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

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, 2001

Commission File Number 1-8722

MSC.SOFTWARE CORPORATION
(Exact Name of Registrant as Specified in its Charter)

(714) 540-8900
(Registrant's Telephone Number, Including Area Code)

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

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 ý No o

        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. o

        As of March 22, 2002, the approximate aggregate market value of MSC.Software Corporation's voting stock held by non-affiliates was $601,874,000.

        As of March 22, 2002, there were outstanding 29,396,391 shares of Common Stock of MSC.Software Corporation.

MSC.SOFTWARE CORPORATION
INDEX TO FORM 10-K
DECEMBER 31, 2001

PART I

ITEM 1. BUSINESS

GENERAL

        We are a leader in the development, marketing and support of simulation software, services and systems to optimize product design and quality and reduce product costs and time to market. We also provide a broad range of strategic consulting services to our customers to improve the integration and performance of their product development process. With the acquisition of Advanced Enterprise Solutions, Inc. ("AES") in July 2001, we also became an information systems and software integrator, selling Product Lifecycle Management products that address the needs of small and medium size product development and manufacturing companies. We serve customers in several industries, including aerospace, automotive, machinery, electronics, consumer products, biomedical, shipbuilding and railroad. In 2001, we sold our products and services to over 7,500 customers worldwide through our dedicated sales force and network of value added resellers. We maintain 70 offices in 22 countries. Representative customers in various markets include Airbus, Amgen, BMW, Boeing, Cooper Tire, DaimlerChrysler, Denso, General Motors, Hyundai, Lloyd's Register, Lockheed Martin, Matsushita, NASA, Sony and Toyota.

        We have been providing simulation software for over 30 years. In the current customer product development process, 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 certain variables, such as stress, pressure and temperature. This allows our customers to reduce costly and time-consuming physical testing of prototypes. Advances in technology have made simulation analysis available for not only sophisticated projects, such as space vehicles, but also to less complicated products, such as toys.

        In addition to the acquisition of AES, we have engaged in a number of key strategic initiatives to expand into market opportunities that are natural extensions of our expertise in simulation software. The initiatives include:

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expanding our professional services group, which includes traditional engineering consulting activities as well as super computing services;



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providing cost-effective Linux-based applications of our software and assistance to our customers who want to move to a Linux operating system;



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creating our Engineering-e.com division to act as an Application Service Provider of our software over the Internet, as well as to provide our customers access to our Simulation Center and Engineering Exchange;



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forming a strategic alliance with Dassault Systemes S.A. pursuant to which we will develop our next generation of simulation software using Dassault Systemes' Version 5 Architecture. We will also act as a strategic distribution channel for the joint Version 5 Analysis and Simulation portfolio. This alliance will accelerate our capability to deliver innovative simulation software as an integral part of our next generation Product Life Cycle Management ("PLM") portfolio;



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seeking acquisitions that will allow us to strengthen our core software business by broadening the technology scope of our simulation software; and



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expanding the information systems and software integration business to Europe and Asia-Pacific. Our expertise in this area was previously concentrated in North America.

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RECENT DEVELOPMENTS

        On March 15, 2002, we entered into a definitive agreement to acquire Mechanical Dynamics, Inc ("MDI"). MDI is a publicly traded company that develops, markets and supports virtual prototyping solutions. We intend to acquire all of the issued and outstanding common shares of MDI in a cash tender offer of $18.85 per share. The aggregate value of the consideration paid will be approximately $130,000,000, a portion of which will be funded by new debt. The acquisition has been approved by our board of directors as well as MDI's board of directors, but is subject to certain other conditions, including governmental approvals. If we are successful in completing our tender offer and obtaining government approvals, we expect to close this acquisition by the end of the second quarter of 2002.

INDUSTRY

Product Lifecycle Management

        The process of managing a product throughout its lifecycle is called Product Lifecycle Management or PLM. The product lifecycle includes four significant segments; conceive the product, design the product, manufacture the product and maintain the product. These key product lifecycle segments utilize various digital technologies and software tools including mechanical computer-aided design, or CAD, computer-aided engineering, or CAE, computer-aided manufacturing, or CAM, and product data management, or PDM, and related services and systems. Our CAE software and services are used throughout the PLM segments and, with the acquisition of AES, we added CAD, CAM and PDM tools to our product offering. Our information systems integration activities provide the infrastructure necessary for efficient PLM implementation.

        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. Today, CAD, CAM and CAE allow engineers to create and test designs much more quickly and accurately.

        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 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 early in the process to designs that would likely prove faulty, saving time and potentially costly redesigns later in the process. Our simulation software is designed to interoperate seamlessly with other leading mechanical computer-aided design software products in the market.

        Broadly, the industry provides several services that include the development of software, consulting services, training and hardware reselling.

Systems Integrator

        The systems integrator industry is the extended arm of technology manufacturers. In essence, a CAD/CAM/CAE systems integrator delivers and integrates a mix of products from a variety of manufacturers into tools that are tailored to a customer's particular needs. Systems integrators add value to both product manufacturers and customers because they can better evaluate a customer's

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individual needs and tailor a customized turn-key solution consisting of hardware, software, a variety of product and integration services, application support and training. A systems integrator's goal is to be the expert source where customers can acquire products, knowledge, support, training and integration resources.

        There are many factors that determine the overall success of a CAD/CAM/CAE systems integrator organization relative to competitors. These include technical expertise (technical skill sets, industry experience, etc.), pre- and post-sales support capabilities, customer relationship management (sales and service staff), security (financial soundness, years in business, etc.), geographic coverage and price. Competition in these industries includes the direct sales forces of technology manufacturers.

OUR STRATEGY

        Our goal is to expand our leading position as a provider of simulation software, services and systems. Our strategy has the following key elements:

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Maintain and expand our leading position in simulation software.  We are a leader in providing high-end simulation software to the aerospace, automotive and other manufacturing industries. We will continue to focus our efforts on these industries, but will apply the technical expertise we have developed to additional applications in manufacturing as well as consumer products and other industries that are increasingly turning to simulation during the development phase of production. Our products have recently been used by a manufacturer to optimize material usage, a cellular phone manufacturer to perform drop tests for durability and heat transfer, and a toy manufacturer to meet product safety standards and improve functionality.



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Leverage our expertise in simulation software by providing engineering consulting services.  We have been providing simulation software for over 30 years and in that time we have developed a significant amount of expertise in understanding the engineering processes of our customers. We are leveraging that expertise by providing strategic engineering software consulting services to our customers to improve the integration and performance of their simulation technologies. For example, we are working with Cooper Tire to develop a predictive tire modeling system to integrate simulation, design and testing, with the goal of helping Cooper Tire reduce tire development time by 70%. We also provide training, onsite support and implementation services for our customers.



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Expand our information systems business into new markets.  With the acquisition of AES, we now have significant expertise as an integrator of information systems and software. In addition to building that business domestically, we will expand the systems integrator business in Europe and Asia-Pacific.



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Expand our engineering consulting services for the Linux operating system.  The Internet has accelerated the development of open source software. Open source software has emerged as a viable alternative to traditional proprietary software, such as Unix and Windows NT. One of the better known open source products is the Linux operating system. We are providing our customers with cost-effective Linux-based applications of our products and helping our customers who request to move to Linux by configuring their systems, porting their in-house software, customizing the operating system for special needs, and providing training. We deliver our software on Linux computer clusters, providing turn-key super computing with price/performance benefits.



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Offer our software and engineering consulting services through the Internet.  We continue to expand our infrastructure and product offerings over the Internet to complement and make our existing sales channels more efficient. The internet has also provided opportunities for improved efficiencies in product ordering and availability from any location worldwide 24 hours per day. In

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March 1999 we launched our Web portal, Engineering-e.com. This portal allows our customers to "rent" many of our software products for a specified period of time or run simulations on demand through our network. Early in March 2000, we launched the Simulation Center, where customers are able to run our software over the internet, removing the need for them to purchase computers for performing simulation. In addition, commencing in June 2000, our customers were able to access our Engineering Exchange, which matches clients who have engineering problems with consultants with a wide variety of expertise.

SOFTWARE

        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-processors. These solvers are capable of simulating virtually any mechanical or structural phenomena.

        The governing principle for our core software is to provide:

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enhanced engineering productivity, in terms of process/task automation (via dedicated environments, templates, and workflow managers), numerical and graphics performance, and overall ease of use;



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greater range of simulation, including loads analysis (and kinematics), non-linear effects, robust design (including probabilistic analysis), manufacturing process simulation, and test correlation;



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increased modeling, manipulation, and analysis of assemblies, from geometry to full finite element analysis models to super-elements/substructures to matrices from analysis and test;



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continued commitment to interoperability through data exchange standards such as AP203, AP214 and AP209; and



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increased emphasis on advanced visualization techniques and dedicated results processing utilities.

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

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MSC.visualNastran Enterprise—This family includes software for dedicated analysts at major manufacturers to simulate a wide variety of complex mechanical conditions. Within this family, we include our core simulation software, including MSC.Nastran, MSC.Patran, MSC.Marc, MSC.Dytran and MSC.Enterprise Mvision.



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MSC.visualNastran Professional—This family includes software for multi-disciplinary engineers at large or small companies that perform simulation on occasion, though this is not their primary task. This family includes the Ultima product, MSC.Nastran for Windows, and new integrated products for these engineers, among others.



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MSC.visualNastran Desktop—This family includes software for design engineers at large or small companies who need to verify design concepts. This family includes the current Working Knowledge products acquired in 1998 and others to be defined.



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MSC.e-visualNastran—This family includes software from the other MSC.visualNastran families that runs across the internet in an internet ASP model that is similar to data centers.

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 it was first released in 1970, resulting in substantially greater capabilities and scope of our product, MSC.Nastran.

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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 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.

        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 computer-aided design, or CAD, access, automated finite element modeling and completeness of analysis integration.

        MSC.Marc.  MSC.Marc simulates physical behavior due to material contact conditions such as impact, crash and crush, resulting in material failure under extreme stress. MSC.Marc is increasingly being used in areas where materials undergo large deformations, such as 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.

        MSC.Dytran.  MSC.Dytran is similar to MSC.Marc and uniquely combines fluid-structure interaction to facilitate the simulation of, for example, 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.

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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 a solver engine. MSC.Nastran for Windows was launched in early 1995.

        MSC.Working Model.  The December 1998 acquisition of Knowledge Revolution 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 conveyors. 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 SolidWorks, Mechanical Desktop and Solid Edge.

Other Software Products

        We also offer other software products, including:

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MSC.Fatigue, used for durability analysis;



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MSC.Acumen, used to capture and automate a customer's product development process;



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MSC.SuperForge, used for forging simulation; and



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Third party software including Dassault Systemes Products: Catia, Enovia, Delmia and Smartsolutions, as well as Autodesk.

PROFESSIONAL SERVICES

        We offer services in the areas of PLM and product development, engineering and manufacturing solutions, including consulting, deployment, development and engineering.

Engineering Consulting

        We provide engineering analysis and design services to our existing software customers and to companies who do not use our software. These services are delivered to our current customers to provide analysis or design expertise that they may not have, and to augment their capabilities if they have a manpower shortage. These services are provided to other companies who do not have any analysis or design professionals on staff, but who need these capabilities provided via outsourcing. We deliver the expertise of over 200 highly trained engineers who write, support and use our software on a daily basis. We have provided services to automotive, aerospace, biomedical, electronic packaging, petrochemical, nuclear and consumer product manufacturers and suppliers. In addition to analysis and design services before a product's manufacture, we have also investigated the cause of in-service failures for a wide range of products. Typical examples of our engineering services include:

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Engineering Optimization.  We assist clients in enabling multi-disciplinary collaboration and concurrent engineering and eliminating redundant activities.



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E-Engineering.  We help clients achieve easy and effective collaboration, reduce cycle time, accelerate decision-making and gain access to people and vital product information.

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Supply Chain Integration.  We work with clients to help resolve cost and lead-time issues, ensure compatible tools and environments, define standards and procedures and develop alliances with key suppliers in order to leverage their expertise over the long term.



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Analysis.  We provide a broad range of analysis services, including stress, thermal, dynamics and linear and non-linear analysis for a variety of industries.



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Data Translations.  We help clients exchange data between various CAD systems.



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Design.  We assist clients in defining requirements, conceptualizing form, fit and function details, designing for ease of manufacture and cost and reverse engineering.



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Legacy Conversion.  We provide processes and resources to convert vellum and scanned drawings to CAD data using manual or automated processes and can manage the associated conversion issues.

Process Automation

        We work closely with our key customers to advise them on product development processes, enabling them to make better products in less time and for less cost. We assist our customers to automate the process by providing software systems that integrate our software with CAD, product data management, test and in-house software. Automation moves simulation up front in the conceptual and detailed design phases to enable simulation to be performed by design engineers and to be an integral part of the product development process. In many of our service engagements, we use the MSC.Acumen toolkit to create design engineering workflow templates that capture and automate the engineering process.

Deployment and Development Services

        We provide services that allow our customers to efficiently and effectively deploy IT solutions. These services include:

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Solutions Implementation.  We help plan and manage implementations in order to ensure rapid and successful deployments. We also provide an integrated test bed environment, deliver training and education to support deployments and ensure IT infrastructure readiness to minimize the impact associated with the deployment of new technologies.



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Application Customization.  Depending on a client's needs, we customize templates, databases, graphical user interfaces and applications for web access and integration.



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Application Development.  We create customized applications based on customer-defined requirements for automated quality checking, web utilization and knowledge management.



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Application Integration.  We can integrate and bridge a variety of divergent applications and create applications that format and/or enhance data used by other applications.



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Databases.  We will install, modify and oversee the migration of databases, schema and object modules solutions and enterprise-wide applications.

HIGH PERFORMANCE COMPUTING SERVICES

Linux Services

        An expanding services area for us is porting to the Linux operating system. For Linux, we 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.

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INTERNET SERVICES

        Through our Engineering-e.com group, we offer simulation software package tools to a broad base of customers over the Internet.

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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 product line is MSC.visualNastran 4D, a design simulation package. Each of our Simulation Center applications runs on our servers and are paid for by the customer on a monthly subscription basis. This reduces the need for customers to make significant upfront investments in software and upgrades, computer infrastructure, and system maintenance.



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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 multiplies 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 formulate an engineering project into a comprehensive request for proposals. In addition, the Engineering Exchange provides for online meeting services and administrative handling of contract and billing details for the consultant participants.

TRAINING AND ONSITE SERVICES

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Training.  We have developed educational tools designed to train users of our products as an extension of our software business. We also offer training in a variety of aspects of products manufactured by third parties, including Dassault Systemes, SmarTeam and AutoDesk. Training seminars are conducted in local languages on a frequent basis at the MSC Institute of Technology in Santa Ana, California, at our offices worldwide, and at client sites. We also offer our simulation software 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.



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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 onsite experts.

SYSTEMS

        Our systems business uses information technology solutions, systems integration and support services to address the workgroup and enterprise computing needs for organizations around the world. We market our solutions to engineering, manufacturing, academic, scientific and commercial organizations. Our focus is on providing integrated hardware, software and services to help companies deploy high availability servers and clusters, databases and tools, workgroup systems, storage solutions including storage area networks ("SAN") or network attached storage, backup and archive solutions,

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security and network infrastructure. Some of our key vendor partners for these solutions are industry-leaders like IBM, Dell, HP, SGI, Sun, EMC, Veritas, Cisco, Extreme Networks, iPlanet, Oracle and Precise, among others.

        Our systems deployment and integration services include system architecture design, systems and application performance tuning and customization, cluster configuration, SAN implementation, system/network operation and administration services, as well as complete systems integration. Networking services generally consist of networking mixed systems environment as well as supply chain integration services such as Autoweb for automotive suppliers.

        Together with IBM, Dassault Systemes and others, we are a leader in product lifecycle management, a new and critical dimension of Enterprise Resource Planning. The fully tuned and optimized information technology solutions we provide are the critical infrastructure for efficient PLM implementations.

        By offering a comprehensive software, hardware and systems-integration solution, we give customers all the tools to manage their product data and transfer knowledge throughout their organizations efficiently and effectively.

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, 2001, 2000 and 1999, gross research and development expenditures were approximately $35,820,000, $30,311,000 and $27,766,000, respectively. Of the amounts expended, $13,752,000, $13,655,000 and $8,255,000, respectively, were included in capitalized software costs.

        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 increased our expenditures for software development. This increase resulted primarily from 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 15% of revenue for 2001, 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 global marketing. At December 31, 2001, our sales and marketing force consisted of 356 employees, including 197 in the Americas, 92 in Europe and 67 in Asia-Pacific. 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

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manufacturing engineers of our customers. With the addition of AES, we have expanded our marketing efforts to include designers and IT professionals, focusing on middle market companies with annual revenues between $25 million and $500 million. We now have offerings that cover the entire lifecycle of a product, from design through manufacture, as well as covering the manufacturing company's IT infrastructure.

        Pricing of products sold in Europe through our European subsidiaries are generally denominated in Euros or local currency and products sold through our Japanese subsidiary are generally denominated in Japanese Yen. Most 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 technology 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 of 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 conferences in the United States, Europe, Asia Pacific, Australia and Latin America to gather data on client needs, new engineering applications, and new trends in computing technology.

PRICING

        We provide a variety of licensing alternatives for the use of our software products. Our software products are offered on an annual non-cancelable, pre-paid license basis and on a paid-up 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. A paid-up license provides significant revenue at the original time of sale of the product, with smaller payments for maintenance following the time of sale. Maintenance revenue is deferred and recognized as revenue over the term of the maintenance agreement. Revenue from the sale of systems is recognized at the time of shipment.

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SALES AND SUPPORT OFFICES

        We maintain North American sales and client support offices in:

        Sales and 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.

        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 Europe. In the Asia Pacific region, sales and service are handled through our wholly owned subsidiary in Tokyo, Japan. We also have subsidiary offices in Australia, Brazil and Korea. In addition, we maintain offices in the following countries:

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

        All of our offices are leased under agreements expiring at various times over the next one to twelve years. In 2001, we relocated our Corporate Headquarters and Costa Mesa office to new office space in Santa Ana, California. The new office in Santa Ana, California includes 203,000 square feet under a lease expiring in 2013.

CUSTOMERS

        In 2001, we sold our products to approximately 7,500 customers. Customers in the aerospace, automotive and other manufacturing industries accounted for 33%, 19% and 15%, respectively, of our revenues for 2001. Our top ten customers accounted for approximately 19% of our total revenues in 2001 and no single customer accounted for more than 5%. Our major end-user customers include:

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Amgen, Inc.



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The Boeing Company

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Honda R&D Co, Ltd.



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Lockheed Martin Corporation



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McDonnell Douglas Corporation



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NASA



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Raytheon Company



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United Technologies Corporation

        For 2001, foreign sales accounted for approximately 51% of gross revenues, most of which was attributable to Europe (27%) and Asia-Pacific (24%). The balance was attributable to Canada and South America.

BACKLOG

        We do not maintain backlog statistics for our software or systems products because they are generally available for delivery upon execution of a licensing agreement or contract. Backlog for consulting services 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, MSC/DYTRAN, MSCINCHECK (Design), MSC.ULTIMA and MSC.SUPERMODEL are some of our registered trademarks. NASTRAN is a registered trademark of NASA. MSC.Nastran is an enhanced proprietary version of NASTRAN.

        We also obtained the registered trademarks of MARC, MENTAT, MARC/DESIGNER, MARC/AUTOFORGE, KNOWLEDGE REVOLUTION AUTOMATION, EPROBE, and KNOWLEDGE REVOLUTION as part of our 1998 and 1999 acquisitions. Many 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 and have registered copyrights on all documentation and manuals related to these programs and maintain trade secret protection on our software products.

COMPETITION

        With respect to our software business, the following list sets forth our primary competitors.

•

Altair Engineering, Inc.



•

ANSYS, Inc.



•

Hibbitt, Karlsson & Sorensen, Inc.

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•

Structural Dynamics Research Corporation (acquired by Electronics Data Systems Corporation in 2001

        In our professional services business, we compete with in-house information technology personnel and consulting groups.

        In our systems business, our primary competitors include the direct sales forces of technology manufacturers as well as RAND Worldwide and Mtra Datavision, a wholly-owned subsidiary of European-based EADS.

        We believe that the principal competitive factors affecting the software business include quality, functionality, ease of use and, to a lesser extent, price. In our professional services business, we believe that the principal competitive factor is expertise. The principal competitive factors in our systems business include technical expertise, support capabilities, relationship management, geographic coverage and price. Although we believe we currently compete effectively with respect to the factors in all of our businesses, we cannot assure you that we will be able to maintain our competitive position against current and potential competitors.

EMPLOYEES

        At December 31, 2001, we employed 1,285 persons, of whom 722 were involved in technical activities, 356 in sales and marketing, and 207 in administration. 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. Nader Khoshniyati and Abbass Khoshniyati are first cousins. We are not aware of any other family relationships between these executive officers and any other executive officers.

        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

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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 Greco has 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.

        Kenneth Blakely has served as Executive Vice President of Software and Services since September 2001. Prior positions at MSC.Software include Senior Vice President and General Manager of our Mechanical Solutions Division; 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.

        Nader Khoshniyati has served as Executive Vice President of Systems since July 2001. From 1989 to 2001, Mr. Khoshniyati was President and CEO of Advanced Enterprise Solutions (acquired by MSC Software in July 2001). Mr. Khoshniyati holds a Bachelors Degree in Industrial Accounting and Management, a Masters Degree in Business Administration from Northeastern State University in Oklahoma, and has completed PhD postgraduate study pending dissertation in computer education and management at United States International University in San Diego, California.

        Abbas Khoshniyati has served as the Senior Vice President of The Americas System Business since July 2001. Mr. Khoshniyati came to us with the acquisition of AES, where he served as Chief Technology Officer since 1989. Mr. Khoshniyati holds a Bachelor of Science Degree in Engineering Physics from Oklahoma State University and a Masters Degree in Computer Engineering from California State University at Long Beach.

        Richard Murphy has served as Senior Vice President of Global Sales 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 1996 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.

        Paul Chermak has served as Vice President of Asia Pacific New Business since joining us in August 2001. Prior to joining MSC.Software, Mr. Chermak served as Vice President and General Manager of Application Solutions at Silicon Graphics, Inc. ("SGI") from 1999 to 2001, as well as a Board member of SGI Japan. Before joining SGI, he spent 27 years with Hewlett-Packard, holding numerous management positions at Hewlett-Packard, including Managing Director of Asia Pacific. He is currently a Board member of NEI College of Technology in Minnesota. Mr. Chermak hold a Bachelor of Science Degree in Geo-Chemistry from the University of Minnesota and has both a Bachelor of Science Degree in Business and a Master's Degree in Business Administration from the University of California at Berkeley. He also has an International Business Certificate from Mankato State University.

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        Charles Davis was promoted to Vice President of Finance and Accounting in January 2002 and has served as Corporate Controller since coming to us in January 2001. Prior to joining MSC.Software, Mr. Davis was with a privately-held developer and publisher of video game entertainment software where he held the positions of Chief Financial Officer from July 2000 to December 2000, Vice President of Finance and Accounting from September 1999 to July 2000, and Corporate Controller from January 1998 to September 1999. From August 1996 to December 1997 Mr. Davis also served as the Senior Manager of Financial Reporting for Ingram Micro, Inc. Prior to 1996, Mr. Davis accumulated 17 years of experience in public accounting, including six years as a partner with two national public accounting firms. Mr. Davis holds a Bachelor of Science Degree in Business Administration from California State University at Northridge and a Masters Degree in Business Administration from the University of California at Los Angeles. He is also a Certified Public Accountant licensed in the state of California.

        John Di Lullo has served as Vice President 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.

        Amir Mobayen joined us in 2001 as the Vice President of European New Business. Prior to joining MSC.Software, Mr. Mobayen spent 12 years at Avnet, Inc., a global technology marketing and services company. His positions at Avnet included European Executive Vice President of Sales & Marketing from 1999 to 2001, Senior Vice President of Global Relations between Avnet Inc. and IBM Corporation from 1997 to 1999 and Vice President of Sales for the Western United States from 1993 to 1997. Mr. Mobayen holds a Bachelor of Science Degree in Mechanical Engineering from California State University at Northridge.

        Jeffrey Morgan has served as Vice President of Software since September 2001 and previously served as our Vice President of Worldwide Product and Business Development. 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 Mowrey has 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 CarnegieMellon University and a Masters Degree in Engineering from the University of Michigan.

        Greg Sikes has served as Vice President of High Performance Computing at 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.

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        Dr. Christopher St. John joined us in 1991 to start an Engineering Services business in the United Kingdom operation of PDA Engineering. He has served as Vice President of Services since September 2001 and previously served as the Vice President of our European Mechanical Solutions Division . 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.

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. In 2001, sales to customers in the aerospace and automotive industries accounted for approximately 33% and 19%, respectively, of our revenues. Changes in capital spending by, and cyclical trends affecting, customers in these industries may adversely affect our sales to these customers and our operating results. 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 again become a new opportunity for several years.

        Our international sales expose us to material risks. Revenues from foreign export sales represented approximately 51% of our revenue in 2001. 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:

•

currency exchange rate fluctuations, as many of our sales originating with our German and Japanese subsidiaries are stated in foreign currencies, which may affect the value of profits earned on international sales when converted to dollars;



•

imposition of government controls;



•

export license requirements;



•

restrictions on the export of critical technology or other trade restrictions;



•

political and economic stability;



•

ineffective copyright and trade secret protections under foreign law;



•

changes in regulatory practices, tariffs and taxes;



•

difficulties in staffing and managing international operations;



•

longer accounts receivable payment cycles; and



•

burdens of complying with a wide variety of foreign laws and regulations.

        We have acquired and may continue to acquire other companies and may be unable to integrate successfully such companies with our operations. We acquired AES in 2001 and during 1998 and 1999, we

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acquired five other 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:

•

unexpected losses of key employees or customers of the acquired company;



•

conforming the acquired company's standards, processes, procedures and controls with our operations;



•

coordinating our new product and process development;



•

hiring additional management and other critical personnel;



•

increasing the scope, geographic diversity and complexity of our operations;



•

difficulties in consolidating facilities and transferring processes and know-how;



•

other difficulties in the assimilation of acquired operations, technologies or products;



•

diversion of management's attention from other business concerns; and



•

adverse effects on existing business relationships with customers.

        We may not be able to develop new products to satisfy changes in demand. 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 and the reseller industries may affect prices, which could reduce margins and adversely affect our operating results and financial position. The simulation software and reseller industries are highly competitive. One or both of the industries may experience pricing and margin pressure which could adversely affect our operating results and financial position. Some of our

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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.

        We must adapt to the rapidly changing business environment brought on by the widespread use of the internet. We have begun to integrate the use of the Internet in many parts of our business, including creating the Engineering-e.com division to act as an Application Service Provider of our software over the Internet, as well as to provide our customers access to our Simulation Center and Engineering Exchange. There are still many uncertainties regarding many facets of the internet, including reliability, security, access, tax, government regulation and cost. If we fail to adapt to the latest changes in the internet or if the growth of the internet does not develop at the pace we expect, our operating results could be adversely affected.

        Our customers may cancel or delay their purchases of our products, which could adversely affect our business. Our products may be considered to be capital purchases by certain customers or prospective customers. Capital purchases are often discretionary and, therefore, are cancelled or delayed if the customer experiences a downturn in its business or prospects or as a result of economic conditions in general. Any cancellation or delay could adversely affect our results of operations.

        We face potential disruption from natural hazards. Our corporate headquarters is located near a major earthquake fault. The impact of a major earthquake on our facilities, infrastructure and overall operations is not known. Safety precautions have been implemented, however, there is no guarantee that an earthquake would not seriously disturb our entire business process. We are largely uninsured for losses and business disruptions caused by an earthquake.

        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.

        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

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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.

        The Federal Trade Commission (the "FTC") has issued an administrative challenge to our acquisitions of Universal Analytics, Inc. ("UAI") and Computerized Structural Analysis & Research Corp. ("CSAR"). The FTC asserts that the acquisitions of UAI and CSAR substantially lessened competition and tended to create a monopoly in the Nastran market. The commencement of an administrative proceeding by the FTC is not a finding or ruling that we have engaged in any improper conduct but instead reflects the FTC's view that there is sufficient reason to believe that a substantial lessening of competition may have occurred to warrant further proceeding before an administrative law judge. Relief being sought by the FTC may include, but is not limited to, requiring us to release the code underlying the Nastran software product to our competitors. The ultimate outcome of this challenge could harm our business.

        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:

•

variations in our anticipated or actual operating results;



•

announcements or introductions of new products;



•

technological innovations or setbacks by us or our competitors;



•

conditions in the software market;



•

the commencement of litigation;



•

changes in estimates of our performance by securities analysts; and



•

announcements of merger or acquisition transactions.

        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 stockholders. These provisions include the following:

•

division of our Board of Directors into three classes, with each class serving a staggered three-year term;



•

removal of Directors for cause only;



•

ability of the Board to authorize the issuance of preferred stock in series;



•

vesting of exclusive authority in the Board to determine the size of the Board (subject to certain limited exceptions) and to fill vacancies thereon; and



•

advance notice requirements for stockholder proposals and nominations for election to the Board.

        In addition to the above provisions, in 1998 we adopted a 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 the "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.

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ITEM 2. PROPERTIES

        All of our offices are leased under agreements expiring at various times over the next one to 12 years. In 2001, we relocated our corporate headquarters in Los Angeles and the Costa Mesa office to new office space in Santa Ana, California. We believe that this move provided enhanced productivity by having key personnel in one facility. The new facility includes 203,511 square feet under a lease expiring in 2013. We also lease other offices throughout the United States and internationally. See Note 15—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.

        In October 2001, the Federal Trade Commission (the "FTC") issued an administrative challenge to our 1999 acquisitions of UAI and CSAR. The complaint alleges that these acquisitions substantially lessened competition and tended to create a monopoly in the Nastran market. The commencement of an administrative proceeding by the FTC is not a finding or ruling that we have engaged in any improper conduct but instead reflects the FTC's view that there is sufficient reason to believe that a substantial lessening of competition may have occurred to warrant further proceeding before an administrative law judge.

        Relief being sought by the FTC may include, but is not limited to, requiring us to release the code underlying the Nastran software product to our competitors. The challenge is currently in the discovery phase. We believe that the challenge is without merit and will vigorously defend ourselves in this matter.

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, 2001.

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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:

        As of March 1, 2002, there were 338 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, 2001, 2000, 1999, 1998 and 1997 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.