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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2000

Commission File Number 1-8722

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MSC.SOFTWARE CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware(State or Other Jurisdiction of
Incorporation or Organization)

95-2239450(IRS Employer Identification No.)815 Colorado Boulevard
Los Angeles, California(Address of principal executive offices)

90041(Zip Code)


(323) 258-9111(Registrant's Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

|Title of Each Class                                            |  | Name of Each Exchange On Which Registered
|-------------------------------------------------------------- |  | -----------------------------------------
|Common Stock, Par Value $0.01 Per Share                        |  | New York Stock Exchange                  
|7-7/8% Convertible Subordinated Debentures
Due August 18, 2004 |  | New York Stock Exchange                  

Securities Registered Pursuant to Section 12(g) of the Act:

Warrants

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

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

As
of March 15, 2001, the approximate aggregate market value of MSC.Software Corporation's voting stock held by non-affiliates was $133,074,000.

As
of March 15, 2001, there were outstanding 14,236,336 shares of Common Stock of MSC.Software Corporation.

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MSC.SOFTWARE CORPORATION  INDEX TO FORM 10-K  DECEMBER 31, 2000

|        |  |                                                     |  | Page
|------- |  | --------------------------------------------------- |  | ----
|PART I  |  |                                                    
|Item 1. |  | Business                                            |  | 1   
|Item 2. |  | Properties                                          |  | 15  
|Item 3. |  | Legal Proceedings                                   |  | 15  
|Item 4. |  | Submission of Matters to a Vote of Security Holders |  | 15  

|         |  |                                                                                       |  |   
|-------- |  | ------------------------------------------------------------------------------------- |  | --
|PART II  |  |                                                                                      
|Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 16
|Item 6.  |  | Selected Financial Data                                                               |  | 17
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 18
|Item 7a. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 34
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 35
|Item 9.  |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure  |  | 73

|         |  |                                                                |  |   
|-------- |  | -------------------------------------------------------------- |  | --
|PART III |  |                                                               
|Item 10. |  | Directors and Executive Officers of the Registrant             |  | 73
|Item 11. |  | Executive Compensation                                         |  | 76
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management |  | 81
|Item 13. |  | Certain Relationships and Related Transactions                 |  | 82

|         |  |                                                                 |  |   
|-------- |  | --------------------------------------------------------------- |  | --
|PART IV  |  |                                                                
|Item 14. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K |  | 83

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PART I

ITEM 1. BUSINESS

GENERAL

MSC.Software was re-incorporated in Delaware in 1994. Since our inception in 1963, we have been engaged in mechanical computer-aided engineering,
including the development, marketing and support of mechanical computer-aided engineering software solutions to optimize product design and quality, reduce product design costs and time to market, and
complement and minimize physical testing of products. We also provide a broad range of strategic engineering software consulting services to our customers to improve the integration and performance of
their simulation technologies. We serve customers in several industries, including aerospace, automotive, off-road vehicles, machinery, electronics, consumer products, shipbuilding and
railroad.

In
the current computer-aided design and manufacturing environment, designs are simulated before manufacturing begins. Simulation tools allow engineers to construct computer models of
products, components and systems to simulate performance conditions and predict physical responses to varying levels of stress, pressure, temperature and other variables. This allows our customers to
get better products to market faster. They do this by reducing costly and time-consuming physical testing of prototypes, and by substantially increasing the number of design
trade-offs and design cycles. Recent extensions of technology to simulate manufacturing processes now offer the opportunity to deliver substantial returns on investment for manufacturing
companies.

Since
early 1999, we have engaged in a number of key strategic activities to expand our market opportunities. These activities include the completion of four acquisitions to broaden
the technology scope of our core simulation software products and the establishment of a focused professional services group. The professional services group includes traditional engineering
consulting activities as well as extreme performance computing services, with special technical expertise in the use of Linux and other related operating systems. As an Application Service Provider,
we are utilizing the Internet and web-centric engineering software tools to broaden our customer base and expand our total available market.

In
2000, we sold our products and services to over 5,400 customers worldwide through our dedicated sales force and value-added resellers. We maintain 52 offices in 22 countries.

INDUSTRY

The product development industry broadly includes four interrelated software segments: mechanical computer-aided design ("CAD"); computer-aided engineering
("CAE"); computer-aided manufacturing ("CAM"); and product data management ("PDM") software products and related services. These segments combined are referred to as the mechanical computer-aided
design ("MCAD") industry. Our products generally are in the CAE segment.

Product
development has traditionally been an iterative process of detailed product definition, conceptual design, layout, drafting, physical prototyping, testing, design refinement,
manufacturing and assembly. Prior to the development of computer-driven design tools, the product development cycle demanded a long lead time since modifications to a product's design required time
intensive manual redesign at each step. CAD, CAM and CAE allowed engineers to create and test designs much more quickly and accurately.

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Once focused on the individual engineer's demand for functionality, the market is now driven by the needs of the original equipment manufacturers, suppliers, partners and customers to
collaborate, share data and integrate the multiple sub-assemblies in the creation of a complex master digital model. These needs have raised decision-making to executive management levels.
However, the requirement for an enterprise level solution has not lessened the need to provide superior functionality and engineering capabilities to the individual user.

CAE
provides design engineers with the tools to develop simulations that test the robustness of their designs through physics based rules to test whether a mechanical part, such as a
crankshaft, or a system of parts, such as an automobile, performs in the desired manner. CAE simulates stresses that the prototype may encounter, such as typical operation to crash testing. These
simulations enable design engineers to gain important information on the likely performance of their products and allow them to make alterations to designs early in the process that would likely prove
faulty, saving time and potentially costly redesigns later in the process. Our simulation software is designed to interoperate seamlessly with the leading MCAD software products in the market.

The
process of developing, testing and communicating new product designs throughout the enterprise requires large amounts of scarce resources, including skilled engineers and
processing power. The refinement of software interfaces, increased network capacity, scalability of resources and continued integration of enterprises have partially mitigated these challenges.
However, continued competitive pressure exists to streamline the process for both continued cost savings and more rapid product design.

OUR STRATEGY

Our goal is to expand our leading position as a provider of simulation software solutions and services. We are doing this by increasing the size of the market
that we address and by increasing our ability to reach and serve both new and existing customers. Our strategy has the following key elements:



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SOFTWARE

We market our software products under the name MSC.visualNastran and we group our products into four families:



Our
simulation software products consist primarily of a complement of solvers linked to a graphically based customer interface, sometimes referred to as pre and post processor. These
solvers are capable of simulating virtually any mechanical or structural phenomena.

The
governing principles for our core software are to provide:



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MSC.visualNastran Enterprise Family

MSC.NastranMSC.Nastran is a descendant of NASTRAN, a computer program owned by the
United States Government and leased to others. We have improved upon NASTRAN since NASTRAN was first released in 1970 and the current capabilities and scope of MSC.Nastran
are substantially greater
than those of NASTRAN. We have been selling MSC.Nastran since 1971. Pursuant to a 1982 agreement with the National Aeronautics and Space Administration, we acquired the non-exclusive
perpetual rights to commercially use those elements of NASTRAN which are embodied in MSC.Nastran.

We
believe that MSC.Nastran is the leading program for engineering analysis worldwide, based upon capability, functionality, international acceptance and sales volume. MSC.Nastran is
based upon the "finite element method", or FEM, of analysis. With FEM analysis, complex structures are divided into small elements, which form a finite element model, which is then subjected to
computer analysis. MSC.Nastran is used to analyze structures in order to determine, among other things, their strength, safety and performance characteristics. For example, in the aerospace industry,
MSC.Nastran is employed to determine the stress distribution in the major parts of an aircraft, such as engines, wings, fuselage and tail. A computer analysis could be applied to improve the design of
aircraft by suggesting the removal of material where stresses are low and the addition of material where stresses are high, while reducing the usage of physical prototypes and other testing. With this
knowledge, aircraft can be made both stronger and lighter. The same principles have been applied to improve the design of jets, rockets, engines, automobiles, trucks, tires, ships, farm equipment,
heavy industrial equipment, nuclear containment vessels, helicopters, spacecraft and other products and structures.

Because
MSC.Nastran has been designed in a modular way, new features can be added and obsolete features replaced without disrupting the other modules of the system. As a result, major
changes in computer hardware have been systematically accommodated. For example, the program has been adapted to be used on a variety of computer types, from supercomputers to personal computers. We
believe that the continued development and maintenance of MSC.Nastran, together with the modular design features of that program, have prevented, and will continue to prevent, its obsolescence,
although no assurance can be given that future changes in hardware or breakthroughs in software design will not result in the obsolescence of the program.

Version
2000 of MSC.Nastran was released in October 1999, a key feature being support for distributed parallel processing for statics, normal modes, and frequency response
analysis. As an example, this feature now makes it possible for large automotive jobs to be run during the workday, enabling this type of simulation to be an integral part of the design process.
Material sensitivity was also added. Over the next two years, our emphasis will expand to include more non-linear capabilities, utilizing MSC.Marc technologies, which are needed for large,
system-type simulation.

MSC.PatranMSC.Patran provides finite element modeling, analysis data integration, analysis simulation, and results
evaluation capabilities to simulate product performance early in the design-for-manufacture process. All of the functions of MSC.Patran may be integrated, automated and
tailored to the user's specific requirements using a powerful programming command language. We believe MSC.Patran is the standard simulation environment for manufacturers worldwide, based upon its
enhanced usability, direct CAD access, automated finite element modeling and completeness of analysis integration. MSC.Marc
Mentat continues to be the pre and post processor for MSC.Marc, and its unique features are being merged into MSC.Patran.

MSC.MarcMSC.Marc is the newest addition to the MSC.Software suite of solvers. MSC.Marc is a non-linear finite
element analysis program that offers substantial multi-physics simulation capability as well as automated non-linear analysis of complex contact problems commonly found in rubber or metal
forming and many other applications. MSC.Marc also has extensive distributed parallel processing capabilities, and it is known for its contact algorithms and its extensive materials library.

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MSC.DytranMSC.Dytran is for highly-non-linear analyses such as those found in impact. It uniquely
combines fluid-structure interaction to facilitate the simulation of tire hydroplaning and occupant safety (airbag-occupant interaction).

MSC.Enterprise MvisionMSC.Enterprise Mvision delivers quality materials information for use and
reuse during the product development, testing and manufacturing cycles. This valuable resource and data is available to engineers worldwide via integrated Intranet and Extranet web access.
MSC.Enterprise Mvision provides electronic data exporting directly into popular CAD/CAE programs, and can be supplied complete with authoritative, ready-to-go materials
databanks from the extensive MSC.Mvision library.

MSC.visualNastran Professional/Desktop Family

MSC.Nastran for WindowsMSC.Nastran for Windows is a Windows NT-based simulation
product, incorporating finite element modeling, simulation, and post processing. It uses MSC.Nastran as the solver engine. MSC.Nastran for Windows was launched in early 1995.

MSC.Working ModelThe December 1998 acquisition of Knowledge Revolution Inc. ("KR") led to the MSC.visualNastran
Desktop suite of products for motion and visualization/animation. These products can be linked to solid modelers such as Solid Works, Mechanical Desktop and Solid Edge. We plan to extend their
visualization capabilities to work with our core solvers.

During
1999, we introduced MSC.visualNastran 4D, which combined MSC.Working Model Motion with MSC.InCheck. MSC.Working Model Motion is used to simulate motion such as falling and
colliding objects, pistons or conveyor. This simulation answers the question "Will it work?" MSC.InCheck is used to simulate stress, deformation and vibration. This simulation answers the question
"Will it break?" These products run on Microsoft Windows-based personal computers and are closely linked to desktop-based CAD programs such as Solid Works, Mechanical Desktop and Solid Edge.

Other Software Products

Our other software products include MSC.Fatigue for durability analysis, MSC.Akusmod for internal acoustic modeling and analysis, and MSC.Construct for
topology and shape optimization. In addition, we have a variety of other products, none of which accounts for more than 5% of our revenue, including MSC.SuperModel for aerospace structural modeling,
and MSC.SuperForge for forging simulation.

PROFESSIONAL SERVICES

We provide a broad range of professional services, including the following:



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EXTREME PERFORMANCE COMPUTING SERVICES

Linux ServicesA new service area for us will be porting to the Linux operating system. For Linux,
we will help our customers move from Unix, configuring systems for them, porting their in-house software, customizing the operating system for special needs, and training them.

Turnkey ServicesWe will also offer our customers increased capability and productivity through "turnkey" systems that
include computers, the operating system, and software (ours and others). The computers will range from single personal computers or workstations to high-performance clusters of multiple
machines.

INTERNET SERVICES

Through our Engineering-e.com division, we offer simulation software package tools to a broad base of customers over the Internet. Our site went
live in April 1999, our Simulation Center was launched in March 2000 and our Engineering Exchange was launched in June 2000.

Simulation CenterThe Simulation Center provides the engineering community access to the latest and most advanced
simulation tools over the Internet on a subscription basis. The cornerstone of our ASP product line is MSC.visualNastran 4D, a design simulation package. Each of our Simulation Center applications
runs on our servers and is paid for by the customer on a monthly subscription basis. Our ASP reduces the need for customers to make significant upfront investments in software and upgrades, computer
infrastructure, and system maintenance.

Engineering ExchangeThrough our Engineering Exchange, we provide a consulting service facility to support the outsourcing
of engineering consulting projects using the Internet to connect consultants with clients. The Engineering Exchange provides a cost-effective means for connecting clients with a need for
consulting services with consultants who can fulfill the need. The Engineering Exchange provides a Web-based environment for companies to post projects and consultants to bid on them in
open competition. This new mode of outsourcing facilitates both client and consultant opportunities using the speed and global reach of the Internet. The Engineering Exchange also offers a structured,
manageable problem description process with templates designed to structure an engineering project into a comprehensive request for proposals. The Engineering Exchange also provides for online meeting
services and administrative handling of contract and billing details for the consultant participants.

TRAINING AND ONSITE SERVICES

TrainingWe have developed educational tools designed to train users of our products as an
extension of our software business. Training seminars are conducted in local languages on a frequent basis at the MSC Institute of Technology in Costa Mesa, California, at our offices worldwide, and
at client sites. We also offer both our core simulation software and Working Knowledge products to schools and universities.

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Custom Software Development, Collaborative Development, and PortingWe can customize our software in order to provide
customer requested capabilities on a funded basis. Some of our major software capabilitiesincluding dynamic sensitivity and optimization, acoustics, and static
aeroelasticitywere developed as custom projects. In many cases, the projects are fully funded by the customer, but there are cases where we absorb part of the cost if there is a future
commercial benefit (collaborative development). One type of custom development is funded porting, where the hardware provider pays us to port our software to their new hardware or to new versions of
operating systems.

Onsite SupportAs an optional service, we also provide onsite support for our software. This service enables our customers
to receive a dedicated level of technical support, with our personnel becoming or adding to the in-house experts.

RESEARCH AND DEVELOPMENT

We continually expend significant amounts on the development and maintenance of our suite of software products, as well as on new product research and
development. During the years ended December 31, 2000, 1999 and 1998, gross research and development expenditures were approximately $30,311,000, $27,766,000 and $25,266,000, respectively. Of
the amounts expended, $13,655,000, $8,255,000 and $11,600,000, respectively, were included in software costs capitalized.

Our
development activities have historically involved adding new capabilities to our family of simulation programs or converting those programs for use on new computer platforms.
These activities are intended to prevent technological obsolescence and assure our clients the maximum flexibility in selecting computer hardware.

Maintenance
of our software products includes system integration, quality assurance testing, error correction, and modifications to accommodate changes to computer system software.
Given the maturity of our software, most maintenance efforts stem from continuing new developments. Maintenance costs are expensed as incurred.

We
have recently increased our expenditure for software development. This increase resulted primarily from the acquisitions of MARC Analysis Research Corporation ("MARC"), Universal
Analytics Inc. ("UAI"), Computerized Structural Analysis and Research Corporation ("CSAR") and KR, and changes within our product management function in staffing and staff mix related to a strategic
revision in product development activity. This shift in strategy de-emphasizes features upgrades for specific products and promotes the development of technologies and integrated software
solutions for targeted customers. Our total development cost before software capitalization was 17% of revenue for 2000, which was consistent with our target under the new strategy.

SALES AND MARKETING

We sell our products worldwide through a dedicated sales force as well as value added resellers. We also use the Internet for domestic marketing. At
December 31, 2000, our sales force consisted of 349 sales and marketing personnel in 22 countries. We market our products by advertising in trade publications, participating in industry trade
shows and exhibits, conducting training seminars and working with our strategic partners as described above.

Historically,
our software products were used primarily in the design phase of product development. Accordingly, we targeted our marketing efforts on the product design engineers of
our customers. With the addition of MSC.Marc, we have expanded our marketing efforts to also cover the manufacturing engineers of our customers.

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Pricing of products sold in Europe through our German subsidiary are in Euros or local currency and products sold through our Japanese subsidiary are generally denominated in Japanese
Yen. All other products are sold through contracts that are generally denominated in United States Dollars.

POST SALES SUPPORT

Client service is an integral aspect of our marketing program. We maintain toll-free numbers and a "hot line" service for our clients. We have
invested in advanced "call center" technologies to improve our capabilities.

User
manuals, training and quality assurance are also essential to our marketing program. Our user manuals are comprehensive and updated on a regular basis. A staff of writers and
editors manage the design, writing, editing and preparation of user manuals as well as training materials and promotional literature.

We
conduct formal training for clients, ranging from three-day introductory courses to intensive courses on specialized subjects for experienced users. Onsite courses for
clients are provided for larger user organizations. We also host technology and industry conferences in the United States, Europe and Asia-Pacific to gather data on client needs, new
engineering applications, and new trends in computing technology.

REVENUE POLICY

We provide a variety of licensing alternatives for the use of our software products. Our software products have been primarily offered on an annual
non-cancelable, pre-paid license basis. An annual non-cancelable, pre-paid license is set at a fixed rate for the period and provides for payment in
advance of use. Prior to October 1, 1998, license revenue was recognized at the time of sale, while maintenance revenue, representing approximately 15% of the revenue from a
non-cancelable, pre-paid license, was recognized ratably over the term of the maintenance period. Effective October 1, 1998, we adopted the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants Statement of Position 98-9,"Modification of SOP 97-2, Software Revenue
Recognition With Respect to Certain Transactions", pursuant to which revenue will be recognized ratably over the life of the contract for a non-cancelable,
pre-paid annual license.

SALES AND SUPPORT OFFICES

We maintain North American sales and client support offices in:

  Atlanta, Georgia

  Bellevue, Washington

  Costa Mesa, California  Dayton, Ohio

  East Berlin, Connecticut

  Grapevine, Texas  Los Angeles, California

  Lowell, Massachusetts

  Mount Laurel, New Jersey  Palo Alto, California

  San Diego California

  San Mateo, California  Southfield, Michigan


Sales
and/or technical support representatives who have engineering backgrounds and experience using our products are staffed in these offices. These representatives market our
products, provide training in their use, respond to user support calls and provide solutions for simulation analysis throughout North America. In addition, sales and support personnel work out of
numerous home offices throughout the United States.

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Our products are marketed, distributed and supported outside of North America through a network of foreign subsidiary offices. Our wholly-owned European subsidiary, headquartered in
Munich, Germany, manages our network of wholly-owned subsidiaries in the United Kingdom, Italy, Spain, France, Norway, The Netherlands, Poland, and the Czech Republic. Other sales offices are located
in Greece, Russia, Hungary, Belgium, Romania, Slovenia and Turkey. In the Asia-Pacific region, sales and service are handled through our wholly-owned subsidiary in Tokyo, Japan, with
branch offices in Osaka and Nagoya, as well as other sales and services offices in Korea, Taiwan and the People's Republic of China. Foreign subsidiary offices are also located in Brazil and
Australia.

Representative
arrangements are also utilized in several other European and Asia-Pacific countries as well as in India and parts of Latin America.

CUSTOMERS

In 2000, we sold our products to approximately 5,400 customers. Customers in the aerospace, automotive and other manufacturing industries accounted for 32%,
25% and 15%, respectively, of our revenues for 2000, although no single customer accounted for more than 5% of our revenues.

For
2000, foreign export sales accounted for 57% of gross revenues, most of which was attributable to Europe (29%) and Asia-Pacific (28%). The balance was attributable to
Canada and South America.

BACKLOG

We do not maintain backlog statistics for our products because software is generally available for delivery upon execution of a licensing agreement or
contract. Backlog for consulting services work is currently not material.

INTELLECTUAL PROPERTY RIGHTS

We regard our software as proprietary and rely on a combination of trade secret, copyright and trademark laws, license agreements, nondisclosure and other
contractual provisions, and technical measures to protect our proprietary right in our products. We distribute our software products under software license agreements that grant customers nonexclusive
licenses for the use of our products, which are nontransferable. Use of the licensed software is restricted to designated computers at specified sites, unless the customer obtains a site license for
its use of the software. Software and hardware security measures are also employed to prevent unauthorized use of our software, and the licensed software is subject to terms and conditions prohibiting
unauthorized reproduction of the software.

MSC,
MSC., MSC.Aries, MSC.Patran, MSC.Mvision and MSC.Dytran are our registered trademarks. Working Model is a registered trademark of our wholly-owned subsidiary, Knowledge
Revolution, Inc. NASTRAN is a registered trademark of NASA. MSC.Nastran is an enhanced proprietary version of NASTRAN.

MSC.Nastran,
MSC.Nastran for Windows, MSC.SuperModel, MSC.InCheck, MSC.SuperForge, MSC.NVH Manager, MSC.DropTest, MSC.FEA, MSC.Fatigue, MSC.Working Knowledge, MSC.Construct, and
MSC.AMS are our trademarks. We also obtained the registered trademarks of MARC, Mentat, MARC/AutoForge, CSA and CSAR as part of our 1999 acquisitions. Registration is pending on certain of these
trademarks. Most of our trademarks have also been registered in foreign countries.

In
addition, we maintain federal statutory copyright protection with respect to our software programs and products, have registered copyrights on all documentation and manuals related
to these programs, and maintain trade secret protection on our software products.

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COMPETITION

We compete in highly competitive markets, including the development and marketing of software for use principally by engineers and designers in industry,
research laboratories and universities. We believe that we are a leading supplier of software and services to the MCAE markets in which we compete.

We
must continue to offer attractive prices and performance capabilities in order to retain existing clients and further extend our markets. See "Research and Development" and "Sales
and Marketing" above. We compete primarily based upon product quality, service, price and technological innovation.

EMPLOYEES

At December 31, 2000, we employed 918 persons, of whom 463 were involved in technical activities, 349 in sales and marketing, and 106 in administration.
Of these employees, over half of them hold advanced degrees. We have no contracts with labor organizations and believe our relations with our employees are good.

EXECUTIVE OFFICERS OF THE REGISTRANT

The table below sets forth certain information about our executive officers. We are not aware of any arrangement or understanding between these persons and any
other persons pursuant to which the executive officers were selected as such. We are not aware of any family relationships between these executive officers and any other executive officers.

|Name                     |  | Age |  | Current Position                                                       
|------------------------ |  | --- |  | -----------------------------------------------------------------------
|Frank Perna, Jr.         |  | 63  |  | Chairman and Chief Executive Officer                                   
|Louis A. Greco           |  | 53  |  | Chief Financial Officer and Corporate Secretary                        
|Kenneth D. Blakely       |  | 46  |  | Senior Vice President and General ManagerMechanical Solutions Division
|John Di Lullo            |  | 57  |  | Vice President and General ManagerEngineering-e.com Division          
|Jeffrey M. Morgan        |  | 55  |  | Vice PresidentWorldwide Product and Business Development              
|John W. Mowrey           |  | 60  |  | Vice PresidentProfessional Services                                   
|Richard C. Murphy        |  | 37  |  | Vice PresidentThe Americas                                            
|Greg Sikes               |  | 38  |  | Vice President and General ManagerLinux Division                      
|Dr. Christopher St. John |  | 54  |  | Vice PresidentEurope                                                  
|Masaru Tateishi          |  | 55  |  | Vice PresidentAsia-Pacific                                            

Frank Perna, Jr.has served as Chairman and Chief Executive Officer since December 1998. Prior to that, Mr. Perna was Chairman and
Chief Executive Officer of EOS, a privately held provider of power supplies for electrical equipment and notebook computers, from 1994 to 1998. Mr. Perna also serves as a director of California
Amplifier, Inc., a public company that designs and manufacturers a broad line of microwave amplifier equipment used with satellite video and terrestrial broadband applications, and as a director of
Geometric Software Solutions Co. Ltd., a public company headquartered in India providing CAD/CAM/CAE/PDM software applications, component technology and development services. Mr. Perna previously
served as director of PDA Engineering from 1990 to 1994 and was a member of the Board of Directors of PDA Engineering when it was acquired by us.

Louis A. Grecohas served as Chief Financial Officer since March 1983. He has served as Corporate Secretary since
December 1985. Mr. Greco has a Bachelor of Science Degree in Business with an Accounting Emphasis from California State University at Los Angeles and a Masters Degree in Business
Administration from the University of Southern California. He is also a Certified Public Accountant.

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Kenneth D. Blakelyhas served as Senior Vice President and General Manager of our Mechanical Solutions Division since
January 1999. Prior positions at MSC.Software include Vice President and General Manager of the Aerospace Business Unit; Vice President of Marketing; Director of Product Management; and Manager
of Technical Planning and Product Services. He also headed the MSC.Nastran for Windows team, responsible for conceiving, developing and launching the product. Mr. Blakely has written more than
40 technical papers, primarily on test-analysis correlation, structural dynamics, PC applications, and CAD-FEA interoperability. Mr. Blakely has a Bachelor of Science
Degree in Engineering and a Masters Degree in Structural Dynamics from the University of California at Los Angeles.

John Di Lullohas served as Vice President and General Manager of our Engineering-e.com Division since March 2000.
He came to us in October 1999. Prior to that, Mr. Di Lullo was the General Manager of Education Systems at Systems and Computer Technology from December 1997 through
October 1999, where he web-enabled their software products. Mr. Di Lullo was a Senior Director at Time-Warner from October 1994 through
December 1997, where he led various Internet commerce initiatives. Mr. Di Lullo has a Bachelor of Science Degree in Mathematics and a Masters Degree in Information Systems from Temple
University.

Jeffrey M. Morganhas served as Vice President of Worldwide Product and Business Development of our Mechanical Solutions
Division since March 2000. Mr. Morgan came to us with the acquisition of UAI, where he served as President since 1992. Mr. Morgan has a Bachelor of Science Degree in Flight
Sciences from Columbia University.

John W. Mowreyhas served as Vice President of Professional Services since September 2000. Prior to that, he was President and
Chief Operating Officer of Automated Analysis Corporation, an Ann Arbor services company, from October 1997 to August 2000. Mr. Mowrey has extensive experience in the automotive industry, having
served with General Motors from 1962 to 1982, where he held numerous positions including Vehicle Chief Engineer and Executive Director of Planning for Chevrolet. He moved to American Motors as Vice
President of Product Planning, Design and Purchasing in 1982. After its acquisition by DaimlerChrysler in 1987, he went into the engineering services business, first as
Chief Executive Officer of Time Engineering (1988 to 1992), then as Executive Vice President of Modern Engineering (1992 to 1996). He became a Senior Consultant to Andersen Consulting in 1996, and
subsequently joined Automated Analysis in a relationship with Andersen Consulting. Mr. Mowrey has a Bachelor of Science Degree in Mechanical Engineering from Carnegie-Mellon University and a
Masters Degree in Engineering from the University of Michigan.

Richard C. Murphyhas served as Vice President of The Americas of our Mechanical Solutions Division since January 1999. Prior to
that, he was Vice President and General Manager of the Growth Industries Business Unit from February 1997 to December 1998; Vice President and General Manager of the General
Manufacturing Unit from September 1996 to January 1997; Department Director of North American Sales and Support from March 1997 to August 1996; Regional Office Manager of
North American Sales and Sales Support from February 1994 to February 1996; and Sales Representative of North American Sales and Support from April 1991 to January 1994.
Mr. Murphy has a Bachelor of Science Degree in Mechanical Engineering Technology from California State Polytechnic University in Pomona, California.

Greg Sikeshas served as Vice President and General Manager of our Linux Division of MSC.Software since March 2000.
Mr. Sikes joined us in 1993 and has held various positions including Director of Aerospace Development, Manager of Aerospace Products and Product Manager for MSC.Patran. Mr. Sikes has a
Bachelor of Science Degree in Aeronautical Engineering from the University of Illinois and a Masters Degree in Mechanical Engineering from the University of California at Berkeley.

11

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Dr. Christopher St. Johnjoined us in 1991 to start an Engineering Services business in the United Kingdom operation of PDA
Engineering. He has served as Vice President of Europe of our Mechanical Solutions Division since April 1997. Prior to joining us, he worked for ten years in Engineering Education, lecturing
first at the University of London and subsequently at the University of Minnesota. He then worked for ten years as a Consulting Engineer with companies in the United States and the United Kingdom.
Dr. St. John received a Bachelor of Science Degree in Mining Engineering and a Ph.D for research on Numerical Modeling in Rock Mechanics, both from the University of London' Imperial College of
Science and Technology.

Masaru Tateishihas served as Vice President of Asia-Pacific of our Mechanical Solutions Division since
February 1995. Before that, he was General Manager of MSC Japan from March 1993 to January 1995. Mr. Tateishi has Bachelor of Science and Masters Degrees in Naval
Architecture from Kyushu National University (Japan).

RISK FACTORS

Some
of the statements in this report are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995 (the "Act"). You can identify these statements
by the use of words like "may", "will", "could", "continue", "expect" and variations of these words or comparable words. Actual results could differ substantially from the results that the
forward-looking statements suggest for various reasons, including those set forth below. The statements in this section are being made pursuant to the Act and with the intention of obtaining the
benefits of the "safe harbor" provisions of the Act. The forward-looking statements made in this report are made only as of the date of this report and we do not undertake to update or revise the
forward-looking statements.

Downturns in the industries we serve would adversely affect our operating results.For 2000, sales to customers in the aerospace and
automotive industries accounted for approximately 32% and 25%, respectively, of our revenues. Changes in capital spending by, and cyclical trends affecting, customers in these industries may adversely
affect the demand for our products and services. In addition, these types of customers tend to adhere to a technology choice for long periods, possibly an entire development cycle. As a result, a lost
opportunity with a given customer may not become an opportunity for several years.

Our international sales expose us to material risks.Revenues from foreign export sales represented 57% of our gross revenue for 2000.
We expect revenues from foreign export sales to continue to represent a significant portion of total revenue. There are risks inherent in doing business internationally, including:



12

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We may not be able to develop new products to satisfy changes in demand to meet competition.Our operating results will depend in part
on our ability to develop and introduce new and enhanced products on a timely basis. Successful product development and introduction depends on numerous factors, including our ability to anticipate
customer requirements, changes in technology, our ability to differentiate our products from those of our competitors, and market acceptance. We may not be able to develop and introduce new or
enhanced products in a timely or cost-effective manner or to develop and introduce products that satisfy customer requirements. Our products also may not achieve market acceptance or
correctly anticipate technological changes.

The timing of orders can impact our quarterly results and the price of our common stock.We derive most of our revenue from selling
software products and services to high-end users of the product design markets. Our revenue growth and our ability to match spending levels with revenue growth rates will directly affect
our future operating results. Historically, a significant portion of our revenue has been generated from shipments in the last month of a quarter. In addition, higher volumes of orders have been
experienced in the fourth quarter. The concentration of orders makes projections of quarterly financial results difficult. Accordingly, we may experience fluctuations in our future operating results
on a quarterly or annual basis, which, in turn, could adversely affect the price of our common stock.

Our operating expenses are fixed in advance. Therefore, we have limited ability to reduce expenses in response to any revenue
shortfalls.We plan our operating expense levels, in part, on expected revenue growth. Our expense levels, however, are generally committed in advance and, in the near term, we
are able to change only a relatively small portion of our expenses. As a result, our ability to convert operating outlays into expected revenue growth at profitable margins will affect our future
operating results. If our future revenues are less than expected, our net income may be disproportionately affected since expenses are relatively fixed.

Strong competition in the software industry may affect prices, which could reduce margins and adversely affect our operating results and financial
position.The simulation software industry is highly competitive. The entire industry may experience pricing and margin pressure, which could adversely affect our operating
results and financial position. Some of our current and possible future competitors have greater financial, technical, marketing and other resources than we do, and some have
well-established relationships with our current and potential customers. It is also possible that alliances among competitors may emerge and rapidly acquire significant market share or
that competition will increase as a result of software industry consolidation. Increased competition may result in price reductions, reduced profitability and loss of market share, any of which could
have a material adverse effect on our business, financial condition and results of operations.

Our future success depends in part on the continued service of our key technical and management personnel and our ability to identify, hire and retain
additional personnel.There is intense competition for qualified personnel in the software industry. We may not be able to continue to attract and retain qualified personnel
necessary for the development of our business or to replace qualified personnel who may leave our employ in the future. Any growth we experience is expected to place increased demands on our resources
and will likely require the addition of management and technical personnel, and the development of additional expertise by existing management personnel. Loss of the services of, or failure to
recruit, key technical and management personnel could harm our business.

If we cannot adequately protect our intellectual property rights, our financial results may suffer.Our ability to compete is affected
by our ability to protect our intellectual property rights. We rely on a combination of trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and licensing
arrangements to protect our intellectual property rights. Despite these efforts, the steps we take to protect our proprietary information may not be adequate to prevent misappropriation of our
technology, and our competitors may independently develop technology that is substantially similar or superior to our technology.

13

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We could be harmed by litigation involving intellectual property rights.We may be accused of
infringing the intellectual property rights of third parties. Furthermore, we may have certain indemnification obligations to customers with respect to the infringement of third-party intellectual
property rights by our products. Infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims may be asserted in the
future and such assertions, if proven to be true, may harm our business.

Any
litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, would, at a minimum, be costly and could divert
the efforts and attention of our management and technical personnel. In the event of any adverse ruling in any such litigation, we could be required to pay substantial damages, cease the
manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party claiming infringement. A
license might not be available on reasonable terms, or at all.

We have acquired and may continue to acquire other companies and may be unable to successfully integrate such companies with our
operations.During 1998 and 1999, we acquired five businesses. We may continue to expand and diversify our operations with additional acquisitions. If we are unsuccessful in
integrating these companies or product lines with our operations, or if integration is more difficult than anticipated, we may experience disruptions that could have a material adverse effect on our
business, financial condition and results of operations. Some of the risks that may affect our ability to integrate or realize any anticipated benefits from companies we acquire include those
associated with:



Our stock price may continue to be volatile.The market price of our common stock has fluctuated significantly to date. In the future,
the market price of our common stock could be subject to significant fluctuations due to general economic and market conditions and in response to other factors, including:



14

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Certain provisions of our certificate of incorporation may delay, defer or prevent a change of control.Certain provisions of our
Restated Certificate of Incorporation and Restated Bylaws could make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to shareholders.
These provisions include the following:



In
addition to the above provisions, in 1998 we adopted a new shareholder rights plan. This plan entitles the stockholders, if an entity acquires more than 20% of our stock or in the
event of a transaction commonly known as a "squeeze-out merger", to purchase either our common stock or the common stock of the merged entity at one-half of such stock's market value. We may redeem
the rights
at a nominal value until ten days after the announcement of the acquisition of such a 20% interest and under certain other circumstances.

ITEM 2. PROPERTIES

All of our offices are leased under agreements expiring at various times over the next one to 12 years. The Los Angeles office serves as our corporate
headquarters and e-commerce office. This office includes 28,035 square feet under a lease expiring in 2005. Our office in Costa Mesa, California includes 81,178 square feet under a lease
expiring in 2002. In 2001, we will be relocating the corporate headquarters and the Costa Mesa office to new office space nearby in the South Coast Metro area of Orange County, California. We believe
that this move will provide enhanced productivity by having key personnel in one office. The new office includes 203,511 square feet under a lease expiring in 2013. The earliest move-in
date is anticipated to be April 2001. We also lease other offices throughout the United States and internationally. See Note 16Commitments and Contingencies in Notes to
Consolidated Financial Statements of this report for additional information regarding our lease obligations.

ITEM 3. LEGAL PROCEEDINGS

We are involved in various pending or threatened litigation matters arising out of the normal conduct of our business. In our opinion, these matters will not
have a material adverse effect on our financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders during the last quarter of our fiscal year ended December 31, 2000.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed for trading on the New York Stock Exchange ("NYSE") under the symbol "MNS". The following table sets forth the high, low, average
and closing prices, as reported on the NYSE composite trading system, for the periods shown:

Sales PricesHigh

Low

Average

CloseCalendar Year 2000:Fourth Quarter

$
10.75

$
6.50

$
8.44

$
7.85Third Quarter

$
12.20

$
9.00

$
10.30

$
10.60Second Quarter

$
11.75

$
8.31

$
9.54

$
9.31First Quarter

$
14.25

$
7.50

$
10.43

$
11.81Calendar Year 1999:Fourth Quarter

$
10.31

$
6.25

$
7.45

$
10.13Third Quarter

$
7.25

$
4.88

$
5.77

$
6.69Second Quarter

$
6.13

$
5.19

$
5.71

$
5.81First Quarter

$
7.63

$
5.06

$
6.15

$
6.00


As
of March 15, 2001, there were 385 record holders of our common stock. We eliminated our dividend in September 1996 and do not anticipate paying a dividend in the
foreseeable future. In addition, our loan agreement with our principal bank imposes restrictions on the payment of cash dividends or payments on account of or in redemption, retirement or purchase of
common stock or other distributions.

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 is derived from our audited consolidated financial
statements. The selected financial data should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial
Statements and the related Notes to Consolidated Financial Statements.

|                              |                       | As of and for the Years Ended December 31,
|----------------------------- | --------------------- | ------------------------------------------
|
|
|STATEMENT OF OPERATIONS DATA: |                       |                                           
|Revenue                       |                       | $                                         
|Operating Income (Loss)       |                       | $                                         
|Net Income (Loss)             |                       | $                                         
|Basic Earnings (Loss)         |                       |                                           
|                              | Per Share             |                                           
|Diluted Earnings (Loss)       |                       |                                           
|                              | Per Share             |                                           
|Cash Dividends Declared       |                       |                                           
|                              | Per Share             |                                           
|BALANCE SHEET DATA:           |                       |                                           
|Total Assets                  |                       | $                                         
|Long-Term Debt:               |                       |                                           
|Note Payable, Less            |                       |                                           
|                              | Current Portion       |                                           
|Convertible Subordinated      |                       |                                           
|                              | Debentures, Net       |                                           
|Subordinated Notes            |                       |                                           
|                              | Payable, Less Current |                                           
|                              | Portion               |                                           

---

17

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are a leader in providing high-end engineering analysis technology. We develop and market mechanical computer-aided engineering, or MCAE,
software for use principally by engineers and designers in industry, research laboratories and universities. Our MCAE solutions allow our customer's "design-to-manufacture"
team greater freedom to innovate design concepts, optimize complex solutions and exploit materials as a design variable.

In
addition to our high-end engineering analysis technology, we have packaged our technology in lower-priced offerings for multi-disciplinary engineers that perform
simulation on occasion and for design engineers who need to verify design concepts.

On
January 29, 1999, we changed our fiscal year from a year ending January 31 to a year ending December 31. All financial information for prior periods is
restated to coincide with the new fiscal year.

RECENT ACQUISITIONS

During 1999, MSC acquired the following companies: MARC Analysis Research Corporation ("MARC"); Universal Analytics Inc. ("UAI"); and Computerized
Structural Analysis and Research Corporation ("CSAR"). In late December 1998, MSC acquired Knowledge Revolution Inc. ("KR").

MARC Analysis Research CorporationOn June 18, 1999, we acquired all of the outstanding stock of MARC, a software
developer and supplier whose products include MARC, a non-linear finite element analysis program for engineering structural analysis; Mentat, a graphical user interface for MARC; and
MARC/Autoforge, a simulation program for the bulk forging industry.

The
aggregate fair value of the consideration paid to shareholders and holders of options of MARC resulted in a purchase price valued at approximately $36,100,000 including
approximately $20,300,000 in cash and a package of securities to the MARC shareholders, including $11,000,000 principal amount of 8% subordinated notes due in 10 years, approximately $3,236,000
principal amount of 8% subordinated notes due in two years, $2,000,000 principal amount of our 7-7/8% convertible subordinated debentures due August 18, 2004, and
five-year warrants to purchase 1,400,000 shares of our common stock at an exercise price of $10.00 per share.

In
allocating the purchase price to the acquired assets and assumed liabilities, we recorded an $8,719,000 deferred income tax liability related to identified intangible assets,
offset by $1,933,000 for deferred income tax assets, and $2,360,000 for restructuring costs related to the integration of MARC, primarily severance costs and costs related to facility consolidations.

The
acquisition was accounted for as a purchase and, accordingly, the operating results of MARC are included in our consolidated financial statements from the date of acquisition. The
total purchase price was allocated to the assets and liabilities of MARC based upon their approximate fair values. The independent appraisal of the acquired business included $4,067,000 of purchased
in-process research and development, which was related to two products under development. The acquired technology had not yet reached technological feasibility and had no future
alternative uses. Accordingly, it was written off at the time of the acquisition. The remaining purchase price was allocated as follows: $3,433,000 to net tangible assets; $25,643,000 to identified
intangible assets (including $15,274,000 of developed technology, $6,322,000 to customer list, $2,390,000 for trade name recognition, and $1,657,000 of assembled work force); and $12,126,000 to
goodwill. Goodwill and identified intangibles are being amortized over 15 years.

18

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On the date of its acquisition, MARC's technology was classified between core or developed technology and in-process research and development. Three MARC products that had been
released were grouped under developed technology and two development projects under way were identified as in-process research and development. The completion of the two development projects was
estimated to be 24% and 91% at the time of acquisition. The technology assets were valued using a relief from royalty and discounted cash flow approach. The concept of the relief from royalty approach
is that the value of a technology is the avoided cost of licensing the technology from a third party that the company would otherwise incur if it did not own the technology in question. The in-process
technology was incorporated in our MSC.Marc and MSC.Marc Mentat products that were released in the second quarter of 2000.

These
research and development valuations represent the ten-year after-tax cash flow of the technology using a discount rate of 15% for developed technology and 18% for in-process
research and development. The discount rate is based upon MARC's weighted-average cost of capital ("WACC") of 16%. This WACC was derived by considering various factors to quantify the risk above a
risk-free rate of return of approximately 6%. The discount rate selected for the in-process research and development was determined to be higher due to the relatively higher risk of these cash flows.

In
valuing both the developed technology and in-process research and development, the initial focus was on the revenue contribution generated by each of the products. Revenue
estimates were based on the following: (1) aggregate revenue growth rates for the business as a whole; (2) individual product revenues; (3) growth rates for related products;
(4) anticipated product development and introduction schedules; (5) product sales cycles; and (6) the estimated useful life of a product's underlying technology. The aggregate
product revenue amounts were estimated and segregated between the developed technology and each in-process research and development project. In valuing the developed technology, an after-tax royalty
rate of 10% was combined with a 2% after-tax royalty rate attributable to the in-process technology to arrive at the "free cash flow" of the developed technology. This cash flow was then discounted to
determine the value of the developed technology at the acquisition date. In valuing the in-process technology, an after-tax royalty rate of 8% was applied to the revenues associated with the
technology and the resulting avoided royalty payments were discounted to determine the value of the technology. Percentage of completion factors, based on historical and planned future development
expenditures, were applied to the unadjusted projected cash flows of the in-process technologies.

Universal Analytics Inc.On June 24, 1999, we acquired UAI for approximately $8,400,000 in
cash. UAI is a developer and distributor of FEA software and engineering services for the engineering community and to major manufacturers worldwide. The acquisition was accounted for as a purchase
and, accordingly, the operating results of UAI are included in our consolidated financial statements from the date of acquisition. The excess of the aggregate purchase price over the fair market value
of net assets acquired was approximately $6,800,000. Goodwill and identified intangibles are being amortized over ten years.

Computerized Structural Analysis and Research CorporationOn November 4, 1999, we acquired CSAR for approximately
$9,650,000 in cash and five-year warrants to purchase 110,000 shares of our common stock at an exercise price of $10.00 per share. We financed a portion of the purchase price through an
$8,000,000 term loan. CSAR is a developer and distributor of FEA software and services for the engineering community and to major manufacturers worldwide. The acquisition has been accounted for as a
purchase and, accordingly, the operating results of CSAR have been included in our consolidated financial statements since the date of acquisition. The excess of the aggregate purchase price over the
fair market value of net assets acquired was approximately $9,800,000. Goodwill and identified intangibles are being amortized over five years.

19

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Knowledge Revolution Inc.In late December 1998, we acquired KR for approximately $19,200,000 in cash. KR is
the world's leading developer and distributor of 2D and 3D-motion simulation software for design engineers and analysts. The acquisition was accounted for as a purchase. The total purchase price was
allocated to the assets and liabilities of KR based on their approximate fair market value. The appraisal of the acquired business included $6,000,000 of purchased in-process research and
development, which was related to three products under development. The acquired technology had not yet reached technological feasibility and had no future alternative uses. Accordingly, it was
written off at the time of the acquisition. The remaining purchase price was allocated as follows: $1,549,000 to net tangible assets; $9,890,000 to identified intangible assets (including $5,200,000
of value-added reseller distribution channel, $4,300,000 of developed technology, and $390,000 of assembled work force); and $1,786,000 to goodwill. Goodwill and identified intangibles are being
amortized over three to ten years.

On
the date of its acquisition, KR's technology was classified between core or developed technology and in-process research and development. Four KR products, one released and the
others under development, were identified and their reliance on the developed technology and in-process research and development was determined. The reliance on in-process research and development
ranged from 0% to 90% on these products. In-process research and development was further segmented into classifications of completed and to-be-completed based on three criteria: (1) the
estimated time required to complete the development; (2) the estimated cost to complete; and (3) the complexity involved in overcoming technological obstacles that must be resolved
during development. The completion of development at the time of acquisition ranged from 39% to 72%. The in-process technology was incorporated in our Working Model Motion product that was released in
the second quarter of 1999.

These
research and development valuations represent the five-year after-tax cash flow of this technology using a discount rate of 23% for developed technology and 28% for in-process
research and development. The discount rate is based upon KR's WACC of 22%. This WACC was derived by considering various factors to quantify the risk above a risk-free rate of return of approximately
5%. The discount rate selected for the in-process research and development was determined to be significantly higher than the WACC due to the fact that the technology had not yet reached technological
feasibility as of the date of acquisition.

In
valuing KR's developed technology and in-process research and development, the initial focus was on the revenue contribution generated by each of the products. Revenue estimates
were made using the same principles as we used with respect to Marc. The aggregate product revenue amounts were estimated and segregated between the developed technology and in-process research and
development. Operating expenses were deducted from the revenue estimates to arrive at operating income. Operating expenses included cost of revenue, selling and marketing, and general and
administrative expenses but no non-cash charges such as depreciation and amortization. Certain adjustments were made to operating income to derive the after-tax cash flow. These adjustments included
the calculation of an applicable tax expense and an appropriate charge for the use of contributory assets necessary to generate revenue and operating income associated with the subject intangible
assets.

20

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ACCOUNTING CHANGES

In the fourth quarter of 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 98-9,"Modification of SOP 97-2Software Revenue Recognition with Respect to Certain
Transactions" which retained the restrictive definition of what qualified for vendor specific objective evidence ("VSOE") of fair value for allocating a contract fee among the
various elements of a multiple element arrangement. VSOE of fair value must exist for all undelivered elements of an arrangement, such as post-sales customer support ("PCS"). As permitted,
we adopted the provisions of SOP 98-9 effective October 1, 1998 and, accordingly, revenue on non-cancelable and pre-paid lease agreements is recognized
monthly over the term of the agreement, beginning in the fourth quarter of 1998, since the VSOE of fair value required under SOP 97-2 to allocate the contract fee to the undelivered PCS
elements of the arrangements is not available.

Future
quarters will also reflect the deferral of revenue associated with non-cancelable and pre-paid annual lease arrangements entered into in those quarters
under SOP 98-9. Because SOP 98-9 did not permit restatements of prior periods and because there are annual license renewals in every month of the year, the entire effect of
this change in revenue recognition was not fully recognized in reported revenue on a quarterly basis until the fourth quarter of 1999. The year 2000 is the first reported year that reflects a full
twelve months of revenue under this method of revenue recognition for annual licenses.

ASSET IMPAIRMENT AND RESTRUCTURING

We have consistently followed the policy of capitalizing software development costs related to product development in accordance with the guidelines
established under Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed". Capitalized software costs are then amortized over a period of time (expected useful life) that is estimated to equate to the term during which meaningful revenue
from the related product is expected to be recognized. Previously capitalized product development costs and projected revenues are reviewed quarterly to determine if any impairment in value has
occurred that would require an adjustment in the carrying value or change in expected useful lives under the guidelines established in SFAS No. 86 and SFAS No. 121,
"Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of". We recognize impairment losses on long lived assets
when
indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts.

Accordingly,
during the second quarter of 1999, we recognized non-cash pre-tax charges of $1,500,000 related to the write-off of the net book value
of certain previously capitalized software development costs and to provide for the remaining payments due. These costs were deemed impaired because they represented duplicate technologies from those
acquired in the MARC acquisition. During the fourth quarter of 1998, we recognized non-cash pre-tax charges of $7,771,000 related to the write-off of the net book
value of certain previously capitalized software development costs and $393,000 of other impairment charges recorded in cost of revenues and a non-cash pre-tax charge of
$1,670,000 recorded as part of restructuring and other impairment charges related to the write-off of previously reported goodwill from the acquisition of Silverado Software &
Consulting ("Silverado").

On
February 3, 1999, we announced a new organizational structure following a re-evaluation of our business strategy. We are now emphasizing the expansion of the
software business into new markets and value-added integration services. The new structure is designed to better serve the existing customer base and at the same time address expanding growth
opportunities. The reorganization plan provided for a reduction in our worldwide workforce of approximately 75 positions and the consolidation of 15 field offices. These changes resulted in
pre-tax charges of $5,497,000 in the first two

21

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quarters of 1999. The charges consist of severance costs of $2,908,000, costs related to facility consolidations of $2,262,000 and other charges of $327,000. We believe these charges provided a
reduction in our annual operating costs.

RESULTS OF OPERATIONS

The following table sets forth items included in the consolidated statements of operations data as percentages of total revenue.

|                                                          |                                                | Years Ended December 31,          |     
|--------------------------------------------------------- | ---------------------------------------------- | --------------------------------- | ----
|
|REVENUE:                                                  |                                                |                                   |     
|                                                          | Software Licenses                              |                                   | 61.0
|                                                          | Software Support and Services                  |                                   | 39.0
|                                                          |                                                |                                   |     
|                                                          |                                                | Total Revenue                     |     
|                                                          |                                                |                                   |     
|COST OF REVENUE:                                          |                                                |                                   |     
|                                                          | Software Licenses                              |                                   | 12.7
|                                                          | Software Support and Services                  |                                   | 12.5
|                                                          |                                                |                                   |     
|                                                          |                                                | Total Cost of Revenue             |     
|                                                          |                                                |                                   |     
|GROSS PROFIT                                              |                                                | 74.8                              | %   
|                                                          |                                                |                                   |     
|OPERATING EXPENSE:                                        |                                                |                                   |     
|                                                          | Research and Development                       |                                   | 9.4 
|                                                          | Selling, General and Administrative            |                                   | 46.2
|                                                          | Amortization of Goodwill and Other Intangibles |                                   | 6.2 
|                                                          | Restructuring and Other Impairment Charges     |                                   |    
|                                                          | Write-Off of Acquired In-Process Technology    |                                   |    
|                                                          |                                                |                                   |     
|                                                          |                                                | Total Operating Expense           |     
|                                                          |                                                |                                   |     
|OPERATING INCOME (LOSS)                                   |                                                | 13.0                              | %   
|                                                          |                                                |                                   |     
|OTHER EXPENSE (INCOME):                                   |                                                |                                   |     
|                                                          | Interest Expense                               |                                   | 3.8 
|                                                          | Gain on Sale of Investment                     |                                   |    
|                                                          | Other Expense (Income), Net                    |                                   | (0.1
|                                                          |                                                |                                   |     
|                                                          |                                                | Total Other Expense (Income), Net |     
|                                                          |                                                |                                   |     
|INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES |                                                | 9.3                               | %   
|Provision (Benefit) for Income Taxes                      |                                                | 3.0                               | %   
|                                                          |                                                |                                   |     
|NET INCOME (LOSS)                                         |                                                | 6.3                               | %   
|                                                          |                                                |                                   |     

22

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2000 Compared to 1999

Net IncomeConsolidated net income was $11,133,000, or $0.76 per diluted share, in 2000 compared to
$5,097,000, or $0.37 per diluted share, in 1999.

RevenueWe reported revenue of $178,024,000 in 2000 compared to $149,235,000 in 1999, an increase of $28,789,000, or 19%.
The acquisitions of MARC, UAI and CSAR accounted for revenues of $20,365,000 in 2000 compared to $10,359,000 in 1999, an increase of $10,006,000. These acquisitions were all accounted for under the
purchase method of accounting, so the corresponding revenue in 1999 was only from their respective acquisition dates. Increased sales of our core software products and the items discussed below
accounted for the remaining increase of $18,783,000.

Software
license revenue and support fees account for 93% of total reported revenue for 2000 and 1999, with service revenue making up the difference. For 2000 and 1999, approximately
75% and 70%, respectively, of our software license revenue and support fees was derived from annual renewable leases and recurring support fees, with the remaining 25% and 30%, respectively, related
to paid-up licenses. Non-recurring revenues, which are unaffected by the adoption of SOP 98-9, decreased $1,220,000, including: consulting services revenue
increased $1,954,000; paid-up license revenue, excluding paid-up license revenue from acquisitions, decreased $1,938,000; embedded technology license revenue decreased
$967,000; and other software services revenue decreased $269,000. Revenue for 2000 and 1999 from the acquisitions of MARC, UAI and CSAR included paid-up license revenue of $6,184,000 and
$3,430,000, respectively, an increase of $2,754,000. We anticipate the same percentage of revenue derived from paid-up licenses from MARC, UAI and CSAR for 2001.

As
permitted, we adopted the provisions of SOP 98-9 effective October 1, 1998 and, accordingly, revenue on non-cancelable, pre-paid annual
lease agreements is recognized monthly over the term of the agreement, beginning in the fourth quarter of 1998, as compared to only deferring the fee related to maintenance for licenses sold before
October 1, 1998. Due to the adoption of SOP 98-9, it is difficult to make comparisons of revenues between 2000 and 1999. However, for comparative purposes, we estimate that total
revenue for 1999 would have been $8,800,000 higher than the reported revenues if SOP 98-9 had been adopted beginning on October 1, 1997.

Software
license revenue consists of licensing fees, which are fees charged for the right to use our software or a third parties' software. Software is sold through monthly, annual or
longer lease
arrangements and through paid-up license arrangements, whereby the customer purchases a long-term license for the use of the software. Support and services revenues include
PCS, consulting and training services. PCS includes telephone support, "bug" fixes and upgrade privileges on a when and if available basis. Services range from installation and basic consulting to
software modification and customization to meet specific customer needs and training.

The
following table shows revenue by geographic region and the related growth rates between 2000 and 1999:

|         |              | Year Ended December 31, |   | Revenue Growth |             | % of Total Revenue |           
|-------- | ------------ | ----------------------- | - | -------------- | ----------- | ------------------ | ----------
|
|Revenue: |              |                         |   |                |             |                    |           
|         | The Americas |                         | $ | 76,423,000     |             | $                  | 68,092,000
|         | Europe       |                         |   | 52,469,000     |             |                    | 45,672,000
|         | Asia-Pacific |                         |   | 49,132,000     |             |                    | 35,471,000
|         |              |                         |   |                |             |                    |           
|         |              | Total Revenue           |   | $              | 178,024,000 |                    | $         
|         |              |                         |   |                |             |                    |           

23

---

The increase in reported revenues for all regions was due primarily to increases from core business revenue. Europe and Asia-Pacific also had increases from the
acquisitions of MARC, UAI and CSAR, which accounted for revenue increases in Asia-Pacific of $7,796,000 and in Europe of $2,834,000.
Revenue growth in 2000 was also impacted by unfavorable foreign currency translation rates for the Euro and favorable foreign currency translation rates for the Japanese Yen. Revenue in the current
year would have been approximately $184,105,000 if translated using the prior year's foreign currency translation rates. Our international operations in Europe and Asia-Pacific are sales
organizations with high gross profit margins, which is due to these operations having minimal software development expenses. As a result, we are exposed to the effects of foreign currency fluctuations
of the United States Dollar versus the Japanese Yen and the Euro. The following table details the effect of the currency rate changes on revenue for 2000 and the risk of change in 2001. The trend
exchange rate was determined by extrapolating the rate change between 1999 and 2000 and is used to illustrate the sensitivity to foreign currency fluctuations. The trend rate is for illustration
purposes only and may or may not reflect the actual translation rate in the future period.

2000
Using 1999
Exchange Rates

2000
Using 2000
Exchange Rates

2000 Using
1999/2000 Trend
Exchange RatesRevenues:The Americas

$
76,423,000

$
76,423,000

$
76,423,000Europe


60,755,000


52,469,000


44,183,000Asia-Pacific(1)


46,927,000


49,132,000


51,594,000Total Revenue

$
184,105,000

$
178,024,000

$
172,200,000Exchange Rates:$/Euro


1.07


0.92


0.77Yen/$


113.68


107.73


101.78


---

Cost of RevenueIn accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed", cost of revenue expense includes period expenses directly related to revenue as well as the amortization of
capitalized software costs. Total cost of revenue was $44,853,000, or 25% of total revenue, compared to $38,261,000, or 26% of total revenue, for the prior year.

Cost of RevenueSoftware LicensesCost of revenuesoftware licenses was $22,648,000, or 21% of
license revenues, for 2000 compared to $19,171,000, or 19% of license revenues, for the prior year. 2000 and 1999 included software amortization of $11,317,000 and $8,816,000, respectively. Cost of
revenue for 1999 also included a software impairment charge of $1,500,000. Excluding amortization of capitalized software costs and the software impairment charge, cost of revenuesoftware
licenses was $11,331,000, or 10% of license revenues, for 2000, which was consistent with the prior year of $8,855,000, or 9% of license revenues.

Cost of RevenueSupport and ServicesCost of revenuesupport and services was $22,205,000, or 32%
of support and services revenues, for 2000 compared to $19,090,000, or 39% of support and services revenues, for the prior year. The decrease in cost of revenuesupport and services as a
percentage of support and services revenue was the result of higher revenues and efficiencies from new call center technologies that allowed for more efficient customer service.

Gross ProfitGross profit, which is total revenue less cost of revenue, was $133,171,000, or 75% of total revenue, for
2000, an increase of $22,197,000 as compared to a gross profit of $110,974,000, or 74% of total revenue, for 1999. This percent increase was due to the percent decreases in cost of
revenuesupport and services.

24

---

Operating ExpenseOperating expense was $110,030,000 for 2000 compared to $108,338,000 for the prior year, an increase of
$1,692,000, or 2%. Operating expense for 1999 included a write-off of acquired in-process technology of $4,067,000 and restructuring costs of $5,497,000. Without these charges,
operating expense would have totaled $98,774,000 for 1999 compared to $110,030,000 for 2000, an increase of $11,256,000, or 11%. This increase resulted from additional development and selling costs
from the acquisitions of MARC, UAI and CSAR, the creation of Engineering-e.com in the second quarter of 1999, and the creation of the MSC.Linux division in January 2000.

Research and DevelopmentIn accordance with SFAS No. 86, research and development expense is reported net of the
amount capitalized. Research and development expense for 2000 was $16,656,000 compared to $19,511,000 for 1999, a decrease of $2,855,000, or 15%. The decrease was due to a $2,545,000 increase in the
total gross investment in research and development activities, which was more than offset by an increase of $5,400,000 in the amount of research and development expenditures capitalized under SFAS
No. 86.

The
total gross investment in research and development activities for 2000 was $30,311,000, or 17% of total revenue, compared to $27,766,000, or 19% of total revenue, for the prior
year. The increase in research and development expense resulted from additional development costs from the acquisitions of MARC, UAI and CSAR and the creation of the MSC.Linux division.

Capitalized
software development costs were $13,655,000 for 2000 compared to $8,255,000 for the prior year, an increase of $5,400,000. The amount of product development capitalized in
any given period is a function of many factors, including the number of products under development at any point in time as well as their stage of development. Our product development process is
continually under review to improve efficiency and product quality, and to reduce time to market. Due to the continual change in the product development process, there can be no assurance that the
level of development capitalized in future periods will be comparable to current capitalized levels.

Selling, General and AdministrativeSelling, general and administrative expense was $82,325,000, or 46% of total revenue,
for 2000 compared to $72,152,000, or 48% of total revenue, for 1999, an increase of $10,173,000, or 14%. This increase resulted from additional selling costs from the acquisition of MARC, primarily in
the Asia-Pacific region, the creation of the MSC.Linux division in January 2000, and increased product marketing costs.

Amortization of Goodwill and Other IntangiblesAmortization of goodwill and other intangibles was $11,049,000 for 2000
compared to $7,111,000 for 1999, an increase of $3,938,000. The increase was due to the acquisitions of MARC, UAI and CSAR. The amount of amortization of goodwill and other intangibles in 2001 is
expected to be approximately $11,000,000, excluding the impact of any new acquisitions subsequent to December 31, 2000.

As
with revenue, our expenses are impacted by foreign currency fluctuations. The following table details the effect of the currency rate changes on total expense for 2000 and the risk
of change in 2001. The trend exchange rate was determined by extrapolating the rate change between 1999 and 2000 and is used to illustrate the sensitivity to foreign currency fluctuations. The trend
rate is for illustration purposes only and may or may not reflect the actual translation rate in the future period.

25

---

2000
Using 1999
Exchange Rates

2000
Using 2000
Exchange Rates

2000 Using
1999/2000 Trend
Exchange RatesExpense:The Americas

$
103,664,000

$
103,664,000

$
103,664,000Europe


31,898,000


27,548,000


23,198,000Asia-Pacific


22,286,000


23,671,000


25,239,000Total Expense

$
157,848,000

$
154,883,000

$
152,101,000Exchange Rates:$/Euro


1.07


0.92


0.77Yen/$


113.68


107.03


100.38


Operating IncomeOperating income was $23,141,000 for 2000 compared to $2,636,000 for 1999, an increase of
$20,505,000. Operating income for 1999 includes impairment charges, restructuring costs, and the write-off of acquired in-process technology. Without the effects of these
items, we estimate operating income would have been $23,141,000 and $13,700,000 for 2000 and 1999, respectively, an increase of $9,441,000, as shown in the following table:

Years Ended December 31,2000

1999Operating IncomeAs Reported

$
23,141,000

$
2,636,000Adjustments:Restructuring Charges





5,497,000Write-Off of Acquired In-Process Technology





4,067,000Impairment of Capitalized Software Costs





1,500,000Total Adjustments





11,064,000Operating IncomeAs Adjusted

$
23,141,000

$
13,700,000


Total Other Expense (Income)Total other expense was $6,573,000 for 2000 compared to income of ($6,399,000) for 1999. The
change was primarily attributable to a $10,773,000 gain from the sale of an equity investment in 1999. Excluding this gain, other expense was $4,374,000 for 1999, which represents an increase of
$2,199,000 compared to the $6,573,000 of other expense for 2000. This increase was due to an increase in interest expense and a decrease in investment income.

Interest ExpenseInterest expense was $6,679,000 for 2000 compared to $5,788,000 for the prior year, an increase of
$891,000, or 15%. The increase in interest expense was attributable to increased debt levels as a result of acquisitions. Interest expense reflects the interest on the convertible subordinated
debentures issued as part of the acquisitions of PDA Engineering in 1994 and MARC in June 1999, as well as interest on the subordinated notes payable issued as part of the acquisition of MARC
and interest on the note payable taken out as part of the CSAR acquisition in November 1999. For financial statement purposes, the convertible subordinated debentures and subordinated notes
payable were issued with a discount. Such discount is amortized over the terms of the convertible subordinated debentures and subordinated notes payable and treated as additional interest expense. As
a result, reported interest will be higher than the cash amount of interest that will actually be paid to the holders of the convertible subordinated debentures and subordinated notes payable.

26

---

Other Expense (Income)Other expense (income) was income of ($106,000) for 2000 compared to income of ($1,414,000) for
1999. The change is attributable to foreign exchange adjustments in 1999. Other expense (income) also includes gains and losses on property and equipment and other non-operating income or
expense.

Provision for Income TaxesThe estimated effective tax rates in 2000 and 1999 were 33% and 44%, respectively. The tax
provision in 2000 was benefited by a net reduction in our valuation allowance of approximately $2,256,000 due to the reversal of $3,410,000 related to certain foreign deferred taxes, offset by an
increase in the valuation allowance on undistributed earnings of foreign subsidiaries. Refer to Note 12Taxes Based on Income in Notes to Consolidated Financial Statements.

1999 Compared to 1998

Net Income (Loss)Consolidated net income was $5,097,000, or $0.37 per diluted share, in 1999
compared to a net loss of ($12,979,000), or ($0.95) per diluted share, in 1998.

RevenueWe reported revenue of $149,235,000 in 1999 compared to revenue of $125,397,000 in 1998, an increase of
$23,838,000, or 19%. The increase in reported revenue from 1998 to 1999 was primarily due to our acquisitions at the end of 1998 and during 1999, as well as a favorable impact from the adoption of SOP
98-9, beginning October 1, 1998. The acquisitions of KR, MARC, UAI and CSAR accounted for an increase in revenues of $14,559,000, or 12%, during the period. These acquisitions were
all accounted for under the purchase method of accounting, so there was $711,000 of KR revenue in the same period of the prior year. As permitted, we adopted the provisions of SOP 98-9
effective October 1, 1998 and, accordingly, revenue on non-cancelable, pre-paid annual lease agreements is recognized monthly over the term of the agreement, beginning
in the fourth quarter of 1998, as compared to only deferring the fee related to support for licenses sold before October 1, 1998.

Software
license revenue and support fees account for 93% and 94% of total reported revenue for 1999 and 1998, respectively, with service revenue making up the difference. For 1999
and 1998, approximately 70% and 79%, respectively, of software license revenue and support fees is derived from annual renewable leases and recurring maintenance fees, with the remaining 30% and 21%,
respectively, related to paid-up licenses.

Due
to the adoption of SOP 98-9, it is difficult to make comparisons of revenues between 1999 and 1998. For comparative purposes, we estimate that total revenue for the
year ended December 31, 1998 would have been $1,335,000 lower than the reported revenues if SOP 98-9 had been adopted beginning on October 1, 1997. This would have resulted
in a 20% growth rate in 1999 in total revenues. An additional $11,338,000 of revenue increases were due to those revenues which are unaffected by the adoption of SOP 98-9:
paid-up license revenue, which increased $9,459,000; embedded technology license revenue, which decreased $802,000; consulting services revenue, which increased $2,711,000; and other
software services revenue, which decreased $31,000. Revenues for 1999 from the acquired companies include paid-up license revenue of $3,430,000.

The
following table illustrates revenue by geographic region and the related growth rates between 1999 and 1998 in functional currencies as reported utilizing the current revenue
recognition policy adopted on October 1, 1998 for 1999 and estimated for the year ended December 31, 1998 as if the policy had been adopted on October 1, 1997:

27

---

Growth RateYear Ended December 31, 1999 vs.
Year Ended December 31, 1998Year Ended
December 31,
1999If SOP 98-9 Had
Been Adopted on
October 1, 1997% of Total
Revenue

As ReportedThe Americas

45
%
17
%
16
%Europe

31
%
14
%
17
%Asia-Pacific

24
%
31
%
34
%Total

100
%
19
%
20
%


The
increase in reported revenues for all regions was due to increases from core business revenue and from the acquisitions of KR and MARC in December 1998 and
June 1999, respectively. The acquisitions of KR, MARC, UAI and CSAR accounted for increases in revenue in Asia-Pacific of $5,767,000, or 5%, in the Americas of $5,346,000, or 4%,
and in Europe of $3,446,000, or 3%. We estimate that the $1,335,000 decline in 1998 reported revenues had SOP 98-9 been adopted beginning on October 1, 1997 would have had
unfavorable impacts in Europe of $1,012,000, or 1%, and in Asia-Pacific of $774,000, or 1%, partially offset by a favorable impact in The Americas of $451,000, or 1%.

Revenue
growth in 1999 was also impacted from favorable foreign currency translation rates for the Japanese Yen. Revenue in the current year would have been approximately
$147,893,000, if translated using the prior year's foreign currency translation rates. Our international operations in Europe and Asia-Pacific are sales organizations with high gross
profit margins, which is due to these operations having minimal software development expenses. As a result, we are exposed to the effects of foreign currency fluctuations of the United States Dollar
versus the Japanese Yen and the Euro. The following table details the effect of the currency rate changes on revenue for 1999 and the risk of change in 2000. The trend exchange rate was determined by
extrapolating the rate change between 1998 and 1999 and
is used to illustrate the sensitivity to foreign currency fluctuations. The trend rate is for illustration purposes only and may or may not reflect the actual translation rate in the future period.

|                |                 | 1999
Using 1998
Exchange Rates |   | 1999
Using 1999
Exchange Rates |             | 1999 Using
1998/1999 Trend
Exchange Rates
|--------------- | --------------- | ------------------------------ | - | ------------------------------ | ----------- | -----------------------------------------
|Revenues:       |                 |                                |   |                                |             |                                          
|                | The Americas    |                                | $ | 68,092,000                     |             | $                                        
|                | Europe          |                                |   | 48,071,000                     |             |                                          
|                | Asia-Pacific(1) |                                |   | 31,730,000                     |             |                                          
|                |                 |                                |   |                                |             |                                          
|                |                 | Total Revenue                  |   | $                              | 147,893,000 |                                          
|                |                 |                                |   |                                |             |                                          
|Exchange Rates: |                 |                                |   |                                |             |                                          
|                | $/Euro          |                                |   | 1.11                           |             |                                          
|                | Yen/$           |                                |   | 130.81                         |             |                                          

---

Cost of RevenueCost of revenue was $38,261,000, or 26% of total revenues, for 1999, a decrease of $7,994,000, or 17%, as
compared to cost of revenue of $46,255,000, or 37% of total revenues, for the prior year. Cost of revenue for 1999 and 1998 includes software amortization of $8,816,000 and $11,974,000 and software
impairment charges of $1,500,000 and $7,771,000, respectively under Cost of RevenueSoftware Licenses ("COS-LIC"). Amortization of capitalized software costs decreased
$3,158,000, or 26% primarily as a result of the impairment costs recorded in 1998.

28

---

Cost of revenue, excluding amortization of capitalized software costs and software impairment charges, was $27,945,000, or 19% of total revenues, for 1999 compared to $26,510,000, or
21% of total revenues, for the prior year, an increase of $1,435,000, or 5%. This increase was primarily due to: (1) a $528,000 increase in the cost of technical support services due to a
change in staffing mix between sales and support resources under Cost of RevenueSoftware Support and Services ("COS-SS"); (2) a $485,000 increase in software licensing
costs under COS-LIC; (3) a $470,000 increase in packaging costs under COS-SS; (4) a $443,000 decrease in cost sharing reimbursements under COS-SS;
(5) a $282,000 increase in third party commissions under COS-LIC; (6) and an increase of $227,000 in other costs; offset by (7) a $1,000,000 decrease in royalty
expense under COS-LIC. Royalty expense is paid to third parties under various agreements. We do not consider any royalty expense related to individual agreements to be material. Royalty
expense is expected to decline with the replacement of a third party product by MARC products.

Gross ProfitGross profit, which is total revenue less cost of revenue, was $110,974,000, or 74% of total revenues, for
1999, an increase of $31,832,000, or 40%, as compared to a gross profit of $79,142,000, or 63% of total revenues, for 1998. This increase was due to the MARC and KR acquisitions, plus the favorable
impact of the change in revenue recognition method, and due to the decrease in cost of revenues, primarily as a result of $7,771,000 of impairment costs recorded in 1998.

Operating ExpenseOperating expense was $108,338,000 for 1999 compared to $89,183,000 for the prior year, an increase of
$19,155,000, or 21%. Operating expense for 1999 includes a restructuring charge of $5,497,000 and a write-off of acquired in-process technology of $4,067,000. Operating expense
for 1998 includes a write-off of acquired in-process technology of $6,000,000 and restructuring and other impairment charges of $2,365,000. Without these charges in 1999 and
1998, operating expense would have totaled $98,774,000 for 1999, an increase of $17,956,000, or 22%, from the $80,818,000 for 1998. This increase includes $12,315,000 of additional operating expenses
resulting from the companies acquired.

Research and DevelopmentResearch and development expense for 1999 was $19,511,000 compared to $13,666,000 for 1998, an
increase of $5,845,000, or 43%. The increase is due to a $2,500,000 increase in
the total gross investment in research and development activities and a decrease of $3,345,000 in the amount of research and development expenditures capitalized under SFAS No. 86.

The
total gross investment in research and development activities for 1999 was $27,766,000, or 19% of total revenue, compared to $25,266,000, or 20% of total revenue, for the prior
year. This increase resulted primarily from an additional $3,283,000 of development costs from the acquisitions of KR, MARC, UAI and CSAR.

Capitalized
software development costs were $8,255,000 for 1999 compared to $11,600,000 for the prior year, a decrease of $3,345,000, or 29%. The amount of product development
capitalized in any given period is a function of many factors, including the number of products under development at any point in time as well as their stage of development. Our product development
process is continually under review to improve efficiency and product quality, and to reduce time to market. Due to the continual change in the product development process, there can be no assurance
that the level of development capitalized in future periods will be comparable to current capitalized levels.

Selling, General and AdministrativeSelling, general and administrative expense was $72,152,000 for 1999 compared to
$64,884,000 for 1998, an increase of $7,268,000, or 11%. This increase includes an additional $8,402,000 resulting from the acquisitions of KR and MARC. The remaining decrease of $1,134,000 was
primarily due to: (1) a decrease of $1,958,000 in bad debt expense as a result of the reversal of prior year provisions due to collections of older receivable balances primarily in the fourth
quarter of 1999; (2) a decrease of $528,000 as a result of the reallocation of sales resources to support maintenance and consulting activities from the recent reorganization; offset by
(3) an increase of $1,157,000 as a result of 1998's gain from the termination of the Post Retirement Health Care Plan; and (4) $195,000 of other increases.

29

---

Amortization of Goodwill and Other IntangiblesAmortization of goodwill and other intangibles was $7,111,000 for 1999
compared to $2,268,000 for 1998, an increase of $4,843,000. The increase was due to the acquisitions of KR, MARC, UAI and CSAR.

As
with revenue, our expenses are impacted by foreign currency fluctuations. The following table details the effect of the currency rate changes on total expense for 1999 and the risk
of change in 2000. The trend exchange rate was determined by extrapolating the rate change between 1998 and 1999 and is used to illustrate the sensitivity to foreign currency fluctuations. The trend
rate is for illustration purposes only and may or may not reflect the actual translation rate in the future period.

|                |              | 1999
Using 1998
Exchange Rates |   | 1999
Using 1999
Exchange Rates |             | 1999 Using
1998/1999 Trend
Exchange Rates
|--------------- | ------------ | ------------------------------ | - | ------------------------------ | ----------- | -----------------------------------------
|Expense:        |              |                                |   |                                |             |                                          
|                | The Americas |                                | $ | 106,267,000                    |             | $                                        
|                | Europe       |                                |   | 26,001,000                     |             |                                          
|                | Asia-Pacific |                                |   | 15,049,000                     |             |                                          
|                |              |                                |   |                                |             |                                          
|                |              | Total Expense                  |   | $                              | 147,317,000 |                                          
|                |              |                                |   |                                |             |                                          
|Exchange Rates: |              |                                |   |                                |             |                                          
|                | $/Euro       |                                |   | 1.11                           |             |                                          
|                | Yen/$        |                                |   | 130.81                         |             |                                          

Operating Income (Loss)Operating income was $2,636,000 for 1999 compared to an operating loss of ($10,041,000) for 1998, a
change of $12,677,000. Operating income (loss) for the years ended December 31, 1999 and 1998 includes the effects of our adoption of SOP 98-9 in the fourth quarter of 1998,
write-offs of acquired in-process technology, software impairment charges, and restructuring and other impairment charges, in addition to ongoing operating costs necessary for
the operation of the business. The operating loss for 1998 also includes a $1,157,000 gain from the termination of the Post Retirement Health Care Plan and a $393,000 charge for minimum royalty
payments on the impaired software. Without the effects of these items, and had we adopted SOP 98-9 in the fourth quarter of
1997 with respect to the 1998 results, we estimate operating income would have been $13,700,000 and $4,116,000 for 1999 and 1998, respectively, an increase of $9,584,000, as shown in the following
table:

Years Ended December 31,1999

1998Operating Income (Loss)As Reported

$
2,636,000

$
(10,041,000
)Adjustments:Revenue Change, Net of Cost of Revenue





(1,215,000
)Restructuring and Other Impairment Charges


5,497,000


2,365,000Write-Off of Acquired In-Process Technology


4,067,000


6,000,000Impairment of Capitalized Software Costs


1,500,000


7,771,000Gain on Termination of Post Retirement Health Care Plan





(1,157,000
)Accrued Liabilities for Impaired Software





393,000Total Adjustments


11,064,000


14,157,000Operating IncomeAs Adjusted

$
13,700,000

$
4,116,000


Total Other Expense (Income)Total other expense (income) was income of ($6,399,000) for 1999 compared to
expense of $3,134,000 for 1998, a change of $9,533,000. This change includes a $10,733,000 gain from the sale of our equity investment in LMS International. Excluding this gain, total other expense
(income) was expense of $4,334,000 for 1999, an increase of $1,200,000 compared to the prior year. The increase in expense was due to an increase in interest expense, a decrease in investment income
offset by a decrease in currency losses.

30

---

Interest ExpenseInterest expense was $5,788,000 for 1999 compared to $4,461,000 for the prior year, an increase of
$1,327,000, or 30%. The increase in interest expense is primarily attributable to increased debt levels as a result of acquisitions. Interest expense reflects the interest on the convertible
subordinated debentures issued as part of the acquisitions of PDA Engineering in 1994 and MARC in June 1999, as well as interest on the subordinated notes payable issued as part of the
acquisition of MARC and interest on the note payable taken out as part of the CSAR acquisition in November 1999. For financial statement purposes, the convertible subordinated debentures and
subordinated notes payable were issued with a discount. Such discount is amortized over the terms of the convertible subordinated debentures and subordinated notes payable and treated as additional
interest expense. As a result, reported interest will be higher than the cash amount of interest that will actually be paid to the holders of the convertible subordinated debentures and subordinated
notes payable.

Other Expense (Income)Other expense (income) was income of ($1,414,000) for 1999 compared to income of ($1,327,000) for
1998, an increase of $87,000. The increase is primarily attributable to a $914,000 decrease in foreign currency exchange losses, offset by an $827,000 decrease in interest and investment income. Other
expense (income) also includes gains and losses on property and equipment and other non-operating income or expense. We anticipate that interest and investment income will continue to
decrease throughout 2000 from the 1998 and early 1999 levels as a result of the decrease in cash balances following the acquisitions of KR, MARC, UAI and CSAR.

Provision (Benefit) for Income TaxesThe effective tax rate for 1999 was a provision of 44% compared to a benefit of 2% in
the same period of the prior year. The rate in 1999 was higher than historical rates before 1998 due primarily to certain non-deductible charges from our acquisitions during 1999,
including goodwill and acquired in-process technology. Refer to Note 12Taxes Based on Income in Notes to Consolidated Financial Statements.

COMPANY TRENDS

During the past three years, we have engaged in a number of key strategic activities to expand our market opportunities. These activities include the
completion of four acquisitions to broaden the technology scope of our core simulation software products and the establishment of a focused professional services group. The professional services group
includes traditional engineering consulting activities as well as extreme performance computing services, with special technical expertise in the use of Linux and other related operating systems. As
an Application Service Provider, we are utilizing the Internet and web-centric engineering software tools to broaden our customer base and expand our total available market.

OPERATING PATTERN

The change in year-end to December 31 and the adoption of SOP 98-9 in the fourth quarter of 1998 both had a significant effect
on our operating pattern. The month of January has historically been the largest revenue month of the year with the highest volume of renewals. Having this month as the first accounting period versus
the last accounting period allows us to better forecast the annual results. Under SOP 98-9, we are recognizing software lease revenue on a monthly basis over the term of the licenses. This
change has reduced the volatility of our revenue stream between interim accounting periods.

31

---

Effective January 1, 1999, we changed the estimated useful life of our capitalized software assets from three and four years to two and three years. We have always estimated
the expected life of these assets based on the release cycle of its products. We believe that as software production cycles decrease, amortization periods should also decrease in order to coincide
with a version's revenue stream. We made this change prospectively. Due to the continual change in the product development process, there can be no assurance that the level of development capitalized
in future periods will be comparable to current capitalized levels. Therefore, the effect of this change is not determinable.

LIQUIDITY AND CAPITAL RESOURCES

In the past, working capital needed to finance our operations has been provided by cash on hand and from cash flow from operations. We believe that cash
generated from operations will continue to provide sufficient capital for normal working capital needs in the foreseeable future. We may engage in additional financing methods that we believe are
advantageous, particularly to finance acquisitions. Net cash provided by operating activities was $34,580,000 and $32,228,000 for the years ended December 31, 2000 and 1999, respectively. Our
working capital (current assets minus current liabilities) at December 31, 2000 was $17,355,000 compared to $10,755,000 at December 31, 1999, an increase of $6,600,000.

During
2000, cash outlays related to the restructuring liability were $1,535,000. During 1999, cash outlays of $6,047,000 were made in conjunction with the $8,922,000 of restructuring
charges and acquisition costs recorded in 1998 and 1999. The remaining outlays are anticipated to be paid by the end of 2001.

During
1999, we expended approximately $32,703,000 of cash in connection with the acquisitions of MARC, UAI and CSAR. In late December 1998, we expended $19,140,000 of cash in
connection with the acquisition of KR and Silverado. These acquisitions adversely affected our working capital position and cash reserves, and lowered our investment income. We do not expect to have
significant amounts of investment income in the near future.

In
August 1999, we entered into a Loan and Security Agreement ("Loan Agreement") with a bank (the "Bank"). This credit facility includes a $12,000,000 revolving line of credit
and an $8,000,000 term loan. The amount of the line of credit available in excess of $5,000,000 is subject to a defined borrowing base of outstanding trade receivables. As of December 31, 2000,
the amount available under the line of credit, based on the defined borrowing base, was approximately $11,827,000. The term of the revolving portion of the Loan Agreement expires on May 31,
2001. As of December 31, 2000, there was no balance outstanding on the line of credit and there were no borrowings from the line of credit during 1999 or 2000. On November 4, 1999, we
borrowed $8,000,000 in connection with the acquisition of CSAR. The term of the loan is two years and requires monthly principal payments of $267,000. As of December 31, 2000, the balance on
the loan was $4,533,000. All borrowings under the Loan Agreement carry an interest rate equal to the Bank's prime lending rate or LIBOR plus 200 basis points. Borrowings under the Loan Agreement are
secured by nearly all of our goods and equipment, inventory, contract rights, and intellectual property rights. Borrowings also involve certain restrictive covenants, including restrictions on
dividends and investments. As of December 31, 2000, we were in compliance with all covenants.

We
issued $56,608,000 of convertible subordinated debentures in connection with the acquisition of PDA Engineering in 1994. An additional $2,000,000 principal amount of convertible
subordinated debentures was issued, at a discount, in June 1999 in connection with the MARC acquisition. The debentures bear interest at 77/8% with interest payments due
semi-annually on March 15 and September 15. The conversion feature permits the holder to convert the debentures into shares of our common stock at a conversion price of
$15.15 per share. The debentures mature August 18, 2004, but are redeemable at our option at any time after August 18, 1997 upon payment of a premium. The amount of interest expense will
decrease if the debentures are converted into common stock. At December 31, 2000, the balance of the convertible subordinated debentures, excluding unamortized discount of $211,000, was
$58,556,000.

32

---

We also issued subordinated notes payable in June 1999, in connection with the MARC acquisition, in the aggregate principal amount of $14,236,000. The subordinated notes
payable bear interest at 8% with interest payments due semi-annually in January and July. $3,236,000 of the notes payable is due in June 2001 and the remaining $11,000,000 is due by
June 2009.

We
expect to continue to invest a substantial portion of our revenues in the development of new computer software technologies and products and the enhancement of certain existing
products. During 2000 and 1999, we expended a total of $30,311,000 and $27,766,000, respectively, on development efforts, of which $13,655,000 and $8,255,000, respectively, were capitalized. Product
development costs and the capitalization rate may vary depending, in part, on the number of products and the stage of development of the products in process.

During
2000 and 1999, we acquired $10,829,000 and $3,107,000, respectively, of new property and equipment. Capital expenditures included upgrades in computer equipment in order to
keep current with technological advances and upgrades of facilities worldwide. Our capital expenditures vary from year to year, as required by business needs. We intend to continue to expand the
capabilities of our computer equipment used in the development and support of our proprietary software products. We expect expenditures for property and equipment in 2001 to increase due to costs
associated with the new facility in South Coast Metro. Capital expenditures in 2000 were higher than 1999 due to additional expenditures in the Engineering-e.com and MSC.Linux divisions.

We
do not plan to pay dividends in the foreseeable future. In addition, our Loan Agreement with our principal bank contains restrictions on the payment of dividends.

EURO CONVERSION

On January 1, 1999, eleven of the fifteen member countries of the European Union (the "participating countries") established fixed conversion rates
between their existing sovereign currencies (the "legacy currencies") and the Euro currency, adopting the Euro as their common legal currency on that date. The legacy currencies are scheduled to
remain legal tender in the participating countries as denominations of the Euro between January 1, 1999 and January 1, 2002. During this transition period, public and private parties may
pay for goods and services using either the Euro or the participating country's legacy currency on a "no compulsion, no prohibition" basis whereby recipients must accept Euros or the legacy currency
as offered by the payer. A currency translation process known as triangulation dictates how legacy currencies are converted to the Euro and other legacy currencies. Beginning January 1, 2002,
the participating countries will issue new Euro-denominated bills and coins and replace the legacy currencies as legal tender in cash transactions by July 1, 2002.

Because
we conduct a significant portion of our business in Europe through our wholly-owned German subsidiary, our business and operations will be affected by the Euro conversion. We
are addressing the Euro conversion, but its impact on future operating results is uncertain. We expect the conversion to decrease pressure for pricing in legacy currencies in the participating
countries. However, we also do
business in many non-participating countries, including the United Kingdom. This could lead to an increase in cross-border competition, which could affect our allocation of resources
within Europe, and eventually our labor cost.

We
are implementing an upgrade to our management information system, which includes the ability to simultaneously record transactions in Euros, perform the prescribed currency
conversion computations and convert legacy currency amounts to Euro. The impact of the conversion on currency risk and taxable income is not expected to be significant. In regard to contracts
denominated in legacy currencies, we have not identified any third party or customer contracts whose performance might be considered unenforceable due to a currency substitution. Software lease and
maintenance contracts are typically renewed on an annual basis.

33

---

INFLATION

Inflation in recent years has not had a significant effect on our business.

ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of foreign currency fluctuations and interest rate changes.

Foreign Currency RiskInternational revenues are 57% of our total revenues. International sales are made mostly from our
two foreign sales subsidiaries in Germany and Japan and are typically denominated in the local currency of each country. These subsidiaries also incur most of their expenses in the local currency.
Accordingly, all foreign subsidiaries use the local currency as their functional currency.

Our
international business is subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other
factors.

Our
exposure to foreign exchange rate fluctuations arises in part from intercompany accounts in which cash from sales of our foreign subsidiaries are transferred back to the United
States. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary in order to centralize foreign exchange risk with the parent company in the United
States. We are also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into United States Dollars in consolidation. As exchange rates vary,
these results, when translated, may vary from expectations and adversely impact overall expected profitability. The effect of foreign exchange rate fluctuations in 2000 was not significant.

Interest Rate RiskOur exposure to market rate risks for changes in interest rates relates to any borrowings under our line
of credit. Refer to Note 5Financial Instruments in Notes to Consolidated Financial Statements.

We
have not used derivative financial instruments in our investment portfolio. We invest our excess cash primarily in debt instruments of U.S. municipalities and other
high-quality issuers and, by policy, limit the amount of credit exposure to any one issuer. We protect and preserve our invested funds by limiting default, market and reinvestment risk.
The following table is a summary of investments:

December 31,2000

1999Fair
Market
Value

Rate of
Return

Fair
Market
Value

Rate of
ReturnEquity Securities

$
1,853,000



$
183,000

$
1,853,000



$
183,000


34

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                    |  | Page
|--------------------------------------------------------------------------------------------------- |  | ----
|Consolidated Balance Sheets as of December 31, 2000 and 1999                                        |  | 36  
|Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998          |  | 37  
|Consolidated Statements of Shareholders' Equity for the Period
January 1, 1998 to December 31, 2000 |  | 38  
|Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998          |  | 39  
|Notes to Consolidated Financial Statements                                                          |  | 40  
|Report of Ernst & Young LLP, Independent Auditors                                                   |  | 72  

35

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MSC.SOFTWARE CORPORATION        CONSOLIDATED BALANCE SHEETS        DECEMBER 31, 2000 AND 1999

|                                                 |                                                                                                                                                                         | 2000                       |                                            | 1999       |            
|------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ---------- | -----------
|ASSETS                                           |                                                                                                                                                                         |                            |                                            |           
|Current Assets:                                  |                                                                                                                                                                         |                            |                                            |            |            
|                                                 | Cash and Cash Equivalents                                                                                                                                               |                            | $                                          | 28,806,000 |            
|                                                 | Investments                                                                                                                                                             |                            |                                            | 1,853,000  |            
|                                                 | Trade Accounts Receivable, Net of Allowance of $4,355,000 in 2000 and $3,182,000 in 1999                                                                                |                            |                                            | 45,950,000 |            
|                                                 | Deferred Tax Charges                                                                                                                                                    |                            |                                            | 16,172,000 |            
|                                                 | Other Current Assets                                                                                                                                                    |                            |                                            | 9,683,000  |            
|                                                 |                                                                                                                                                                         |                            |                                            |            |            
|                                                 |                                                                                                                                                                         | Total Current Assets       |                                            |            | 102,464,000
|Property and Equipment, Net                      |                                                                                                                                                                         |                            | 15,040,000                                 |            |            
|Capitalized Software Costs, Net                  |                                                                                                                                                                         |                            | 23,704,000                                 |            |            
|Goodwill, Net                                    |                                                                                                                                                                         |                            | 33,011,000                                 |            |            
|Other Intangible Assets, Net                     |                                                                                                                                                                         |                            | 30,420,000                                 |            |            
|Other Assets                                     |                                                                                                                                                                         |                            | 4,015,000                                  |            |            
|                                                 |                                                                                                                                                                         |                            |                                            |            |            
|                                                 |                                                                                                                                                                         | Total Assets               |                                            | $          | 208,654,000
|                                                 |                                                                                                                                                                         |                            |                                            |            |            
|LIABILITIES AND SHAREHOLDERS' EQUITY             |                                                                                                                                                                        
|Current Liabilities:                             |                                                                                                                                                                         |                            |                                            |            |            
|                                                 | Accounts Payable                                                                                                                                                        |                            | $                                          | 5,575,000  |            
|                                                 | Current Portion of Note Payable                                                                                                                                         |                            |                                            | 4,533,000  |            
|                                                 | Current Portion of Subordinated Notes Payable                                                                                                                           |                            |                                            | 3,236,000  |            
|                                                 | Deferred Revenue                                                                                                                                                        |                            |                                            | 38,671,000 |            
|                                                 | Compensation and Related Expenses                                                                                                                                       |                            |                                            | 10,043,000 |            
|                                                 | Restructuring Reserve                                                                                                                                                   |                            |                                            | 1,340,000  |            
|                                                 | Other Current Liabilities                                                                                                                                               |                            |                                            | 21,711,000 |            
|                                                 |                                                                                                                                                                         |                            |                                            |            |            
|                                                 |                                                                                                                                                                         | Total Current Liabilities  |                                            |            | 85,109,000 
|Deferred Income Taxes                            |                                                                                                                                                                         |                            | 16,344,000                                 |            |            
|Note Payable, Less Current Portion               |                                                                                                                                                                         |                            |                                           |            |            
|Convertible Subordinated Debentures              |                                                                                                                                                                         |                            | 58,345,000                                 |            |            
|Subordinated Notes Payable, Less Current Portion |                                                                                                                                                                         |                            | 8,874,000                                  |            |            
|Commitments and Contingencies (Note 16)          |                                                                                                                                                                         |                            |                                            |            |            
|Shareholders' Equity:                            |                                                                                                                                                                         |                            |                                            |            |            
|                                                 | Preferred Stock, $0.01 Par Value, 10,000,000 Shares Authorized; No Shares Issued and Outstanding                                                                        |                            |                                            |           |            
|                                                 | Common Stock, $0.01 Par Value, 100,000,000 Shares Authorized; 14,173,400 and 13,841,600 Issued and Outstanding at December 31, 2000 and December 31, 1999, Respectively |                            |                                            | 35,198,000 |            
|                                                 | Common Stock Warrants                                                                                                                                                   |                            |                                            | 4,428,000  |            
|                                                 | Retained Earnings (Deficit)                                                                                                                                             |                            |                                            | 4,826,000  |            
|                                                 | Accumulated Other Comprehensive Loss                                                                                                                                    |                            |                                            | (4,193,000 | )          
|                                                 | Treasury Shares, At Cost (40,000 and 49,000 Shares at December 31, 2000 and December 31, 1999, Respectively)                                                            |                            |                                            | (277,000   | )          
|                                                 |                                                                                                                                                                         |                            |                                            |            |            
|                                                 |                                                                                                                                                                         | Total Shareholders' Equity |                                            |            | 39,982,000 
|                                                 |                                                                                                                                                                         |                            |                                            |            |            
|                                                 |                                                                                                                                                                         |                            | Total Liabilities and Shareholders' Equity |            | $          
|                                                 |                                                                                                                                                                         |                            |                                            |            |            

See accompanying notes to consolidated financial statements.

36

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MSC.SOFTWARE CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS        YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

|                                                          |                                                | 2000                              |             | 1999        |             | 1998        |            
|--------------------------------------------------------- | ---------------------------------------------- | --------------------------------- | ----------- | ----------- | ----------- | ----------- | -----------
|REVENUE:                                                  |                                                |                                   |             |             |             |             |            
|                                                          | Software Licenses                              |                                   | $           | 108,665,000 |             | $           | 100,869,000
|                                                          | Software Support and Services                  |                                   |             | 69,359,000  |             |             | 48,366,000 
|                                                          |                                                |                                   |             |             |             |             |            
|                                                          |                                                | Total Revenue                     |             |             | 178,024,000 |             |            
|                                                          |                                                |                                   |             |             |             |             |            
|COST OF REVENUE:                                          |                                                |                                   |             |             |             |             |            
|                                                          | Software Licenses                              |                                   |             | 22,648,000  |             |             | 19,171,000 
|                                                          | Software Support and Services                  |                                   |             | 22,205,000  |             |             | 19,090,000 
|                                                          |                                                |                                   |             |             |             |             |            
|                                                          |                                                | Total Cost of Revenue             |             |             | 44,853,000  |             |            
|                                                          |                                                |                                   |             |             |             |             |            
|GROSS PROFIT                                              |                                                |                                   | 133,171,000 |             |             | 110,974,000 |            
|                                                          |                                                |                                   |             |             |             |             |            
|OPERATING EXPENSE:                                        |                                                |                                   |             |             |             |             |            
|                                                          | Research and Development                       |                                   |             | 16,656,000  |             |             | 19,511,000 
|                                                          | Selling, General and Administrative            |                                   |             | 82,325,000  |             |             | 72,152,000 
|                                                          | Amortization of Goodwill and Other Intangibles |                                   |             | 11,049,000  |             |             | 7,111,000  
|                                                          | Restructuring and Other Impairment Charges     |                                   |             |            |             |             | 5,497,000  
|                                                          | Write-Off of Acquired In-Process Technology    |                                   |             |            |             |             | 4,067,000  
|                                                          |                                                |                                   |             |             |             |             |            
|                                                          |                                                | Total Operating Expense           |             |             | 110,030,000 |             |            
|                                                          |                                                |                                   |             |             |             |             |            
|OPERATING INCOME (LOSS)                                   |                                                |                                   | 23,141,000  |             |             | 2,636,000   |            
|                                                          |                                                |                                   |             |             |             |             |            
|OTHER EXPENSE (INCOME):                                   |                                                |                                   |             |             |             |             |            
|                                                          | Interest Expense                               |                                   |             | 6,679,000   |             |             | 5,788,000  
|                                                          | Gain on Sale of Investment                     |                                   |             |            |             |             | (10,773,000
|                                                          | Other Expense (Income), Net                    |                                   |             | (106,000    | )           |             | (1,414,000 
|                                                          |                                                |                                   |             |             |             |             |            
|                                                          |                                                | Total Other Expense (Income), Net |             |             | 6,573,000   |             |            
|                                                          |                                                |                                   |             |             |             |             |            
|INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES |                                                |                                   | 16,568,000  |             |             | 9,035,000   |            
|Provision (Benefit) for Income Taxes                      |                                                |                                   | 5,435,000   |             |             | 3,938,000   |            
|                                                          |                                                |                                   |             |             |             |             |            
|NET INCOME (LOSS)                                         |                                                | $                                 | 11,133,000  |             | $           | 5,097,000   |            
|                                                          |                                                |                                   |             |             |             |             |            
|BASIC EARNINGS (LOSS) PER SHARE                           |                                                | $                                 | 0.79        |             | $           | 0.37        |            
|                                                          |                                                |                                   |             |             |             |             |            
|DILUTED EARNINGS (LOSS) PER SHARE                         |                                                | $                                 | 0.76        |             | $           | 0.37        |            
|                                                          |                                                |                                   |             |             |             |             |            
|Basic Weighted-Average Shares Outstanding                 |                                                |                                   | 14,025,000  |             |             | 13,800,000  |            
|                                                          |                                                |                                   |             |             |             |             |            
|Diluted Weighted-Average Shares Outstanding               |                                                |                                   | 14,614,000  |             |             | 13,905,000  |            
|                                                          |                                                |                                   |             |             |             |             |            

See accompanying consolidated financial statements.

37

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MSC.SOFTWARE CORPORATION    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY    FOR THE PERIOD JANUARY 1, 1998 TO DECEMBER 31, 2000

|                             |                                                                             | Shares of
Common Stock |          | Shareholders' Equity |        
|---------------------------- | --------------------------------------------------------------------------- | ---------------------- | -------- | -------------------- | -------
|
|Balance at January 1, 1998   |                                                                             | 13,570,400             |          |                     |        
|                             | Net Loss                                                                    |                        |          |                      |        
|                             | Currency Translation Adjustment                                             |                        |          |                      |        
|                             | Unrealized Investment Gain                                                  |                        |          |                      |        
|                             |                                                                             | Comprehensive Loss     |          |                      |        
|                             | Shares Issued Under Employee Stock Option and Employee Stock Purchase Plans |                        | 168,000  |                      |       
|                             | Shares Issued for Businesses Acquired                                       |                        | 222,200  |                      |       
|                             | Warrants Issued                                                             |                        |         |                      |       
|                             | Purchase and Retirement of Stock                                            |                        | (249,900 | )                    |       
|                             |                                                                             |                        |          |                      |        
|Balance at December 31, 1998 |                                                                             | 13,710,700             |          |                     |        
|                             | Net Income                                                                  |                        |          |                      |        
|                             | Currency Translation Adjustment                                             |                        |          |                      |        
|                             | Unrealized Investment Loss                                                  |                        |          |                      |        
|                             |                                                                             |                        |          |                      |        
|                             |                                                                             | Comprehensive Income   |          |                      |        
|                             | Shares Issued Under Employee Stock Purchase Plan                            |                        | 130,900  |                      |       
|                             | Warrants Issued for Businesses Acquired                                     |                        |         |                      |       
|                             | Warrants Issued                                                             |                        |         |                      |       
|                             | Purchase of Stock                                                           |                        |         |                      | (49,000
|                             |                                                                             |                        |          |                      |        
|Balance at December 31, 1999 |                                                                             | 13,841,600             |          | (49,000              | )      
|                             | Net Income                                                                  |                        |          |                      |        
|                             | Currency Translation Adjustment                                             |                        |          |                      |        
|                             | Unrealized Investment Gain, Net of Tax                                      |                        |          |                      |        
|                             |                                                                             | Comprehensive Income   |          |                      |        
|                             | Treasury Shares Used for Compensation                                       |                        |         |                      | 9,000  
|                             | Shares Issued Under Employee Stock Option and Employee Stock Purchase Plans |                        | 331,800  |                      |       
|                             |                                                                             |                        |          |                      |        
|Balance at December 31, 2000 |                                                                             | 14,173,400             |          | (40,000              | )      
|                             |                                                                             |                        |          |                      |        

See accompanying notes to consolidated financial statements.

38

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MSC.SOFTWARE CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS        YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

|                                                             |                                                                                          | 2000                                                    |                                           | 1999                                                |            | 1998       |            
|------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------- | ---------- | ---------- | -----------
|CASH FLOWS FROM OPERATING ACTIVITIES:                        |                                                                                          |                                                         |                                           |                                                     |            |            |            
|                                                             | Net Income (Loss)                                                                        |                                                         | $                                         | 11,133,000                                          |            | $          | 5,097,000  
|                                                             | Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities: |                                                         |                                           |                                                     |            |            |            
|                                                             |                                                                                          | Provision for Doubtful Accounts                         |                                           |                                                     | 1,421,000  |            |            
|                                                             |                                                                                          | Depreciation and Amortization of Property and Equipment |                                           |                                                     | 4,368,000  |            |            
|                                                             |                                                                                          | Amortization of Capitalized Software Costs              |                                           |                                                     | 11,317,000 |            |            
|                                                             |                                                                                          | Impairment of Capitalized Software Costs                |                                           |                                                     |           |            |            
|                                                             |                                                                                          | Amortization of Goodwill and Other Intangibles          |                                           |                                                     | 11,049,000 |            |            
|                                                             |                                                                                          | Impairment of Goodwill                                  |                                           |                                                     |           |            |            
|                                                             |                                                                                          | Write-Off of Acquired In-Process Technology             |                                           |                                                     |           |            |            
|                                                             |                                                                                          | Amortization of Discounts                               |                                           |                                                     | 364,000    |            |            
|                                                             |                                                                                          | Loss (Gain) on Disposal of Property and Equipment       |                                           |                                                     | 6,000      |            |            
|                                                             |                                                                                          | Gain on Sale of Investment                              |                                           |                                                     |           |            |            
|                                                             |                                                                                          | Treasury Shares Used for Compensation                   |                                           |                                                     | 63,000     |            |            
|                                                             |                                                                                          | Deferred Income Taxes                                   |                                           |                                                     | (2,182,000 | )          |            
|                                                             |                                                                                          | Changes in Assets and Liabilities:                      |                                           |                                                     |            |            |            
|                                                             |                                                                                          |                                                         | Trade Accounts Receivable                 |                                                     |            | (9,376,000 | )          
|                                                             |                                                                                          |                                                         | Other Current Assets                      |                                                     |            | (3,290,000 | )          
|                                                             |                                                                                          |                                                         | Accounts Payable                          |                                                     |            | 883,000    |            
|                                                             |                                                                                          |                                                         | Deferred Revenue                          |                                                     |            | 4,658,000  |            
|                                                             |                                                                                          |                                                         | Compensation and Related Expenses         |                                                     |            | 509,000    |            
|                                                             |                                                                                          |                                                         | Restructuring Reserve                     |                                                     |            | (1,535,000 | )          
|                                                             |                                                                                          |                                                         | Other Current Liabilities                 |                                                     |            | 5,192,000  |            
|                                                             |                                                                                          |                                                         |                                           |                                                     |            |            |            
|                                                             |                                                                                          |                                                         |                                           | Net Cash Provided By Operating Activities           |            |            | 34,580,000 
|                                                             |                                                                                          |                                                         |                                           |                                                     |            |            |            
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |                                                                                          |                                                         |                                           |                                                     |            |            |            
|                                                             | Purchase of Securities Available-for-Sale                                                |                                                         |                                           | (51,000                                             | )          |            |           
|                                                             | Sale of Securities Available-for-Sale                                                    |                                                         |                                           | 12,000                                              |            |            | 16,347,000 
|                                                             | Acquisition of Property and Equipment                                                    |                                                         |                                           | (10,829,000                                         | )          |            | (3,107,000 
|                                                             | Proceeds from Sale of Investment                                                         |                                                         |                                           |                                                    |            |            | 12,000,000 
|                                                             | Businesses Acquired, Net of Cash Received                                                |                                                         |                                           |                                                    |            |            | (32,703,000
|                                                             | Purchase of Software                                                                     |                                                         |                                           | (1,249,000                                          | )          |            | (1,088,000 
|                                                             | Capitalized Internal Software Development Costs                                          |                                                         |                                           | (13,655,000                                         | )          |            | (8,255,000 
|                                                             | Other                                                                                    |                                                         |                                           | (1,565,000                                          | )          |            | (153,000   
|                                                             |                                                                                          |                                                         |                                           |                                                     |            |            |            
|                                                             |                                                                                          |                                                         |                                           | Net Cash Used In Investing Activities               |            |            | (27,337,000
|                                                             |                                                                                          |                                                         |                                           |                                                     |            |            |            
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |                                                                                          |                                                         |                                           |                                                     |            |            |            
|                                                             | (Repayment) Borrowing on Line of Credit                                                  |                                                         |                                           |                                                    |            |            | (10,800,000
|                                                             | Proceeds from Note Payable                                                               |                                                         |                                           |                                                    |            |            | 8,000,000  
|                                                             | Repayments of Note Payable                                                               |                                                         |                                           | (3,200,000                                          | )          |            | (267,000   
|                                                             | Issuance of Common Stock                                                                 |                                                         |                                           | 2,747,000                                           |            |            | 697,000    
|                                                             | Issuance of Common Stock Warrants                                                        |                                                         |                                           |                                                    |            |            | 576,000    
|                                                             | Purchase and Retirement of Stock                                                         |                                                         |                                           |                                                    |            |            | (340,000   
|                                                             | Other                                                                                    |                                                         |                                           |                                                    |            |            | (18,000    
|                                                             |                                                                                          |                                                         |                                           |                                                     |            |            |            
|                                                             |                                                                                          |                                                         |                                           | Net Cash (Used In) Provided By Financing Activities |            |            | (453,000   
|                                                             |                                                                                          |                                                         |                                           |                                                     |            |            |            
|TRANSLATION ADJUSTMENT                                       |                                                                                          |                                                         | 281,000                                   |                                                     |            | (2,204,000 | )          
|                                                             |                                                                                          |                                                         |                                           |                                                     |            |            |            
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         |                                                                                          |                                                         | 7,071,000                                 |                                                     |            | 10,913,000 |            
|Cash and Cash Equivalents at Beginning of Period             |                                                                                          |                                                         | 21,735,000                                |                                                     |            | 10,822,000 |            
|                                                             |                                                                                          |                                                         |                                           |                                                     |            |            |            
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                   |                                                                                          | $                                                       | 28,806,000                                |                                                     | $          | 21,735,000 |            
|                                                             |                                                                                          |                                                         |                                           |                                                     |            |            |            
|Supplemental Cash Flow Information:                          |                                                                                          |                                                         |                                           |                                                     |            |            |            
|                                                             | Income Taxes Paid (Refunded)                                                             |                                                         | $                                         | 675,000                                             |            | $          | 4,884,000  
|                                                             | Interest Paid                                                                            |                                                         | $                                         | 6,393,000                                           |            | $          | 5,021,000  
|Reconciliation of Businesses Acquired, Net of Cash Received: |                                                                                          |                                                         |                                           |                                                     |            |            |            
|                                                             | Fair Value of Assets Acquired                                                            |                                                         | $                                         |                                                    |            | $          | 71,449,000 
|                                                             | Non-Cash Financing of Purchase Price and Liabilities Assumed:                            |                                                         |                                           |                                                     |            |            |            
|                                                             |                                                                                          | Issuance of Convertible Subordinated Debentures         |                                           |                                                     |           |            |            
|                                                             |                                                                                          | Issuance of Subordinated Notes Payable                  |                                           |                                                     |           |            |            
|                                                             |                                                                                          | Issuance of Common Stock and Common Stock Warrants      |                                           |                                                     |           |            |            
|                                                             |                                                                                          | Liabilities Assumed                                     |                                           |                                                     |           |            |            
|                                                             |                                                                                          |                                                         |                                           |                                                     |            |            |            
|                                                             |                                                                                          |                                                         | Businesses Acquired, Net of Cash Received |                                                     | $          |           |            
|                                                             |                                                                                          |                                                         |                                           |                                                     |            |            |            

See accompanying notes to consolidated financial statements.

39

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MSC.SOFTWARE CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2000, 1999 AND 1998

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BusinessMSC.Software Corporation (the "Company") is an information software and services provider.
The Company designs, produces and markets proprietary computer software products and provides related services for use in computer-aided engineering. The Company's products are marketed
internationally to aerospace, automotive and other industrial concerns, computer and electronics manufacturers, and universities.

Change in Year-EndIn January 1999, the Company changed its reporting period from a January 31
fiscal year basis to a December 31 calendar year basis. As part of this change, the Company elected to present restated financial results on a calendar year basis for all reported prior
periods.

Principles of ConsolidationThe accounting and reporting policies of the Company conform to generally accepted accounting
principles ("GAAP") in the United States. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have
been eliminated.

Business AcquisitionsDuring 1999, the Company acquired the following companies: MARC Analysis Research Corporation
("MARC"), Universal Analytics Inc. ("UAI"), and Computerized Structural Analysis and Research Corporation ("CSAR"). In late December 1998, the Company acquired Knowledge
Revolution Inc. ("KR"). Refer to Note 4Business Acquisitions and Divestitures.

Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

ReclassificationsCertain amounts in the 1999 and 1998 consolidated financial statements have been reclassified to conform
to the 2000 presentation.

Revenue RecognitionSoftware license revenue consists of licensing fees, which are fees charged for the right to use the
Company's or a third parties' software. Support and services revenues include post-sales
customer support ("PCS"), training and consulting services. PCS includes telephone support, bug fixes and upgrade privileges on a when and if available basis. Services range from installation,
training, and basic consulting to software modification and customization to meet specific customer needs. Software is sold through monthly, annual or longer lease arrangements and through
paid-up license arrangements whereby the customer purchases a long-term license for the use of the Company's software.

As
of January 1, 1998, the Company adopted SOP 97-2,"Software Revenue Recognition", as modified by SOP
98-4,"Deferral of the Effective Date of a Provision of SOP 97-2". SOP 97-2, as modified by SOP 98-4,
provides for revenue recognition only when there is pervasive evidence of an arrangement, delivery has occurred, the vendor's fee is fixed or determinable, and collectibility of the sales proceeds is
considered probable. If an arrangement includes multiple elements, the vendor must allocate the revenue to the various elements based on vendor-specific objective evidence ("VSOE") of fair value. The
significant restrictions of what qualified for VSOE were deferred under SOP 98-4 and, therefore, no changes in the Company's revenue recognition policy were necessary upon adoption of SOP
97-2, as modified by SOP 98-4.

40

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In the fourth quarter of 1998, the Accounting Standards Executive Committee of the AICPA issued SOP 98-9,"Modification of SOP 97-2,
Software Revenue Recognition With Respect to Certain Transactions".SOP 98-9 retained SOP 97-2's restrictions related to the definition of what
qualified for VSOE of fair value for allocating a contract fee among the various elements of a multiple element arrangement. In addition, SOP 98-9 instituted what is known as the
"residual" method. The residual method is an exception to the requirement to have VSOE of fair value for all elements in the arrangement. However, the residual method only allows for the calculation
of a residual amount for the delivered element (i.e., VSOE of fair value must exist for all undelivered elements). As permitted, the Company adopted the provisions of SOP 98-9 effective
October 1, 1998, the earliest time possible under published guidelines. Accordingly, beginning in the fourth quarter of 1998, revenue on non-cancelable, pre-paid annual
lease agreements is recognized monthly over the term of the agreement, since the VSOE of fair
value required under SOP 97-2 needed to allocate the contract fee to the undelivered PCS elements of the arrangements is not available.

For
purposes of allocating lease revenues between software licenses or support revenues in the accompanying consolidated statements of operations, the Company continues to use the
same percentages used for allocating paid-up licenses sold with annual maintenance agreements. Revenue from the sale of paid-up licenses is recognized when the Company receives pervasive
evidence of an arrangement (generally a contract or purchase order), the software had been delivered to the customer, the price charged the customer is fixed or determinable, and collection is
probable. When paid-up licenses include a maintenance arrangement, a portion of the license fee is deferred and recognized over the maintenance period based on VSOE of fair value of the maintenance
element.

Revenue
is derived through the Company's direct sales force, a network of value-added resellers and other sales agents. Revenue from the sale of products by other sales agents, for
which a commission is due to the sales agent, is reported as gross revenues earned from the product sale. Commissions due to these sales agents represent an operating expense and are recorded as
commission expense in cost of license revenue. Revenue from the sale of products provided by other suppliers, for which a royalty is due to the suppliers, is reported as gross revenues earned from the
product sale. Royalties due to these other suppliers represent an operating expense and are recorded as royalty expense in cost of license revenue.

Service
and other revenues are recognized when the service is provided and the revenue has been earned. Long-term contracts are recognized using the percentage of
completion method.

Cash and Cash EquivalentsThe Company considers investments with original maturities of three months or less to be cash
equivalents.

InvestmentsMarketable equity securities and debt securities are classified as held-for-investment,
held-to-maturity or available-for-sale. Management determines the appropriate classification of securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. Securities available-for-sale are carried at fair value, with the unrealized gains and losses, net of
tax, reported as a separate component of shareholders' equity. Realized gains and losses on sales of investment securities are included in the consolidated statements of operations. The cost of
securities sold is based on the specific identification method. In 1999, realized gains on sales of investment securities amounted to $10,773,000. Refer to Note 5Financial
Instruments.

41

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Trade Accounts ReceivableAccounts receivable are reported net of allowances for doubtful accounts receivable. The
Company's revenue is generated from customers in diversified industries, primarily in North America, Europe and Asia-Pacific. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. Refer to
Note 6Trade Accounts Receivable.

Property and EquipmentProperty and equipment are recorded at cost, less accumulated depreciation and amortization.
Depreciation is computed on the straight-line method over the estimated useful lives of the assets, ranging from two to five years. Amortization of leasehold improvements is calculated on
the straight-line method over the shorter of the estimated useful lives of the assets or the corresponding lease term.

Capitalized Software CostsCapitalized software costs are comprised of purchased software and internal software development
costs. In accordance with SOP 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use", the Company capitalizes
qualifying computer software costs which are incurred during the application development stage and amortizes them over the software's estimated useful life.

Software
developed for sale or lease is capitalized under Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed". Software costs incurred subsequent to the determination of the technological feasibility of the software product are
capitalized. Capitalization ceases and amortization of capitalized costs begins when the software product is available for general release to customers. Capitalized product development costs and
projected revenues are reviewed quarterly to determine if any impairment in value has occurred that would require an adjustment in the carrying value or change in expected useful lives under the
guidelines established under SFAS 86. Capitalized software amortization expense is included in cost of license revenue. The amortization period for the software costs capitalized is the economic life
of the related products, typically two to three years. Refer to Note 2Accounting Changes and Note 3Impairment of Assets.

Other Long-Lived AssetsIn accordance with SFAS No. 121,"Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company recognizes impairment losses on long-lived assets
used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. If such assets are
identified to be impaired, the impairment to be recognized is the amount by which the carrying value of the asset exceeds the fair value of the asset. Refer to Note 3Impairment of
Assets.

Advertising ExpenseThe cost of advertising is expensed as incurred. The Company incurred $2,020,000, $1,196,000 and
$1,409,000 in advertising costs during the years ended December 31, 2000, 1999 and 1998, respectively.

Royalties to Third PartiesThe Company has agreements with third parties requiring the payment of royalties for sales of
third party products or inclusion of such products as a component of the Company's products. Royalties are charged to cost of license revenue. The Company does not consider any royalty expense related
to individual agreements to be material.

42

---

Stock-Based CompensationThe Company grants stock options for a fixed number of shares to employees with an exercise price
equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, no compensation expense is recognized for the stock option grants. The Company has also made
available an Employee Stock Purchase Plan for eligible employees. Such eligible employees are entitled semi-annually to purchase common stock, by means of limited payroll deductions, at a
10% discount from the fair market value of the common stock as of specific dates. In 1997, the Company adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Refer to Note 15Stock Option Plans and Warrants.

Income TaxesThe Company uses the liability method of accounting for income taxes. Provision is made in the Company's
consolidated financial statements for current income taxes payable and deferred income taxes arising primarily from temporary differences in accounting for capitalized software costs, undistributed
earnings of international subsidiaries, depreciation expense, deferred income and state income taxes. Refer to Note 12Taxes Based on Income.

Effect of Foreign CurrencyThe Company translates the assets and liabilities of its foreign subsidiaries at the rate of
exchange in effect at the end of the period. Revenues and expenses are translated using an
average of exchange rates in effect during the period. Translation adjustments are recorded as a separate component of shareholders' equity in the consolidated balance sheets. Transaction gains and
losses, other than on intercompany accounts deemed to be of a long-term nature, are included in net income in the period in which they occur. The Company does not provide any deferred tax
benefit for translation adjustment because the recoverability of the benefit is not anticipated in the foreseeable future.

Earnings Per ShareThe Company discloses Basic and Diluted Earnings Per Share in accordance with SFAS No. 128, "Earnings Per Share".Basic Earnings Per
Share is computed by dividing net income by the weighted-average number of common shares outstanding for the
period. Diluted Earnings Per Shares reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted
in the issuance of common stock. Diluted Earnings Per Share is computed by using the weighted-average number of common and common equivalent shares outstanding during each period. Common equivalent
shares are not included in the per share calculations where their inclusion would be anti-dilutive. Refer to Note 19Earnings Per Share.

Impact of Recently Issued Accounting StandardsIn June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133,"Accounting for Derivative Instruments and Hedging Activities", as amended, which is required to be adopted in all fiscal
years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of this new Statement will have a significant effect
on earnings or the financial position of the Company.

In
December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB No. 101"),"Revenue Recognition in
Financial Statements". SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The
adoption of SAB No. 101 did not have a material effect on the Company's financial position or results of operations.

43

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In March 2000, the FASB issued Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions Involving Stock Compensation (An
Interpretation of APB Opinion No. 25)", which addresses certain accounting issues which arose under the previously established accounting principles relating to
stock-based compensation. The adoption of FIN No. 44 did not have a material effect on the Company's financial position or results of operations.

NOTE 2ACCOUNTING CHANGES

Early Adoption of SOP 98-9In the fourth quarter of 1998, the Company adopted the
provisions of SOP 98-9 that required VSOE for all undelivered elements of a software arrangement. Accordingly, revenue on non-cancelable and pre-paid annual lease
agreements is recognized monthly over the term of the agreement since the Company does not have the VSOE of fair value required under SOP 97-2 to allocate the contract fee to the
undelivered PCS elements of the arrangements.

Change in EstimateEffective January 1, 1999, the Company changed the estimated useful life of its capitalized
software assets from three and four years to two and three years. The Company has always estimated the expected life of these assets based on the release cycle of its products. The Company
believes that as software production cycles decrease, amortization periods should also decrease in order to coincide with a version's revenue stream. Refer to Note 3Impairment of
Assets. The Company made this change prospectively. Due to the continual change in the product development process, there can be no assurance that the level of development capitalized in future
periods will be comparable to current capitalized levels. Therefore, the effect of this change is not determinable.

NOTE 3IMPAIRMENT OF ASSETS

In accordance with SFAS No. 86 and SFAS No. 121, the Company recognizes impairment losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. Accordingly, for the years ended
December 31, 1999 and 1998, the Company recognized non-cash, pre-tax charges totaling $1,500,000 and $9,834,000, respectively, on various long-lived assets,
as described below. There were no such losses recognized during 2000.

Capitalized Software (Non-Linear Technology Code for MSC.Nastran)Prior to the acquisition of MARC, the Company
had entered into an agreement with a third party for the commercialization of the third party's non-linear technology code. The Company had capitalized $750,000 in payments to the third
party under the licensing agreement and was obligated to pay an additional $750,000. In addition, the Company had agreed to make minimum royalty payments over the next three years for approximately
$1,300,000. The Company's interest in entering this agreement was to acquire non-linear technology that could be integrated into MSC.Nastran. However, as a result of the acquisition of
MARC and its non-linear technology, the Company decided not to pursue the development of the third party's code.
As one of the world's leading technology codes in the non-linear finite element market, MARC had significant capabilities in non-linear technology, which were similar to those
of the third party. In addition, the Company has full access to the MARC source code, which allows for an easier

44

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and more complete integration of its non-linear capabilities into MSC.Nastran. The Company negotiated with the third party to modify the agreement. Consequently, the Company paid its full
obligation for licensing the code. In exchange, the third party relieved the Company of its minimum royalty obligations and provided the source code modules for one of its non-linear
capabilities. However, since the Company had no current plans to integrate these modules into MSC.Nastran, management did not believe that there would be any future cash flow for these modules.
Accordingly, a $1,500,000 charge was recorded in cost of license revenue in the second quarter of 1999 to write-off these capitalized software costs and to provide for the remaining
payments due under the licensing agreement.

Capitalized Software (MSC.Patran)Since the acquisition of PDA Engineering, Inc. ("PDA") in 1994, the Company
attempted to correct many of the shortcomings with MSC.Patran but found that a major rewrite and replacement of the underlying database management system was necessary to correct inherent flaws with
the product's basic architecture. These flaws prevented both performance enhancements and increases in the functionality of the product. This initiative began in late 1996 and the result of these
efforts was Version 8 of MSC.Patran. This major rewrite included many changes to the underlying architecture, complete replacement of the existing data base management system, and other programming
enhancements to improve performance, reliability, and portability to new hardware platforms, specifically the NT operating system. The release of Version 8 was staged over the second and third
quarters of 1998 with pre-releases to select customers for beta testing. This strategy was orchestrated to assure customer acceptance at an early stage. MSC.Patran customer responses to
Version 8 were very positive with the transition from earlier versions to Version 8 occurring very quickly during the later part of 1998. At December 31, 1998, MSC.Patran Version 8 was the
primary source of MSC.Patran revenue, with over 93% of total MSC.Patran revenue in the fourth quarter of 1998 coming from Version 8. With this high level of acceptance in the marketplace, management
believed the future cash flows from prior versions would be near zero for all prior versions of
MSC.Patran. In addition, due to the significant changes in the technological architecture of the product, future cash flows of Version 8 could not be considered in measuring the net realizable value
of prior versions. Accordingly, a $4,096,000 charge was recorded in cost of license revenue in the fourth quarter of 1998 to write-off the capitalized software costs of all versions of
MSC.Patran prior to Version 8.

Other Capitalized SoftwareThe Company launched many new products in 1997 and 1998. The 1998 revenues from some of these
products were below original projections. As part of the change in the Company's leadership in December 1998 and the resulting restructuring plan (refer to
Note 10Restructuring Reserve), the Company changed its focus and reduced its marketing efforts for certain products. Accordingly, management revised its future revenue projections
of these products. These revenue decreases reduced the future cash flows of six products below their net asset value. Therefore, the Company wrote off $3,675,000 of capitalized software costs as a
charge to cost of license revenue in the fourth quarter of 1998, which represented the excess of the carrying amount of these products over their future cash flows, and provided for $393,000 of
related minimum royalty payments and software licenses for these products, which was charged to royalty expense.

45

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Silverado GoodwillAs discussed in Note 4Business Acquisitions, $1,670,000 of excess purchase price was
recorded as goodwill in connection with the purchase of Silverado Software & Consulting, Inc. ("Silverado"). This premium was based in part on Silverado's past performance but also on
the potential opportunity the Company's management saw in the ability to tap into Silverado's established customer base to expand the Company's contract analysis and consulting business. As part of
the Company's restructuring plan in December 1998 (refer to Note 10Restructuring Reserve), the Company changed its focus to emphasize the expansion of the software business
and value-added integration services as opposed to the contract analysis business. It was then determined that the revenue stream from the contract analysis business would not be sufficient nor
projected to be sufficient to cover the costs associated with the operation. Management estimated that Silverado would not produce sufficient revenue to cover the costs associated with the production
of the revenue. Therefore, during the fourth
quarter of 1998, the Company determined the fair value of the goodwill was zero and recorded a charge included in restructuring and other impairment charges to write-off the entire amount
of goodwill associated with the acquisition of Silverado.

NOTE 4BUSINESS ACQUISITIONS AND DIVESTITURES

Acquisition of MARC Analysis Research CorporationOn June 18, 1999, the Company acquired
100% of MARC pursuant to an Agreement and Plan of Merger dated as of May 26, 1999 (the "Merger Agreement") among the Company, MARC and significant shareholders of MARC. MARC is a software
developer and supplier whose products include MARC (a non-linear finite element analysis ("FEA") program for engineering structural analysis), Mentat (a graphical user interface for MARC),
and MARC/AutoForge (a simulation program for the bulk forging industry).

The
aggregate fair value of the consideration paid to shareholders and holders of options of MARC resulted in a purchase price valued at approximately $36,123,000. The Merger
Agreement provided for a cash purchase price of approximately $20,300,000 and the Stock Purchase Agreement provided for the Company to issue a package of securities to two of the MARC shareholders,
including $11,000,000 principal amount of 8% subordinated notes due in 10 years, $3,236,000 principal amount of 8% subordinated notes due in two years, $2,000,000 principal amount of the
Company's 77/8% convertible subordinated debentures due August 18, 2004, and five-year warrants to purchase 1,400,000 shares of the Company's common stock at an
exercise price of $10.00 per share. The subordinated notes payable and convertible subordinated debentures were discounted to their respective estimated fair values based on
the Company's current borrowing rates. The warrants were valued at their estimated fair value of $3,038,000 based on the Black-Scholes option-pricing model.

In
allocating the purchase price to the acquired assets and assumed liabilities, the Company has recorded an $8,719,000 deferred income tax liability related to identified intangible
assets, offset by $1,933,000 for deferred income tax assets, and $2,360,000 for restructuring costs related to the integration of MARC, primarily severance costs and costs related to facility
consolidations. Refer to Note 10Restructuring Reserve.

46

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The acquisition has been accounted for as a purchase and, accordingly, the operating results of MARC have been included in the Company's consolidated financial statements since the
date of acquisition. The total purchase price was allocated to the assets and liabilities of MARC based upon their approximate fair values. The independent appraisal of the acquired business included
$4,067,000 of purchased in-process research and development, which was related to two products under development. This valuation represents the ten-year after-tax
cash flow of this in-process technology using a discount rate of 18%. The acquired technology had not yet reached technological feasibility and had no future alternative uses. Accordingly,
it was written off at the time of the acquisition. The remaining purchase price was allocated as follows: $3,433,000 to net tangible assets; $25,643,000 to identified intangible assets (including
$15,274,000 of developed technology, $6,322,000 to customer list, $2,390,000 for trade name recognition, and $1,657,000 of assembled work force); and $12,126,000 to goodwill. Goodwill and identified
intangibles are being amortized over 15 years.

The
purchase price was determined through arms' length negotiations between members of the Board of Directors of the Company and representatives of MARC. The Company considered the
revenues and results of operations of MARC in recent periods, estimates of the business potential of MARC,
MARC's software offerings in the non-linear finite element analysis market segment, and other synergies of the two companies (such as the ability to offer a full suite of FEA products and
leveraging technology and distribution channels). The following summarized unaudited pro forma consolidated results of operations reflects the effect of the MARC acquisition as if it had occurred on
January 1, 1999 and 1998. The unaudited pro forma consolidated results of operations presented below are not necessarily indicative of operating results which would have been achieved had the
acquisition been consummated as of January 1, 1999 or 1998 and should not be construed as representative of future operations.

Years Ended December 31,1999

1998Revenue

$
158,726,000

$
144,680,000Operating Expense

$
153,521,000

$
157,774,000Net Income (Loss)

$
5,967,000

$
(16,348,000
)Basic Earnings (Loss) Per Share

$
0.43

$
(1.20
)Diluted Earnings (Loss) Per Share

$
0.43

$
(1.20
)


Acquisition of Universal Analytics Inc.On June 24, 1999, the Company acquired UAI for approximately
$8,400,000 in cash. UAI is a developer and distributor of FEA software and engineering services for the engineering community and to major manufacturers worldwide. The acquisition has been accounted
for as a purchase and, accordingly, the operating results of UAI have been included in the Company's consolidated financial statements since the date of acquisition. The excess of the aggregate
purchase price over the fair market value of net assets acquired was approximately $6,800,000. Goodwill and identified intangibles are being amortized over ten years. The pro forma effect of the UAI
acquisition as if it had occurred on January 1, 1999 or 1998 is immaterial to the consolidated financial statements presented herein.

47

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Acquisition of Computerized Structural Analysis and Research CorporationOn November 4, 1999, the Company acquired
CSAR for approximately $9,650,000 in cash and five-year warrants to purchase 110,000 shares of the Company's common stock at an exercise price of $10.00 per share. The warrants were
recorded at their estimated fair value of $258,000 based on the Black-Scholes option-pricing model. The Company financed a portion of the purchase price through an $8,000,000 term loan. Refer to
Note 5Financial Instruments. CSAR is a developer and distributor of FEA software and services for the engineering community and to major manufacturers worldwide. The acquisition
has been accounted for as a purchase and, accordingly, the operating results of CSAR have been included in the Company's consolidated financial statements since the date of acquisition. The excess of
the aggregate purchase price over the fair market value of net assets acquired was approximately $9,800,000. Goodwill and identified intangibles are being amortized over five years. The pro forma
effect of the CSAR acquisition as if it had occurred on January 1, 1999 or 1998 is immaterial to the consolidated financial statements presented herein.

Acquisition of Knowledge Revolution Inc.In late December 1998, the Company acquired KR for approximately
$19,200,000 in cash. KR is the world's leading developer and distributor of 2D and 3D-motion simulation software for design engineers and analysts. The acquisition has been accounted for as a
purchase. The total purchase price was allocated to the assets and liabilities of KR based on their approximate fair market value. The appraisal of the acquired business included $6,000,000 of
purchased in-process research and development, which was related to three products under development. This valuation represents the five-year after-tax cash flow of
this in-process technology using a discount rate of 28%. The acquired technology had not yet reached technological feasibility and had no future alternative uses. Accordingly, it was
written off at the time of the acquisition. The remaining purchase price was allocated as follows: $1,549,000 to net tangible assets; $9,890,000 to identified intangible assets (including $5,200,000
of value-added reseller distribution channel, $4,300,000 of developed technology, and $390,000 of assembled work force); and $1,786,000 to goodwill. Goodwill and identified intangibles are being
amortized over three to ten years. The pro forma effect of the KR acquisition as if it had occurred on January 1, 1998 is immaterial to the consolidated financial statements presented herein.

Acquisition of Silverado Software & Consulting, Inc.In September 1998, the Company acquired all of
the stock of Silverado for total consideration of $2,809,000, consisting of the issuance of 222,200 shares of the Company's common stock at $6.9375 per share, or $1,542,000, a promissory note of
$331,000 due March 2000, and cash of $936,000. Net assets acquired included cash and securities available-for-sale of approximately $945,000. Silverado is a provider of
engineering services and custom software solutions for the design and analysis of mechanical components, electronic packaging, and civil structures. The acquisition has been accounted for as a
purchase. The excess of the aggregate purchase price over the fair market value of net assets acquired was approximately $1,670,000, which was written off during 1998 due to its impairment. Refer to
Note 3Impairment of Assets.

Sale of Investment in LMS InternationalIn June 1999, the principal shareholders of LMS International ("LMS")
exercised a repurchase option for an equity position that the Company had held in LMS. The Company realized a pre-tax gain of $10,733,000. LMS is a privately held company based in Leuven,
Belgium.

48

---

NOTE 5FINANCIAL INSTRUMENTS

Concentrations of Credit RiskFinancial instruments that potentially subject the Company to
significant concentrations of credit risk consists principally of trade accounts receivable. Concentrations of credit risk with respect to trade accounts receivable are limited due to the number of
entities and the size of those entities comprising the Company's customer base.

InvestmentsAs of December 31, 2000 and 1999, all investments were equity securities and had a cost of $279,000 and
$175,000, respectively, and a fair market value of $1,853,000 and $183,000, respectively.

Line of Credit and Note PayableDuring 1999, the Company entered into a Loan and Security Agreement ("Loan Agreement") with
its principal bank (the "Bank"). The Loan Agreement includes a $12,000,000 revolving line of credit and an $8,000,000 term loan. The amount of the line of credit available in excess of $5,000,000 is
subject to a defined borrowing base of outstanding trade receivables. The term of the revolving portion of the Loan Agreement expires on May 31, 2001. As of December 31, 2000, the amount
available under the line of credit, based on the defined borrowing base, was approximately $11,827,000. There was no balance outstanding on the line of credit as of December 31, 2000 and there
were no borrowings from the line of credit during 1999 and 2000.

On
November 4, 1999, the Company borrowed the $8,000,000 term loan in connection with the acquisition of CSAR. The term of the loan is two years and requires monthly principal
payments of $267,000. As of December 31, 2000, the balance on the loan was $4,533,000. Borrowings under the Loan
Agreement carry an interest rate equal to the Bank's prime lending rate or LIBOR plus 200 basis points, adjustable on a monthly basis. Borrowings under the Loan Agreement are secured by nearly all of
Company's goods and equipment, inventory, contract rights, and intellectual property rights. Borrowings also involve certain restrictive covenants, including restrictions on dividends and investments.
As of December 31, 2000, the Company is in compliance with all covenants.

Convertible Subordinated DebenturesIn 1994, the Company issued $56,608,000 of convertible subordinated debentures in
connection with the acquisition of PDA. In June 1999, in connection with the MARC acquisition, the Company issued additional convertible subordinated debentures in the aggregate principal
amount of $2,000,000. The convertible subordinated debentures were recorded at their estimated fair value at the time of issuance, net of a discount of $300,000. Refer to
Note 4Business Acquisitions and Divestitures. The debentures bear interest at 7-7/8% with interest payments due semi-annually on March 15th and
September 15th. The conversion feature permits the holder to convert the debentures into shares of the Company's common stock at a conversion price of $15.15 per share. The debentures mature
August 18, 2004, but are redeemable at the Company's option at any time after August 18, 1997 upon payment of a premium. At December 31, 2000, the principal balance of the
convertible subordinated debentures was $58,556,000 and their carrying amount was $58,345,000, net of an unamortized discount of $211,000. The unamortized discount is being amortized to interest
expense using the effective-interest method over the term of the convertible subordinated debentures.

49

---

Subordinated Notes PayableIn June 1999, in connection with the MARC acquisition, the Company issued subordinated
notes payable, at a discount, in the aggregate principal amount of $14,236,000. The subordinated notes payable were recorded at their estimated fair value at the time of issuance, net of a discount of
$2,596,000. Refer to Note 4Business Acquisitions and Divestitures. The subordinated notes payable bear interest at 8% with interest payments due semi-annually in
January and July. $3,236,000 of the subordinated notes payable is due in June 2001 and the remaining $11,000,000 is due by June 2009. At December 31, 2000, the principal balance
of the subordinated notes payable was $14,236,000 and their carrying amount was $12,110,000, net of an unamortized discount of $2,126,000. The unamortized discount is being amortized to interest
expense using the effective-interest method over the term of the subordinated notes payable.

The
maturities of the note payable, convertible subordinated debentures and subordinated notes payable are as follows:

Year Ending December 31,

Maturities2001

$
7,769,0002002


2003


2004


58,345,0002005 and Thereafter


8,874,000$
74,988,000


Fair Value of Financial InstrumentsThe following methods and assumptions were used by the Company in estimating its fair
value disclosures for financial instruments:



50

---

The
carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2000 and 1999 are as follows:

|                                  |                                                       | December 31, 2000 |   | December 31, 1999 |  
|--------------------------------- | ----------------------------------------------------- | ----------------- | - | ----------------- | -
|
|Financial Instrument Assets:      |                                                       |                   |   |                   |  
|                                  | Cash and Cash Equivalents                             |                   | $ | 28,806,000        |  
|                                  | Investments                                           |                   | $ | 1,853,000         |  
|                                  | Trade Accounts Receivable, Net                        |                   | $ | 45,950,000        |  
|Financial Instrument Liabilities: |                                                       |                   |   |                   |  
|                                  | Accounts Payable                                      |                   | $ | (5,575,000        | )
|                                  | Note Payable, including Current Portion               |                   | $ | (4,533,000        | )
|                                  | Convertible Subordinated Debentures                   |                   | $ | (58,345,000       | )
|                                  | Subordinated Notes Payable, including Current Portion |                   | $ | (12,110,000       | )

NOTE 6TRADE ACCOUNTS RECEIVABLE

The following is the activity in the allowance for doubtful accounts receivable for the periods indicated.

|                  |                                 | Years Ended December 31, |          
|----------------- | ------------------------------- | ------------------------ | ---------
|
|Beginning Balance |                                 | $                        | 3,182,000
|                  | Additions Due to Acquisitions   |                          |          
|                  | Amounts Charged to Expense      |                          |          
|                  | Write-Downs Against the Reserve |                          |          
|                  |                                 |                          |          
|Ending Balance    |                                 | $                        | 4,355,000
|                  |                                 |                          |          

51

---

NOTE 7PROPERTY AND EQUIPMENT

Property and equipment, at cost, consists of the following:

December 31,2000

1999Computers and Other Equipment

$
32,817,000

$
26,018,000Leasehold Improvements


6,547,000


3,027,000Furniture and Fixtures


3,436,000


2,970,00042,800,000


32,015,000Less Accumulated Depreciation and Amortization


(27,760,000
)

(23,430,000
)Property and Equipment, Net

$
15,040,000

$
8,585,000


Depreciation
and amortization expense on property and equipment for the years ended December 31, 2000, 1999 and 1998 was $4,368,000, $4,672,000 and $6,026,000, respectively.

NOTE 8CAPITALIZED SOFTWARE COSTS

Capitalized software costs consist of the following:

December 31,2000

1999Capitalized Software Costs

$
95,493,000

$
80,589,000Less Accumulated Amortization


(71,789,000
)

(60,472,000
)Capitalized Software Costs, Net

$
23,704,000

$
20,117,000


The
components of capitalized software costs, as they affected operating income, are as follows:

Years Ended December 31,2000

1999

1998Capitalized Internal Software Development Costs

$
(13,655,000
)
$
(8,255,000
)
$
(11,600,000
)Amortization of Capitalized Software Costs


11,317,000


8,816,000


11,974,000Impairment of Capitalized Software Costs





1,500,000


7,771,000$
(2,338,000
)
$
2,061,000

$
8,145,000


In
addition, the Company purchased certain software that was capitalized in 2000, 1999 and 1998 amounting to $1,249,000, $1,088,000 and $1,313,000, respectively.

52

---

NOTE 9GOODWILL AND OTHER INTANGIBLE ASSETS

As of December 31, 2000 and 1999, goodwill was $33,011,000 and $36,746,000, respectively, net of accumulated amortization of $15,011,000 and $9,480,000,
respectively. Goodwill arising from acquisitions is amortized on the straight-line basis over three to fifteen years.

Other
intangible assets are amortized on the straight-line basis over three to fifteen years and consist of the following:

December 31,2000

1999Developed Technology

$
23,674,000

$
23,674,000Customer List


6,322,000


6,322,000Value-Added Reseller Distribution Channel


5,200,000


5,200,000Tradename Recognition


2,390,000


2,390,000Assembled Work Force


2,047,000


2,047,000Other


3,949,000


3,554,00043,582,000


43,187,000Less Accumulated Amortization


(13,162,000
)

(7,653,000
)Other Intangible Assets, Net

$
30,420,000

$
35,534,000


The
carrying values of goodwill and other intangible assets are evaluated periodically in relation to the operating performance and the future undiscounted cash flows of the
underlying business. Adjustments are made if the sum of expected future net cash flows is less than book value. Refer to Note 3Impairment of Assets.

NOTE 10RESTRUCTURING RESERVE

In December 1998, the Company accrued $695,000 of severance costs as part of a restructuring plan that was completed in the first quarter of 1999.
During February 1999, the Company announced a new organizational structure following a re-evaluation of its business strategy. The reorganization plan provided for a 10% reduction
in the Company's worldwide workforce (approximately 75 positions) and the consolidation of 15 field offices. These changes resulted in pre-tax charges of $5,897,000 during the first
quarter of 1999. The charges consisted of severance costs of $3,200,000, costs related to facility consolidations of $2,200,000, and other charges of $497,000. The Company continually evaluates the
balance of the restructuring reserve based on the remaining estimated amounts to be paid. As a result, during the second quarter of 1999, the Company decreased the restructuring reserve by $400,000.

During
1999, as part of the acquisitions of MARC, UAI and CSAR, the Company recorded $2,730,000 of additional acquisition costs related to the integration of these entities into the
Company. In accordance with Emerging Issues Task Force Issue No. 95-3,"Recognition of Liabilities in Connection With a Purchase Business
Combination", these costs were included in the purchase price allocations, resulting in additional goodwill. These charges primarily consisted of severance costs of $1,171,000
and costs related to facility consolidations of $1,559,000.

53

---

As of December 31, 2000, the restructuring reserve was $1,340,000. During 2000, cash outlays were $1,535,000 in conjunction with the $8,922,000 of restructuring charges and
acquisition costs recorded in 1998 and 1999. The remaining cash outlays are anticipated to be completed by the end of 2001.

The
following is the activity in the restructuring reserve for the periods indicated:

Years Ended December 31,2000

1999

1998Balance at Beginning of Period

$
2,875,000

$
695,000

$
Charges to Expense





5,897,000


695,000Reversal of Restructuring Charges





(400,000
)

Acquisition Costs Capitalized





2,730,000


Amounts Paid


(1,535,000
)

(6,047,000
)

Balance at End of Period

$
1,340,000

$
2,875,000

$
695,000


NOTE 11OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

December 31,2000

1999Income Taxes Payable

$
4,782,000

$
2,891,000Sales Taxes Payable


4,305,000


3,144,000Contribution to Profit Sharing Plan


2,141,000


2,031,000Interest Payable


2,014,000


2,092,000Royalties Payable


1,426,000


747,000Commissions Payable


1,392,000


986,000Other


5,651,000


4,628,000Total Other Current Liabilities

$
21,711,000

$
16,519,000


54

---

NOTE 12TAXES BASED ON INCOME

The provision (benefit) for taxes based on income (loss) consists of the following:

Years Ended December 31,2000

1999

1998Current:Federal

$
2,450,000

$
3,103,000

$
1,994,000State


1,568,000


(134,000
)

489,000Foreign


3,485,000


3,229,000


2,786,0007,503,000


6,198,000


5,269,000Deferred


(2,068,000
)

(2,260,000
)

(5,465,000
)Provision (Benefit) for Income Taxes

$
5,435,000

$
3,938,000

$
(196,000
)


The
foreign tax provision for 2000, 1999 and 1998 includes withholding taxes of $2,886,000, $1,748,000 and $2,075,000, respectively, assessed to the Company by foreign authorities on
amounts remitted to the United States. For the years ended December 31, 2000, 1999 and 1998, the Company's foreign operations realized combined income (loss) before taxes, including
intercompany charges, of $1,960,000, $816,000 and ($4,134,000), respectively.

55

---

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 2000 and 1999 are as follows:

December 31,2000

1999Deferred Tax Liabilities:Capitalized Software

$
9,035,000

$
8,060,000Intangible Assets


8,459,000


10,794,000Unrealized Gain on Investment


614,000


Organization Costs


82,000


743,000Other


755,000


263,000Total Deferred Tax Liabilities


18,945,000


19,860,000Deferred Tax Assets:Deferred Revenue


8,648,000


7,265,000Foreign Deferred Taxes


4,527,000


6,585,000Undistributed Earnings of Foreign Subsidiaries


4,077,000


2,708,000Net Operating Losses


2,297,000


3,070,000Benefits and Compensation


1,596,000


1,463,000Business Credits


1,027,000


1,855,000Restructuring Liability


529,000


1,491,000State Taxes


465,000


843,000Allowance for Doubtful Accounts


445,000


700,000Other


81,000


534,000Total Deferred Tax Assets


23,692,000


26,514,000Valuation Allowance


(4,919,000
)

(8,329,000
)Net Deferred Tax Assets


18,773,000


18,185,000Net Deferred Tax Liabilities

$
172,000

$
1,675,000


In
2000, the Company recorded as a charge to shareholders' equity a deferred tax liability on unrealized gains from an investment and a current tax benefit related to stock options.
In 1999, the Company recorded a net deferred tax liability of $5,050,000 as a charge to goodwill. These items are not reflected in the provision for taxes.

56

---

The balance sheet presentation of the net deferred tax liabilities/(assets) is as follows:

December 31,2000

1999Long-Term Deferred Income Taxes, Net

$
16,344,000

$
16,957,000Current Deferred Tax Charges


(16,172,000
)

(15,282,000
)Net Deferred Tax Liabilities

$
172,000

$
1,675,000


At
December 31, 2000, the Company had net operating loss carryforwards for federal income tax purposes of approximately $6,563,000. The federal net operating loss carryforwards
expire at various dates through the year 2012. An acquisition by the Company in 1993 constituted an ownership change for federal income tax purposes and, as a result, the amount of net operating loss
carryforwards that may be utilized in any given year may be limited.

A
valuation allowance of $3,410,000 at December 31, 1999 was recognized to offset the deferred tax asset relating to foreign deferred taxes. In 2000, this valuation allowance
was eliminated because of management's determination that it is more likely than not that the asset will be realized. During 2000, approximately $1,154,000 of deferred taxes related to the
undistributed earnings of foreign subsidiaries was charged against the valuation allowance. The valuation allowance decreased by $339,000 from 1998 to 1999, reflecting a decrease of $3,047,000
attributable to the elimination of restrictions on and the use of previously acquired net operating losses, offset by an addition of $2,708,000 attributable to undistributed earnings of foreign
subsidiaries.

57

---

The following table reconciles the provision (benefit) for income taxes based on income (loss) before taxes to the statutory federal income tax rate of 35% for the years ended
December 31, 2000, 1999 and 1998.

|                                            |                                                        | Years Ended December 31,             |  
|------------------------------------------- | ------------------------------------------------------ | ------------------------------------ | -
|
|Income Tax Provision (Benefit) at Statutory |                                                        |                                      |  
|                                            | Federal Income Tax Rate                                |                                      | $
|Increase (Decrease) Related To:             |                                                        |                                      |  
|                                            | Amortization of Goodwill                               |                                      |  
|                                            | Income of Foreign Sales Corporation                    |                                      |  
|                                            | Other Changes in the Valuation Allowance               |                                      |  
|                                            | Foreign Tax Credits Not Benefited                      |                                      |  
|                                            | State Income Taxes, Net of Federal Benefits            |                                      |  
|                                            | Federal and State Research and Development Tax Credits |                                      |  
|                                            | Valuation Allowance Related to Foreign Deferred Taxes  |                                      |  
|                                            | Acquired In-Process Technology                         |                                      |  
|                                            | Other, Net                                             |                                      |  
|                                            |                                                        |                                      |  
|                                            |                                                        | Provision (Benefit) for Income Taxes |  
|                                            |                                                        |                                      |  

58

---

NOTE 13SEGMENT INFORMATION

The Company operates in a single reportable segment. International Operations consists primarily of foreign sales offices selling software developed in the
United States combined with local service revenue. The following tables summarize consolidated financial information of the Company's operations by geographic location:

Years Ended December 31,2000

1999

1998Revenues:The Americas

$
76,423,000

$
68,092,000

$
58,409,000Europe


52,469,000


45,672,000


39,875,000Asia-Pacific


49,132,000


35,471,000


27,113,000Total Revenue

$
178,024,000

$
149,235,000

$
125,397,000


December 31,2000

1999Identifiable Assets:The Americas

$
152,563,000

$
141,890,000Europe


33,496,000


27,638,000Asia-Pacific


22,595,000


17,692,000Total Identifiable Assets

$
208,654,000

$
187,220,000


The
net assets of the Company's foreign subsidiaries totaled $31,524,000 and $22,725,000 as of December 31, 2000 and 1999, respectively, excluding intercompany items.
Long-lived assets included in these amounts were $6,249,000 and $5,709,000 as of December 31, 2000 and 1999, respectively. The income before taxes of the Company's foreign
subsidiaries is reported in Note 12Taxes Based on Income.

NOTE 14EMPLOYEE BENEFITS

The Company contributes an amount, integrated with Social Security, to a defined contribution plan, covering substantially all North American
full-time employees who have completed a specified term of service with the Company. For the years ended December 31, 2000, 1999 and 1998, contributions charged to expense in
connection with this plan were $2,087,000, $1,934,000 and $1,704,000, respectively. The plan has a 401(k) feature to permit voluntary employee contributions, which does not affect the Company's
expenses.

In
1995, the Company adopted a non-qualified supplemental retirement plan. The Company contributes an amount, integrated with Social Security and the Company's defined
contribution plan, covering certain key employees who have completed a specified term of service with the Company. For the years ended December 31, 2000, 1999 and 1998, contributions charged to
expense in connection with this plan were $94,000, $49,000 and $58,000, respectively.

59

---

NOTE 15STOCK OPTION PLANS AND WARRANTS

1991 PlanThe MSC.Software Corporation 1991 Stock Option Plan ("the 1991 Plan"), as amended,
consists of two parts: a "Key Employee Program" that allows discretionary awards of non-transferable incentive stock options and non-qualified stock options to officers and
other key employees, and a "Non-Employee Director Program" that provides for automatic annual grants of non-transferable, non-qualified stock options to
non-employee directors.

The
"Key Employee Program" section of the 1991 Plan provides for the granting of both incentive stock options and non-qualified options for the purchase of up to 2,500,000
authorized but unissued shares of the Company's common stock at the fair market value of such shares on the date the option is granted, or for non-qualified options at such price as the
Compensation Committee may determine.

The
"Non-Employee Director Program" section of the 1991 Plan provides for automatic grants to members of the Company's Board of Directors who are not officers or employees
of the Company or its subsidiaries. A maximum of 500,000 shares of authorized but unissued shares of the Company's common stock may be issued upon the exercise of options under the
"Non-Employee Director Program". All eligible directors will receive annual non-discretionary grants of non-qualified stock options for the purchase of 3,000 shares
of the Company's common stock.

Options
under the 1991 Plan are exercisable up to ten years from the date of grant, subject to vesting provisions outlined at the grant date. Generally, options vest and become
exercisable one year after the grant date.

A
summary of stock option activity for the 1991 Plan is as follows:

Options

Option Price
Per Share

Weighted-Average
Exercise PriceOutstanding at December 31, 1997

2,076,800

$
6.50

to

$
15.88

$
12.07Granted

1,167,350

$
5.38

to

$
11.25

$
9.28Exercised

(64,950
)
$
6.50

to

$
11.00

$
8.78Canceled

(629,750
)
$
7.75

to

$
15.88

$
13.27Outstanding at December 31, 1998

2,549,450

$
5.38

to

$
15.88

$
10.58Granted

255,350

$
5.50

to

$
7.25

$
6.08Canceled

(632,300
)
$
5.94

to

$
15.38

$
10.24Outstanding at December 31, 1999

2,172,500

$
5.38

to

$
15.88

$
10.15Granted

540,549

$
8.38

to

$
25.00

$
14.47Exercised

(160,533
)
$
5.50

to

$
9.88

$
8.20Canceled

(308,800
)
$
5.50

to

$
15.38

$
10.92Outstanding at December 31, 2000

2,243,716

$
5.38

to

$
25.00

$
11.20


60

---

As
of December 31, 2000, the number of options outstanding and exercisable under the 1991 Plan, by range of exercise prices, was as follows:

Options OutstandingOptions ExercisableWeighted-
Average
Remaining
Contractual
LifeRange of
Exercise Prices

Number
of
Options

Weighted-
Average
Exercise
Price

Number
of
Options

Weighted-
Average
Exercise
Price$
5.38

to

$
6.94

202,567

$
5.79

7.2

108,567

$
5.86$
8.25

to

$
9.88

1,145,375

$
9.08

6.1

767,650

$
9.12$
10.13

to

$
15.88

695,774

$
13.02

4.0

608,774

$
13.17$
20.00

to

$
25.00

200,000

$
22.50

9.2



$
Total

2,243,716

$
11.20

5.8

1,484,991

$
10.54


At
December 31, 2000, 1999 and 1998, the number of options exercisable under the 1991 Plan, the per-share weighted-average exercise prices of the stock options
exercisable under the 1991 Plan and the number of options available for future grant under the 1991 Plan were as follows:

Options Exercisable

Options
Available
for Future
GrantsNumber of
Options

Weighted-Average
Exercise PriceDecember 31, 1998

1,386,150

$
11.46

711,000December 31, 1999

1,600,050

$
11.01

687,950December 31, 2000

1,484,991

$
10.54

456,201


1998 PlanThe MSC.Software Corporation 1998 Stock Option Plan ("the 1998 Plan"), as amended, consists of two parts: a "Key
Employee Program" that allows discretionary awards of non-transferable incentive stock options and non-qualified stock options to officers and other key employees, and a
"Non-Employee Director Program" that provides for automatic annual grants of non-transferable, non-qualified stock options to non-employee directors.

The
"Key Employee Program" section of the 1998 Plan provides for the granting of both incentive stock options and non-qualified options for the purchase of up to 3,440,000
authorized but unissued shares of the Company's common stock at the fair market value of such shares on the date the option is granted, or for non-qualified options at such price as the
Compensation Committee may determine.

61

---

The "Non-Employee Director Program" section of the 1998 Plan provides for automatic grants to members of the Company's Board of Directors who are not officers or employees
of the Company or its subsidiaries. A maximum of 60,000 shares of authorized but unissued shares of the Company's common stock may be issued upon the exercise of options under the
"Non-Employee Director Program". All eligible directors will receive annual non-discretionary grants of non-qualified stock options for the purchase of 3,000 shares
of the Company's common stock. Options to be granted to non-employee directors under the 1998 Plan do not begin until 2000. Directors may receive only 3,000 shares of the Company's common
stock per year from either the 1991 or 1998 Plans.

Options
under the 1998 Plan are exercisable up to ten years from the date of grant, subject to transfer restrictions and vesting provisions outlined at the grant date. Generally,
options vest and become exercisable one year after the grant date. The 1998 Plan provides that vesting may be accelerated in certain events related to changes in control of the Company, unless prior
to such change in control the Compensation Committee determines otherwise. Similarly, the 1998 Plan provides that the Compensation Committee has discretion, subject to certain limits, to modify the
terms of outstanding options. No amendment or cancellation and re-grant, subject to permitted adjustments, shall reduce the per share exercise price to a price less than 100% of the fair
market value of the Company's common stock on the option date of the initial option.

A
summary of stock option activity for the 1998 Plan is as follows:

Options

Option Price
Per Share

Weighted-Average
Exercise PriceOutstanding at December 31, 1997



$


to

$


$
Granted

600,000

$
5.38

to

$
9.00

$
8.00Outstanding at December 31, 1998

600,000

$
5.38

to

$
9.00

$
8.00Granted

1,376,850

$
5.00

to

$
7.69

$
5.76Canceled

(161,000
)
$
5.25

to

$
5.25

$
5.25Outstanding at December 31, 1999

1,815,850

$
5.00

to

$
9.00

$
6.36Granted

875,704

$
7.94

to

$
15.00

$
10.20Exercised

(54,767
)
$
5.00

to

$
9.00

$
6.14Canceled

(306,698
)
$
5.00

to

$
9.63

$
6.72Outstanding at December 31, 2000

2,330,089

$
5.00

to

$
15.00

$
7.76


62

---

As of December 31, 2000, the number of options outstanding and exercisable under the 1998 Plan, by range of exercise prices, was as follows:

Options OutstandingOptions ExercisableWeighted-
Average
Remaining
Contractual
LifeRange of
Exercise Prices

Number
of
Options

Weighted-
Average
Exercise
Price

Number
of
Options

Weighted-
Average
Exercise
Price$
5.00

to

$
6.94

1,222,683

$
5.79

8.3

589,519

$
5.66$
7.50

to

$
9.69

866,876

$
8.98

8.5

175,800

$
8.99$
10.00

to

$
15.00

240,530

$
13.41

9.3



$
Total

2,330,089

$
7.76

8.5

765,319

$
6.43


At
December 31, 2000, 1999 and 1998, the number of options exercisable under the 1998 Plan, the per-share weighted-average exercise prices of the stock options
exercisable under the 1998 Plan and the number of options available for future grant under the 1998 Plan were as follows:

Options ExercisableOptions
Available
for Future
GrantsNumber of
Options

Weighted-Average
Exercise PriceDecember 31, 1998



$


400,000December 31, 1999

181,250

$
8.15

684,150December 31, 2000

765,319

$
6.43

1,116,144


63

---

Employee Stock Purchase PlanIn September 1996, the Company's Board of Directors adopted the MSC.Software
Corporation 1996 Employee Stock Purchase Plan ("the Employee Stock Purchase Plan"). The Employee Stock Purchase Plan was approved by the Company's shareholders at the 1997 Annual Meeting of
Shareholders. Under the Employee Stock Purchase Plan, a maximum of 750,000 shares of the Company's common stock has been made available for purchase by eligible employees electing to participate in
the Employee Stock Purchase Plan. The Employee Stock Purchase Plan is intended to provide participating eligible employees an additional incentive to advance the best interests of the Company through
ownership of common stock. As of December 31, 2000, a total of 122 eligible employees elected to participate in the Employee Stock Purchase Plan with total payroll deductions as of that date
equal to $307,000. Purchases were as follows for the periods indicated:

Shares

Price
Per Share

Total
PurchasesJuly 31, 1997

89,986

$
6.98

$
628,000January 31, 1998

48,876

$
8.38


410,000July 31, 1998

54,119

$
7.14


387,000January 31, 1999

59,734

$
5.85


349,000July 31, 1999

71,177

$
4.89


348,000January 31, 2000

75,470

$
4.84


365,000July 31, 2000

48,584

$
7.65


372,000447,946

$
6.38

$
2,859,000


There
are 302,054 remaining shares eligible for purchase under the Employee Stock Purchase Plan as of December 31, 2000. On January 31, 2001, purchases of 39,156 shares
totaling $352,000 were exercised.

64

---

Stock-Based CompensationThe Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized in the consolidated statements of operations for the
stock option grants. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards during the years ended December 31, 2000,
1999 and 1998 consistent with the provisions of SFAS No. 123, the Company's Net Income (Loss), Basic Earnings (Loss) Per Share and Diluted Earnings (Loss) Per Share would have been reduced to
the pro forma amounts as follows:

Years Ended December 31,2000

1999

1998Net Income (Loss):As Reported

$
11,133,000

$
5,097,000

$
(12,979,000
)Pro Forma

$
9,717,000

$
4,053,000

$
(13,371,000
)Basic Earnings (Loss) Per Share:As Reported

$
0.79

$
0.37

$
(0.95
)Pro Forma

$
0.69

$
0.29

$
(0.98
)Diluted Earnings (Loss) Per Share:As Reported

$
0.76

$
0.37

$
(0.95
)Pro Forma

$
0.56

$
0.22

$
(0.98
)


Using
the Black-Scholes valuation model, the estimated per share weighted-average fair value of stock options granted during the years ended December 31, 2000, 1999 and 1998
was $4.75, $2.95 and $4.23, respectively.

The
pro forma effect on the Company's Net Income (Loss) and Basic Earnings (Loss) Per Share for 2000, 1999 and 1998 is not representative of the pro forma effect in future years. The
pro forma effect does not take into consideration compensation expense related to grants made prior to 1996 or additional grants in future years, which are anticipated. The fair value of each option
is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the periods indicated:

Years Ended December 31,2000

1999

1998Dividend Yield

0.0
%
0.0
%
0.0
%Expected Volatility

51.3
%
49.7
%
46.1
%Risk-Free Interest Rate

5.38
%
6.25
%
7.00
%


65

---

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options. The Company's employee stock options have characteristics significantly
different from those of traded options, such as vesting restrictions and extremely limited transferability. In addition, the assumptions used in option valuation models are highly subjective,
particularly the expected stock price volatility of the underlying stock. Because changes in these subjective input assumptions can materially affect the fair value estimate, in management's opinion,
the existing models do not provide a reliable single measure of the fair value of its employee stock options.

WarrantsOn March 9, 1998, the Company entered into a joint-development and marketing arrangement with Kubota Solid
Technology Corporation ("KSTC"). This arrangement allowed KSTC to purchase warrants with an aggregate exercise price of up to $3,000,000 to purchase shares of the Company's common stock. As of
December 31, 2000, all warrants were purchased under the arrangement. The
exercise price is equal to the fair market value of the common stock on the date of issuance of the warrants. The warrants are non-transferable, have a five-year term and
become exercisable two years after the date of issuance. The arrangement also provided KSTC with marketing rights to a specific technology being developed.

The
Company recorded service revenue related to the development effort and marketing rights provided under the arrangement and issued warrants to KSTC. The following table shows the
service revenue recorded and warrants issued for the periods indicated.

Years Ended December 31,2000

1999

1998Service Revenue Recorded

$


$
924,000

$
944,000Value of Warrants Issued

$


$
576,000

$
556,000Shares of Common Stock





217,864


185,843Average Exercise Price

$


$
6.8850

$
8.0713


The
warrants were recorded at fair value based on the Black-Scholes valuation method using the following assumptions: dividend yield of 0.0%; expected volatility between 42.6% and
49.7%; and risk-free interest rates between 5.5% and 7.0%. As of December 31, 2000, warrants to purchase 403,707 shares of the Company's common stock were outstanding under the
arrangement. The warrants issued have exercise prices ranging between $5.8125 per share and $11.375 per share. The Company has no obligation under the arrangement to produce a commercially viable
product or technology or to refund any monies contributed by KSTC.

On
June 18, 1999, in connection with the acquisition of MARC, the Company issued five-year warrants to purchase 1,400,000 shares of the Company's common stock at an
exercise price of $10.00 per share. The warrants had an estimated fair value of $3,038,000 based on the Black-Scholes valuation method
using the following assumptions: dividend yield of 0.0%, expected volatility of 48.4%, and a risk-free interest rate of 7.0%. On November 4, 1999, in connection with the acquisition
of CSAR, the Company issued five-year warrants to purchase 110,000 shares of the Company's common stock at an exercise price of $10.00 per share. The warrants had an estimated fair value
of $258,000 based on the Black-Scholes valuation method using the following assumptions: dividend yield of 0.0%, expected volatility of 47.9%, and a risk-free interest rate of 5.5%.

66

---

NOTE 16COMMITMENTS AND CONTINGENCIES

The
Company leases facilities and equipment under various lease agreements, which range from one to twelve years, which require the following minimum annual rental commitments:

Operating Leases
Years Ending December 31,2001

$
6,003,0002002


6,353,0002003


6,093,0002004


5,913,0002005


4,810,000Thereafter


31,444,000$
60,616,000


For
the years ended December 31, 2000, 1999 and 1998, the combined annual rental cost for various facilities and equipment under operating leases approximated $8,356,000,
$7,690,000 and $6,900,000, respectively. In most cases, management expects that, in the normal course of business, leases will be renewed or replaced by others.

The
Company is involved in various pending or threatened litigation matters arising out of the normal conduct of our business. In our opinion, these matters will not have a material
adverse effect on our financial position or results of operations.

NOTE 17ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) are as follows:

Currency
Translation
Adjustment

Unrealized
Investment
Gain (Loss),
Net of Tax

Accumulated
Other
Comprehensive
Income (Loss)Balance at December 31, 1999

$
(5,434,000
)
$
8,000

$
(5,426,000
)Other Comprehensive Income


281,000


952,000


1,233,000Balance at December 31, 2000

$
(5,153,000
)
$
960,000

$
(4,193,000
)


The
Company does not provide any deferred tax benefit for the currency translation adjustment because the recoverability of the benefit is not anticipated in the foreseeable future.
The amount of tax
associated with the unrealized gain as of December 31, 2000 was $614,000. The amount of tax associated with the unrealized gain and loss as of December 31, 1999 and 1998 was immaterial.

67

---

NOTE 18SHAREHOLDERS' EQUITY

In October 1998, the Company adopted a Stockholder Rights Plan ("the Plan"). As part of the Plan, a special type of dividend was declared on the common
stock of the Company distributing these rights to all stockholders of record on October 16, 1998. These rights, which do not have any shareholder rights, including voting or dividend rights,
will expire on October 5, 2008, unless earlier redeemed by the Company prior to expiration at a price of $.01 per right. The rights automatically transfer with a transfer of common stock until
the time they become exercisable, which happens when certain specified events occur. If the rights become exercisable, they entitle the holders thereof to purchase stock of the Company at a price of
$35.00, subject to certain other provisions of the Plan.

The
debentures issued by the Company have a feature that allows the holder to convert the debentures to common stock of the Company at a conversion price of $15.15 per share.

As
of December 31, 2000, shares of common stock reserved for issuance were as follows:

Stockholder Rights Plan

14,173,400Convertible Subordinated Debentures

3,865,100Common Stock Warrants

1,913,707Employee Stock Option Plans:1991 Plan

2,699,9171998 Plan

3,446,233Employee Stock Purchase Plan

302,054Total Shares Reserved for Issuance as of December 31, 2000

26,400,411


68

---

NOTE 19EARNINGS PER SHARE

The following table sets forth the computation of Basic and Diluted Earnings (Loss) Per Share:

|                              |                                                  | Net Income (Loss) |   | Weighted-Average Shares Outstanding |   | Per Share Amount | 
|----------------------------- | ------------------------------------------------ | ----------------- | - | ----------------------------------- | - | ---------------- | 
|Year Ended December 31, 2000: |                                                  |                   |   |                                     |   |                  | 
|                              | Basic Earnings Per Share                         |                   | $ | 11,133,000                          |   | 14,025,000       | 
|                              | Effect of Dilutive Stock Options and Warrants(1) |                   |   |                                    |   | 589,000          | 
|                              |                                                  |                   |   |                                     |   |                  | 
|                              | Diluted Earnings Per Share                       |                   | $ | 11,133,000                          |   | 14,614,000       | 
|                              |                                                  |                   |   |                                     |   |                  | 
|Year Ended December 31, 1999: |                                                  |                   |   |                                     |   |                  | 
|                              | Basic Earnings Per Share                         |                   | $ | 5,097,000                           |   | 13,800,000       | 
|                              | Effect of Dilutive Stock Options and Warrants(1) |                   |   |                                    |   | 105,000          | 
|                              |                                                  |                   |   |                                     |   |                  | 
|                              | Diluted Earnings Per Share                       |                   | $ | 5,097,000                           |   | 13,905,000       | 
|                              |                                                  |                   |   |                                     |   |                  | 
|Year Ended December 31, 1998: |                                                  |                   |   |                                     |   |                  | 
|                              | Basic Loss Per Share                             |                   | $ | (12,979,000                         | ) | 13,655,000       | 
|                              | Effect of Dilutive Stock Options and Warrants(1) |                   |   |                                    |   |                 | 
|                              |                                                  |                   |   |                                     |   |                  | 
|                              | Diluted Loss Per Share                           |                   | $ | (12,979,000                         | ) | 13,655,000       | 
|                              |                                                  |                   |   |                                     |   |                  | 

---

For
additional disclosures regarding the convertible subordinated debentures, employee stock options and common stock warrants, refer to Note 5Financial
Instruments and Note 15Stock Option Plans and Warrants.

69

---

The following table shows the common stock equivalents that were outstanding as of December 31, 2000, 1999 and 1998, but were not included in the computation of Diluted
Earnings (Loss) Per Share because the options' or warrants' exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive,
or the effect of the conversion would be anti-dilutive:

Number of
Shares

Option Price
Per ShareAnti-Dilutive Stock Options:As of December 31, 2000

1,530,624

$
9.688 to $25.000As of December 31, 1999

2,527,200

$
6.313 to $15.875As of December 31, 1998

2,524,000

$
8.625 to $15.875Anti-Dilutive Common Stock Warrants:As of December 31, 2000

1,619,399

$
9.813 to $11.375As of December 31, 1999

1,728,300

$
6.688 to $11.375As of December 31, 1998

185,800

$
6.188 to $11.375Anti-Dilutive Convertible Subordinated Debentures:As of December 31, 2000

3,865,100


$15.150As of December 31, 1999

3,865,100


$15.150As of December 31, 1998

3,734,300


$15.150


NOTE 20RELATED PARTY TRANSACTIONS

The Company utilizes, in the normal course of business, the services of Geometric Software Solutions Co. Ltd. ("GSSL"), a public company headquartered in India
that provides CAD/CAM/CAE/PDM software applications, component technology and development services. The Chairman and Chief Executive Officer of the Company is a director of GSSL. For the years ended
December 31, 2000, 1999 and 1998, the amounts paid by the Company to GSSL were approximately $1,442,000, $852,000 and $605,000.

70

---

NOTE 21QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is selected unaudited quarterly financial data for the years ended December 31, 2000 and 1999.

|                                |              | Quarter Ended
|------------------------------- | ------------ | -------------
|
|                                |              |              
|Revenue                         |              | $            
|Cost of Revenue                 |              |              
|                                |              |              
|Gross Profit                    |              |              
|Operating Expense               |              |              
|                                |              |              
|Operating Income                |              |              
|Other Expense, Net              |              |              
|                                |              |              
|Income Before Provision for     |              |              
|                                | Income Taxes |              
|Provision for Income Taxes      |              |              
|                                |              |              
|NET INCOME                      |              | $            
|                                |              |              
|Basic Earnings Per Share        |              | $            
|Diluted Earnings Per Share      |              | $            
|Basic Weighted-Average Shares   |              |              
|Diluted Weighted-Average Shares |              |              

|                                                          |  | Quarter Ended
|--------------------------------------------------------- |  | -------------
|
|Revenue                                                   |  | $            
|Cost of Revenue                                           |  |              
|                                                          |  |              
|Gross Profit                                              |  |              
|Operating Expenses                                        |  |              
|                                                          |  |              
|Operating Income (Loss)                                   |  |              
|Other Expense (Income), Net                               |  |              
|                                                          |  |              
|Income (Loss) Before Provision (Benefit) for Income Taxes |  |              
|Provision (Benefit) for Income Taxes                      |  |              
|                                                          |  |              
|NET INCOME (LOSS)                                         |  | $            
|                                                          |  |              
|Basic Earnings (Loss) Per Share                           |  | $            
|Diluted Earnings (Loss) Per Share                         |  | $            
|Basic Weighted-Average Shares                             |  |              
|Diluted Weighted-Average Shares                           |  |              

---

71

---



REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To
the Board of Directors and Shareholders of
MSC.Software Corporation

We
have audited the accompanying consolidated balance sheets of MSC.Software Corporation as of December 31, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MSC.Software Corporation at
December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.



Los
Angeles, California
February 28, 2001

72

---



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Nominees for Directors

The following Class I director is currently serving until the Annual Meeting and until his successor is elected and qualified.

|Name             |  | Age |  | Last Five Years                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | Director
Since
|---------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Frank Perna, Jr. |  | 63  |  | Chairman and Chief Executive Officer (December 14, 1998 to present) of MSC.Software. Chairman and Chief Executive Officer, EOS, a privately held provider of power supplies for electrical equipment and notebook computers
(1994 to 1998). Mr. Perna also serves as a director of California Amplifier, Inc., a public company that designs and manufacturers a broad line of microwave amplifier equipment used with satellite video and terrestrial broadband applications, and as
a director of Geometric Software Solutions Co. Ltd., a public company headquartered in India providing CAD/CAM/CAE/PDM software applications, component technology and development services. Mr. Perna previously served as a director of PDA Engineering
(1990 to 1994) and was a member of the Board of Directors of PDA Engineering when it was acquired by us. |  | 1994          

Continuing Directors

The following table sets forth certain information, furnished to us by the respective persons named below, about the directors who comprise Class II and
Class III of our Board of Directors.

The
Nominating Committee is currently searching for candidates to fill the vacancy created by Thomas Curry's resignation from the Board in April 1999. We intend to maintain the
size of the Board at six directors. Once a suitable candidate has been qualified and appointed, he or she will serve the remainder of Mr. Curry's term as a Class I director and until a
successor is elected and qualified.

73

---

The following Class II directors are currently serving until the 2002 Annual Meeting and until their respective successors are elected and qualified:

|Name            |  | Age |  | Last Five Years                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | Director
Since
|--------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Donald Glickman |  | 68  |  | Managing Partner, J.F. Lehman and Company, a private equity investment firm (1993 to present). President of Donald Glickman & Company, a private investment firm. Mr. Glickman currently serves as Chairman of Elgar
Electronics (1998 to present), and a director of Burke Industries (1997 to present), Monro Muffler Brake Inc. (1984 to present), Massachusetts Mutual Corporate Investors (1992 to present), Massachusetts Mutual Participating Investors (1992 to present)
, and SCI Incorporated (1998 to present). Monro Muffler Brake Inc., Massachusetts Mutual Corporate Investors and Massachusetts Mutual Participating Investors are publicly held.                                  |  | 1998          
|Larry S. Barels |  | 52  |  | Principal, Pacific Capital Resources, Mr. Barels' private consulting practice (1996 to present). Chairman, Driveway Corporation, a provider of Internet file storage solutions (June 1999 to present). Advisor, Vantage Point Venture Partners (1997 to
present). Chairman, Openwave Systems, Inc., a publicly held company that develops Internet and intranet-based messaging server software (1995 to 1997). Chairman and Chief Executive Officer, Wavefront Technologies, a company involved in digital image
manipulation and computer animation (1985 to 1995). Mr. Barels is currently a director of Miramar Systems (1990 to present) and Miravant Medical Technologies (1998 to present). |  | 1998          

74

---

The
following Class III directors are currently serving until the 2003 Annual Meeting and until their respective successors are elected and qualified:

|Name              |  | Age |  | Last Five Years                                                                                                                                                                                                                                                                                                                                                      |  | Director
Since
|----------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|George N. Riordan |  | 67  |  | Former Chairman of the Board of MSC.Software (February 1, 1997 to December 14, 1998). Mr. Riordan is also Managing Director, George Riordan & Co., investment bankers (February 1991 to present) and is a director of
Pancho's Mexican Buffet, Inc. (1993 to present). Mr. Riordan was previously a director of Lewis Galoob Toys, Inc. (1994 to 1996).              |  | 1983          
|William F. Grun   |  | 54  |  | Mr. Grun is a private investor and consultant. From 1996 to 1999, he was the President and Chief Operating Officer of Optum Software, a privately held supply chain software company. From 1989 to 1996, he was an executive with AlliedSignal (now
Honeywell International) where he held several positions including President of Aerospace Systems and Equipment. |  | 1997          

Other
information regarding our executive officers is included under the caption "Executive Officers of the Registrant" in Part I, Item 1.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of a registered
class of our equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of
MSC.Software Corporation. Officers, directors and greater than 10% stockholders are required by Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a)
forms they file.

To
our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended
December 31, 2000, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with.

75

---

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

|                   |                         |      |      |   |         |         |   |         |        | Long-Term
Compensation
Awards
|------------------ | ----------------------- | ---- | ---- | - | ------- | ------- | - | ------- | ------ | -----------------------------
|
|
|
|Frank Perna, Jr.   |                         | 2000 |      | $ | 327,084 |         | $ | 125,000 |        | $                            
|                   | Chairman and Chief      |      | 1999 |   | $       | 306,731 |   | $       |       |                              
|                   | Executive Officer       |      | 1998 |   | $       | 14,808  |   | $       |       |                              
|Louis A. Greco     |                         | 2000 |      | $ | 224,375 |         | $ | 27,520  |        | $                            
|                   | Chief Financial Officer |      | 1999 |   | $       | 210,417 |   | $       | 28,363 |                              
|                   |                         | 1998 |      | $ | 203,750 |         | $ | 73,100  |        | $                            
|Kenneth D. Blakely |                         | 2000 |      | $ | 219,037 |         | $ | 26,240  |        | $                            
|                   | Senior Vice President   |      | 1999 |   | $       | 193,542 |   | $       | 27,181 |                              
|                   |                         | 1998 |      | $ | 191,000 |         | $ | 65,000  |        | $                            
|Richard C. Murphy  |                         | 2000 |      | $ | 181,250 |         | $ | 11,668  |        | $                            
|                   | Vice President          |      | 1999 |   | $       | 145,417 |   | $       | 34,491 |                              
|                   |                         | 1998 |      | $ | 138,750 |         | $ | 30,000  |        | $                            
|Jeffrey Morgan     |                         | 2000 |      | $ | 171,875 |         | $ |        |        | $                            
|                   | Vice President          |      | 1999 |   | $       |        |   | $       |       |                              
|                   |                         | 1998 |      | $ |        |         | $ |        |        | $                            

Notes to Summary Compensation Table

76

---

Option Grant Table

The following table presents additional information concerning the stock options shown in the Summary Compensation Table and granted to the named executive
officers for fiscal year 2000:

|Individual Grants 
|------------------
|
|                  
|Frank Perna, Jr.  
|                  
|                  
|                  
|Louis A. Greco    
|                  
|Kenneth D. Blakely
|Richard C. Murphy 
|                  
|Jeffrey Morgan    
|                  
|                  

Notes to Option Grant Table

77

---

78

---

Aggregated Option Exercises and Year-End Option Values

The following table shows information for the named executive officers concerning exercises of stock options during 2000 and the amount and values of
unexercised stock options as of December 31, 2000.

|                   |  |        |  |   |        | Number of Securities
Underlying Unexercised
Options at Fiscal Year-End
(#) |         |  |         | 
|------------------ |  | ------ |  | - | ------ | -------------------------------------------------------------------------- | ------- |  | ------- | 
|
|
|
|Frank Perna, Jr.   |  |       |  | $ |       |                                                                            | 221,500 |  | 612,500 | 
|Louis A. Greco     |  | 10,000 |  | $ | 64,000 |                                                                            | 211,274 |  | 148,750 | 
|Kenneth D. Blakely |  |       |  | $ |       |                                                                            | 142,500 |  | 172,500 | 
|Richard C. Murphy  |  |       |  | $ |       |                                                                            | 75,000  |  | 95,500  | 
|Jeffrey Morgan     |  |       |  | $ |       |                                                                            | 6,250   |  | 64,250  | 

Notes to Option Exercise Table

Severance Plans and Other Information

We have entered into severance agreements with the named executive officers and other key employees. These severance agreements provide that, if we or the
employee terminate the employee's employment with MSC.Software (other than as a result of death or disability) for any reason within two years after a change of control(1)
of MSC.Software, the employee will receive a severance payment. The severance payments will be reduced to the extent any payment is not deductible by us for federal income tax purposes. The severance
agreements are automatically renewed annually unless MSC.Software gives written notice that it does not wish to extend them. In addition, the agreements will continue in effect for three years after a
change in control.

---

Perna, Greco, Blakely, Murphy and MorganThe severance payment for Frank Perna, Jr., Louis Greco, Kenneth Blakely,
Richard C. Murphy and Jeffrey Morgan will be a cash payment of two and one-half times the average of the cash compensation received by the employee over the last five years.

79

---

Other Key EmployeesSome key employees with severance agreements who have been employed by MSC.Software for at least five
years will receive a severance payment at least equal to the average of the employee's total cash compensation over the last five years, increasing ratably to a maximum of two times the average of the
last five years of such employee's total cash compensation if the employee was
employed for ten years or more. Others will receive two and one half times the average of the cash compensation received by the employee over the last five years regardless of the length of service. A
total of 149 employees have severance agreements with MSC.Software.

Directors' Compensation

Directors who are also employees or officers of MSC.Software do not receive any additional compensation for their service on the Board. Currently,
non-employee directors receive a $15,000 annual retainer plus $5,000 per year for each committee chair. Directors also receive $2,500 for each Board meeting they attend and $1,500 for each
committee meeting they attend. In addition, non-employee directors are reimbursed for all expenses incurred in connection with attendance at meetings of the Board and the performance of
Board duties.

Directors
who are not officers or employees of MSC.Software are eligible to participate in the Non-Employee Director Program. Under this program, directors receive a grant
of options to purchase 10,000 shares of common stock upon election to the Board. In addition, directors receive an annual grant of options to purchase 3,000 shares of common stock on the first
business day of each calendar year. On January 3, 2000, Larry Barels, Donald Glickman, George Riordan and William Grun each received 3,000 options to purchase common stock of the Company at an
exercise price of $10.125. All of the options granted under the program become exercisable 12 months after the date of grant and expire on the fifth anniversary of the grant date.

Compensation Committee Interlocks and Insider Participation

William Grun, Donald Glickman and Larry Barels each served as members of the Compensation Committee during 2000. None of the members of the Compensation
Committee are officers or employees, or former officers or employees, of MSC.Software or any of its subsidiaries. No interlocking relationship exists between the members of the Board or Compensation
Committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of March 15, 2001, the names, addresses, and holdings of those persons known to us to be beneficial owners of more
than 5% of our common stock, the names and holdings of each director and each nominee for director, the names and holdings of each executive officer named in the Summary Compensation Table ("named
executive officers") and the holdings of all directors and executive officers as a group.

|Name and Address of Beneficial Owner                         |                             | Amount Beneficially Owned and Nature of Beneficial Ownership (1) |     | Percent of Class (2) |  
|------------------------------------------------------------ | --------------------------- | ---------------------------------------------------------------- | --- | -------------------- | -
|Royce & Associates, Inc.                                     |                             | 1,427,415                                                        | (3) | 10.0                 | %
|                                                             | 1414 Avenue of the Americas |                                                                  |     |                      |  
|                                                             | New York, NY 10019          |                                                                  |     |                      |  
|Nearchos Irinarchos                                          |                             | 1,532,013                                                        | (4) | 9.7                  | %
|                                                             | Vikavagen 9                 |                                                                  |     |                      |  
|                                                             | 5-167 71 Bromma, Sweden     |                                                                  |     |                      |  
|Larry S. Barels                                              |                             | 46,000                                                           |     | *                    |  
|Donald Glickman                                              |                             | 23,000                                                           |     | *                    |  
|William F. Grun                                              |                             | 29,000                                                           |     | *                    |  
|George N. Riordan                                            |                             | 81,600                                                           |     | *                    |  
|Frank Perna, Jr.                                             |                             | 489,687                                                          |     | 3.3                  | %
|Louis A. Greco                                               |                             | 268,195                                                          |     | 1.9                  | %
|Kenneth D. Blakely                                           |                             | 176,415                                                          |     | 1.2                  | %
|Richard C. Murphy                                            |                             | 109,439                                                          |     | *                    |  
|Jeffrey Morgan                                               |                             | 17,500                                                           |     | *                    |  
|All Directors and Executive Officers as a Group (14 persons) |                             | 1,418,986                                                        | (5) | 10.0                 | %

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Notes to Stock Ownership Table

* Holdings represent less than 1% of all shares outstanding.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During 2000, we utilized the services of Geometric Software Solutions Co. Ltd. ("GSSL"), a public company headquartered in India that provides CAD/CAM/CAE/PDM
software applications, component technology and development services. Frank Perna, Jr. is a director of GSSL. In 2000, we paid $1,442,000 to GSSL.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Item 14(a)1. Financial Statements

The following consolidated financial statements of MSC.Software Corporation, as included in its Annual Report, are included in Item 8.

Consolidated Balance Sheets as of December 31, 2000 and 1999Consolidated Statements of Operations for the Years EndedDecember 31, 2000, 1999 and 1998Consolidated Statements of Shareholders' Equity for the PeriodJanuary 1, 1998 to December 31, 2000Consolidated Statements of Cash Flows for the Years EndedDecember 31, 2000, 1999 and 1998Notes to Consolidated Financial StatementsReport of Ernst & Young LLP, Independent Auditors


Item 14(a)2. Financial Statement Schedules

All schedules have been omitted because the information either has been shown in the consolidated financial statements or notes thereto, or is not applicable
or required under the instructions.

Item 14(a)3. Exhibits

|Exhibit
Number |  |                                                                                                                                                                                                                                                  
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Certificate of Incorporation of MSC.Software Corporation, as amended (filed as Exhibit 3.1 of MSC.Software Corporation's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999, and incorporated herein
by reference).      
|3.2            |  | Restated Bylaws of MSC.Software Corporation (filed as Exhibit 3.2 to MSC.Software Corporation's Annual Report on Form 10-K filed for the fiscal year ended January 31, 1996, and incorporated herein by reference).                              
|3.3            |  | Certificate of Designations of Junior Participating Preferred Stock (filed as Exhibit 2.2 to The MacNeal-Schwendler Corporation's Registration Statement on Form 8-A filed October 13, 1998, and incorporated herein by reference).              
|4.1            |  | The MacNeal-Schwendler Corporation Indenture dated as of June 17, 1999 with Chase Manhattan Bank & Trust Company N.A. as Trustee (filed as Exhibit 4.1 to a Current Report on Form 8-K filed July 1, 1999, and incorporated herein by
reference).
|               |  |                                                                                                                                                                                                                                                  

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|4.2  |   | The MacNeal-Schwendler Corporation Warrant Agreement dated as of June 18, 1999 with The MacNeal-Schwendler Corporation acting in the capacity of Warrant Agent (filed as Exhibit 4.2 to a Current Report on Form 8-K filed July 1, 1999, and incorporated
herein by reference).                                                                                                                                                                                                                                                                              
|---- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.3  |   | Rights Agreement dated as of October 5, 1998 between The MacNeal-Schwendler Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, including the Form of Right Certificate (Exhibit A), the Summary of Rights to Purchase Junior
Participating Preferred Stock (Exhibit B) and the Form of Certificate of Designations of Junior Participating Preferred Stock (Exhibit C) (filed as Exhibit 2.1 to The MacNeal-Schwendler Corporation's Registration Statement on Form 8-A filed October
13, 1998 and incorporated herein by reference).
|4.4  |   | Indenture, dated as of August 18, 1994, between MSC.Software Corporation and Chemical Trust Company of California, as trustee (filed as part of MSC.Software Corporation's Registration Statement on Form S-3 (No. 33-83174), and incorporated herein by
reference).                                                                                                                                                                                                                                                                                         
|4.5  |   | First Supplemental Indenture, dated September 22, 1994, between MSC.Software Corporation and Chemical Trust Company of California, as trustee (filed as Exhibit 4.2 of MSC.Software Corporation's Quarterly Report on Form 10-Q for the quarterly period
ended October 31, 1994, and incorporated herein by reference).                                                                                                                                                                                                                                      
|4.6  |   | Second Supplemental Indenture, dated December 14, 1994, between MSC.Software Corporation and Chemical Trust Company of California, as trustee (filed as Exhibit 4.3 of MSC.Software Corporation's Quarterly Report on Form 10-Q for the quarterly period
ended October 31, 1994, and incorporated herein by reference).                                                                                                                                                                                                                                      
|10.1 |   | Agreement of Lease, dated August 25, 1999, between MSC.Software Corporation and Imperial Promenade Associates, LLC, a Delaware limited liability company (filed as Exhibit 10.1 to MSC.Software Corporation's Annual Report on Form 10-K filed for the
fiscal year ended December 31, 1999, and incorporated herein by reference).                                                                                                                                                                                                                           
|10.2 | * | 1998 Incentive Stock Option Plan for Key Employees, as amended (filed as Annex A to The MacNeal-Schwendler Corporation's Annual Proxy Statement for the Annual Meeting of Shareholders held on June 23, 1999, and incorporated herein by
reference).                                                                                                                                                                                                                                                                                                         
|10.3 | * | Employment Agreement Between MSC.Software Corporation and Frank Perna, Jr. (filed as Exhibit 3.1 of MSC.Software Corporation's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999, and incorporated herein by
reference).                                                                                                                                                                                                                                                                                                            
|10.4 |   | Loan and Security Agreement Between MSC.Software Corporation and Comerica Bank-California (filed as Exhibit 3.1 of MSC.Software Corporation's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999, and incorporated herein by
reference).                                                                                                                                                                                                                                                                                             
|10.5 |   | Second Amendment to Loan and Security Agreement Between MSC.Software Corporation and Comerica Bank-California (filed as Exhibit 10.1 of MSC.Software Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999, and
incorporated herein by reference).                                                                                                                                                                                                                                                                   
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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|10.6  |      | Registration Rights Agreement dated June 18, 1999 among The MacNeal-Schwendler Corporation, Dendron Technology B.V. and Fronos Technology B.V. (filed as Exhibit 4.3 to a Current Report on Form 8-K filed July 1, 1999 and incorporated herein by
reference).                        
|----- | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7  |      | Form of Agreement for use of MSC.Nastran, as modified to September 1991 (filed as Exhibit 10.1 to MSC.Software Corporation's Annual Report on Form 10-K filed for the fiscal year ended January 31, 1992, and incorporated herein by
reference).                                      
|10.8  |      | Agreement dated October 22, 1982, between MSC.Software Corporation and NASA (filed as Exhibit 10.2 to MSC.Software Corporation's Registration Statement on Form S-1, File No. 2-82719, and incorporated herein by reference).                                                         
|10.9  |      | Agreement of Lease, dated July 31, 1980, between MSC.Software Corporation and Frank De Pietro (filed as Exhibit 10.3 to MSC.Software Corporation's Registration Statement on Form S-1, File No. 2-82719, and incorporated herein by
reference).                                       
|10.10 | *    | Form of Indemnification Agreement between MSC.Software Corporation and directors, officers and agents thereof (filed as Exhibit 10.5 to MSC.Software Corporation's Annual Report on Form 10-K filed for the year ended January 31, 1989, and incorporated
herein by reference).       
|10.11 | (a)* | Form of Severance Agreement between MSC.Software Corporation and executive officers thereof (filed as Exhibit 10.6(a) to The MacNeal-Schwendler Corporation's Transition Report on Form 10-K filed for the fiscal year ended December 31, 1998, and
incorporated herein by reference).
|10.11 | (b)* | Form of Severance Agreement between MSC.Software Corporation and key employees (filed as Exhibit 10.6(a) to The MacNeal-Schwendler Corporation's Transition Report on Form 10-K filed for the fiscal year ended December 31, 1998, and incorporated herein
by reference).             
|10.12 | *    | Amendment 1991-1 to 1983 Incentive Stock Option Plan for Key Employees (filed as Annex A to MSC.Software Corporation's Annual Proxy Statement for the Annual Meeting of Shareholders held on June 12, 1991, and incorporated herein by
reference).                                    
|10.13 | *    | Amendment 1992-1 to 1983 Incentive Stock Option Plan for Key Employees (filed as part of the Annual Proxy Statement for MSC.Software Corporation's Annual Meeting of Shareholders held on June 10, 1992, and incorporated herein by
reference).                                       
|10.14 | *    | 1991 Stock Option Plan (filed as Annex A to MSC.Software Corporation's Annual Proxy Statement for the Annual Meeting of Shareholders held on June 10, 1992, and incorporated herein by reference).                                                                                    
|10.15 | *    | 1991 Stock Option Plan Amendment (filed as part of MSC's definitive Proxy Statement for the Annual Meeting of Shareholders on June 14, 1995, and incorporated herein by reference).                                                                                                   
|      |      |                                                                                                                                                                                                                                                                                       

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|10.16 |    | Separation Agreement with Thomas Curry (filed as Exhibit 10.12 to The MacNeal-Schwendler Corporation's Transition Report on Form 10-K filed for the fiscal year ended December 31, 1998, and incorporated herein by reference).                       
|----- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.17 |    | Termination and General Release Agreement with Thomas Curry (filed as Exhibit 10.13 to The MacNeal-Schwendler Corporation's Transition Report on Form 10-K filed for the fiscal year ended December 31, 1998, and incorporated herein by
reference).  
|10.18 |    | Termination and General Release Agreement with George Riordan (filed as Exhibit 10.14 to The MacNeal-Schwendler Corporation's Transition Report on Form 10-K filed for the fiscal year ended December 31, 1998, and incorporated herein by
reference).
|10.19 | *  | Form of Director Change in Control Agreement (filed as Exhibit 10.15 to The MacNeal-Schwendler Corporation's Transition Report on Form 10-K filed for the fiscal year ended December 31, 1998, and incorporated herein by reference).                 
|21    | ** | Material Subsidiaries of the Registrant.                                                                                                                                                                                                              
|23    | ** | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                                   

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Item 14(b). Reports on Form 8-K

None.

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SIGNATURES

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

| |                        | MSC.SOFTWARE CORPORATION(Registrant)
| | ---------------------- | ------------------------------------
| | Dated:  March 30, 2001 |                                     

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and
on the date indicated.

|Name                                  |  | Title                                                                |  | Date          
|------------------------------------- |  | -------------------------------------------------------------------- |  | --------------
|                                      |  |                                                                      |  |               
|/s/FRANK PERNA, JR.Frank Perna, Jr.   |  | Chairman of the Board and Chief Executive Officer                    |  | March 30, 2001
|/s/LOUIS A. GRECOLouis A. Greco       |  | Chief Financial Officer
(Principal Financial and Accounting Officer) |  | March 30, 2001
|/s/LARRY S. BARELSLarry S. Barels     |  | Director                                                             |  | March 30, 2001
|/s/DONALD GLICKMANDonald Glickman     |  | Director                                                             |  | March 30, 2001
|/s/WILLIAM F. GRUNWilliam F. Grun     |  | Director                                                             |  | March 30, 2001
|/s/GEORGE N. RIORDANGeorge N. Riordan |  | Director                                                             |  | March 30, 2001

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