($)(2)
- ----------------------- ----------- --------------- ----------------------------- --------------------------------
<S> <C> <C> <C> <C>
Michael E.
Korybalski........... -- -- --/-- --/--
Robert R. Ryan......... -- -- --/-- --/--
James D. Price......... -- -- --/-- --/--
H. Allan Larkin........ 7,500 10,125 15,000/-- 131,325/--
Patrick Ryan Turner.... 11,250 3,825 11,250/-- 98,494/--
</TABLE>

- ---------------
(1) "Value Realized" represents the fair market value of the underlying
securities on the exercise date minus the aggregate exercise price of such
options.

(2) Calculated on the basis of the fair market value of the underlying
securities at December 31, 1995 of $9.00 per share, minus the aggregate
exercise price.

41
<PAGE> 46

STOCK INCENTIVE PLANS

Mechanical Dynamics, Inc. 1995 Amended and Restated Stock Purchase Plan

The Company's 1995 Amended and Restated Stock Purchase Plan (the "1995
Plan") was originally adopted by the Board of Directors in 1983. A total of
1,312,500 shares of Common Stock have been reserved for issuance under the 1995
Plan. As of March 31, 1996, there were 15,000 shares subject to options under
the 1995 Plan, which options expire in 1996 and 1997. The purchase price of such
shares is $0.25 per share. The 1995 Plan was terminated by the Board of
Directors in March 1996.

Mechanical Dynamics, Inc. 1993 Stock Option Plan

The Company's 1993 Stock Option Plan (the "1993 Plan") was adopted by the
Board of Directors in 1983. A total of 187,500 shares of Common Stock have been
reserved for issuance under the 1993 Plan. As of March 31, 1996, there were
approximately 61,671 shares subject to options under the 1993 Plan, which
options expire in April 1998. The exercise price per share of such options is
$0.93. The 1993 Plan was terminated by the Board of Directors in March 1996.

Mechanical Dynamics, Inc. Employee Stock Purchase Plan

The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors in March 1996. A total of 300,000
shares of Common Stock are reserved for issuance under the Purchase Plan. The
Purchase Plan provides that the Company will sell shares to employees who elect
to participate in the Purchase Plan (the "Participants") at a price equal to 85%
of the lesser of the fair market value of the Common Stock on (i) the first
trading day of an offering period (a "Purchase Period") or (ii) the last trading
day of such Purchase Period. The first Purchase Period will commence on the
effective date of the Offering, and will end on December 31, 1996. Thereafter,
each Purchase Period will be three months in length and will begin on January 1,
April 1, July 1 and October 1 of each year. The Purchase Plan is intended to
qualify as an "employee stock purchase plan" as defined in Section 423 of the
Code.

If a Participant ceases to be an employee of the Company for any reason
during a Purchase Period, his or her outstanding purchase right will immediately
terminate, and all sums previously collected from such Participant during such
Purchase Period under the terminated purchase right will be refunded. A
Participant may withdraw from the Purchase Plan by filing a form electing to
withdraw prior to 15 days before the beginning of the next Purchase Period.

The Purchase Plan is administered by the Compensation Committee of the
Board of Directors. The Compensation Committee determines the commencement and
termination date of the offering of Common Stock under the Purchase Plan and is
authorized, among other things, to interpret the terms of the Purchase Plan,
establish and revoke rules for the administration of the Purchase Plan and
correct or reconcile any defect or inconsistency in the Plan. The Compensation
Committee may terminate or amend the Purchase Plan at any time; provided,
however, such termination or amendment may not affect or change purchase rights
previously granted under the Purchase Plan without the consent of the affected
Participant, and any amendment that materially increases the benefits or number
of shares under the Purchase Plan (except for certain allowable adjustments in
the event of changes to the Company's capital structure or for changes
authorized by the Purchase Plan to be made by the Compensation Committee or the
Plan Administrator) or materially modifies the eligibility requirements of the
Purchase Plan is subject to shareholder approval. If not sooner terminated by
the Compensation Committee, the Purchase Plan will terminate at the time
purchase rights have been exercised with respect to all shares of Common Stock
reserved for grant under the Purchase Plan.

1996 Stock Incentive Plan For Key Employees

The Company's Board of Directors adopted the 1996 Stock Incentive Plan For
Key Employees (the "Stock Option Plan") in March 1996. Under the Stock Option
Plan, options will be granted or restricted stock will be awarded for the
purpose of attracting and motivating key employees of the Company. The Stock
Option Plan will be administered by the Compensation Committee of the Board of
Directors. A total of

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<PAGE> 47

450,000 shares of Common Stock are reserved for issuance under the Stock Option
Plan. The Stock Option Plan provides for (i) the grant of "incentive stock
options" within the meaning of Section 422 of the Code, (ii) the grant of
"nonqualified stock options" (options which do not meet the requirements of
Section 422), and (iii) the award of restricted stock, which grants or awards
may be made to key employees of the Company. The Compensation Committee will
determine which key employees will be granted options or awarded restricted
stock, the number of options granted or shares awarded and other terms and
conditions applicable to each grant or award.

The Board of Directors may amend or revise the terms of the Stock Option
Plan; provided, however, without the approval or ratification of the
shareholders the Board may not (i) increase the maximum number of shares subject
to the Stock Option Plan, (ii) increase the maximum number of shares for which
any participant may be granted options or awards under the Stock Option Plan,
(iii) change the class of persons eligible to be participants, or (iv)
materially increase the benefits of any participant. In addition, without the
consent of the holder thereof, no amendment or revision alter or impair any
option or award previously granted or awarded under the Stock Option Plan.

Under the terms of the Stock Option Plan, the exercise price of an
incentive stock option will be not less than the fair market value of the Common
Stock at the time of the grant (or not less than 110% of the fair market value
if the optionee owns more than 10% of the total combined voting stock of the
Company or any parent or subsidiary of the Company (a "10% Holder") at the time
of grant). The exercise price of nonqualified options will not be less than 75%
of the fair market value of the stock on the date the option is granted. If an
optionholder ceases to be an employee for any reason other than death or
disability, the Compensation Committee may, in its discretion, permit the
exercise of such options for a period not to exceed three months following the
termination of employment. The Compensation Committee may, in its discretion,
permit the exercise of nonqualified options held by a terminated optionholder
for a period not to extend beyond the expiration date of such nonqualified
option. No option under the Stock Option Plan may be exercised more than ten
years after its date of grant. In the case of an incentive option granted to a
10% Holder, such option will expire not more than five years after its date of
grant.

Restricted stock awarded under the Stock Option Plan typically will be
subject to vesting and unvested shares awarded to a participant will be
forfeited and transferred back to the Company if the participant ceases to be
employed by the Company for any reason other than death or permanent disability.
If the participant is terminated by action of the Company without cause or by
agreement of the Company and the participant, the Compensation Committee may, at
its discretion, release some or all of the shares from the restrictions. If a
participant ceases to be an employee of the Company because of death or
permanent disability, the restrictions will lapse with respect to such shares,
unless otherwise determined by the Compensation Committee.

In April 1996, 43 employees of the Company were granted options to purchase
an aggregate of 82,500 shares of the Company's Common Stock. These options all
become fully exercisable in April 1997 at $9.00 per share and expire in April
2001.

Non-Employee Director Stock Option Plan

The Company's Board of Directors adopted the Non-Employee Director Stock
Option Plan (the "Director Stock Option Plan") in March 1996. The Director Stock
Option Plan provides for the grant of "nonqualified" options to purchase shares
of Common Stock. In April 1996, all four non-employee directors on the Company's
Board of Directors were each granted an option to purchase 5,000 shares of
Common Stock of the Company at an exercise price equal to the per share price to
the public in connection with this Offering. These options become fully
exercisable one year from the date of grant, April 1997, and expire in April
2001. Immediately following each annual meeting of shareholders of the Company,
each non-employee director who has served as a director for at least six months
will automatically be granted an option to purchase 5,000 shares of Common Stock
of the Company. Upon appointment to the Board of Directors, each newly-appointed
non-employee director will receive an option to purchase 5,000 shares of Common
Stock of the Company. A total of 100,000 shares of Common Stock are reserved for
issuance under the Director Stock Option Plan.

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<PAGE> 48

The exercise price of any option will be equal to the market price of the
Common Stock at the time of grant. Each option, if not sooner terminated as
provided in the Director Stock Option Plan, will have a five-year term from the
date of grant and will vest and become exercisable in full on the first
anniversary of the date of grant. Options granted under the Plan are generally
not transferable during the holder's lifetime, but are transferable at death by
will or by the laws of descent and distribution. Upon the death of an
optionholder, all options granted to such optionholder will immediately vest and
will terminate twelve months thereafter. If an optionholder ceases his or her
service as a director of the Company due to disability, all options granted to
such optionholder will immediately vest and will terminate 90 days thereafter.
Upon an optionholder ceasing his or her service as a director for any other
reason, such options will terminate 90 days thereafter.

The Director Stock Option Plan provides that in the event of a change in
control of the Company (defined as any person or other entity which becomes the
beneficial owner, directly or indirectly, of more than 50% of the total combined
voting power of all classes of capital stock of the Company entitled to vote for
the election of directors of the Company), all outstanding options under the
Director Stock Option Plan will become immediately vested and exercisable.

Mechanical Dynamics, Inc. 401(k) Plan and Trust

The Company maintains a 401(k) plan covering substantially all of its
employees. Under the plan, the Company provides matching contributions equal to
25% of qualified employee contributions up to a maximum of 1.5% of each
employee's eligible compensation. In 1993, 1994 and 1995, the Company
contributed $47,000, $59,000 and $71,000, respectively, to the plan. Beginning
in January 1996, the Company will match 40% of qualified employee contributions
up to a maximum of 2.4% of eligible compensation.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with several of its
executive officers.

Michael E. Korybalski entered into an employment agreement with the Company
dated as of April 1, 1994, and amended as of March 1, 1995 and as of March 1,
1996. The agreement provides that Mr. Korybalski will serve as the Company's
President and Chief Executive Officer until March 31, 1999, at which point the
employment agreement can be extended at the option of the Company for an
additional three-year term. Mr. Korybalski's base salary under the agreement for
1995 was $158,000. Mr. Korybalski's employment may be terminated by the Company
with or without cause. Mr. Korybalski's base salary is determined by the Board
of Directors on an annual basis. In the event the Board chooses to change his
duties or directs him to relocate, or if he is terminated without cause, Mr.
Korybalski would then be entitled to his base salary, bonus and benefits for a
period equal to the longer of the remaining term of the agreement or one year
from the date of his resignation. In the event he is terminated with cause, then
he would be entitled to receive only such payments and/or benefits as would be
provided to other employees of the Company in accordance with the Company's
employee policies and procedures. In the event of a change of control, the
agreement is automatically extended through a date three years from the
effective date of such change in control. In the event Mr. Korybalski is
terminated in connection with a change in control, then the Company will pay
severance benefits under the same formula as in the event of termination without
cause. During the term of the agreement, and for a period of two years
thereafter, Mr. Korybalski will be subject to noncompetition and nonsolicitation
restrictions.

The Company's Executive Vice President and Chief Operating Officer, Robert
R. Ryan, entered into an employment agreement with the Company dated as of April
1, 1994, as amended March 1, 1995 and as of March 1, 1996, pursuant to which he
will serve in such capacities until March 31, 1998, at which point the
employment agreement can be extended at the option of the Company for an
additional two-year term. Dr. Ryan's base salary under the agreement for 1995
was $135,000. Dr. Ryan's base salary is determined by the Board of Directors on
an annual basis. Dr. Ryan's employment may be terminated by the Company with or
without cause. In the event the Board chooses to change his duties or directs
him to relocate, or if he is terminated without cause, Dr. Ryan would then be
entitled to his base salary, bonus and benefits for a period equal to the longer
of the remaining term of the agreement or one year from the date of his
resignation. In the

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<PAGE> 49

event he is terminated with cause, then he would be entitled to receive only
such payments and/or benefits as would be provided to other employees of the
Company in accordance with the Company's employee policies and procedures. In
the event of a change of control, the agreement is automatically extended
through a date three years from the effective date of such change in control. In
the event Dr. Ryan is terminated in connection with a change in control, then
the Company will pay severance benefits under the same formula as in the event
of termination without cause. During the term of the agreement, and for a period
of two years thereafter, Dr. Ryan will be subject to noncompetition and
nonsolicitation restrictions.

James D. Price, the Company's Vice President -- Marketing, H. Allan Larkin,
the Company's Vice President -- North American Sales and Patrick Ryan Turner,
the Company's Vice President -- Product Development, have entered into
employment agreements with the Company as of April 1, 1994, as amended as of
March 1, 1995 and as of March 1, 1996. While the 1995 base salaries of Mr.
Price, Mr. Larkin and Mr. Turner were $85,000, $95,000 and $90,000,
respectively, and each employee's bonus (based on the Company's operating
results and/or individual performance) varied, all of the other material terms
of their employment agreements with the Company were identical. These agreements
each terminate March 31, 1997, can be extended at the option of the Company and
provide that the employee may be terminated with or without cause. In the event
the employee is terminated without cause, the employee is entitled to his
salary, all fringe benefits and pro rata bonus, if applicable, in effect at the
date of the employee's termination, for a period equal to the greater of six
months from the date of termination or the remaining term of his agreement. In
the event the employee is discharged for cause, or if the employee voluntarily
resigns or retires, then the employee is entitled to receive only such payments
and/or benefits as would be provided to other employees of the Company under
similar circumstances. Upon a change in control, each agreement will
automatically be extended through a date one year from the effective date of
such change of control. During the terms of these agreements, and for a period
of two years thereafter, each of the employees will be subject to
noncompensation and nonsolicitation restrictions.

CERTAIN TRANSACTIONS

For a description of the compensation of certain officers of the Company,
employment agreements between certain officers and the Company and the
eligibility of the Company's officers and directors to participate in the
Company's employee benefit plans, see "Management -- Executive Compensation,"
"-- Director Compensation" and "-- Stock Incentive Plans."

For a description of limitations of liability applicable to the Company's
officers and directors and indemnification arrangements, see
"Management -- Limitation of Liability and Indemnification."

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<PAGE> 50

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the shares of Common Stock of the Company as of the date of this
Prospectus, and as adjusted to reflect the sale of the shares offered hereby,
(i) by each of the executive officers of the Company, (ii) by each of the
Company's directors, (iii) by each person who is known by the Company to own
beneficially more than 5% of the shares of Common Stock, (iv) by all executive
officers and directors, as a group, and (v) by all other Selling Shareholders:

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
HELD PRIOR TO HELD AFTER
OFFERING(1) SHARES OFFERING(1)
----------------------- BEING -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------- --------- ------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Michael E. Korybalski.................. 976,785 25.2 94,663 882,122 16.4
John C. Angell......................... 431,040 11.1 43,000 388,040 7.2
Robert R. Ryan......................... 236,250 6.1 20,000 216,250 4.0
James D. Price......................... 210,000 5.4 21,000 189,000 3.5
James E. Vincke........................ 191,897(2) 4.9 9,000 182,897 3.4
Patrick R. Turner...................... 78,000 2.0 -- 78,000 1.4
Herbert S. Amster...................... 75,930 2.0 -- 75,930 1.4
Mitchell I. Quain...................... 68,592(3) 1.6 -- 68,592 1.3
Joseph F. Gloudeman.................... 38,430(4) * -- 38,430 *
H. Allan Larkin........................ 22,500(5) * -- 22,500 *
David E. Cole.......................... 12,000 * -- 12,000 *
All directors and executive officers as
a group (11 persons)................. 2,341,424 59.9 187,663 2,153,761 39.8
OTHER SELLING SHAREHOLDERS:
Doris Angell........................... 408,750 10.5 408,750 -- --
Rajiv Rampalli......................... 129,997(6) 3.3 13,000 116,997 2.2
James Silverman........................ 98,194(7) 2.5 1,000 97,194 1.8
James McConville....................... 91,561(8) 2.4 9,000 82,561 1.5
Onset BIDCO............................ 81,060 2.1 81,060 -- --
Tedas GmbH............................. 75,649 1.9 75,649 -- --
Mark Palmieri.......................... 69,040 1.8 10,000 59,040 1.1
Howard Wikel........................... 58,030 1.5 58,030 -- --
Raymond Gaynor......................... 40,719 1.0 3,000 37,719 *
Leanne Chaka........................... 32,085 * 8,000 24,085 *
James Molnar........................... 21,208 * 2,000 19,208 *
Sandra Reich........................... 15,525 * 8,000 7,525 *
Steven Harris.......................... 7,314 * 1,000 6,314 *
Gary Gatien............................ 3,000 * 500 2,500 *
Janet Adkins........................... 2,925 * 2,925 -- --
Dolores Hayes.......................... 2,283 * 1,000 1,283 *
Tonia Voss............................. 1,362 * 1,362 -- --
Allen Schuerholz....................... 1,023 * 1,023 -- --
David and Toni Voss.................... 1,023 * 800 223 *
Henry Vincke (9)....................... 1,000 * 600 400 *
Bruce Hudd............................. 1,000 * 400 600 *
Michael Bartels........................ 238 * 238 -- --
</TABLE>

- ---------------
* Represents less than one percent.

(footnotes continued on next page)

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<PAGE> 51

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options or warrants held by that person
that are currently exercisable, or will become exercisable within 60 days
of the date of this Prospectus, are deemed outstanding. Such shares,
however, are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Unless otherwise indicated in the
footnotes to this table, the persons and entities named in the table have
sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Each individual listed in the above table can be contacted c/o Mechanical
Dynamics, Inc., 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105.

(2) Includes 21,937 shares subject to options exercisable within 60 days of the
date of this Prospectus.

(3) Includes 68,592 shares held by trusts of which Mr. Quain holds voting power
as the trustee.

(4) Includes 20,430 shares held by a trust of which Dr. Gloudeman holds voting
power as the trustee.

(5) Includes 7,500 shares subject to options exercisable within 60 days of the
date of this Prospectus.

(6) Includes 9,997 shares subject to options exercisable within 60 days of the
date of this Prospectus.

(7) Includes 19,500 shares subject to options exercisable within 60 days of the
date of this Prospectus.

(8) Includes 10,237 shares subject to options exercisable within 60 days of the
date of this Prospectus.

(9) Henry Vincke is the father of James E. Vincke; however, James E. Vincke
disclaims any beneficial ownership of Henry Vincke's shares.

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<PAGE> 52

DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 15,000,000 shares of Common Stock, no par value per
share, and 1,000,000 shares of preferred stock, no par value per share. The
following description of the capital stock of the Company does not purport to be
complete or to give full effect to Michigan statutory or common law and is, in
all respects, qualified by reference to the applicable provisions of the MBCA
and the Company's Restated Articles and Restated Bylaws.

COMMON STOCK

As of March 31, 1996, there were 3,879,637 shares of Common Stock
outstanding held of record by approximately 94 shareholders. Holders of shares
of Common Stock have no preemptive, redemption, conversion or sinking fund
rights. Holders of shares of Common Stock are entitled to one vote per share on
all matters submitted to a vote of holders of shares of Common Stock and do not
have any cumulative voting rights. In the event of a liquidation, dissolution or
winding-up of the Company, the holders of shares of Common Stock are entitled to
share equally and ratably in the assets of the Company, if any, remaining after
the payment of all debts and liabilities of the Company, subject to prior
liquidation rights of any outstanding shares of preferred stock. The outstanding
shares of Common Stock are, and the shares offered by the Company hereby when
issued will be, fully paid and nonassessable. Additional authorized but unissued
shares of Common Stock may be issued by the Board of Directors of the Company
without the approval of the shareholders. Holders of shares of Common Stock
participate ratably in such dividends and other distributions, if any, as may be
declared by the Board of Directors out of funds legally available for such
purposes, subject to the rights of any outstanding shares of preferred stock.
See "Dividend Policy." The rights, preferences and privileges of holders of
Common Stock are subject to and may be adversely affected by the rights of
holders of any series of preferred stock which the Company may designate and
issue in the future.

PREFERRED STOCK

The Board of Directors is permitted to issue 1,000,000 authorized shares of
preferred stock without shareholder approval in one or more series and to fix
the designations, preferences, powers and relative, participating, optional or
other rights and restrictions thereof, including without limitation, the
dividend rate, conversion rights, voting rights, redemption price and
liquidation preference, to fix the number of shares constituting any such series
and to increase and decrease the number of shares of such series. The Company
has no present plans to issue any preferred shares.

ANTITAKEOVER LEGISLATION AND PROVISIONS OF THE ARTICLES AND BYLAWS

Chapters 7A and 7B of the MBCA may affect attempts to acquire control of a
company. In general, under Chapter 7A, "Business Combinations" (defined to
include, among other transactions, certain mergers, substantial sales of assets
or securities and recapitalizations) between covered Michigan business
corporations or their subsidiaries and an "Interested Shareholder" (generally
defined as a direct or indirect beneficial owner of 10% or more of the voting
power of the corporation's outstanding shares) can only be consummated if
approved by at least 90% of the votes of each class of the corporation's shares
entitled to vote and by at least two-thirds of such voting shares not held by
the Interested Shareholder, its affiliates and associates. These requirements do
not apply, however, where the Interested Shareholder satisfies certain price,
form of consideration and other requirements and at least five years have
elapsed after the person involved became an Interested Shareholder. The Board of
Directors has the power to elect to be subject to Chapter 7A as to specifically
identified or unidentified Interested Shareholders.

Generally, under Chapter 7B, an entity that acquires "Control Shares" of a
company may vote the Control Shares on any matter only if a majority of all
shares, and of all shares that are not "Interested Shares," of each class of
shares entitled to vote as a class, approve such voting rights. In general,
"Interested Shares" are shares owned by employee-directors of the company, its
officers or the entity making the "Control Share Acquisition." "Control Shares"
are shares that, when added to those already owned by an entity, would give

48
<PAGE> 53

the entity voting power in the election of directors over any of three
thresholds: one-fifth, one-third and a majority of such voting power. If Control
Shares acquired in a Control Share Acquisition are accorded full voting rights
and the acquiror of such Control Shares has acquired a majority of all voting
power of the company, Chapter 7B would afford special dissenters' rights to the
company shareholders other than the acquiring person, unless otherwise provided
in the articles of incorporation or bylaws before the Control Share Acquisition
occurs. The effect of the statute is to condition the acquisition of voting
control of the company on the approval of a majority of the pre-existing
disinterested shareholders. The board of directors has the option of choosing to
amend the company's bylaws before a Control Share Acquisition occurs to provide
that Chapter 7B does not apply to the company.

Certain provisions of the Company's Restated Articles and Restated Bylaws
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control of the
Company through either a tender offer or a proxy contest for the election of
directors. Such provisions could also limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common Stock.
The Restated Articles and the Restated Bylaws contain provisions which (i)
classify the Board of Directors into three classes as nearly equal in numbers as
possible, and provide that each director will serve for three years with
directors in only one class being elected each year, and (ii) permit the Board
of Directors to issue up to 1,000,000 shares of preferred stock in one or more
series and to fix the number of shares, and the voting powers and all other
rights and preferences of any such series, without any further vote or action by
the Company's shareholders. The approval by at least 80% of the outstanding
shares of the Company's voting stock is required to amend or repeal the
provision in the Restated Articles for the classified Board of Directors. In
addition, the Company's Restated Bylaws provide that: (i) special meetings of
shareholders may be called by the Chief Executive Officer, the Board of
Directors or a majority of the shareholders entitled to vote at the meeting; and
(ii) directors may be removed only with cause, by a vote of the holders of a
majority of the shares entitled to vote at an election of directors. All of the
above-described provisions may have the effect of delaying or preventing a
change of control, which could adversely affect the market price of the
Company's Common Stock. See "Risk Factors -- Effect of Certain Anti-Takeover
Provisions."

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is American
Securities Transfer, Inc.

LISTING

The Company has applied to list the Common Stock on The Nasdaq National
Market under the trading symbol "MDII."

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<PAGE> 54

COMMON STOCK ELIGIBLE FOR FUTURE SALE

Prior to the Offering, there has not been any public market for the Common
Stock and there can be no assurance that a significant public market for the
Common Stock will be developed or be sustained after the Offering. Sales of
substantial amounts of Common Stock in the public market after the Offering, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities.

After the Offering, the Company will have outstanding 5,379,637 shares of
Common Stock. Of these shares, the 2,375,000 shares offered hereby will be
freely tradeable in the public market without restriction under the Securities
Act, unless such shares are held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act.

The remaining 3,004,637 shares of Common Stock outstanding upon completion
of the Offering will be "restricted securities" as that term is defined in Rule
144 ("Restricted Securities"). The Restricted Securities were issued and sold by
the Company in private transactions in reliance upon exemptions from
registration under the Securities Act. Restricted Securities may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration under Rules 144 or 701 under the Securities Act, which are
summarized below.

Pursuant to certain "lock-up" agreements, all of the executive officers,
directors and certain shareholders of the Company, who collectively hold an
aggregate of approximately 2,746,816 shares, have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of any such
shares for a period of 180 days from the date of this Prospectus. The Company
has also entered into an agreement with the representatives of the Underwriters
that it will not offer, sell or otherwise dispose of Common Stock for a period
of 180 from the date of this Prospectus, other than pursuant to existing stock
option plans.

As a result of these securities law restrictions and lock-up agreements,
the following Restricted Securities will be eligible for sale in the public
market following this Offering: (i) 6,000 shares will become saleable
immediately following the Offering pursuant to Rule 144(k); (ii) 118,426 shares
commencing on the date 90 days after the date of this Prospectus; (iii)
2,746,816 shares commencing on the date 180 days after the date of this
Prospectus; and (iv) 133,395 shares will become saleable, subject to various
restrictions under Rule 144, beginning June 1997.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares of the Company
are aggregated) who has beneficially owned Restricted Securities for at least
two years (including the holding period of any prior owner who is not an
affiliate of the Company) would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of (i) one percent of
the then outstanding shares of Common Stock (approximately 54,000 shares
immediately after the Offering), or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the filing of a Form
144 with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale and who has beneficially owned the shares proposed to be sold for at least
three years (including the holding period of any prior owner who is not an
affiliate of the Company) is entitled to sell such shares without complying with
the manner of sale, public information, column limitation or notice provisions
of Rule 144. Certain shares issued upon exercise of options granted by the
Company prior to the date of this Prospectus will also be available for sale in
the public market pursuant to Rule 701 under the Securities Act. Rule 701
permits resales of such shares in reliance upon Rule 144 but without compliance
with certain restrictions, including the holding period requirement, imposed
under Rule 144.

As of March 31, 1996, options to purchase a total of 76,671 shares of
Common Stock were outstanding under the Company's stock option plans. All of
such shares are subject to lock-up agreements for a period of 180 days from the
date of this Prospectus. In March 1996, the Board of Directors adopted, subject
to shareholder approval, the Purchase Plan, the Stock Option Plan and the
Director Stock Option Plan, under which an aggregate of 850,000 additional
shares have been reserved.

50
<PAGE> 55

The Company intends to file after the effective date of the Offering one or
more registration statements on Form S-8 to register the 850,000 shares of
Common Stock reserved for issuance under the Purchase Plan, the Stock Option and
the Director Stock Option Plan as well as the 76,761 shares subject to options
under the Company's 1995 Amended and Restated Stock Purchase Plan and the 1993
Stock Option Plan. Such registration statements will become effective
automatically upon filing. Shares issued under the foregoing plans, after the
filing of the respective registration statement on Form S-8, may be sold in the
open market, subject, in the case of certain holders, to the Rule 144
limitations applicable to affiliates, the above-referenced lock-up agreements
and vesting restrictions imposed by the Company.

51
<PAGE> 56

UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement (a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus is a part), the Underwriters named below, for which
Wessels, Arnold & Henderson, L.L.C., and SoundView Financial Group, Inc. are
acting as Representatives (the "Representatives"), have severally agreed to
purchase 2,375,000 shares of Common Stock from the Company in the amounts set
forth opposite their names:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Wessels, Arnold & Henderson, L.L.C. ......................................
SoundView Financial Group, Inc. ..........................................
---------
Total........................................................... 2,375,000
=========
</TABLE>

The Underwriters are obligated to take and pay for all of such shares if
any are taken. The Representatives have advised the Company that the
Underwriters propose initially to offer the Common Stock to the public on the
terms set forth on the cover page of this Prospectus. The Underwriters may allow
to selected dealers a concession of not more than $ per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the effective date of this Prospectus, to purchase up to
a maximum of 356,250 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares in approximately the same proportions as set forth in the
above table. The Underwriters may purchase such shares only to cover
over-allotments made in connection with this Offering.

The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters, and the Underwriters will
indemnify the Company and the Selling Shareholders, against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the indemnified party may be required to make in respect thereof.

The executive officers, directors and certain shareholders of the Company
have agreed not to directly or indirectly offer, sell, offer to sell, contract
to sell, grant an option to purchase, assign, encumber, transfer, grant a
security interest in, or otherwise dispose of any of their shares of Common
Stock, or any securities convertible into or exchangeable for any shares of
Common Stock, for a period of 180 days after the effective date of this
Prospectus without the prior written consent of Wessels, Arnold & Henderson,
L.L.C., except for bona fide gifts to donees who agree to be bound by such
agreement. The Company has agreed not to issue, sell, offer to sell, contract to
sell, grant options to purchase or otherwise dispose of any of the Company's
equity securities, or any other securities convertible into or exchangeable with
its Common Stock or other equity security, for a period of 180 days after the
effective date of this Prospectus without the prior written consent of Wessels,
Arnold & Henderson, L.L.C.; provided that the Company may, without such consent,
(i) issue shares of its Common Stock upon the exercise of options granted under
its employee and director stock option plans and (ii) grant options under its
employee and director stock option plans upon terms and in amounts consistent
with past practice. See "Common Stock Eligible for Future Sale and
"Management -- Stock Incentive Plans."

52
<PAGE> 57

Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price was determined by
negotiations among the Company and the Representatives. Among the factors
considered in such negotiations were the history of, and the prospects for, the
Company and the industry in which it competes, an assessment of the Company's
management, its past and present operations, its past and present earnings and
the trend of such earnings, the prospects for future earnings of the Company,
the present state of the Company's development, the general condition of the
securities markets at the time of the Offering and the market prices of publicly
traded common stocks of comparable companies in recent periods.

EXPERTS

The consolidated balance sheets as of December 31, 1994 and 1995, and the
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1995, included in this
Prospectus and elsewhere in this Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated by their
report with respect thereto, and are included in or incorporated by reference
herein in reliance on the authority of said firm as experts in accounting and
auditing. Reference is made to said report, which includes an explanatory
paragraph with respect to the change in the method of accounting for income
taxes as explained in Note 4 to Notes to Consolidated Financial Statements.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), in Washington, D.C., a Registration Statement on Form S-1
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the Rules and Regulations of the Commission. Statements made in the Prospectus
as to the contents of any contract, agreement or other document referred to are
not necessarily complete; with respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement, including exhibits and schedules filed therewith, may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549;
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center (13th Floor), New York, New York 10048.
Copies of such material may be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549.

LEGAL MATTERS

The legality of the shares offered hereby is being passed upon for the
Company by Honigman Miller Schwartz and Cohn, Detroit, Michigan, counsel for the
Company. Certain legal matters will be passed upon for the Underwriters by Gray
Cary Ware & Freidenrich, A Professional Corporation, Palo Alto, California.

53
<PAGE> 58

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS (AUDITED):
Report of Independent Public Accountants........................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995....................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and
1995............................................................................ F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
December 31, 1993, 1994 and 1995................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993,
1994 and 1995................................................................... F-6
Notes to Consolidated Financial Statements......................................... F-7
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996... F-16
Condensed Consolidated Statements of Income for the Three Months Ended March 31,
1995 and 1996................................................................... F-17
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1995 and 1996............................................................... F-18
Notes to Condensed Consolidated Financial Statements............................... F-19
</TABLE>

F-1
<PAGE> 59

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Mechanical Dynamics, Inc.:

We have audited the accompanying consolidated balance sheets of MECHANICAL
DYNAMICS, INC. (a Michigan corporation) and subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of income, shareholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mechanical
Dynamics, Inc. and its subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.

As discussed in Note 4 to the consolidated financial statements, effective
January 1, 1993 the Company changed its method of accounting for income taxes.

ARTHUR ANDERSEN LLP

Detroit, Michigan

March 12, 1996, except with respect to

the matters discussed in Notes 5 and 8 as to

which the date is April 23, 1996

F-2
<PAGE> 60

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
ASSETS 1994 1995
------ ------ ------
<S> <C> <C>
Current assets:
Cash..................................................................... $ 817 $1,141
Accounts receivable...................................................... 3,175 4,423
Prepaid and deferred expenses............................................ 781 936
------ ------
Total current assets............................................. 4,773 6,500
------ ------
Net property and equipment................................................. 1,104 1,268
------ ------
Total other assets......................................................... 1,457 1,570
------ ------
$7,334 $9,338
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current portion of long-term debt........................................ $ 470 $ --
Borrowings under line of credit.......................................... 800 82
Accounts payable......................................................... 708 620
Accrued expenses......................................................... 1,090 2,777
Deferred revenue......................................................... 3,073 3,666
------ ------
Total current liabilities........................................ 6,141 7,145
------ ------
Long-term debt, less current portion above................................. 79 --
------ ------
Redeemable common stock:
Class A common stock warrants............................................ 332 --
107,329 shares of redeemable Class A common stock........................ 859 859
------ ------
Total redeemable common stock.................................... 1,191 859
------ ------
Shareholders' equity (deficit):
Convertible preferred stock, $.002 par value, 1,000,000 shares
authorized, 354,932 shares issued and outstanding..................... 265 265
Class A common stock, $.004 par value, 10,000,000 shares authorized,
2,006,625 and 2,027,625 shares issued and outstanding in 1994 and
1995, respectively.................................................... 5 6
Class B common stock, $.004 par value, 5,000,000 shares authorized,
1,134,390 and 1,167,615 shares issued and outstanding in 1994 and
1995, respectively.................................................... 3 3
Class A common stock warrants............................................ 332 449
Additional paid-in capital............................................... -- 114
Retained earnings (deficit).............................................. (671) 475
Subscriptions receivable................................................. (28) (10)
Cumulative translation adjustment........................................ 17 32
------ ------
Total shareholders' equity (deficit)............................. (77) 1,334
------ ------
$7,334 $9,338
====== ======
</TABLE>

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

F-3
<PAGE> 61

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
Software licenses....................................... $ 10,394 $ 9,478 $ 12,338
Services................................................ 4,480 6,789 8,918
--------- --------- ---------
Total revenue................................... 14,874 16,267 21,256
--------- --------- ---------
Cost of revenue:
Software licenses....................................... 142 570 728
Services................................................ 2,538 3,838 5,194
--------- --------- ---------
Total cost of revenue........................... 2,680 4,408 5,922
--------- --------- ---------
Gross profit.............................................. 12,194 11,859 15,334
--------- --------- ---------
Operating expenses:
Sales and marketing..................................... 6,523 6,465 8,118
Research and development................................ 2,107 2,442 2,940
General and administrative.............................. 1,760 2,317 2,610
--------- --------- ---------
Total operating expenses........................ 10,390 11,224 13,668
--------- --------- ---------
Operating income.......................................... 1,804 635 1,666
--------- --------- ---------
Other income (expense).................................... (115) 27 9
--------- --------- ---------
Income before income taxes and cumulative effect of
accounting change....................................... 1,689 662 1,675
Provision for income taxes................................ 496 212 294
--------- --------- ---------
Income before cumulative effect of accounting change...... 1,193 450 1,381
Cumulative effect of change in accounting for income
taxes................................................... 161 -- --
--------- --------- ---------
Net income................................................ $ 1,354 $ 450 $ 1,381
========= ========= =========
CALCULATION OF NET INCOME (LOSS) PER SHARE
- ----------------------------------------------------------
Net income................................................ $ 1,354 $ 450 $ 1,381
Accretion of value of warrants.......................... -- 664 234
--------- --------- ---------
Net income (loss) available to common shareholders........ $ 1,354 $ (214) $ 1,147
========= ========= =========
Pro forma net income (loss) per common share before
cumulative effect of accounting change.................. $ .33 $ (.06) $ .30
Pro forma per common share effect of change in accounting
for income taxes........................................ .05 -- --
Pro forma net income (loss) per common share.............. $ .38 $ (.06) $ .30
========= ========= =========
Pro forma weighted average common and common equivalent
shares.................................................. 3,576,414 3,694,439 3,849,824
========= ========= =========
</TABLE>

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

F-4
<PAGE> 62

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
CONVERTIBLE CLASS CLASS
PREFERRED A B CLASS A ADDITIONAL RETAINED CUMULATIVE
STOCK UNDER COMMON COMMON COMMON STOCK PAID-IN EARNINGS SUBSCRIPTIONS TRANSLATION
PUT OPTION STOCK STOCK WARRANTS CAPITAL (DEFICIT) RECEIVABLE ADJUSTMENT TOTAL
----------- ------ ------ ------------ ---------- -------- ------------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992........................ $ 265 $5 $3 $ -- $ 50 $(1,912) $ (38) $-- (1,627)
Net income................. -- -- -- -- -- 1,354 -- -- 1,354
Issuance of 86,625 shares
of Class A common
stock.................... -- -- -- -- 37 -- -- -- 37
Issuance of 77,250 and
repurchase of 68,250
shares of Class B common
stock.................... -- -- -- -- (1) -- (3) -- (4)
Collections on
subscriptions
receivable............... -- -- -- -- -- -- 4 -- 4
----- -- -- ---- ---- ------- ----- --- ------
Balance at December 31,
1993....................... 265 5 3 -- 86 (558) (37) -- (236)
Net income................. -- -- -- -- -- 450 -- -- 450
Issuance of 84,450 and
repurchase of 1,935
shares of Class B common
stock.................... -- -- -- -- 15 -- (3) -- 12
Accretion of value of
warrants................. -- -- -- 332 (101) (563) -- -- (332)
Collections on
subscriptions
receivable............... -- -- -- -- -- -- 12 -- 12
Foreign currency
translation adjustment... -- -- -- -- -- -- -- 17 17
----- -- -- ---- ---- ------- ----- --- ------
Balance at December 31,
1994....................... 265 5 3 332 -- (671) (28) 17 (77)
Net income................. -- -- -- -- -- 1,381 -- -- 1,381
Issuance of 21,000 shares
of Class A common
stock.................... -- 1 -- -- 15 -- -- -- 16
Issuance of 45,000 and
repurchase of 11,775
shares of Class B common
stock.................... -- -- -- -- 15 (1) (2) -- 12
Accretion of value of
warrants................. -- -- -- 117 -- (234) -- -- (117)
Compensation related to
stock purchase plan
issuances................ -- -- -- -- 84 -- -- -- 84
Collections on
subscriptions
receivable............... -- -- -- -- -- -- 20 -- 20
Foreign currency
translation adjustment... -- -- -- -- -- -- -- 15 15
----- -- -- ---- ---- ------- ----- --- ------
Balance at December 31,
1995....................... $ 265 $6 $3 $449 $114 $ 475 $ (10) $32 $1,334
===== == == ==== ==== ======= ===== === ======
</TABLE>

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

F-5
<PAGE> 63

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 1,354 $ 450 $ 1,381
Adjustments to reconcile net income to net cash provided by operating
activities --
Depreciation and amortization....................................... 148 453 567
Provision for deferred income taxes................................. 131 (90) (95)
Cumulative effect of change in accounting for income taxes.......... (161) -- --
(Gain) loss on disposal of assets................................... 7 (4) (28)
Changes in assets and liabilities, net of effect of acquisition --
Prepaid and deferred expenses..................................... (120) 992 (188)
Accounts receivable............................................... (1,140) 856 (1,304)
Other assets...................................................... (15) 25 (102)
Accounts payable.................................................. 132 (363) (76)
Accrued expenses.................................................. 657 (371) 1,311
Deferred revenue.................................................. (309) (1,009) 650
-------- -------- --------
Net cash provided by operating activities...................... 684 939 2,116
-------- -------- --------
Cash flows from investing activities:
Acquisition of foreign subsidiaries, net of cash acquired............. -- 300 --
Proceeds from sale of property and equipment.......................... -- 14 269
Purchases of property and equipment................................... (30) (324) (819)
-------- -------- --------
Net cash used in investing activities.......................... (30) (10) (550)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (payments) under line of credit agreements............. 115 401 (738)
Proceeds from issuance of common stock................................ 33 12 28
Proceeds from collections on subscriptions receivable................. 4 12 20
Payments of long-term debt............................................ (765) (575) (528)
-------- -------- --------
Net cash used in financing activities.......................... (613) (150) (1,218)
-------- -------- --------
Effect of exchange rate changes on cash................................. -- (22) (24)
-------- -------- --------
Net increase in cash.................................................... 41 757 324
Cash at beginning of year............................................... 19 60 817
-------- -------- --------
Cash at end of year..................................................... $ 60 $ 817 $ 1,141
======== ======== ========
Supplemental disclosures of cash flow information --
Cash paid during the year for --
Interest............................................................ $ 120 $ 73 $ 59
======== ======== ========
Income taxes........................................................ $ 240 $ 298 $ 413
======== ======== ========
Supplemental schedule of noncash investing and financing activities:
Acquisition of foreign subsidiaries, with purchase price consisting of
the following:
Cash paid........................................................... $ $ 448 $ --
Notes payable issued................................................ -- 526 --
Class A common stock issued under put option........................ -- 859 --
-------- -------- --------
Total fair value of acquisition................................ $ -- $ 1,833 $ --
======== ======== ========
Equipment acquired under capital lease................................ $ -- $ 292 $ --
======== ======== ========
</TABLE>

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

F-6
<PAGE> 64

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Mechanical Dynamics, Inc. (the "Company") and its subsidiaries develop,
market and support virtual prototyping software and provide consulting,
training, and maintenance services to the automotive, general machinery,
construction equipment, aerospace, defense and other industries on a worldwide
basis.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

Foreign Currency

The financial statements of international subsidiaries are translated using
exchange rates in effect at period end for assets and liabilities and at average
rates during the period for results of operations. The resulting foreign
currency translation adjustments are reflected as a separate component of
shareholders' equity. Foreign currency transaction gains and losses are included
in other income and expense.

Revenue

Software licenses revenue consists primarily of license fees for the
Company's software products and, to a much lesser extent, license fees from
other companies' software products licensed through the Company's European
subsidiaries. Revenue under paid-up software licensing agreements, including
licenses generated through distributors, is recognized when a customer contract
is fully executed and the software is delivered. Revenue under annual software
licensing arrangements is deferred and amortized over the terms of the
agreements. In either instance, revenue is recognized only when no significant
remaining obligations to the customer exist.

Services revenue consists of revenue from software maintenance agreements
as well as consulting, training and funded research and development. Revenue
related to advance payments received under software maintenance agreements is
deferred and amortized over the terms of the agreements. Revenue from other
services is recognized upon performance of the service.

Cost of Revenue

Cost of software licenses revenue 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 incurred by the Company.

Cost of services includes payroll and overhead expenses attributable to
hotline support, consulting, training and funded research and development.

Research and Development Expenses

Product Development

Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," capitalization of software

F-7
<PAGE> 65

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

development costs begins upon the establishment of technological feasibility of
the product. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future gross product revenue, estimated economic product lives
and changes in software and hardware technology. Amounts that would have been
capitalized under this statement after consideration of the above factors were
immaterial, and therefore no software development costs have been capitalized by
the Company.

Concentration of Credit Risk

Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial Accounting
Standards No. 105, consist primarily of accounts receivable. The Company's
accounts receivable are concentrated in global automotive-related companies as
well as other equipment, aerospace and defense manufacturers and the Company's
international distributor network. The Company generally does not require
collateral upon delivery of its products.

Accounts Receivable

Accounts receivable includes an allowance for doubtful accounts of $60 and
$105 in 1994 and 1995, respectively.

Property and Equipment

Property and equipment is stated at cost. Office furniture and equipment is
depreciated using accelerated methods over estimated useful lives of three to
seven years. Leasehold improvements are amortized using the straight-line method
over the lesser of the respective asset's life or the life of the related lease,
generally ten years. Property and equipment consists of the following:

<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Office furniture and equipment..................................... $1,334 $1,851
Leasehold improvements............................................. 707 708
------ ------
2,041 2,559
Less -- accumulated depreciation................................... 937 1,291
------ ------
Net property and equipment............................... $1,104 $1,268
====== ======
</TABLE>

Goodwill

Included in other assets on the accompanying balance sheets is goodwill of
$1,249 and $1,168 as of December 31, 1994 and 1995, respectively. Goodwill is
presented net of accumulated amortization of $66 and $154 in 1994 and 1995,
respectively. The Company acquired its European subsidiaries in April 1994 which
accounts for a majority of the goodwill. (See Note 2.)

Goodwill represents the unamortized cost in excess of fair value of net
assets acquired and is amortized on a straight-line basis over fifteen years. On
an ongoing basis, management reviews the valuation and amortization of goodwill.
As part of this review, the Company considers the value of projected future
undiscounted cash flows attributable to the acquired operations in evaluating
potential impairment.

Net Income (Loss) Per Common Share

Net income (loss) available to common shareholders is net of an equity
charge in 1994 and 1995 to accrete the redemption price of warrants outstanding
during the periods.

F-8
<PAGE> 66

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The calculation of pro forma weighted average shares is based on the
following: the daily weighted average number of shares of common stock
outstanding; the dilutive effect of outstanding stock options and warrants,
including any shares issued below fair market value for all periods presented;
the 1.5-for-1 stock split (see Note 8); and the conversion of the preferred
stock into Class A common stock for all periods.

Long-Lived Assets

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. This statement is required to be adopted by the Company as of
January 1, 1996. The Company believes there will be no material impact on its
financial statements when adopted.

Use of Estimates

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

Accounting for Stock-Based Compensation

During 1996, the Company will adopt the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires additional disclosures in the footnotes, on a pro
forma basis, of the fair value of stock options and other stock compensation
instruments issued to employees. The Company will continue to use the intrinsic
value method of recognizing compensation cost prescribed in Accounting
Principles Board Opinion No. 25 in the Statement of Income.

(2) ACQUISITION

On April 1, 1994, the Company purchased certain intangible assets and
software rights from one of its European distributors, and all outstanding stock
of the distributor's majority-owned subsidiaries in France, Germany, Sweden,
Italy and the United Kingdom. The total purchase price of $1,833 consisted of
$448 in cash, $526 in notes and $859 associated with 107,329 shares of the
Company's Class A common stock with redemption privileges at $8 per share. The
redemption privileges are exercisable by the holders with respect to 53,665
shares between June 15, 1996 and July 14, 1996 and 53,664 shares between June
15, 1997 and July 14, 1997. The acquisition has been accounted for by the
purchase method of accounting. The excess of the aggregate purchase price over
the fair value of the net assets acquired has been recognized as goodwill. The
operating results of all acquired subsidiaries have been included in the
consolidated results of operations from the date of acquisition.

The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisitions had occurred at the beginning of the
periods presented and does not purport to be indicative of what would have
occurred had the acquisition been made as of those dates or of results which may
occur in the future.

<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
Revenue.......................................................... $16,982 $17,038
Net income....................................................... 1,537 474
Net income (loss) per common share............................... $ .43 $ (.05)
</TABLE>

F-9
<PAGE> 67

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(3) FINANCING ARRANGEMENTS

The Company has a line of credit, secured by eligible accounts receivable,
which expires on April 30, 1996, with a maximum borrowing capacity of $1,500,
and is subject to annual renewal. Borrowings on the line of credit bear interest
at 0.75% in excess of the bank's prime rate of interest (effective rate of 9.25%
at December 31, 1995). No borrowings were outstanding at December 31, 1995. The
line of credit agreement also provides that the Company comply with certain
restrictive covenants, including: (1) requiring the Company to maintain minimum
levels of tangible net worth and (2) limiting the Company's ability to incur
certain types of additional indebtedness.

The Company's subsidiaries in Germany, Italy, Sweden and France also have
line of credit and overdraft facilities that provide for aggregate borrowing
availability of approximately $600, at various fixed and variable interest
rates. Borrowings are collateralized by certain assets of the subsidiaries.
Borrowings outstanding under these agreements were $82 at December 31, 1995. The
weighted average interest rate on borrowings outstanding at December 31, 1995
was 12.5%.

At December 31, long-term debt consisted of the following:

<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Term notes payable to stockholders, repaid in 1995.................... $325 --
Term notes payable, repaid in 1995.................................... 91 --
Capital lease obligations, repaid in 1995............................. 133 --
---- ----
549 --
Less -- Current portion............................................... 470 --
---- ----
$ 79 $--
==== ====
</TABLE>

(4) INCOME TAXES

On January 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
statement requires a change in the method of financial accounting and reporting
for income taxes from the deferral method to an asset and liability approach.
The cumulative effect on prior years of this change in accounting principle
increased 1993 net income by $161. A summary of income before provision for
income taxes and components of the provision for income taxes is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------ ---- ------
<S> <C> <C> <C>
Income (loss) before provision for income taxes:
Domestic................................................. $1,689 $620 $1,679
Foreign.................................................. -- 42 (4)
------ ---- ------
$1,689 $662 $1,675
====== ==== ======
Domestic provision (benefit) for income taxes:
Current.................................................. 365 260 329
Deferred................................................. 131 (90) (95)
Foreign provision for income taxes:
Current.................................................. -- 42 60
------ ---- ------
Provision for income taxes................................. $ 496 $212 $ 294
====== ==== ======
</TABLE>

F-10
<PAGE> 68

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The differences between the income tax provision calculated at the United
States Federal statutory rate and the consolidated income tax provision are
summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
----- ---- -----
<S> <C> <C> <C>
Federal statutory provision................................. $ 574 $225 $ 570
Nondeductible meals and entertainment....................... 14 25 24
Reduction in valuation reserve due to recognition of certain
tax credits and deferred assets........................... (150) (70) (456)
Foreign losses without tax benefit.......................... -- -- 33
Effect of differences between U.S. and foreign tax rates.... -- 27 31
Foreign withholding taxes paid, net of domestic benefit..... 58 5 92
----- ---- -----
Provision for income taxes.................................. $ 496 $212 $ 294
===== ==== =====
</TABLE>

Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. The components of
the net deferred income tax asset are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1994 1995
----- ----
<S> <C> <C>
Deferred tax assets:
Tax credits........................................................ $ 504 $ 50
Property and equipment............................................. 109 131
Employee benefits.................................................. 45 60
Accounts receivable................................................ 21 35
Other.............................................................. -- 42
----- -----
679 318
Valuation reserve.................................................... (551) (95)
----- -----
Net deferred tax asset............................................... $ 128 $223
===== =====
</TABLE>

Income taxes have been provided on all undistributed earnings of foreign
subsidiaries.

At December 31, 1995, the Company has approximately $50 of alternative
minimum tax credit carryforwards available, with no expiration. The Company has
established a valuation reserve against any deferred tax assets and credits in
which realization is unlikely.

(5) REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY

Convertible Preferred Stock

Preferred shares are convertible at any time into Class A common stock
based on a formula specified in the preferred stock agreement. Such stock has a
liquidating preference of approximately $0.75 per share in the event of
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Company and shall be paid prior to any distributions to the holders of
Class A or Class B common stock.

Shares of convertible preferred stock also carry redemption privileges and
may be redeemed at the option of such holders at approximately $0.75 per share.
As a result, all shares of convertible preferred stock have been recorded in the
accompanying balance sheets at the total potential redemption value. The
convertible preferred stock has not legally accrued any interest or dividends.

F-11
<PAGE> 69

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The Company may, at its option, redeem the outstanding shares at
approximately $0.75 per share. On February 8, 1996 the Board of Directors
authorized the Company to redeem the outstanding shares of convertible preferred
stock. On March 11, 1996 the Company notified the preferred shareholders of its
intention to redeem all outstanding shares of preferred stock. The holders of
preferred shares had the right to convert such shares into shares of Class A
common stock in lieu of cash redemption payments. All holders notified the
Company by April 11, 1996 of their intention to convert the shares.

Based on the formula in the agreement, each share of preferred stock is
convertible into approximately 1.37 shares of Class A common stock.

Class A Common Stock

Holders of Class A common stock are entitled to one vote for each share so
held with respect to all matters voted on by the shareholders of the
corporation. Subject to the prior and superior right of Preferred Stock, upon
any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the corporation, the holders of Class A common stock shall be
entitled to receive pro rata with the holders of Class B common stock that
portion of the remaining funds to be distributed.

During 1995, the Company issued Class A common stock at prices below fair
market value, based on the estimated initial public offering price of the
Company's common stock. The compensation element which equated to the difference
between fair market value and the issuance price was recorded by the Company in
1995, totaling $37.

Class A Common Stock Warrants

In March 1990, April 1991, and September 1992, 124,155, 23,280, and 14,685
nonnegotiable warrants to acquire Class A common stock of the Company,
respectively, were issued and attached to the Company's subordinated debt. Upon
repayment of this debt in March 1994, the warrants became exercisable through
March 1996. Paid-in capital and retained earnings (deficit) have been charged to
accrete the total redemption value of these warrants, which is calculated based
upon a redemption price from a formula in the warrant agreements. The warrants
do not accrete any additional value subsequent to December 31, 1995. The
redemption price is calculated by taking the difference between the warrant
exercise price of $0.75 per share and the ratio of consolidated revenue to
shares of stock outstanding, adjusted for any shares issued subsequent to March
26, 1990 at prices below $0.75 per share.

The Company was notified on March 11, 1996, that the holder of one-half of
the warrants will exercise at a price of $0.75 per share. The remaining warrants
will be redeemed by the Company for a cash value of $449; these warrants have
been reflected as redeemable stock as of December 31, 1994 and accrued
liabilities as of December 31, 1995 in the accompanying balance sheets.

Class B Common Stock

Shares of the Company's Class B Common Stock acquired by employees vest
over time pursuant to a formula stated in the plan, which is based upon the
years of service and years of ownership of the shares. Each share of Class B
nonvoting common stock is convertible at the option of the holder into one share
of Class A common stock upon filing of an initial public offering. The board of
directors also has the right to authorize conversion to Class A common stock. In
April 1996, the Company amended and restated its Articles of Incorporation to
automatically convert each share of Class B Common Stock into one share of Class
A Common Stock.

F-12
<PAGE> 70

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1995 Amended and Restated Stock Purchase Plan

The Company has a stock purchase plan to attract, retain and motivate key
employees. Under the plan, as amended, the Board can issue shares of Class B
nonvoting common stock through 1998. The price of such shares is determined by
the Board when the opportunity to purchase shares is presented, but shall not be
less than the book value of the stock. Prior to 1995, management determined that
all issuances of stock under this plan were at prices equal to or in excess of
fair market value. During 1995, the Company issued certain shares at prices
below fair market value, based on the estimated initial public offering price of
the Company's common stock. The compensation element which equated to the
difference between fair market value and the purchase price was recorded by the
Company in 1995, totaling $47. In addition, under the plan, the Board has from
time to time also granted stock options to attract, retain and motivate certain
key executive officers. At December 31, 1995, the maximum number of shares
authorized to be offered under the plan is 1,312,500. At December 31, 1994 and
1995, outstanding shares purchased under the plan were 1,134,390 and 1,167,615,
respectively. Stock option activity for this plan is summarized below:

<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1992........................... 123,750 $0.16
Granted.................................................. 33,750 $0.25
Exercised................................................ (41,250) $0.16
Cancelled................................................ (45,000) $0.16
-------
Outstanding at December 31, 1993........................... 71,250 $0.16 -- $0.25
Granted.................................................. 30,000 $0.25
Exercised................................................ (56,250) $0.16 -- $0.25
-------
Outstanding at December 31, 1994........................... 45,000 $0.16 -- $0.25
Exercised................................................ (18,750) $0.16
-------
Outstanding at December 31, 1995........................... 26,250 $0.25
=======
</TABLE>

Class B options totaling 11,250 were exercisable at December 31, 1995.

1993 Stock Option Plan

The Company has an incentive stock option plan to benefit certain key
employees. Under the plan, options may be granted, at the discretion of the
Board, over a period not to exceed ten years. Stock subject to the options is
the Company's Class A, voting common stock. Options granted to any employee
under the plan are limited annually to a fair market value of $100,000. The
price of such options is determined by the Board when the options are granted,
but shall not be less than the book value of the stock. Management determined
that all options granted under this plan were at exercise prices equal to or in
excess of fair market value. Stock option activity for this plan is summarized
below:

<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
--------- ---------
<S> <C> <C>
Outstanding at December 31, 1992................................ 151,500 $0.53
Granted....................................................... 61,671 $0.93
Exercised..................................................... (56,625) $0.53
Cancelled..................................................... (94,875) $0.53
-------- -----
Outstanding at December 31, 1993, 1994 and 1995................. 61,671 $0.93
======== =====
</TABLE>

All Class A options were exercisable at December 31, 1995.

F-13
<PAGE> 71

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(6) COMMITMENTS AND CONTINGENCIES

Employee Benefit Plans

The Company maintains a 401(k) plan covering substantially all of its
employees. Under the plan, the Company provides matching contributions equal to
25% of qualified employee contributions up to a maximum of 1.5% of each
employee's eligible compensation. In 1993, 1994 and 1995, the Company
contributed $47, $59 and $71, respectively, to the plan. Beginning in January
1996, the Company will match 40% of qualified employee contributions up to a
maximum of 2.4% of eligible compensation.

Lease Commitments

The Company and its subsidiaries lease office space and certain equipment
under noncancellable operating lease agreements. Future minimum lease payments
at December 31, 1995 are as follows:

<TABLE>
<S> <C>
1996........................................................................ $1,734
1997........................................................................ 1,295
1998........................................................................ 1,048
1999........................................................................ 877
2000........................................................................ 554
Thereafter.................................................................. --
------
$5,508
======
</TABLE>

Total lease expense amounted to $1,429, $1,701 and $1,902 in 1993, 1994 and
1995, respectively.

Royalty Agreements

The Company has entered into various agreements which generally provide for
royalty payments by the Company based on a percentage of revenue derived through
the licensing of certain software products. Royalty expense under these
agreements amounted to approximately $88, $423 and $469 and in 1993, 1994 and
1995, respectively.

F-14
<PAGE> 72

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(7) GEOGRAPHIC OPERATIONS AND SEGMENT INFORMATION

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenue:
United States
Domestic......................................... $ 6,982 $ 7,419 $ 7,930
Export........................................... 7,892 4,289 5,512
Europe
Germany.......................................... -- 1,837 3,458
Other European countries......................... -- 2,722 4,356
------- ------- -------
Total revenue............................... $14,874 $16,267 $21,256
======= ======= =======
Operating contribution:
United States....................................... $ 5,801 $ 3,544 $ 4,544
Europe
Germany.......................................... -- 503 1,056
Other European Countries......................... -- 760 1,318
------- ------- -------
Total operating contribution................ 5,801 4,807 6,918
Unallocated expenses, net............................. (4,112) (4,145) (5,243)
------- ------- -------
Income (loss) before taxes.......................... $ 1,689 $ 662 $ 1,675
======= ======= =======
Identifiable assets:
United States....................................... $ 4,626 $ 4,650 $ 4,968
Europe
Germany.......................................... -- 811 1,270
Other European countries......................... -- 1,873 3,100
------- ------- -------
Total identifiable assets................... $ 4,626 $ 7,334 $ 9,338
======= ======= =======
</TABLE>

A significant portion of United States export revenue is to customers
domiciled in the Asia-Pacific region.

One customer accounted for approximately 16.1%, 13.4% and 13.2% of total
revenue in the years ended December 31, 1993, 1994 and 1995, respectively.

Unallocated expenses, net consist of general corporate expenses, internal
research and product development expenses, interest expense and interest income.

(8) SUBSEQUENT EVENT

On April 23, 1996, the shareholders approved an amendment and restatement
to the Company's articles of incorporation that effects (i) a 1.5-for-1 stock
split of the Company's common stock, (ii) an increase in the authorized shares
of common stock to 15,000,000 shares, (iii) the conversion of all classes of
common stock to no par common stock, (iv) an increase in the authorized number
of preferred shares to 1,000,000, and (v) an amendment of the privileges of the
preferred stock. All references in the consolidated financial statements and
accompanying notes have also been adjusted to reflect the amendment and
restatement of the articles of incorporation.

F-15
<PAGE> 73

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1996
DECEMBER 31, ----------- ---------
ASSETS 1995
- ----------------------------------------------------------- ------------ (UNAUDITED) PRO FORMA
<S> <C> <C> <C>
Current assets:
Cash..................................................... $1,141 $ 1,518 $ 1,518
Accounts receivable...................................... 4,423 4,201 4,201
Prepaid and deferred expenses............................ 936 977 977
------ ------ ------
Total current assets............................. 6,500 6,696 6,696
------ ------ ------
Net property and equipment................................. 1,268 1,235 1,235
------ ------ ------
Total other assets......................................... 1,570 1,678 1,678
------ ------ ------
$9,338 $ 9,609 $ 9,609
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit.......................... $ 82 $ 94 $ 94
Accounts payable......................................... 620 560 560
Accrued expenses......................................... 2,777 2,516 2,516
Deferred revenue......................................... 3,666 3,804 3,804
------ ------ ------
Total current liabilities........................ 7,145 6,974 6,974
------ ------ ------
Redeemable common stock:
107,329 shares of redeemable Class A common stock........ 859 859 859
------ ------ ------
Total redeemable common stock.................... 859 859 859
------ ------ ------
Shareholders' equity:
Convertible preferred stock, $.002 par value, 1,000,000
shares authorized, 354,932 shares issued and
outstanding........................................... 265 265 --
Class A common stock, $.004 par value, 10,000,000 shares
authorized, 2,027,625 and 2,108,685 shares issued and
outstanding as of December 31, 1995 and March 31,
1996, respectively.................................... 6 6 --
Class B common stock, $.004 par value, 5,000,000 shares
authorized, 1,167,615 and 1,178,865 shares issued and
outstanding as of December 31, 1995 and March 31,
1996, respectively.................................... 3 3 --
Common stock, no par value, 15,000,000 shares authorized;
3,772,308 pro forma shares outstanding................ -- -- 900
Class A common stock warrants............................ 449 -- --
Additional paid-in capital............................... 114 626 --
Retained earnings........................................ 475 846 846
Subscriptions receivable................................. (10) -- --
Cumulative translation adjustment........................ 32 30 30
------ ------ ------
Total shareholders' equity....................... 1,334 1,776 1,776
------ ------ ------
$9,338 $ 9,609 $ 9,609
====== ====== ======
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-16
<PAGE> 74

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------
1995 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
Revenue:
Software licenses................................................... $ 2,688 $ 3,841
Services............................................................ 1,957 2,207
--------- ---------
Total revenue............................................... 4,645 6,048
--------- ---------
Cost of revenue:
Software licenses................................................... 219 200
Services............................................................ 1,162 1,361
--------- ---------
Total cost of revenue....................................... 1,381 1,561
--------- ---------
Gross profit.......................................................... 3,264 4,487
--------- ---------
Operating expenses:
Sales and marketing................................................. 1,838 2,344
Research and development............................................ 675 886
General and administrative.......................................... 557 684
--------- ---------
Total operating expenses.................................... 3,070 3,914
--------- ---------
Operating income...................................................... 194 573
--------- ---------
Other income.......................................................... 3 1
--------- ---------
Income before income taxes............................................ 197 574
Provision for income taxes............................................ 34 203
--------- ---------
Net income............................................................ $ 163 $ 371
========= =========
CALCULATION OF NET INCOME PER SHARE
- ----------------------------------------------------------------------
Net income............................................................ $ 163 $ 371
Accretion of value of warrants...................................... 51 --
--------- ---------
Net income available to common shareholders........................... $ 112 $ 371
========= =========
Pro forma net income per common share................................. $ 0.03 $ 0.10
========= =========
Pro forma weighted average common and common equivalent shares........ 3,822,951 3,878,987
========= =========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-17
<PAGE> 75

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1995 1996
----- ------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 163 $ 371
Adjustments to reconcile net income to net cash provided by operating
activities --
Depreciation and amortization........................................ 148 141
Changes in assets and liabilities
Prepaid and deferred expenses...................................... 112 (38)
Accounts receivable................................................ 378 249
Other assets....................................................... (49) (129)
Accounts payable................................................... (256) (79)
Accrued expenses................................................... (24) (267)
Deferred revenue................................................... 226 128
----- ------
Net cash provided by operating activities....................... 698 376
----- ------
Cash flows from investing activities:
Purchases of property and equipment..................................... (131) (84)
----- ------
Net cash used in investing activities........................... (131) (84)
----- ------
Cash flows from financing activities:
Net borrowings (payments) under line of credit agreements............... (598) 12
Proceeds from issuance of common stock.................................. -- 63
Proceeds from collections on subscriptions receivable................... 16 10
Payments of long-term debt.............................................. (76) --
----- ------
Net cash provided by (used in) financing activities............. (658) 85
----- ------
Effect of exchange rate changes on cash................................... (3) --
----- ------
Net increase (decrease) in cash........................................... (94) 377
Cash at beginning of period............................................... 817 1,141
----- ------
Cash at end of period..................................................... $ 723 $1,518
===== ======
Supplemental disclosures of cash flow information --
Cash paid during the period for --
Interest............................................................. $ 19 $ 6
===== ======
Income taxes......................................................... $ 96 $ 116
===== ======
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-18
<PAGE> 76

MECHANICAL DYNAMICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE (1) -- BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements 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.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in this Registration Statement for the
year ended December 31, 1995.

NOTE (2) -- PRO FORMA BALANCE SHEET

On April 11, 1996, all holders of convertible preferred stock notified the
Company of their intention to convert the preferred shares to Class A common
stock. Convertible preferred stock has been charged and Class A common stock has
been credited to reflect this conversion on a pro-forma basis.

On April 23, 1996, the shareholders approved an amendment and restatement
of the Company's articles of incorporation to convert all classes of common
stock to no par common stock. Class A and Class B common stock have been charged
and common stock, no par value, has been credited to reflect this transaction on
a pro forma basis in the accompanying condensed consolidated balance sheets.

F-19
<PAGE> 77
DOES IT MOVE?

Mechanical Dynamics is a leader ADAMS/CAR SELECTED
in virtual prototyping solutions AWARDED MECHANICAL
and has remained focused on DYNAMICS
this technology since its founding design news AWARDS
in 1977. Today companies from
a wide range of industries rely THE BEST PRESIDENT'S
on Mechanical Dynamics' PRODUCTS E AWARD
ADAMS(R) software to simulate OF 1995 FOR EXCELLENCE
and test their mechanical system IN EXPORTING
designs before building physical
prototypes. DESIGN NEWS
THE BEST
Nearly any design engineering PRODUCTS OF
team can benefit from the use of 1995 AWARD
ADAMS. The qualifying question
is: Does it move? If the answer IEEE COMPUTER
is yes, it's a good bet that the GRAPHICS'
system can be built faster, better, TOP TEN SOFTWARE
and less expensively with the PRODUCTS OF
help of ADAMS virtual proto- 1994 AWARD
typing capabilities.

ADAMS(R) MAJOR [GRAPHIC]
AUTOMOBILE
MANUFACTURERS
ADAMS WORLDWIDE USE MACHINE DESIGN'S
NOT ONLY ADAMS, AS DO MANY CAD/CAM
HELPS REDUCE AUTOMOTIVE LEADER AWARD
THE TIME AND COST SUPPLIERS.
OF DEVELOPMENT.
USERS HAVE ALSO MICHIGAN'S
IMPROVED DESIGN LEADING EDGE
QUALITY. TECHNOLOGIES
AWARD

[GRAPHIC] [GRAPHIC] [MECHANICAL
DYNAMICS
LOGO]

[GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC]

<PAGE> 78

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

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING
SHAREHOLDERS OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
The Company........................... 11
Use of Proceeds....................... 11
Dividend Policy....................... 11
Capitalization........................ 12
Dilution.............................. 13
Selected Consolidated Financial
Data................................ 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 25
Management............................ 38
Certain Transactions.................. 45
Principal and Selling Shareholders.... 46
Description of Capital Stock.......... 48
Common Stock Eligible for Future
Sale................................ 50
Underwriting.......................... 52
Experts............................... 53
Additional Information................ 53
Legal Matters......................... 53
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

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

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

2,375,000 SHARES

MECHANICAL DYNAMICS, INC. LOGO

MECHANICAL
DYNAMICS, INC.

COMMON STOCK

--------------------
PROSPECTUS
--------------------

Wessels, Arnold & Henderson

SoundView Financial Group, Inc.

, 1996

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 79

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses of the issuance and distribution, all of which are
payable by the Registrant, are as follows:

<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 10,360
NASD Fee.................................................................. 3,505
Stock Exchange Listing Fee................................................ 30,950
Printing and Engraving Expenses........................................... 110,000
Accounting Fees and Expenses.............................................. 170,000
Legal Fees and Expenses................................................... 250,000
Blue Sky Fees and Expenses................................................ 10,000
Transfer Agent's Fees and Expenses........................................ 7,500
Miscellaneous Expenses.................................................... 287,685
--------
Total........................................................... $880,000
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Article VII of the Registrant's Restated Bylaws generally provides that the
Registrant will indemnify its directors and officers to the fullest extent
authorized or permitted under the Michigan Business Corporation Act. The
Michigan Business Corporation Act authorizes a corporation, under certain
circumstances, to indemnify its directors and officers (including to reimburse
them for expenses incurred). Reference is made to Exhibit 3.4 to this
Registration Statement for the complete text of Article VII of the Registrant's
Restated Bylaws.

The Registrant's Restated Articles of Incorporation generally limit the
personal liability of directors for monetary damages for breaches of fiduciary
duty. If a director were to breach such duty in performing his or her duties as
a director, neither the Registrant nor its shareholders could recover monetary
damages from the director, and the only course of action available to the
Registrant's shareholders would be equitable remedies, such an action to enjoin
or rescind a transaction involving a breach of fiduciary duty. To the extent
claims against directors are limited to equitable remedies, the provision in the
Restated Articles of Incorporation may reduce the likelihood of derivative
litigation and may discourage shareholders or management from initiating
litigation against directors for breach of their fiduciary duty.

Under the Restated Articles of Incorporation, liability for monetary
damages remains for (i) any breach of the duty of loyalty to the Registrant or
its shareholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) violations of
Section 551(1) of the Michigan Business Corporation Act, (iv) any transaction
from which the director derived an improper personal benefit or (v) any act or
omission that occurred before the effective date of the provision of the
Restated Articles of Incorporation.

Reference is made to Exhibit 3.2 to this Registration Statement for the
complete text of the Restated Articles of Incorporation of the Company.

The Registrant also has agreed with its directors providing for
indemnification and advancement of expenses. Reference is made to Exhibits 10.13
through 10.17 to this Registration Statement for the complete text of these
agreements.

Michigan corporations are also authorized to obtain insurance to protect
directors and officers from certain liabilities, including liabilities against
which corporations cannot indemnify their directors and officers. The Registrant
expects to obtain directors' and officers' liability insurance providing
aggregate coverage in the amount of $5 million prior to commencement of the
Offering.

II-1
<PAGE> 80

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In February 1996, an officer of the Company exercised options to purchase
11,250 unregistered shares of Common Stock. These options were granted in
January 1993, the exercise price of these shares was approximately $0.25 per
share and the aggregate exercise price was approximately $2,756. These shares
were issued by the Company in reliance upon the exemption from registration
contained in Rule 701 of the Securities Act.

In November 1995, the Company sold 12,000 unregistered shares of Common
Stock to eight employees. The price per share was $0.90 and the aggregate
offering price was approximately $17,200. These shares were issued in reliance
upon the exemption from registration contained in Rule 701 of the Securities
Act.

In July through August 1995, the Company sold 21,000 unregistered shares of
Common Stock to three directors of the Company and the Secretary of the Company.
The price per share for 9,000 of such shares was $0.50; the price per share for
12,000 of such shares was $0.90; and the aggregate offering price was $15,300.
These shares were issued in reliance upon the exemption from registration
contained in Rule 701 of the Securities Act.

In July 1995, an officer of the Company exercised options to purchase 7,500
unregistered shares of Common Stock. These options were granted in April 1994,
the exercise price for these shares was approximately $0.25 per share and the
aggregate exercise price was approximately $1,840. These shares were issued by
the Company in reliance upon the exemption from registration contained in Rule
701 of the Securities Act.

In April through May 1995, the Company sold 18,435 unregistered shares of
Common Stock to twelve employees. The price per share was $0.50 and the
aggregate offering price was approximately $9,218. These shares were issued in
reliance upon the exemption from registration contained in Rule 701 of the
Securities Act.

In December 1994 and January 1995, two officers of the Company exercised
options to purchase 30,000 unregistered shares of Common Stock. These options
were granted in January 1993 and July 1991, the exercise price for these shares
was $0.16 and the aggregate exercise price was $4,800. These shares were issued
by the Company in reliance upon the exemption from registration contained in
Rule 701 of the Securities Act.

In June 1994 through July 1994, the Company sold 20,265 unregistered shares
of Common Stock to fifteen employees. The price per share was approximately
$0.25 and the aggregate offering price was approximately $4,965. These shares
were issued in reliance upon the exemption from registration contained in Rule
701 of the Securities Act.

In June 1994, an officer of the Company exercised options to purchase 7,500
unregistered shares of Common Stock. These options were granted in April 1994,
the exercise price was approximately $0.25 per share and the aggregate exercise
price was approximately $1,840. These shares were issued by the Company in
reliance upon the exemption from registration contained in Rule 701 of the
Securities Act.

In June 1994, the Company sold 107,329 unregistered shares of Common Stock
to eight purchasers in connection with the acquisition of the Company's European
subsidiaries. These shares were issued in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act.

In March 1994, two officers of the Company exercised options to purchase
30,000 unregistered shares of Common Stock. These options were granted in
January 1993 and July 1991, the exercise price for these shares was $0.16. The
aggregate exercise price was $4,800. These shares were issued by the Company in
reliance upon the exemption from registration contained in Rule 701 of the
Securities Act.

In March 1994, the Company sold 13,500 unregistered shares of Common Stock
to two employees. The price per share was approximately $0.25 and the aggregate
offering price was approximately $3,308. These shares were issued by the Company
in reliance upon the exemption from registration contained in Rule 701 of the
Securities Act.

II-2
<PAGE> 81

In June 1993, the Company granted options to purchase 36,000 unregistered
shares of Common Stock to nine employees. The exercise price per share was
approximately $0.25 and the aggregate offering price was approximately $8,280.
These shares were issued by the Company in reliance upon the exemption from
registration contained in Rule 701 of the Securities Act.

In May through November 1993, the Company granted options to purchase
79,125 unregistered shares of Common Stock to four employees, a director and the
Secretary of the Company. The exercise price per share for 47,250 of such shares
was approximately $0.53; the exercise price per share for 31,875 of such shares
was approximately $0.25; and the aggregate offering price was approximately
$32,852. These shares were issued by the Company in reliance upon the exemption
from registration contained in Rule 701 of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.

(a) Exhibits

<TABLE>
<C> <C> <S>
1 -- Form of Underwriting Agreement**
3.1 -- Articles of Incorporation of the Company, including Certificates of Amendment to
the Articles of Incorporation**
3.2 -- Restated Articles of Incorporation**
3.3 -- Bylaws of the Company, including First Amendment to Bylaws**
3.4 -- Restated Bylaws of the Company**
4.1 -- Form of Certificate for shares of Common Stock
4.2 -- Line of Credit Loan Agreement between Society Bank, Michigan ("Society") and the
Company dated September 8, 1995 and Master Business Loan Note by the Company in
favor of Society in the amount of $1.5 million dated January 31, 1995, effective
December 22, 1994**
5 -- Opinion of Honigman Miller Schwartz and Cohn
10.1 -- Employment Agreement between the Company and Michael E. Korybalski (Korybalski"),
as amended**
10.2 -- Employment Agreement between the Company and Robert R. Ryan, as amended**
10.3 -- Employment Agreement between the Company and James D. Price, as amended**
10.4 -- Employment Agreement between the Company and H. Allan Larkin, as amended**
10.5 -- Employment Agreement between the Company and Patrick R. Turner, as amended**
10.6 -- Mechanical Dynamics, Inc. 1993 Stock Option Plan**
10.7 -- Mechanical Dynamics, Inc. 1995 Amended and Restated Stock Purchase Plan**
10.8 -- Mechanical Dynamics, Inc. Employee Stock Purchase Plan**
10.9 -- Mechanical Dynamics, Inc. 1996 Stock Incentive Plan for Key Employees**
10.10 -- Mechanical Dynamics, Inc. Non-Employee Director Stock Option Plan**
10.11 -- Mechanical Dynamics, Inc. 401(k) Plan & Trust, as amended**
10.12 -- Lease between Plymouth Square and the Company dated July 12, 1989**
10.13 -- Form of Indemnification Agreement**
11 -- Statement re: computation of per share earnings**
21 -- List of Subsidiaries**
</TABLE>

II-3
<PAGE> 82

<TABLE>
<C> <C> <S>
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Honigman Miller Schwartz and Cohn (contained in their Opinion filed as
Exhibit 5)
24 -- Power of Attorney for Mitchell I. Quain**
</TABLE>

- ---------------
* To be filed by Amendment.

** Previously filed.

(b) Financial Statements Schedules
No Financial Statements Schedules are required to be filed.

ITEM 17. UNDERTAKINGS.

(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
for shares of the Common Stock in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rules 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 83

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Ann Arbor,
Michigan on May 5, 1996.

MECHANICAL DYNAMICS, INC.

By: /s/ MICHAEL E. KORYBALSKI

------------------------------------
Michael E. Korybalski
Its: President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- --------------
<C> <S> <C>
/s/ MICHAEL E. KORYBALSKI President, Chief Executive May 5, 1996
- --------------------------------------------- Officer and Director (Principal
Michael E. Korybalski Executive Officer)

Vice President-Administration May 5, 1996
/s/ JAMES E. VINCKE and Chief Financial Officer
- --------------------------------------------- (Principal Financial and
James E. Vincke Accounting Officer)

* Vice President, Chief Technical May 5, 1996
- --------------------------------------------- Fellow and Director
John C. Angell

* Director May 5, 1996
- ---------------------------------------------
Herbert S. Amster

* Director May 5, 1996
- ---------------------------------------------
Joseph F. Gloudeman

* Director May 5, 1996
- ---------------------------------------------
David E. Cole

* Director May 5, 1996
- ---------------------------------------------
Mitchell I. Quain
</TABLE>

*By: /s/ JAMES E. VINCKE

-----------------------------------------------------
James E. Vincke
Attorney-in-fact

II-5
<PAGE> 84

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIAL PAGE
EXHIBITS NUMBER
- --------- ---------------
<S> <C> <C>
1 -- Form of Underwriting Agreement**
3.1 -- Articles of Incorporation of the Company, including Certificates of
Amendment to the Articles of Incorporation**
3.2 -- Restated Articles of Incorporation**
3.3 -- Bylaws of the Company, including First Amendment to Bylaws**
3.4 -- Restated Bylaws of the Company**
4.1 -- Form of Certificate for shares of Common Stock
4.2 -- Line of Credit Loan Agreement between Society Bank, Michigan
("Society") and the Company dated September 8, 1995 and Master
Business Loan Note by the Company in favor of Society in the amount
of $1.5 million dated January 31, 1995, effective December 22, 1994**
5 -- Opinion of Honigman Miller Schwartz and Cohn
10.1 -- Employment Agreement between the Company and Michael E. Korybalski
(Korybalski"), as amended**
10.2 -- Employment Agreement between the Company and Robert R. Ryan, as
amended**
10.3 -- Employment Agreement between the Company and James D. Price, as
amended**
10.4 -- Employment Agreement between the Company and H. Allan Larkin, as
amended**
10.5 -- Employment Agreement between the Company and Patrick R. Turner, as
amended**
10.6 -- Mechanical Dynamics, Inc. 1993 Stock Option Plan**
10.7 -- Mechanical Dynamics, Inc. 1995 Amended and Restated Stock Purchase
Plan**
10.8 -- Mechanical Dynamics, Inc. Employee Stock Purchase Plan**
10.9 -- Mechanical Dynamics, Inc. 1996 Stock Incentive Plan for Key
Employees**
10.10 -- Mechanical Dynamics, Inc. Non-Employee Director Stock Option Plan**
10.11 -- Mechanical Dynamics, Inc. 401(k) Plan & Trust, as amended**
10.12 -- Lease between Plymouth Square and the Company dated July 12, 1989**
10.13 -- Form of Indemnification Agreement**
11 -- Statement re: computation of per share earnings**
21 -- List of Subsidiaries**
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Honigman Miller Schwartz and Cohn (contained in their
Opinion filed as Exhibit 5)
24 -- Power of Attorney for Mitchell I. Quain**
</TABLE>

- ---------------
* To be filed by Amendment.

** Previously filed.

(b) Financial Statements Schedules
No Financial Statements Schedules are required to be filed.

<PAGE> 1
EXHIBIT 4.1

INCORPORATED UNDER THE LAWS OF THE
STATE OF MICHIGAN

NUMBER SHARES

CS-

SEE REVERSE FOR [MECHANICAL DYNAMICS COMMON STOCK
CERTAIN DEFINITIONS LOGO] CUSIP 583521 10 9

THIS CERTIFIES THAT is the owner of

fully paid and non-assessable shares of Common Stock, no par value per share,
of

MECHANICAL DYNAMICS, INC.,

transferable only on the books of the Corporation in person or by duly
authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
A full statement of the designation, relative rights, preferences and
limitations of the shares of each class or series of stock authorized to be
issued by the Corporation will be furnished to any shareholder upon request and
without charge.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to
be signed by its duly authorized officers and to be sealed with the Seal of
Mechanical Dynamics, Inc.

Dated:

Countersigned and Registered: _____________________________
American Securities Transfer, Inc., President
Transfer Agent and Registrar
_____________________________
Secretary

By:
__________________________________
Authorized Signature

[MECHANICAL DYNAMICS, INC. MICHIGAN CORPORATE SEAL]
<PAGE> 2
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws and regulations.

TEN COM - as tenants in common UNIF GIFT MIN ACT ___Custodian___
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts
to Minors
JT TEN - as joint tenants with right of Act_______________
survivorship and not tenants (State)
in common

Additional abbreviations may also be used though not in the above list.

_____________________ For value received, ___ hereby sell, assign and
PLEASE INSERT SOCIAL transfer unto
SECURITY OR OTHER
IDENTIFYING NUMBER OF
ASSIGNEE

________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________

________________________________________________________________________________

_______________________________________________________________________shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint __________________ Attorney, to transfer the said shares on the books
of the within-named Corporation, with full power of substitution in the
premises.

Dated

In Presence of

_____________________________________ __________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATSOEVER.

<PAGE> 1
EXHIBIT 5

[HMS&C LETTERHEAD]

May 6, 1996

Mechanical Dynamics, Inc.
2301 Commonwealth Blvd.
Ann Arbor, Michigan 48105

Ladies and Gentlemen:

We have represented Mechanical Dynamics, Inc., a Michigan corporation
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission (the "Commission") of a Registration
Statement on Form S-1, File No. 333-2900 (the "Registration Statement"), for
registration of a maximum of 2,731,250 shares of the Common Stock of the
Company (the "Common Stock").

Based upon our examination of such documents and other matters as we
deem relevant, it is our opinion that:

(1) The shares of the Common Stock covered by the Registration
Statement to be issued and sold by the Company have been duly authorized and,
when issued and sold by the Company as described in the Registration Statement
and in the manner set forth in the Underwriting Agreement referred to therein,
will be validly issued, fully paid and nonassessable.

(2) The shares of Common Stock covered by the Registration Statement
heretofore issued and outstanding and to be sold by certain selling
shareholders have been duly authorized and, when sold by such selling
shareholders as described in the Registration Statement and in the manner set
forth in the Underwriting Agreement referred to therein, will be validly
issued, fully paid and nonassessable.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus included in the Registration Statement. In giving
such consents, we do not admit hereby that we come within the category of
persons whose consent is required under Section 7 of the Securities Act or the
Rules and Regulations of the Commission thereunder.

Very truly yours,

HONIGMAN MILLER SCHWARTZ AND COHN

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report (and to all references to our firm) included in or made a part of this
registration statement File No. 333-2900.

ARTHUR ANDERSEN LLP

May 6, 1996