A modular structure for dynamic systems is obtained by functional decomposition. This leads to an interconnected set of dynamic modules. A classification for modular dynamic systems is introduced, including constrained multibody systems with explicit joints, and several state space forms. The resulting mechanical differential-algebraic equations are treated by a post-stabilizing projection method. For most efficient simulation, a multi-rate-method is incorporated. The problem of algebraic loops is discussed and a method for its solution is proposed. The simulation program NEWMOS supplies all simulation strategies introduced. Several examples from different areas of dynamics show the power of the approach proposed.