<PAGE>   1
                                                                    EXHIBIT 10.3
                              EMPLOYMENT AGREEMENT


         THIS AGREEMENT, made as of the 1st day of March, 1997, by and between
MECHANICAL DYNAMICS, INC., a Michigan corporation (the "Company"), having
offices located at 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105, and DAVID
PERALTA, of Ann Arbor, Michigan ("Employee").

                                   WITNESSETH:

         WHEREAS, the Company desires to employ the Employee to devote his full
time and attention to the business of the Company and Employee desires to be so
employed.
         NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, the parties hereto agree as follows:

         1. EMPLOYMENT. The Company hereby agrees to employ Employee in the
capacity of Vice President and Treasurer of the Company. Employee hereby accepts
this employment and agrees to diligently and conscientiously devote his full and
exclusive time and attention to the affairs of the Company. In his capacity as
Vice President and Treasurer of the Company, Employee shall perform such duties
of an executive nature as shall be assigned to him from time to time by the
President, the Executive Vice











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<PAGE>   2

President or the Board of Directors and Employee shall at all times discharge
his duties in consultation with and under the supervision of the President, the
Executive Vice President and the Board of Directors.

















                                     - 2 -
<PAGE>   3

         2. TERM. The term of this Agreement shall commence on the date hereof
and shall terminate on March 31, 1998. At the option of the Company, this
Agreement may be extended for an additional one (1) year term, upon such terms
as may be mutually agreed between Employee and the Company.

         3. COMPENSATION. Employee's compensation hereunder, including base
salary, bonus, vacation and other fringe benefits, for the term of this
Agreement are set forth in Attachment I annexed hereto. The Company and Employee
agree that during the term of this Agreement the fringe benefits offered to
Employee shall be equal to the other Vice Presidents and shall include life
insurance in an amount not less than twice Employee's base salary, if available.

         4. DISABILITY. In the event that Employee is absent from his employment
by reason of illness or other incapacity for a period of six (6) consecutive
months, Employee shall nevertheless be entitled to receive his full base salary
hereunder as well as his pro-rata bonus, vacation accruals and all fringe
benefits during said six (6) month period. Thereafter, during the continued
period of his illness or incapacity in excess of six (6) months, Employee shall
be entitled to receive such long-term disability benefits as are payable under
the Company's then long-term disability insurance program. He shall also receive
continued health and life insurance benefits for the remaining















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<PAGE>   4


term of this Agreement. Except as provided above, all bonus accruals, vacation
accruals and other fringe benefits shall cease at the end of said six (6) month
period. Notwithstanding the foregoing, Employee's salary, bonus, vacation and
other fringe benefits shall be fully reinstated upon his complete return to
employment and the full discharge of his duties hereunder.

         5. DEATH. In the event that Employee dies during the term of this
Agreement while still employed hereunder and drawing his full base salary, then
the Company shall continue to pay an amount equal to one hundred percent (100%)
of Employee's monthly base salary (as of the date of his death) to his estate
for a period of two (2) months subsequent to the date of his death. Such
payments shall be in addition to any other death benefits payable to Employee's
estate from life insurance or otherwise.

         6. CHANGE OF DUTIES; RELOCATION. In the event that during the term of
this Agreement the Board of Directors chooses to change the Employee's title as
an officer of the Company and/or his duties hereunder, this Agreement shall
nevertheless remain in full force and effect in accordance with its terms and no
such change shall constitute grounds upon which Employee may terminate this
Agreement. In the event that the Board of Directors directs Employee to relocate
away from Ann Arbor, Michigan, then Employee shall be entitled to resign and to
receive as severance compensation, the base salary and fringe



















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<PAGE>   5

benefits provided in Section 7.1 hereof.

         7. TERMINATION.

            7.1 Without Cause. In the event Employee is discharged from his
employment during the term of this Agreement without "Cause" (as hereinafter
defined), then the Company shall continue to pay Employee's base salary and
provide all fringe benefits and pro rata bonus, if applicable, in each case as
in effect at the date of Employee's termination, for a period equal to the
greater of six (6) months from the date of termination or the remaining term of
this Agreement. Such payment and benefits shall be in lieu of all other payments
and benefits to which Employee might otherwise be entitled under the Company's
employee policies and procedures and/or under this Agreement.

            7.2 For Cause; Resignation; Retirement. In the event that Employee
is discharged from his employment during the term of this Agreement for "Cause"
(as hereinafter defined), or Employee voluntarily resigns or retires, then
Employee shall be entitled to receive only such payments and/or benefits as
would be provided to other employees of the Company under similar circumstances
in accordance with the Company's employee policies and procedures then in
effect.

            7.3 Definition. For purposes of this Agreement, the term "Cause"
shall mean:

    (i)  Failure or refusal of Employee to work; or 



















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<PAGE>   6

    (ii) Violation of directives of the Board of Directors or President by
Employee; or

   (iii) Intentional misrepresentation to or concealment of a material fact
regarding the operations of the Company from the Board of Directors, the
President, or the Executive Vice President by Employee; or

    (iv) A material breach of this Agreement by Employee; or

    (v)  Conviction of a crime involving moral turpitude. Except in the case of
(v) above, termination of this Agreement for "Cause" shall only become effective
thirty (30) days after Employee has received written notice of such termination
from the Company specifying the details of such "Cause". During such thirty (30)
day period, Employee shall be entitled to a formal meeting with the Board of
Directors for the purpose of presenting reasons why the Agreement should not be
terminated.

              7.4 Change of Control. In the event that more than fifty percent
(50%) of the issued and outstanding capital stock of the Company is purchased by
any entity, person or group of persons acting in concert, and if the remaining
term of this Agreement is less than one (1) year from the effective date of such
change of control, then the term of this Agreement shall be automatically
extended through a date one (1) year from such















                                     - 6 -
<PAGE>   7

effective date.

              7.5 Release. Anything contained in this Section 7 to the contrary
notwithstanding, the payment of any sums to Employee under subsections 7.1, 7.2
or 7.4 hereof, shall be conditioned upon (i) Employee executing and delivering
to the Company the Full And Final Release attached hereto as Attachment II (the
"Release") and (ii) in the event Employee is over forty (40) years of age on the
date of execution of the Release, upon Employee not exercising his right to
revoke said Release after having executed it.

         8. RESTRICTIVE COVENANT. Employee agrees that during the term of this
Agreement and for a period of two (2) years after the termination or expiration
of this Agreement, he will not directly or indirectly, for his own benefit, or
for or with any other person, firm, or corporation (a) own, manage, engage in,
be employed by, or consult for, any business in the United States which competes
directly with the business presently conducted by the Company, or (b) encourage,
solicit, attempt to hire as an employee or consultant or otherwise attempt to
persuade any other employee of the Company to leave the employ of the Company.
For purposes of this Agreement, the "business presently conducted by the
Company" shall mean the development, manufacture, marketing or licensing of
computer programs or software for mechanical systems simulation (often referred
to as "multi-body system




                                     - 7 -
<PAGE>   8

analysis"). Employee further agrees that the Company's remedy at law for any
breach of this restrictive covenant is inadequate and that the Company shall be
entitled to injunctive relief with respect to any breach of this covenant.

         9. NOTICE. Any notice to be delivered under this Agreement shall be
given in writing and delivered, personally or by certified mail, postage
prepaid, addressed to the Company or Employee at their last known addresses.

         10. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding of the parties hereto regarding the subject matter hereof, and
there are no other agreements, conditions or representations, oral or written,
express or implied, with regard thereto. This Agreement may be amended only in
writing, signed by both parties.

         11. BINDING EFFECT. The provisions of this Agreement shall be binding
upon and shall inure to the benefit of both of the parties hereto and their
respective successors and assigns.

         12. GOVERNING LAW. This Agreement shall be governed by and construed
under in accordance with the laws of the State of Michigan.

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

WITNESS:                                         COMPANY

                                          MECHANICAL DYNAMICS, INC.





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<PAGE>   9





/s/ Linda K. Moore                  By: /s/ Robert R. Ryan, President
-----------------------------           ----------------------------------------
                                        Robert R. Ryan, President



                                               EMPLOYEE

/s/ Linda K. Moore                      /s/ David Peralta
-----------------------------           ----------------------------------------
                                        David Peralta





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<PAGE>   10
                         COMPENSATION COMMITTEE REPORT
                                        
                                  ATTACHMENT I
                                        
                               1997 COMPENSATION
                                 DAVID PERALTA
                             VICE PRESIDENT FINANCE
                            CHIEF FINANCIAL OFFICER





================================================================================



Base Salary:             $90,000
Car allowance:           $3,600/year
Life Insurance:          $200,000
Bonus:                   20% of Base at plan
Plan:                    25% revenue growth
                         $.50 Earnings per share
Options:                 10,000, four year vesting period
Employment agreement:    Contract expiring 3/31/98


Under this plan you are ineligible for MDI's company profit sharing plan

The bonus matrix is as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
GROWTH                              EARNINGS PER SHARE
--------------------------------------------------------------------------------
                   <$0.40         $0.40         $0.50         $0.60        $0.70
---------       ---------     ---------     ---------     ---------    ---------
<S>                <C>           <C>          <C>           <C>          <C>  
  <15%                 $0            $0            $0            $0           $0
---------       ---------     ---------     ---------     ---------    ---------
   20%                 $0        $4,500        $9,000       $13,500      $18,000
---------       ---------     ---------     ---------     ---------    ---------
   25%                 $0        $9,000       $18,000       $27,000      $36,000
---------       ---------     ---------     ---------     ---------    ---------
   30%                 $0       $13,500       $27,000       $40,500      $54,000
---------       ---------     ---------     ---------     ---------    ---------
   35%                 $0       $18,000       $36,000       $54,000      $72,000
--------------------------------------------------------------------------------
</TABLE>




-    Revenue growth between 0% and 35% will be linearly interpolated. Revenue
     growth beyond 35% will linearly extrapolated.

-    Earnings per Share between $.40 and $.70 will be linearly interpolated. 
     Earnings per Share beyond $.70 will be limited to $.70










                                      -42-
<PAGE>   11
                                  ATTACHMENT II


                             FULL AND FINAL RELEASE

         In consideration of the termination benefits provided to me by
MECHANICAL DYNAMICS, INC., a Michigan corporation ("MDI"), as set out in Section
7 of the attached Employment Agreement, as amended (Attachment A), I hereby
agree as follows:

         1. MECHANICAL DYNAMICS, INC. When used herein, "MDI" includes any
parent, subsidiary, associated and affiliated companies of Mechanical Dynamics,
Inc., and its and their successors, assigns, officers, directors, agents,
employees and attorneys, past, present or future, jointly and individually.

         2. RELEASE OF CLAIMS. I release and forever discharge MDI, from any and
all claims, disputes, causes of action, administrative proceedings, legal
actions, whether arising out of statutory law, common law or equity, and
damages, known or unknown, which I have or may have against MDI, however
denominated, including, but not limited to, claims related to my employment, the
conduct of MDI during my employment, any claims of discrimination under any
federal, state or local law, rule or regulation (including claims under the Age
Discrimination in Employment Act (ADEA)), any claims under ERISA, any claim for
violation of any other federal, state or local law, rule or regulation, any
claim for wrongful termination of employment, wrongful layoff, failure to recall
to work, breach of contract, violation of any policy, practice or procedure of
MDI, denial of any employment benefit, constructive discharge, retaliatory
discharge, breach of the covenant of good faith and fair dealing, detrimental
reliance, termination in violation of public policy, violation of any
whistleblower statute, negligent supervision, negligent conducting of
performance appraisals, libel, slander, defamation, fraud, misrepresentation,
sexual or any other type of harassment, intentional or negligent infliction of
emotional distress, tortious interference with business relations or prospective
employers, providing false references, any claim to reinstatement or future
employment, any claim for damages, attorney fees or costs and any claims
occurring or existing through the date of this Release. I understand and agree
that I waived my right in the preceding sentence to file a lawsuit or to
commence an administrative action against MDI. If I later file a lawsuit or
administrative action, I shall be liable for the actual attorney fees and costs
incurred by MDI in defending any such legal action.

         3. SCOPE OF RELEASE. This Release covers all issues arising from or in
connection with my employment with MDI as well as any issues, disputes or claims
occurring or existing through the date of this Release.

<PAGE>   12


         4. PRIOR CLAIMS. I have not filed any claim, administrative proceeding
or legal action against MDI.

         5. SUBSEQUENT LEGAL ACTION. I will not initiate, assist or cooperate in
any charge, claim, complaint or legal action against MDI with any federal, state
or local administrative agency or court, or with any other person (the term
"person" shall mean and include an individual, a partnership, a joint venture, a
corporation, a limited liability, a trust, an unincorporated organization, and a
government or any department or agency thereof), unless so ordered by a duly
authorized court, legislative committee or grand jury.

         6. DEROGATORY COMMENTS. I shall not make any negative or derogatory
statements of any kind about MDI, MDI's products and services, or MDI's
employee's, past, present or future.

         7. RESIGNATION AS OFFICER. Effective with the date of my separation
from employment with MDI, I resign any corporate office I hold.

         8. RETURN OF PROPERTY. I have returned all MDI property as defined in
and required by the Confidentiality Agreement signed by me in favor of MDI
(hereinafter the "Confidentiality Agreement").

         9. INJUNCTIVE RELIEF. In the event of a breach or threatened breach by
me of this Release, it is agreed that money damages would not adequately
compensate MDI and that injunctive relief would be essential for its protection.
Such relief shall be without prejudice to any other remedy which MDI may have or
be entitled to receive at law or in equity.

         10. NON-ADMISSION. Nothing contained herein shall be construed as an
admission of liability by MDI in connection with my employment with and
separation from MDI as well as through the date of this Release.

         11. FINALITY OF RELEASE. I recognize that I may be mistaken as to the
facts and/or law upon which I may be relying in executing this Release or that
additional facts may exist of which I am not presently aware. Nonetheless, I
have been fully advised and understand the finality of this Release and intend
to be bound by it.

         12. REVIEW OF DOCUMENT. I have had the opportunity to read and discuss
this Release with MDI, and I have had an opportunity to review this Release with
outside legal counsel.

         13. REVIEW AND REVOCATION PERIODS. I have been given twenty-one (21)
days within which to consider this Release before executing it, I have been
advised that I may revoke this Release for a period of seven (7) calendar days
following the execution of




                                     - 2 -
<PAGE>   13

this Release and that the Release is not effective until the revocation period
has expired and I have notified MDI in writing that I did not revoke the
Release. Notice of revocation and/or non-revocation should be provided in
writing by me to MDI at 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105,
Attn: Michael E. Korybalski, CEO.

Section 13 is applicable only if the undersigned is 40 years of age or older on
date of termination.

         14. AUTHORITY TO RELEASE. I have the authority to release the claims
which are released herein and no claims have been previously assigned to or are
owned by any other person or entity.

         15. ENTIRE AGREEMENT. No other written or oral promises, inducements or
agreements have been made by MDI to me. I understand that this Release may not
be modified, altered or changed in any respect except upon the express prior
written consent by me and MDI.

         16. SEVERABILITY. If after the date of execution of this Release, any
provision of this Release is held to be illegal, invalid, or unenforceable, such
provision shall be fully severable. In lieu thereof, there shall be added a
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.

         17. GOVERNING LAW. This Release shall be construed in accordance with
and shall be governed by the laws of the State of Michigan.

         18. HEADINGS. All headings in this Release are inserted for convenience
of reference only and shall not be deemed to affect the meaning or
interpretation of this Release.

         19. USAGE. Wherever applicable, the masculine gender, when used herein
shall include the feminine gender, and the singular shall include the plural.

         IN WITNESS WHEREOF, I have executed this Release as of the date noted
below.

/s/ Linda K. Moore                          /s/ David Peralta 
--------------------------------            ------------------------------------
Witness                                     [name]


DATE: 6-23-97                               DATE: 6-23-97
     ---------------------------                 -------------------------------



                                     - 3 -
<PAGE>   14
                    FIRST AMENDMENT TO EMPLOYMENT AGREEMENT


         THIS FIRST AMENDMENT, made as of the 1st day of March, 1998, by and 
between MECHANICAL DYNAMICS, INC., a Michigan corporation (the "Company"), 
having offices located at 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105, 
and DAVID PERALTA, of Livonia, Michigan ("Employee"), for the purpose of 
amending that certain Employment Agreement between the Company and Employee 
dated as of March 1, 1997 (the "Employment Agreement").


                                  WITNESSETH:

         WHEREAS, the Company and Employee desire to extend the Employment
Agreement and to confirm the same herein.

         NOW, THEREFORE, in consideration of the foregoing and of the mutual 
covenants contained herein and in the Employment Agreement, the parties hereto 
agree as follows:

         A.   Section 2 of the Employment Agreement is hereby amended to extend 
the term of said Agreement through March 31, 1999.

         B.   Except as expressly modified herein, the Employment Agreement 
shall remain in full force and effect in accordance with its original terms.

         IN WITNESS WHEREOF, the parties hereto have duly executed this First 
Amendment as of the day and date first above written.

WITNESS:                                         COMPANY

                                          MECHANICAL DYNAMICS, INC.


/s/ Linda Moore                     By: /s/ Robert R. Ryan, President
-----------------------------           ----------------------------------------
                                        Robert R. Ryan, President



                                               EMPLOYEE

/s/ Linda Moore                       /s/ David Peralta
-----------------------------         ------------------------------------------
                                      David Peralta
<PAGE>   15
                                                                 


                    SECOND AMENDMENT TO EMPLOYMENT AGREEMENT

         THIS SECOND AMENDMENT, made as of the 1st day of March, 1999, by and
between MECHANICAL DYNAMICS, INC., a Michigan corporation (the "Company"),
having offices located at 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105,
and DAVID PERALTA, of Livonia, Michigan ("Employee"), for the purpose of
amending that certain Employment Agreement between the Company and Employee
dated as of March 1, 1997, and amended by agreement dated as of March 1, 1998
(collectively, the "Employment Agreement").

                                   WITNESSETH:

         WHEREAS, the Company and Employee desire to extend the Employment
Agreement and to confirm a modification of said Agreement herein.

         NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants contained herein and in the Employment Agreement, the parties hereto
agree as follows:

         A.   Section 2 of the Employment Agreement is hereby amended to extend
the term of said Agreement through March 31, 2000.

         B.   Section 7.4 of the Employment Agreement is hereby deleted in its
entirety and there is substituted therefor a new Section 7.4 as follows:

                   "7.4 Change of Control. In the event of a change in control
         (as hereinafter defined) of the Company, if the remaining term of this
         Agreement is less than one (1) year from the effective date of such
         change of control, then the term of this Agreement shall be
         automatically extended through a date one (1) year from such effective
         date. For purposes of this Section 7.4, the term "change of control"
         shall mean the sale of fifty percent (50%) or more of (i) the Company's
         outstanding capital stock or (ii) the assets of the Company."

         C.   Except as expressly modified herein, the Employment Agreement
shall remain in full force and effect in accordance with its terms.

         IN WITNESS WHEREOF, the parties hereto have duly executed this Second
Amendment as of the day and year first above written.

WITNESS:                                           COMPANY

                                             MECHANICAL DYNAMICS, INC.

/s/ Linda K. Moore                           By: /s/  Robert R. Ryan
_________________________                       ____________________________
                                                Robert R. Ryan, President

                                                       EMPLOYEE






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<PAGE>   16

/s/ Linda K. Moore                         /s/ David Peralta
---------------------------                -----------------------------
                                           David Peralta
                                               
                                               
                                               



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