<PAGE>   1
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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


                                    FORM 10-K
  (Mark One)

    [ X ]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
           OF THE SECURITIES EXCHANGE ACT OF 1934  (NO FEE REQUIRED)

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998

                                       OR

    [   ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
           OF THE SECURITIES EXCHANGE ACT OF 1934  (NO FEE REQUIRED)
For the transition period from ____________ to ____________

Commission file number 0-11527

                                MPSI SYSTEMS INC.
             (Exact name of registrant as specified in its charter)

          DELAWARE                                     73-1064024
(State or other jurisdiction of                     (I.R.S. Employer
incorporation or organization)                      Identification No.)

              4343 SOUTH 118TH EAST AVENUE, TULSA, OKLAHOMA 74146
             (Address of principal executive offices and zip code)

        Registrant's telephone number, including area code (918) 877-6774

         SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF  ACT: NONE

              SECURITIES REGISTERED PURSUANT TO  12(g) OF THE ACT:

                          COMMON STOCK, $.05 PAR VALUE
                          ----------------------------
                                (Title of Class)

      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 or
any amendment to this Form 10-K. [ X ]

      The aggregate market value of common stock held by non-affiliates of the
registrant on December 7, 1998 was approximately $1,192,000.

      The number of shares outstanding of the registrant's common stock was
2,849,454 shares of $0.05 Par Value Common Stock as of December 7, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders presently anticipated to be held in February 1999 are incorporated
by reference into Part III.
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                                MPSI SYSTEMS INC.
                                    FORM 10-K

                                    CONTENTS
<TABLE>
<CAPTION>

                                                                                                           PAGE
                                                                                                           ----
PART I
------
<S>                 <C>                                                                                   <C>
         ITEM 1.     Business....................................................................            3

         ITEM 2.     Properties..................................................................           10

         ITEM 3.     Legal proceedings...........................................................           11

         ITEM 4.     Submission of matters to a vote of security holders.........................           11


PART II
-------
         ITEM 5.     Market for the registrant's common equity and related
                     stockholder matters.........................................................           11

         ITEM 6.     Selected financial data.....................................................           12

         ITEM 7.     Management's discussion and analysis of financial
                     condition and results of operation..........................................           12

         ITEM 8.     Financial statements and supplementary data.................................           19

         ITEM 9.     Changes in and disagreements with accountants on accounting and
                     financial disclosure........................................................           34


PART III
--------
         ITEM 10.    Directors and executive officers of the registrant..........................           34

         ITEM 11.    Executive compensation......................................................           34

         ITEM 12.    Security ownership of certain beneficial owners and management..............           34

         ITEM 13.    Certain relationships and related transactions..............................           34


PART IV
-------
         ITEM 14.    Exhibits, financial statement schedules, and
                     reports on Form 8-K.........................................................           35


Signatures           ............................................................................           41

Index to Exhibits    ............................................................................           42
</TABLE>

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                                     PART I

All statements other than statements of historical fact included in this Form
10-K, including without limitation statements under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations, are
forward-looking statements. When used in this Form 10-K, words such as
"anticipate," "believe," "estimate," "expect" "intend," and similar expressions,
as they relate to the Company or its management, identify forward-looking
statements. Such forward-looking statements are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. Actual results could differ materially
from those contemplated by the forward-looking statements as a result of certain
factors, including but not limited to technological change, product development
risks, competitive factors and pricing pressures and general economic
conditions. Such statements reflect the current views of the Company with
respect to future events and are subject to these and other risks,
uncertainties, and assumptions relating to the operations, results of
operations, growth strategy, and liquidity of the Company.


ITEM 1.    BUSINESS

GENERAL

    The operations of MPSI are confined to one business segment wherein it
provides decision support products and services in the form of (1) proprietary
computer software, (2) geographically specific information databases (market
studies), and (3) consulting services. These products and services are designed
to meet retail business planning requirements of its clients.

    From its inception in 1970 until it became a publicly-held company in 1983,
the Company's decision support services were directed primarily at planning
requirements for petroleum companies and other multi-outlet retailers who were
concerned with retail site selection and retail network optimization. MPSI
products provided computerized models of specified retail markets which enabled
its clients to predict sales volumes at proposed new retail sites, while at the
same time indicating the effects of each new outlet on sales volumes at both the
client's and competitors' existing outlets. During this period, the Company's
operations were characterized by limited geographic diversification, centralized
management, centralized market study production and significant dependence on
the petroleum industry.

    With the 1983 capital infusion from its initial public offering, the
operating plan of the Company expanded. In order to diversify and maintain
growth, management initiated programs intended to expand the Company's
geographic presence and its client mix. Accordingly, during the period from 1983
to 1987, MPSI expanded its European operations and opened new offices in
Singapore, Japan and Brazil. This expansion led to decentralization of
management and the market study production operations. In the late 1980's, MPSI
also attempted to diversify its product set and target industries through
acquisitions. Such acquisitions utilized all remaining funds from the initial
public offering and were supplemented by corporate debt. Ultimately, the burden
of multi-faceted product diversification was too great; and, when compounded by
the negative effect of the Persian Gulf War on the core petroleum business, the
Company was forced to substantially scale back and reorganize in the early
1990's. The reorganization resulted in (1) sale of the two acquired companies,
(2) downsizing of foreign database production facilities in Singapore and
Bristol, England, (3) substantial personnel reductions (approximately 50%), and
(4) an equity infusion, the proceeds of which liquidated the remaining
acquisition debt.

    Among other benefits, the recapitalization allowed the Company to redirect
funding from debt service to product development. Beginning in 1994 and in
response to client input, MPSI committed substantial funding and development
efforts toward release of a new generation of MPSI decision support products.
Early versions of these products were completed for commercial release in fiscal
year 1995 (see discussion of CAPS(TM), OPS(R) and PVO(R) software under "Product
Development"). Although MPSI successfully launched initial versions of new
products in 1994 and 1995, such products principally were directed at the North
American market. New versions of CAPS for European and South American clients
were scheduled for release in the first quarter of fiscal year 1996 but were
ultimately delayed approximately eight months until June 1996. The delay in
release was partially attributable to MPSI's desire to accommodate client
requests for additional functionality and multi-product modeling capabilities.
However, a portion of the delay was attributable to 






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MPSI's software development methodology and organizational structure. The
delayed release of the two new CAPS versions significantly hampered MPSI's sales
activities in the European and South American regions in 1996. In order to
address the organizational implications indicated above, MPSI undertook a
revision of its software development group and initiated an evaluation of its
database production methodology. These evaluations ultimately highlighted not
only short-term opportunities to streamline processes and reduce costs, but also
indicated competitive threats to MPSI's long-term growth.

    In 1997, MPSI undertook a complete strategic re-evaluation of its product
direction, competitive position, pricing structure, and cost structure. This
strategic planning, headed by an expert external consultant, encompassed most of
fiscal 1997 and identified several key issues and corrective initiatives which
management began to implement in fiscal 1998. Among other things, the Company
undertook to (1) completely re-engineer its core "retail planning" software
suite in order to reduce development/maintenance costs and in order to open new
market segments for its software applications, (2) launch a substantially
expanded effort to leverage its considerable data warehouse of business location
and operational information through new sales channels, and (3) expand its
consulting practice to encompass broader services to its petroleum target
market. These initiatives were designed to make MPSI the "one-stop" shop for
clients whose retail planning needs span the gamut from raw data through
sophisticated applications software, to the ultimate "Solution" (rather than the
tools and data to develop a solution in house). Although implementation was
hampered in 1998 by a significant economic downturn in the Pacific Rim,
management expects to complete this strategic shift by the end of fiscal 2000.

PRODUCTS AND SERVICES

    The Company markets its services in the United States, Europe, Africa,
Canada, South America, Central America, the Caribbean Basin and the Pacific Rim.
See Note 7 to the Consolidated Financial Statements for financial information
addressing foreign and domestic operations and export sales. Generally, the
Company's marketing activities center on personal presentations to existing and
prospective clients, client referrals, proposal submissions, selective mailings,
limited print advertising, seminars and trade show participation. Most of the
Company's clients are identified by the Company's direct sales force.

    The Company's operating cycle and cash flow are driven principally by the
timing of client orders for market studies. Such studies are high dollar
projects and, consequently, the timing of market study production and the
resulting revenues are subject to a degree of fluctuation. Quarterly/annual
revenues can also be impacted by the timing of software license agreements.
Accordingly, management believes that quarterly results may not be indicative of
results for full fiscal years and that the comparability of annual revenues and
profitability should also be evaluated giving effect to the potential impact of
contract timing.

    Economic conditions throughout the world have varying degrees of impact on
the Company's products. Volatile oil prices, unsettled economic conditions in
the Pacific Rim and consolidations of major multi-national oil companies
affected the Company's volume of new business in fiscal 1998. The Company is
unable to predict the extent to which these conditions will continue to affect
its business during 1999.

    More than 96% of consolidated revenues were derived from the petroleum
industry during the fiscal years ended September 30, 1998, 1997, and 1996,
respectively. In each of the fiscal years 1998, 1997, and 1996, MPSI derived
revenues representing 10% or more of consolidated revenues from certain clients,
together with their affiliates, as set forth below (in millions of dollars):

<TABLE>
<CAPTION>
                            1998             1997              1996
                      ---------------- ----------------  ---------------- 
<S>                     <C>       <C>    <C>        <C>    <C>         <C>
                        AMOUNT      %    AMOUNT       %    AMOUNT       %
Exxon/Esso/Imperial      $ 3.5     19     $ 5.6      24     $ 6.3       29
Texaco/Caltex......      $  .4      2     $ 2.6      11     $ 2.7       12
Amoco..............      $ 2.1     11     $ 2.0       8     $ 2.1       10
</TABLE>





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    The Company would be adversely affected if several petroleum industry
clients curtailed their long-term usage of MPSI products. The following table
shows the percentage of total revenue from operations that the Company derived
from various sources during each of the last three fiscal years.

               REVENUE DERIVED FROM KEY PRODUCTS AND SERVICES (%)
<TABLE>
<CAPTION>

                                         1998   1997  1996
                                         ----   ----  ----
<S>                                      <C>    <C>   <C>
Database construction (market studies)     62    63    71
Software licenses....................       3     8     2
Software maintenance agreements......       4     4     6
Consulting, educational, and other         31    25    21
services.............................
</TABLE>

    Described below are the computer applications software, information
databases and other services currently provided by the Company.

Retail Planning

    Until 1995, the Company's primary retail planning applications software was
the mainframe, computer-based Retail Planning System(R) ("RPS"). See "Product
Development" for discussion of major enhancements of RPS commercially released
beginning in fiscal year 1995. The enhanced systems support client needs in
three areas:

        Short-term pricing issues are addressed using PVO(R) and Price Zones(TM)
    which assist the client with dAILy pricing decisions at retail outlets so as
    to optimize profit while maintaining target sales volumes. The system also
    aids with the establishment of supply/demand-balanced trade zones to reduce
    rapid geographic deterioration in pricing.

        Medium-term operational issues are addressed using OPS(R) which aids in
    systematic forecasting of retaiL sales volume changes resulting from
    operational changes (such as hours of operation and merchandising
    practices), counseling dealers as to pricing, evaluating merchandising and
    operational practices and providing territory-wide planning for anticipated
    retail sales volumes, pricing and operations.

        Long-term capital investment issues are addressed using CAPS in the
    areas of (1) new retail site location where the system provides an objective
    measure for comparing available sites based on competition and convenience
    to demand, (2) identification of outlets to divest where the system isolates
    and evaluates client locations that have poor performance, (3)
    identification of outlets to be rebuilt by identifying sales potential to be
    realized by remodeling or reformatting specified outlets and (4) assessing
    multiple profit centers by forecasting the potential benefits of retailing
    complementary products and services.

    Software licensing agreements for the RPS, CAPS and OPS software (including
ancillary products) generally have multi-year (primarily five-year agreements)
noncancellable terms. These agreements offer the client an installment payment
option requiring a payment upon execution and annual payments on the succeeding
anniversary dates of the agreement. The software can be used by the client for a
particular industry (such as petroleum) and a particular geographic market (such
as Japan). Also, the agreement contains broad restrictions on the use and
disclosure of the software by the client. See "Trademarks, Copyrights, and
Licenses" below. Modifying the software typically involves changes in the
weighting of various supply and demand factors or the addition of a new factor
as the result of changes in the marketplace.

    MPSI provides full maintenance (postcontract customer support) services for
the RPS, CAPS and OPS and, where necessary, training of and consultation with
client staff. Software licenses, maintenance and optional consulting services
are set out separately in each multi-year license agreement. The agreement
states that any company-sponsored modification to the software during the
postcontract customer support period will be provided to the client at no
additional cost. Prices for these software products in the United States are
based upon formulas which address geographical boundaries, population, number of
automobiles and other factors. Prices for such software applicable to foreign
countries are based on a percentage of the United States pricing.





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<PAGE>   6



    PVO and/or Price Zones(TM) software is generally licensed on a perpetual
basis. The contracts provide thAT subsequent upgrades will be provided as MPSI
determines them to be necessary for a given geographic region and that the
client will receive such upgrades upon payment for the enhanced modules, albeit
at a discount for licensed users. The license agreements also provide for
post-installation maintenance and support services, which terms are generally
similar to those related to RPS and CAPS.

Information Databases

    The Company also constructs the market study databases that are the primary
informational sources used by the retail planning software. The database
construction process involves acquisition of geographic digitized mapping,
traffic counts, and demographic demand data from governmental agencies or
independent suppliers, on-site survey of retail outlet supply information by
MPSI personnel or contract surveyors, collation of all demographic demand and
supply information into specified data layout, data editing and quality control
checking, and preparation of the client-specific deliverables. Separate
contracts govern each database order by a client and generally require advance
payments ranging from 35 percent to 70 percent of the total sales value. The
amount of the required prepayment is determined principally by the client's
delivery requirements. There is no retainage provision relative to these
production-type contracts. These databases are arranged and presented in six
types of studies.

        Constantly Current Market Studies ("CCMS"). These multi-year,
    noncancelable studies are used by clients who possess a large number of
    retail sites and who wish to analyze market conditions and evaluate site
    locations in metropolitan areas on a regular basis. The supply and demand
    data used in this type of study is collected by the Company. This type of
    study provides clients with a series of consecutive database updates over a
    specific time period, generally five years. Clients agree to pay for the
    CCMS in periodic installments. It is tailored to individual client needs,
    and pricing is determined in part by the number of subscribers to a
    particular market during the commitment period and offers clients discounts
    for their multi-year commitments.

        Quality Partnership Studies ("QP"). These multi-year, noncancelable
    study programs, like the CCMS studies, offer clients the opportunity to
    regularly update market study information on an annual basis. However, in
    the QP program, clients may participate in the updating process by providing
    regular information about changes (new outlets, new brands, rebuilt outlets,
    etc.) in the market. MPSI gathers information relative to these changes and
    updates the database which otherwise remains unchanged. The lower update
    costs are passed on to the client participants in the form of lower annual
    update prices. Although the updates are not as extensive as full CCMS
    updates, clients are able to track the effects of major market changes using
    QP's.

        Scheduled Market Area Studies ("SMAS"). These studies are similar to the
    CCMS except that the clients do not commit to a series of consecutive
    database updates over a specific time period. These studies are usually
    scheduled by one client and offered to additional clients on a subscription
    basis. While each study uses a common demand-side database, because of
    customized supply-side information, the final database provided to each
    client is unique.

        Market Area Studies ("MAS"). These studies are similar to the SMAS
    except they are sold to a single client and generally carry a higher price
    than a multi-client SMAS of the same market. Portions of the demographic
    data can generally be used as a major part of other studies in the same
    market for clients in the same or comparable retail industries.

        Mini-Market Area Studies. These studies are similar to the MAS except
    the area studied does not contain more than 75 outlets. Likewise, the
    accompanying study deliverables are scaled down.

        Single Site Studies. These studies are used to evaluate market
    conditions or the effects of various operating decisions at a specific
    location within a specified geographic area.







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Other Products and Services

    Licensed software clients may utilize the retail planning software and
information databases on their own computer facilities, may dial in to MPSI's
computers and use the software interactively (subject to certain usage
restrictions), or may elect to have MPSI run tactics (that is, pose "what if"
questions) on MPSI's computers. In cases where software is installed on client
computers, the Company charges for installation of the software and training the
client's personnel. A client may then run unlimited tactics on its own
equipment. If tactics are run on the Company's computers, the client pays a fee
per tactic. Clients who have entered into long-term user agreements are entitled
to discounts on databases and on tactics or support services.

    MPSI introduced two new "data" products during fiscal year 1995 which were
designed to leverage market information already in MPSI's inventory or allow
clients to contract for customized data collection by MPSI. The Market Monitor
product allows MPSI clients to obtain supply trend information in a given
geographic market or to establish specialized market boundaries or specialized
data requirements for an additional fee. MPSI's PriceTracker(TM) product allows
clients to obtain high quality, timely retail pricing information on a recurriNG
basis in order to track pricing trends in the marketplace. Such products were
introduced partially in response to competitors who attempt to infiltrate MPSI's
client base by initially providing low-cost market data. These products are
currently utilized by clients principally in the United States and, while not
intended to be a material portion of MPSI's business, have been well received by
clients needing lower cost data.

    Other products and services provided by the Company include litigation
support; determination of key competitors; regular tracking of petroleum prices
using geographic information systems for user analyses; retail consulting;
consumer research; and customized retail outlet surveys. Certain services are
complementary to retail planning services. For example, the databases provided
as part of the retail planning services may be linked with other data supplied
by the client. This data could then be processed interactively through
geographic information system software which manages and displays information in
a variety of graphic and map formats.

COMPETITION

    Since its inception in 1970 the Company has provided comprehensive
applications software and database systems, primarily to the retail petroleum
industry, and currently has more than 139 multinational clients in 76 countries.
There has recently been a worldwide trend toward competitive product development
of this type due to the availability of computer resources and acceptance of
retail modeling theory. The Company believes its competition lies in two areas:
first, in the market research staffs of petroleum companies or potential
customers who develop and manage their own software and data; and second, in
consulting and research companies which compete for portions of the Company's
business.

    The Company has found that the market research staffs of some large
petroleum companies continue to concentrate on in-house data gathering and site
selection methods, while other companies with more limited resources must
consider low cost alternatives for obtaining market information. It has been
MPSI's experience that clients often encounter substantial cost barriers
relative to internally developed systems. Without the economies of scale, data
gathering expertise and modeling sophistication that MPSI has obtained during
its 28-year existence, clients often find that systems developed in house are
expensive to develop, expensive to maintain given changing market conditions,
require market information with an inherent degree of accuracy which is
difficult to obtain, and that the results of such systems do not justify the
associated costs and effort. Additionally, as clients or potential clients
struggle to manage operating costs and consider outsourcing certain activities
where economically feasible, the capabilities of companies like MPSI offer an
attractive alternative to internal systems. Because of the trend in large
companies to outsource certain functions and because of the growth in business
consulting generally, independent consulting and research companies have
challenged certain products the Company offers such as demographic data
collection, geographic databases, retail outlet surveys, retail consulting,
pricing applications, and single site studies. Occasionally, such consultants
are engaged to develop a proprietary internal model for their clients. Often
competitive services of this type are offered by independent consultants as part
of a larger consulting project wherein pricing for the retail planning segment
can be very competitive with MPSI's pricing. Certain of such 










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<PAGE>   8

companies are offering computerized tools and services which, the Company
believes are not as sophisticated as MPSI products, but may be attractive to
customers willing to sacrifice accuracy for a lower cost solution to their
business needs.

    The Company believes it competes with these various market alternatives by
providing high-quality, sophisticated software and reliable, accurate databases
at a reasonable cost. MPSI further believes its historical expertise and success
in the areas of volume projections and retail network planning provide a
substantial barrier to entry for competitors in the petroleum industry. Further,
MPSI's maintenance programs and its commitment to more than one client in a
given market results in regular updates of existing software and market
information in line with changes in a given market. The Company attributes its
ability to provide these quality products and services to the expertise and
experience of its personnel.

    By focusing on PC-oriented products and services, the Company believes it is
better equipped to challenge "lower cost competitors". New data collection
techniques, to be implemented in 1999, will allow more timely and regular
updating of market data using handheld data collection technology and PC-based
data transmission and delivery technology. These processes are expected to
reduce MPSI's data collection costs relative to market studies and thereby allow
the Company to leverage data already collected or to collect custom data for
clients who may not require full market study information. The Company believes
it can thereby be competitive with potential competitors who have targeted
customers with limited retail market resources.

    In addition to addressing low-cost competitors, MPSI regularly evaluates
potential strategic alliances with independent companies who will allow MPSI to
offer a wider variety of integrated products and/or provide a wider product
distribution system. The target firms will be those who service industries in
which MPSI has historical expertise (e.g., petroleum, government/postal, and
banking). Such alliances can also provide MPSI the opportunity to sub-contract
portions of larger consulting projects thereby establishing MPSI's credibility
with the client and allowing interface with customer personnel who are
potentially valuable sales contacts for future business. By positioning itself
as an integrated service provider and trusted advisor that can meet a client's
needs for a variety of retail decision support information and services, MPSI
can combat both the small competitor's pricing pressure (because the client can
identify the added value of MPSI's multi-purpose data and software as compared
to the individual product or service pricing by a competitor) and the larger
consulting firm's encroachment on retail business segments (by offering
particular industry expertise and a proven track record in our retail planning
niche which the larger firms cannot equal).

BACKLOG

    The Company's September 30, 1998 and 1997 backlog consisted principally of
orders for market information databases (1998 -- $11,638,000, 1997 --
$12,928,000) and multi-year commitments by customers for software maintenance
and support services (1998 -- $1,991,000, 1997 -- $2,327,000). The Company
expects that the market information databases in backlog at September 30, 1998
will be recognized in fiscal year revenues as follows: 1999 -- $4,878,000, 2000
-- $3,528,000, 2001 -- $1,519,000, 2002 -- $1,373,000, 2003 -- $280,000, and
beyond -- $60,000. Maintenance and support services in backlog are the result of
noncancelable client contractual obligations to purchase support services
generally over periods of three to five years. Such revenues will be recognized,
and backlog accordingly reduced, on a ratable basis over the life of each
underlying agreement. Of the aggregate maintenance and support backlog at
September 30, 1998, future fiscal year revenues are expected to be recognized as
follows: 1999 -- $645,000, 2000 -- $542,000, 2001 -- $460,000, 2002 -- $289,000,
2003 -- $53,000, and beyond -- $2,000.

EMPLOYEES

    As of September 30, 1998, the Company employed 196 people, including 60 in
marketing (which includes sales and client services); 34 in research and
development (which includes software development and system support); 75 in
database analysis, consulting, and production; and 27 in management,
administration, and finance. Of these, 165 are employed in the United States and
31 are employed in foreign countries.





                                       8
<PAGE>   9



PRODUCT DEVELOPMENT

    Since 1970, the foundation of the Company's business has been its developed
software which helps retailers select sites, improve operations and make product
pricing decisions. Over the last five years, the major development efforts of
the Company have been directed toward (1) enhancement of these core retail
planning products in order to extend petroleum utilization around the world, (2)
portation of the software from mainframe to workstation/PC platforms, and (3)
incorporation of internally developed or third party software in order to
enhance the user interface, speed and efficiency of this software.

    MPSI's product development cycle consists of four primary stages. During the
product specification phase the Company identifies the initial requirements of
the software, determines the functional requirements and begins the initial
design. During this stage, the Company sets forth the database requirements as
well as the hardware, operating systems, third-party imbedded software and
general functional requirements. From this information a business plan,
conceptual prototype and a project plan are developed. The prototypes developed
during this stage are not fully functional prototypes, but are designed to
present the "look and feel" of the end product. Upon completion of this phase,
the Company has generally completed a detailed program design and, accordingly,
established the technological feasibility of the project. Following the product
specification phase, the project enters the build phase where actual software
programming takes place. Once coding is complete the project enters the quality
assurance phase which encompasses various internal systems testing and user
acceptance testing. Once testing is completed the project enters the
implementation phase where hardware and software installation procedures and
user documentation are finalized.

    Software development costs incurred prior to completion of the detailed
program design are expensed as research and development costs. Costs incurred
during the build, quality assurance and implementation phases are generally
capitalized. At the point where the software product is ready for general
release to the customers, capitalization of costs ceases.

    Beginning in fiscal year 1993, MPSI undertook a major internally funded
enhancement of its retail planning software. The new systems were designed to
meet the three primary operational requirements of clients through PC-based
products including the Capital Performance System ("CAPS") for site selection
and capital planning, the Operational Performance System ("OPS") for use in the
field by retail managers in order to optimize outlet and territory performance
and the Price Volume Optimizer ("PVO") for retail fuel pricing decisions. The
CAPS software for North America was released in January 1995, and from that time
to the present, MPSI has developed and released CAPS, OPS, and PVO capable of
serving all MPSI operating regions except portions of the Pacific Rim. CAPS for
Japan is scheduled for release in fiscal year 1999. Upon completion of the
Japanese CAPS product, MPSI will embark upon development of its next generation
of retail planning applications software. Implicit in that design effort will be
(1) less expensive and less complex client deliverables, (2) modular
architecture which will yield maximum flexibility for interface with existing
client technology and maximum flexibility for MPSI to apply its technology to
industries other than retail petroleum, (3) a substantially reduced data
requirement thereby significantly reducing data gathering costs, and (4) higher
degree of predictive accuracy in geographic areas of sparse housing density
(high transient areas). Management anticipates the roll out of the North
American software in the summer of 1999 and a complete roll out to all MPSI
service regions within 18 months thereafter. Aggregate development costs of
approximately $1 million will be internally funded over the rollout period.
Additional development costs which may be associated with utilization of this
new technology to service industries other than retail petroleum may require
external funding.

    Development of the initial PVO product was the result of a contract that was
signed with a North American client during 1993 for the nonexclusive development
of a volume prediction model for a petroleum related product and service
facility. The commercial version of PVO was completed in August of 1995 and has
been tested by clients in the Pacific Rim and the United States. This product
resulted in opportunities for MPSI to leverage its retail data warehouse and
allowed expanded client databases in 1998. Management expects this suite of
products will also lead to further business with other clients through the
adaptation of the model to other petroleum client ancillary product/service
needs in 1999. Although acceptance of this new price-prediction technology was
slow initially, the pricing business unit was profitable in 1998, and the
Company intends to add both sales and client 





                                       9
<PAGE>   10


support resources for this product set in fiscal year 1999. Utilizing
information from Company produced CAPS/RPS databases or from other MPSI studies,
PVO is designed to give retailers an easy to use decision tool for optimizing
petroleum outlet profits through price or volume level determinations.

    During the years ended September 30, 1998, 1997, and 1996, the Company spent
$2,282,000, $2,132,000, and $2,610,000, respectively, on research and
development or enhancement of new products and the maintenance of existing
products. The amounts spent on research and development were primarily Company
sponsored, meaning there was no material amount of direct recoupment of expenses
from clients.

TRADEMARKS, COPYRIGHTS, AND LICENSES

    The Company holds a number of trademarks, some of which are registered at
the U.S. Patent and Trademark Office. To date, registrations have been sought
only in the United States and Mexico. Set forth below are the Company's
trademarks and final filing dates required to renew trademark status.
<TABLE>
<CAPTION>

                                                                   STATUS OF
    PRODUCT                                                           MARK               EXPIRATION                     COUNTRY
------------------                                                 ----------            ----------                     -------
 
<S>                                                               <C>                 <C>                            <C>
MPSI's Site Evaluation System.....................                 Registered          November 25, 2001                  U.S.
MPSI and Design ..................................                 Registered           February 5, 2002              U.S. / Mexico
MPSI .............................................                 Registered           January 29, 2002              U.S. / Mexico
MPSI's OPS .......................................                 Registered           November 9, 2004                 U.S.
Retail Planning System............................                 Registered           November 8, 2005                 U.S.
PVO ..............................................                 Registered              April 2, 2006                 U.S.
Location Volume ..................................                 Registered           October 23, 2006                 U.S.
Facility/Location Volume..........................                 Registered               May 11, 2007                 U.S.
MPSI's CAPS ......................................                 Registered          February 12, 2007              U.S. / Mexico
Price Volume Optimizer............................                 Registered               May 11, 2007                 U.S.
MPSI Systems .....................................                 Registered                        N/A                Mexico
Capital Planning Systems..........................                 Registered                        N/A                Mexico
MPSI's Market Monitor.............................                  Trademark          Common Law Rights                 U.S.
PriceTracker .....................................                  Trademark          Common Law Rights                 U.S.
The Intelligent Approach to Retail Marketing......                  Trademark          Common Law Rights                 U.S.
</TABLE>


    The Company does not hold any patents or registered copyrights. The
Company's long-term software license agreements require customer acknowledgment
of the proprietary nature of the Company's software. The Company relies on these
agreements, together with trade secret laws and internal nondisclosure
safeguards, to protect its products. To date, the Company has had no indication
of any material breach in the security of its products. Should a material breach
in the security of the Company's software products occur, it might have the
impact of reducing the current barriers to entry for competitors and thus
materially adversely affect long-term results of Company operations. The
Company's modeling methodology, mathematical modeling algorithms and data
gathering processes have been developed over an extensive period of time and
would, in the absence of a material breach in the security, require potential
competitors a substantial period of time to duplicate. Even in the event that a
material breach did occur, such as a reverse engineering of an MPSI software
product, the Company believes that because of the annual change in technology,
the retail markets served, and the regular software upgrades required thereby,
such breach would not result in a material adverse effect on the Company's
short-term business because new versions of its products would likely reduce the
competitive value of older versions breached by potential competitors.

ITEM 2.   PROPERTIES

    The Company's principal facility and corporate headquarters in Tulsa,
Oklahoma (56,000 square feet) is the primary location for software development
and market study production. The Bristol, England facility encompasses 5,000
square feet, and the Rio de Janeiro, Brazil office encompasses 1,500 square
feet. Both foreign offices do single site and special project work in addition
to their primary marketing role. Regional sales offices in Singapore;
Johannesburg, South Africa (established in 1996); Melbourne, Australia; Tokyo,
Japan; Bangkok, Thailand (established in 1998); and Seoul, South Korea
(established in 1997) remained the Company's principal client liaison facilities
in those areas at September 30, 1998. Management believes that the various
facilities are properly sized to meet anticipated business levels.






                                       10
<PAGE>   11



ITEM 3.    LEGAL PROCEEDINGS

         There are no material pending legal proceedings at September 30, 1998
which meet the criteria for disclosure under this item.

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

         No matters were submitted to a vote of security holders during the
fourth quarter ended September 30, 1998.


                                     PART II


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


    The Company's Common Stock is listed on The NASDAQ SmallCap Market tier of
The Nasdaq Market (hereafter NASDAQ). The trading symbol is "MPSI." Information
in the table below reflects the high and low sales prices reported by NASDAQ.
<TABLE>
<CAPTION>

                                                             LOW            HIGH
                                                             ---            ----
<S>                                                        <C>             <C> 
Fiscal 1997
  First Quarter Ended December 31, 1996 ..........          29/64          3 1/2
  Second Quarter Ended March 31 ..................          1 3/4          3 3/4
  Third Quarter Ended June 30 ....................          2              3 1/2
  Fourth Quarter Ended September 30  .............          2 3/8          9 1/2

Fiscal 1998
  First Quarter Ended December 31, 1997 ..........           33/4          7
  Second Quarter Ended March 31 ..................          3              4 5/8
  Third Quarter Ended June 30 ....................          1 3/4          3 1/2
  Fourth Quarter Ended September 30  .............          1              3 3/4
</TABLE>


    The 2,849,000 shares of Common Stock outstanding at December 7, 1998, were
held by 901 stockholders of record. At that date, an additional 160,000 shares
were subject to options to purchase Common Stock (See Note 8 to the Consolidated
Financial Statements). The per share bid and offer price on December 7, 1998,
was $1.00. Common Stock that could be sold pursuant to Rule 144 under the 1933
Act totals 1,657,000 shares as of December 7, 1998.

    The Company intends to reinvest its earnings in its business and therefore
does not anticipate paying any cash dividends in the foreseeable future. The
Company has not paid cash dividends since its inception.



                                       11
<PAGE>   12




ITEM 6.    SELECTED FINANCIAL DATA

                            SELECTED FINANCIAL DATA*
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                      FOR THE YEAR ENDED SEPTEMBER 30,
                                                       --------------------------------------------------------------
                                                          1998          1997        1996           1995        1994
                                                       --------      --------     --------      --------     --------

<S>                                                    <C>           <C>          <C>           <C>          <C>     
OPERATING DATA:
Revenues .........................................     $ 19,101      $ 23,438     $ 21,745      $ 23,437     $ 19,872
Income (loss) from continuing operations .........       (1,499)        1,103         (623)        2,029        1,956
Income (loss) from discontinued operations .......         --            --           --            --           (482)
Net income (loss) ................................       (1,499)        1,103         (623)        2,029        1,474
Per share:
  Basic income (loss) per common share:
     Continuing operations .......................     $   (.53)     $    .39     $   (.23)     $    .73     $    .72
     Discontinued operations .....................         --            --           --            --           (.18)
     Net income (loss) ...........................         (.53)          .39         (.23)          .73          .54
  Weighted average common shares outstanding .....        2,844         2,797        2,756         2,784        2,712
  Diluted income (loss) per common and
     common equivalent share:
     Continuing operations .......................     $   (.53)     $    .39     $   (.23)     $    .72     $    .71
     Discontinued operations .....................         --            --           --            --           (.18)
     Net income (loss) ...........................         (.53)          .39         (.23)          .72          .53
  Weighted average shares of common stock and
     dilutive common stock equivalents ...........        2,844         2,820        2,756         2,802        2,766
     outstanding

BALANCE SHEET DATA:
Total assets .....................................     $  9,490      $ 11,638     $ 10,319      $ 12,924     $  9,734
Noncurrent deferred revenue ......................        1,346         1,634        1,342         1,961        1,068
Noncurrent deferred income taxes .................           86           442           98          --           --
Other noncurrent liabilities .....................          172            37           79           220          349
--------
</TABLE>

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

    The following table sets forth (in thousands), for the periods indicated,
certain items in the consolidated statements of operations and the change of
such items as compared with the indicated prior period.
<TABLE>
<CAPTION>

                                                                                                          
                                                                                             CHANGE
                                                                                       -------------------
                                                YEAR ENDED SEPTEMBER 30                  1998        1997
                                       ---------------------------------------            VS.         VS.
                                           1998          1997         1996               1997        1996
                                       ------------  ------------  -----------         ---------   --------

<S>                                      <C>           <C>          <C>                <C>         <C>     
Revenues............................     $ 19,101      $ 23,438     $ 21,745           $ (4,337)   $  1,693
Cost of sales.......................        8,796         9,603       11,014               (807)     (1,411)
                                         --------      --------     --------           --------    --------
  Gross profit......................       10,305        13,835       10,731             (3,530)      3,104
                                         --------      --------     --------           --------    --------
Operating expenses:
  General and administrative........        3,312         3,763        3,005               (451)        758
  Marketing and client services.....        6,773         6,834        6,928                (61)        (94)
  Research and development..........        1,888         1,598        1,382                290         216
                                         --------      --------     --------           --------    --------
          Total operating expenses..       11,973        12,195       11,315               (222)        880
                                         --------      --------     --------           --------    --------
Operating income (loss).............       (1,668)        1,640         (584)            (3,308)      2,224
Other income (expense), net.........          (30)           92          332               (122)       (240)
                                         --------      --------     --------           --------    --------
Income (loss)  before income taxes..       (1,698)        1,732         (252)            (3,430)      1,984
Income taxes........................         (199)          629          371               (828)        258
                                         --------      --------     --------           --------    --------
Net income (loss)...................     $ (1,499)     $  1,103     $   (623)          $ (2,602)   $  1,726
                                         ========      ========     ========           ========    ========

</TABLE>



                                       12
<PAGE>   13




RESULTS OF OPERATIONS

    MPSI reported a net loss of $1.5 million for fiscal year 1998 as compared to
net income of $1.1 million in fiscal year 1997 and a net loss of $.6 million in
1996. As discussed below, the decline in profitability in 1998 from 1997 was
principally attributable to (1) a 19% decrease in revenues (primarily in the
Pacific Rim), (2) a 6% decrease in gross profit margins on data services, and
(3) the impact of new business units. The increase in net income in 1997 as
compared to 1996 was principally attributable to an 8% growth in revenues
resulting primarily from the renewal of a multi-year worldwide software license
by MPSI's largest client and to increased margins resulting from leveraged sales
of market studies in the Pacific Rim.

    The Company does not believe that inflation has significantly impacted the
results of operations during the three years ended September 30, 1998. Lower
prices in certain regions resulting from increased competition, have adversely
effected revenues during the last three fiscal years.

    Set forth below (in thousands of dollars) is an analysis of MPSI's revenue
fluctuations over the last three fiscal years.

<TABLE>
<CAPTION>

                             1998 VS. 1997             1997 VS. 1996
                         ---------------------     --------------------
                          AMOUNT           %        AMOUNT           %
                         --------         ----     --------        ----

<S>                      <C>              <C>      <C>             <C>
Pacific Rim ........     $(4,281)         (42)     $ 1,942           22
North America ......         349            4          (78)          (1)
Europe/Africa ......          96            5          295           19
Latin America ......        (501)         (29)        (466)         (22)
                         -------                   -------      
Totals .............     $(4,337)          19      $ 1,693            8
                         =======                   =======      
</TABLE>


    In addition to the specific regional information below, it should be noted
that as compared to fiscal 1997, 1998 revenues from all regions do not include a
$1.5 million single client software license renewal similar to that recorded
under a worldwide master agreement during 1997. That transaction principally
accounted for the significant difference in 1997 revenue from software licensing
as compared with 1998 and 1996. See Note 7 to the Consolidated Financial
Statements which sets forth the historical impact of that client on MPSI's
annual revenues. The timing of new or renewed long-term software license
agreements, and the normally attendant market study orders which often accompany
them, can have a substantial impact upon reported revenues and net income
between accounting periods.

    Economic conditions in the Pacific Rim throughout fiscal 1998 had negative
repercussions on MPSI's revenues and gross profits. MPSI's Pacific Rim region
experienced a 42% decline in revenues resulting from the economic uncertainties
in that region and, to a lesser extent, the geographical mix and cyclical impact
of Japanese studies which are updated approximately every 18 months. Although
orders received in late fiscal 1998 indicate that the situation may be
stabilizing, the Company is unable to predict the effect on fiscal year 1999 or
thereafter of unsettled economic conditions in the Pacific Rim. MPSI may
experience (1) pressure on pricing and/or delay in placing orders due to higher
costs of projects associated with weaker foreign currencies versus the US
dollar, (2) longer payment cycles by customers in the region, and (3) pressure
to denominate contracts in foreign currencies which may increase the Company's
exposure to gains or losses based on currency fluctuations. Without the impact
of the Southeast Asian financial uncertainties which occurred in 1998, the
Company was able to leverage its sales of market studies in the Pacific Rim
Region in 1997, which resulted in, increased revenues of $1,942,000 (22%) over
1996.

    Results of operations in North America were impacted during the three years
ended September 30, 1998 by (1) the activities of certain new business units as
discussed below and (2) to a lesser extent by client consolidations that reduced
the number of annual market studies. Recently announced consolidations (e.g.
Exxon and Mobil, British Petroleum and Amoco) may have a more pronounced future
impact. Management is not able at this time to fully assess the impact of these
recent events (positive or negative).





                                       13
<PAGE>   14



  o  In 1996 MPSI released several new software and data products which target
     customer retail pricing issues. Revenues from these products were
     $1,524,000, $684,000 and $481,000 in 1998, 1997 and 1996 respectively
     (incremental costs were $1,136,000, $860,000 and $873,000 respectively).

  o   MPSI's retail postal division has been slowly accepted and generated
     revenues of only $251,000, $508,000 and $456,000 in 1998, 1997 and 1996
     (costs of $453,000, $442,000 and $176,000 respectively). Management will
     re-evaluate the continuation of this business unit pending the results of
     recent proposals to the United States Postal Service.

  o   Based on strategic planning, MPSI began to directly focus on an enhanced
     consulting offering in late 1997. As customers downsize (consequently
     reducing their retail planning staffs) they often express a desire for MPSI
     to deliver the "solution" to their retail planning problems rather than the
     tools/data for them to internally resolve their problems. The consulting
     division generated revenues of $313,000 in 1998 and $24,000 in 1997. This
     required commitment of incremental costs of approximately $645,000 in 1998
     and $454,000 in 1997, related primarily to start-up sales efforts utilizing
     existing personnel. Funding constraints have prevented MPSI from
     accelerating the growth opportunity as anticipated. Absent external funding
     or strategic alliances in 1999 to allow for hiring of experienced sales and
     delivery/consultants, management may re-focus on other growth-oriented
     opportunities, which leverage MPSI's substantial data warehouse.

    Fiscal year 1998 saw some stability in the revenue generated in
Europe/Africa as compared to fiscal 1997, both of which were better than 1996
primarily due to the roll-out of CAPS software for that region in the fourth
quarter of 1996. While European business remains sluggish, African petroleum
business increased $458,000 (48%) in 1998. The Company believes that recent oil
company consolidations in Europe have re-focused the European petroleum industry
on the necessity to maximize profits from existing facilities through ancillary
product offerings in order to remain competitive. Consolidations also have the
effect of requiring retail network outlet rationalization for those companies
who do combine. These market-driven fundamentals should allow the Company to
grow European revenues in fiscal 1999.

    Latin American revenue declined in 1998 as the result of two primary
factors: clients have been slower in that region to undertake the installation
and use of MPSI's CAPS software (which was rolled out during the fourth quarter
of 1996) for the same reasons set forth in Europe above, and privatization of
the petroleum industry in certain countries has diverted client focus to more
long-range strategic issues. Because of the increased emphasis on retail
planning which encompasses privatization, the Company expects improved revenues
from Latin America in fiscal 1999.

    Revenues from market studies (MPSI's traditional full market analysis)
decreased approximately $3.0 million (20%) from 1997 ($.6 million decrease (4%)
in 1997 as compared to 1996) as a result of the Asian financial downturn and to
pricing pressures from competition. The significant revenue reduction in 1998
along with the increase in product deliverables and costs incurred on production
process improvements resulted in a loss of gross margin of $3.1 million (34%) as
compared with 1997. While there has been a decline in revenues from MPSI's
traditional market area studies, sales from other related products (single
sites, pricing products and consulting) have increased over the last three
fiscal years. Revenues from these products were approximately $5,931,000,
$5,824,000 and $4,619,000 for fiscal years 1998, 1997 and 1996 respectively.
Gross margins were approximately $3,556,000 (60%), $3,230,000 (55%) and
$1,452,000 (31%) respectively. MPSI expects to continue placing emphasis on
these revenue sources during fiscal 1999.

    Overall, gross profit decreased approximately $3,530,000 (26%) from fiscal
1997 as a result of revenue shortfalls resulting from the Asian economic
downturn, increasing pricing pressures brought about by competition, enhanced
product deliverables in an attempt to counter price resistance, and a commitment
of resources to an internal evaluation of the production process aimed at cost
reduction ($233,000 in 1998 and $70,000 in 1997). Gross profit (loss)
attributable to software licensing was approximately $224,000, $1,042,000 and
($217,000) in fiscal years 1998, 1997 and 1996, respectively. The timing of
software license revenues as noted previously can significantly impact these
amounts. On a cost comparison basis, cost of sales relating to software
licensing 





                                       14
<PAGE>   15



decreased approximately $452,000 (59%) in 1998 compared with 1997 as the
European and South American CAPS software became fully amortized during the
first fiscal quarter of 1998. Similarly, such costs increased approximately
$120,000 (19%) in 1997 compared with 1996 as the Company amortized the costs
associated with CAPS versions related to Europe and South America.

    Gross profits in 1997 increased $3,103,000 (29%) over 1996 as a result of
increased revenues derived from the renewal of a major five-year software
license, the corresponding orders of market studies, and the increased revenues
in the Pacific Rim as discussed above. Overall, the reduction in cost of sales
by $1.4 million in 1997, as compared to 1996, allowed the Company to commit
additional resources to client services. Enhanced commitment to client services,
in addition to a need to address timely product development, was one of the
reasons for a corporate reorganization undertaken in July 1996. MPSI was able to
utilize personnel previously in production and marketing to (1) organize new
business units focused on specific strategic initiatives and (2) add additional
client service personnel to our marketing group.

    Operating expenses decreased $222,000 (2%) as compared with fiscal year
1998. General and Administration expenses decreased $451,000 (12%) as compared
with 1997. Cost cutting measures, including staff reductions and related lease
space requirements, reduced expenses in Brazil and Bristol by $58,000 and
$174,000 respectively, while domestic expenses decreased primarily due to the
reduction of performance bonuses related to fiscal 1998 results. Overall,
marketing expenses declined approximately 1% in 1998 compared with 1997.
Research and development expenses increased $290,000 (18%) over 1997. This
increase resulted from staff commitment and the utilization of contract
programmers to develop the Japan CAPS product which will be completed in fiscal
1999 (cost are currently being capitalized).

    Operating expenses increased $880,000 (8%) in 1997 compared with 1996.
Personnel re-allocations resulting from the re-organization in late 1996
resulted in growth of approximately $350,000 in both general & administrative
and marketing expenses. General and administrative expenses further increased by
approximately $350,000 due to incremental employee incentive accruals, legal and
accounting fees associated with evaluation of strategic alliance opportunities,
and termination costs relative to the relocation of the Bristol subsidiary's
offices in April 1998. The internal allocation of personnel to client service
(marketing) functions was offset by reduced headcount in Europe and retirement
of a senior officer in Japan (who was replaced during fiscal 1998). Marketing
expenses declined approximately 1% in 1997 compared with 1996. The increase in
Research and Development of $216,000 (16%) in 1997 compared with 1996 is
attributable to less capitalizable software development work as opposed to pure
research. This ratio is the result of the Company having completed most of its
regional CAPS software development except for the Japanese version due for
release in fiscal 1999.

    MPSI enters into multi-year contracts for market studies, some of which are
denominated in foreign currencies (principally the Singapore Dollar and the
British Pound Sterling). This exposes MPSI to exchange gains or losses depending
upon the periodic value of the US Dollar relative to the respective foreign
currencies. The Company experienced exchange losses of approximately $240,000 in
fiscal 1998 as compared with $98,000 in fiscal 1997. During fiscal year 1996,
MPSI benefited from foreign currency exchange gains in the amount of $146,000.
The gain in 1996 was generally the result of multi-year database contracts
denominated in Singapore Dollars which were booked by clients in prior years and
partially collected in 1996. By the time the collections were effected, the
contract values had increased relative to the US Dollar reporting currency.
Although MPSI anticipates continuing exposure from the same source in fiscal
year 1999, the magnitude is not expected to materially increase as the Company
expects to denominate a limited number of contracts in foreign currencies. The
Company does not utilize derivative financial instruments to hedge their foreign
currency risks.

    Income taxes decreased $828,000 as compared to 1997 as a result of the
losses incurred in the US in fiscal 1998 (in which jurisdiction of most of the
Company's consolidated operations are reported) which allowed MPSI to offset
substantially all of the deferred tax liability from 1997 (See Note 6 to the
consolidated financial statements). Reflected in the net income tax benefit for
1998 was $158,000 of foreign income taxes ($212,000 in 1997 and $412,000 in
1996) which includes foreign income tax withheld at the source from payments by
foreign customers of ($87,000, $188,000, and $343,000) respectively. The Company
utilized net operating loss carryforwards in 1998 in Brazil ($71,000) and the UK
($53,000). The amount of foreign income taxes withheld can fluctuate
significantly





                                       15
<PAGE>   16



between fiscal periods based upon not only the geographic areas in which the
Company operates, but on the particular products and services delivered within
an individual country.

    In March 1996, the Internal Revenue Service initiated an examination of tax
years 1993 through 1995. The Company has not yet received a final report of the
results, and believes that the resolution of issues raised will not have a
material effect on its financial position.

FINANCIAL CONDITION AND LIQUIDITY

    Working capital, the Company's primary measure of liquidity, was $1.6
million at September 30, 1998 compared with $3 million at September 30, 1997.
The 1998 decrease of $1.4 million (47%) reflects an 86% ($1,375,000) decrease in
cash reserves, a 3% ($150,000) increase in trade receivables and 9% ($210,000)
lower trade liabilities. Additionally, the Company's production throughput,
which exceeded new orders, resulted in a 6% ($196,000) decrease of the deferred
revenue component at September 30, 1998 compared with 1997. In contrast, the $3
million working capital at September 30, 1997 represented a $1.6 million (114%)
increase compared with September 30, 1996, principally driven by increased
receivables and cash reserves.

    On the strength of the Company's business fundamentals and improved results
of operations during fiscal 1997, MPSI obtained a bank line of credit in June
1997 (see Note 5 to the Consolidated Financial Statements). The initial amount
of the line was $500,000, which was increased to $1,500,000 in May 1998. The
Company had utilized $350,000 of the line of credit at September 30, 1998.
Management expects the combination of internal funding and the bank line of
credit to be sufficient for 1999 operations, excluding the potential
enhancements of the consulting division. Management further believes that
additional funding could be attracted through equity or leasing channels.

    As set forth in the statements of cash flow, the Company utilized $1,202,000
of cash to fund operations in 1998 as compared with cash flows generated from
operations in 1997 of $785,000 and $975,000 from 1996. Expenditures for the
acquisition/upgrade of computer equipment and development of new software
products of $456,000 in 1998 and $434,000 in 1997 has declined from the
$1,363,000 expended in 1996 (during which MPSI committed substantial resources
to acquire and upgrade computer equipment and to development of new CAPS
software products). Capitalized software expenditures declined in 1998 and 1997
as software releases moved into the maintenance stage and equipment requirements
stabilized. The Company anticipates costs in both areas to increase in 1999 but
has no long-term commitments for equipment expenditures at September 30, 1998.
Increases in capitalized software expenditures are anticipated in 1999 related
to the completion of the last regional version of CAPS software (Japanese
version, to be released during 1999) and for the initial release of a new
generation of MPSI's retail planning software product starting with North
America. Such costs are expected to be funded entirely out of operating cash
flows.

    The trends in software licensing discussed under "Results of Operations"
above impacted the relative levels of both the long-term receivables and
deferred revenues. The net current and noncurrent balances in long-term
receivables (totaling $3.5 million and $3.8 million at September 30, 1998 and
1997, respectively) decreased in 1998 compared with 1997 primarily due to the
effect of a five-year license renewal by MPSI's largest customer in 1997. This
contract, now with four years remaining, was not offset by comparative new
contracts or renewals in 1998. The reduction in deferred maintenance in 1998 of
$336,000 (14%) reflects revenue recognition of maintenance income, from all
contracts, in excess of new contracts or renewals. In 1997 receivables and
deferred revenue from new software contracts or renewals exceeded the
collections and maintenance revenue recognized during 1997 resulting in an
increase of $808,000 and $129,000 in long-term receivables and deferred
maintenance, respectively, as compared with September 30, 1996. MPSI's license
agreements generally are noncancelable, although a few contracts include
provisions for cancellation of portions of the client's commitment upon
occurrence of certain negative economic events in the clients' geographic areas
of operations. In accordance with its policy, the Company does not recognize
revenues on such contingent portions of agreements, so that in the event of
cancellation, only receivables and deferred revenue are adjusted. In accordance
with contractual cancellation options, certain clients canceled portions of
their software licenses aggregating $435,000 in 1996 (none in 1997 or 1998). As
the number of 






                                       16
<PAGE>   17



contracts with cancellation clauses is few, the Company does not expect a
significant impact from cancellations in 1999.

    Noncurrent deferred income tax liabilities at September 30, 1998 were
$86,000 as compared to $442,000 in 1997. The reduction of $356,000 was a result
of utilizing the US component of deferred tax liabilities recorded in 1997
against the applicable losses incurred in fiscal 1998. The increase in other
noncurrent liabilities to $172,000 ($37,000 at September 30, 1997 as compared to
$79,000 at September 30, 1996) results from accrual of rental expense at an
average rate which exceeds cash outflow in the early years of the lease
applicable to new corporate headquarters which took effect May 1998.

    MPSI's backlog of market studies at September 30, 1998 in the amount of
approximately $11.6 million, ($12.9 million at September 30, 1997), contained a
substantial number of recurring studies under multi-year client commitments.
Such studies represent approximately 25% of the estimated revenues for fiscal
year 1999. Because customer commitments for market studies may entail multi-year
terms, the number of such agreements in force may have significant implications
on the conclusions to be drawn concerning fluctuations in backlog between
accounting periods. For example, if a customer commits to a five-year series of
market studies in year one, backlog of that year would substantially increase.
Thereafter, as the Company delivers successive market studies, backlog would
decline in years 2 - 4. An analysis which identifies a declining backlog might
lead one to incorrectly assume that the Company's business is declining, when in
fact it is servicing its customers satisfactorily and can rightfully expect
renewed study commitments in the future.

 YEAR 2000 IMPACT

    The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of a company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
of deliverable software products to meet client specifications or the inability
of internal software to process transactions, send invoices, or engage in
similar normal business activities. In order to correct this problem, computer
operating systems, applications software and/or hardware may require
modifications.

    MPSI's assessment of the impact of this issue has encompassed (1) internally
utilized systems, (2) software held for resale, (3) computerized information and
software provided by third parties which might be integral to client usage of
MPSI products, and (4) compliance issues related entirely to the state of
readiness by major customers and vendors. Set forth below is the status of each
review and the estimated impact, to the extent that management can determine it:

  o  Internal Systems. MPSI has assessed and tested its financial accounting
     systems, production control systems, software/data development
     applications, internal hardware, and other internal management information
     systems and believes them to be materially Year 2000 compliant. No
     significant costs have been expended. Costs yet to be incurred are
     estimated to be $75,000.

  o  MPSI Software Held for Resale. The Company has evaluated and tested the
     date sensitivity features of its applications software held for resale to
     customers and believes that there are no material unresolved Year 2000
     compliance issues. MPSI's products typically are not date sensitive in
     nature and no significant costs were incurred or are anticipated in the
     future.

  o  Third Party Systems. MPSI has queried all critical external suppliers of
     applications software, operating systems and PC computer equipment which we
     believe are integral components of a client's computer network that could
     affect the performance of MPSI products in that environment. While such
     products are not directly embedded in the MPSI product delivery, their Year
     2000 compliance could affect a client's satisfaction with the use of MPSI
     products on site. Although not all inquiries have been completed and
     additional issues could yet be discovered, management estimates that it has
     received compliance satisfaction from all of the third party vendors that
     could materially impact MPSI product performance. Although no significant
     costs have been incurred to 






                                       17
<PAGE>   18



  o  date relative to this category of computerized process, management is
     unable to assess future costs associated with as yet unidentified issues.

  o  Customers and Vendors. MPSI's evaluation of the potential impact of Year
     2000 readiness by major customers and suppliers is not yet complete. Such
     evaluations should be completed by March 31, 1999 and should cost less than
     $25,000 to complete. To date, management has identified two potential
     issues: (1) remote product support, and (2) general client system failures.
     Other than the applications software delivered to clients as discussed
     above, the Company has limited direct interfaces with computerized systems
     of its customers or vendors, except that MPSI does provide a variety of
     product support and installation support services using remote access to
     client systems. We do not expect those interfaces to be materially impacted
     by Year 2000 issues, but in the event that they were, manual support could
     supplant the remote support without significantly affecting client
     relationships. Should major clients experience general systems failures as
     the result of their planning for Year 2000, MPSI could be substantially
     impacted on a temporary basis. However, as most of MPSI's applications
     software can run on a single PC if necessary, our contingency plan
     contemplates transfer of client delivered software from its network
     configuration to individual PC equipment until a client's overall system
     problems can be resolved. As clients and vendors are often unable or
     unwilling to share information about their state of Year 2000 readiness,
     management does not have sufficient information concerning the state of
     readiness of major customers/vendors, and assessment of the potential costs
     of the contingency plan (which might have to be partially borne by MPSI)
     cannot be determined.

    Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner, to the extent that compliance is
within the Company's control. As noted above, the Company has not yet completed
all necessary phases of the Year 2000 program. In the event that the Company is
unable to ascertain all potential external impacts and thereby is unable to
contemplate all possible contingency plans, the Company may be unable to satisfy
customer product performance expectations, take additional orders, invoice
customers or collect payments, or perform certain other mission-critical
functions. In addition, disruptions in the economy generally resulting from Year
2000 issues could also materially adversely affect the Company. The Company
could be subject to litigation for computer systems product failure, for
example, equipment shutdown or failure to properly date business records. The
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.







                                       18
<PAGE>   19




ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                                 PAGE NO.

<S>                                                                                              <C>
Report of Independent Auditors ................................................................     20
Consolidated Statements of Operations for the Years Ended September 30, 1998, 1997
 and 1996 .....................................................................................     21
Consolidated Balance Sheets at September 30, 1998 and 1997 ....................................     22
Consolidated Statements of Cash Flow for the Years Ended September 30, 1998, 1997
  and 1996 ....................................................................................     23
Consolidated Statements of Stockholders' Equity - Fiscal Years Ended
September 30, 1996, 1997 and 1998 .............................................................     24
Notes to Consolidated Financial Statements ....................................................     25

</TABLE>





                                       19
<PAGE>   20




                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders MPSI Systems Inc.

    We have audited the accompanying consolidated balance sheets of MPSI Systems
Inc. and subsidiaries as of September 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
MPSI Systems Inc. and subsidiaries at September 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1998 in conformity with generally
accepted accounting principles.


                                          ERNST & YOUNG LLP


Tulsa, Oklahoma
November 20, 1998




                                       20
<PAGE>   21




                       MPSI SYSTEMS INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                                        YEAR ENDED SEPTEMBER 30,
                                                                           ------------------------------------------------
                                                                                1998              1997             1996
                                                                           ------------      ------------      ------------

<S>                                                                        <C>               <C>               <C>         
Revenues:
  Information services and software maintenance ......................     $ 18,563,000      $ 21,630,000      $ 21,354,000
  Software licensing .................................................          538,000         1,808,000           391,000
                                                                           ------------      ------------      ------------
     Total revenues ..................................................       19,101,000        23,438,000        21,745,000
                                                                           ------------      ------------      ------------
Cost of sales:
  Information services and software maintenance ......................        8,482,000         8,837,000        10,406,000
  Software licensing (Note 4) ........................................          314,000           766,000           608,000
                                                                           ------------      ------------      ------------
     Total cost of sales .............................................        8,796,000         9,603,000        11,014,000
                                                                           ------------      ------------      ------------
     Gross profit ....................................................       10,305,000        13,835,000        10,731,000
Operating expenses:
  General and administrative .........................................        3,312,000         3,763,000         3,005,000
  Marketing and client services ......................................        6,773,000         6,834,000         6,928,000
  Research and development ...........................................        1,888,000         1,598,000         1,382,000
                                                                           ------------      ------------      ------------
     Total operating expenses ........................................       11,973,000        12,195,000        11,315,000
                                                                           ------------      ------------      ------------
     Operating income (loss) .........................................       (1,668,000)        1,640,000          (584,000)
Other income (expense):
  Interest income ....................................................          292,000           197,000           204,000
  Interest expense ...................................................          (99,000)         (154,000)          (17,000)
  Gain (loss) on foreign exchange ....................................         (240,000)          (98,000)          146,000
  Other, net .........................................................           17,000           147,000            (1,000)
                                                                           ------------      ------------      ------------
  Income (loss) before income taxes ..................................       (1,698,000)        1,732,000          (252,000)
Income taxes .........................................................         (199,000)          629,000           371,000
                                                                           ------------      ------------      ------------
Net income (loss) ....................................................     $ (1,499,000)     $  1,103,000      $   (623,000)
                                                                           ============      ============      ============
Per share (Note 11):
  Basic and diluted income (loss) per common share ...................     $       (.53)     $        .39      $       (.23)

</TABLE>



          See accompanying notes to consolidated financial statements.




                                       21
<PAGE>   22




                       MPSI SYSTEMS INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>

                                                                                               SEPTEMBER 30,
                                                                                     ------------------------------
                                                                                           1998            1997
                                                                                     ------------      ------------
<S>                                                                                  <C>               <C>         
Current assets:
  Cash and cash equivalents ....................................................     $    224,000      $  1,599,000
  Short-term investments, at cost ..............................................            3,000             3,000
  Receivables (Notes 2 and 5):
     Trade .....................................................................        4,207,000         4,210,000
     Current portion of long-term receivables, net of unamortized
      discount .................................................................        1,275,000         1,122,000
  Work in process inventory ....................................................          107,000           197,000
  Prepayments ..................................................................           81,000           161,000
                                                                                     ------------      ------------
     Total current assets ......................................................        5,897,000         7,292,000
Long-term receivables, net of unamortized discount (Note 2) ....................        2,201,000         2,642,000
Property and equipment, net (Note 3) ...........................................          962,000         1,165,000
Software products, net (Note 4) ................................................          280,000           393,000
Other assets ...................................................................          150,000           146,000
                                                                                     ------------      ------------
     Total assets ..............................................................     $  9,490,000      $ 11,638,000
                                                                                     ============      ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Note payable to bank  (Note 5) ...............................................     $    350,000      $    147,000
  Accounts payable .............................................................          889,000           882,000
  Accrued liabilities (Notes 6 and 8) ..........................................        1,173,000         1,390,000
  Deferred revenue .............................................................        1,929,000         1,837,000
                                                                                     ------------      ------------
     Total current liabilities .................................................        4,341,000         4,256,000
Noncurrent deferred revenue ....................................................        1,346,000         1,634,000
Noncurrent deferred income taxes (Note 6) ......................................           86,000           442,000
Other noncurrent liabilities ...................................................          172,000            37,000
                                                                                     ------------      ------------
          Total liabilities ....................................................        5,945,000         6,369,000
                                                                                     ------------      ------------
Commitments and contingencies (Note 9) .........................................             --                --
Stockholders' equity (Note 8):
  Preferred Stock, $.10 par value, 1,000,000 shares authorized,
     none issued or outstanding ................................................             --                --
  Common Stock, $.05 par value, 20,000,000 shares authorized,
     2,849,000 and 2,833,000 shares issued and outstanding at
     September 30, 1998 and 1997, respectively .................................          142,000           142,000
  Junior Common Stock, $.05 par value, 500,000 shares authorized,
     none issued or outstanding ................................................             --                --
  Additional paid-in capital ...................................................       13,079,000        13,030,000
  Deficit ......................................................................      (10,359,000)       (8,860,000)
  Foreign currency translation adjustment ......................................          683,000           957,000
                                                                                     ------------      ------------
          Total stockholders' equity ...........................................        3,545,000         5,269,000
                                                                                     ------------      ------------
          Total liabilities and stockholders' equity ...........................     $  9,490,000      $ 11,638,000
                                                                                     ============      ============
</TABLE>

          See accompanying notes to consolidated financial statements.




                                       22
<PAGE>   23




                       MPSI SYSTEMS INC. AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF CASH FLOW (SEE ALSO NOTE 10)

<TABLE>
<CAPTION>

                                                                                             YEAR ENDED SEPTEMBER 30,
                                                                                ----------------------------------------------
                                                                                    1998             1997             1996
                                                                                -----------      -----------      -----------

<S>                                                                             <C>              <C>              <C>         
Income (loss) from operations .............................................     $(1,499,000)     $ 1,103,000      $  (623,000)
Adjustments to reconcile income (loss) from
  operations to cash provided (used) by operations:
  Depreciation and amortization of property and
     equipment ............................................................         425,000          419,000          450,000
  Amortization of software products .......................................         314,000          617,000          592,000
  Deferred income taxes ...................................................        (354,000)         312,000             --
  Loss on sale of assets ..................................................            --               --              5,000
Changes in assets and liabilities:
  Decrease (increase) in assets:
     Receivables ..........................................................         295,000       (1,602,000)       1,970,000
     Inventories ..........................................................          90,000          164,000          (57,000)
     Prepayments and Other Assets .........................................          76,000          114,000          189,000
  Increase (decrease) in liabilities:
     Trade payables and accruals ..........................................        (406,000)        (365,000)         388,000
     Taxes payable ........................................................          51,000          178,000         (438,000)
     Deferred revenue .....................................................        (194,000)        (155,000)      (1,501,000)
                                                                                -----------      -----------      -----------
          Net cash provided (used) by operations ..........................      (1,202,000)         785,000          975,000
                                                                                -----------      -----------      -----------
Cash flows from investing activities:
  Decrease in short-term investment .......................................            --             46,000             --
  Purchase equipment ......................................................        (255,000)        (267,000)        (601,000)
  Software development ....................................................        (201,000)        (167,000)        (762,000)
  Proceeds from disposition of assets .....................................          31,000            6,000           16,000
                                                                                -----------      -----------      -----------
          Net cash used by investing activities ...........................        (425,000)        (382,000)      (1,347,000)
                                                                                -----------      -----------      -----------
Cash flows from financing activities:
  Net proceeds from bank line of credit ...................................         203,000          147,000             --
  Proceeds from exercised stock options ...................................          49,000           98,000           53,000
                                                                                -----------      -----------      -----------
          Net cash provided by financing activities .......................         252,000          245,000           53,000
                                                                                -----------      -----------      -----------
                                                                                                                  ...........
Increase (decrease) in cash and cash equivalents ..........................      (1,375,000)         648,000         (319,000)
Cash and cash equivalents at beginning of period ..........................       1,599,000          951,000        1,270,000
                                                                                -----------      -----------      -----------
Cash and cash equivalents at end of period ................................     $   224,000      $ 1,599,000      $   951,000
                                                                                ===========      ===========      ===========
</TABLE>

          See accompanying notes to consolidated financial statements.




                                       23
<PAGE>   24




                       MPSI SYSTEMS INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FISCAL YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998

<TABLE>
<CAPTION>

                                                                                                       
                                               COMMON STOCK                                            FOREIGN
                                         -----------------------      ADDITIONAL                      CURRENCY
                                                        CARRYING       PAID-IN                       TRANSLATION      STOCKHOLDERS'
                                         SHARES           VALUE        CAPITAL          DEFICIT       ADJUSTMENT         EQUITY
                                         -------    ------------    -----------     ------------     -----------      ------------
<S>                                    <C>          <C>             <C>             <C>              <C>              <C>         
Balance, September 30, 1995 ....       2,733,000    $    137,000    $ 12,751,000    $ (9,340,000)    $    938,000     $  4,486,000
  Net loss .....................            --              --              --          (623,000)            --           (623,000)
  Stock options exercised ......          20,000           1,000          52,000            --               --             53,000
  Stock issued to 401(k) Plan ..          41,000           2,000         131,000            --               --            133,000
  Translation adjustment .......            --              --              --              --             16,000           16,000
                                    ------------    ------------    ------------    ------------     ------------     ------------
Balance, September 30, 1996 ....       2,794,000         140,000      12,934,000      (9,963,000)         954,000        4,065,000
  Net  income ..................            --              --              --          1,103,000            --          1,103,000
  Stock options exercised ......          39,000           2,000          96,000            --               --             98,000
  Translation adjustment .......            --              --              --              --              3,000            3,000
                                    ------------    ------------    ------------    ------------     ------------     ------------
Balance, September 30, 1997 ....       2,833,000         142,000      13,030,000      (8,860,000)         957,000        5,269,000
  Net loss .....................            --              --              --        (1,499,000)            --         (1,499,000)
  Stock options exercised ......          16,000            --            49,000            --               --             49,000
  Translation adjustment .......            --              --              --              --           (274,000)        (274,000)
                                    ------------    ------------    ------------    ------------     ------------     ------------
Balance, September 30, 1998 ....       2,849,000    $    142,000    $ 13,079,000    $(10,359,000)    $    683,000     $  3,545,000
                                    ============    ============    ============    ============     ============     ============
</TABLE>

          See accompanying notes to consolidated financial statements.






                                       24
<PAGE>   25





                       MPSI SYSTEMS INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

    Nature of Operations: MPSI Systems Inc. is a United States-based
multinational corporation whose principal line of business is providing decision
support software, information databases and consulting services to businesses
which have an investment in retail outlet networks. The Company markets its
products and services in North America, the Pacific Rim, Latin America, Europe
and South Africa through a direct sales force located in various foreign
countries. As discussed more fully in Note 7, over 51% of consolidated revenues
are generated from foreign customers, and portions of such revenues are billed
in foreign currencies. Most of the Company's business comes from the petroleum
industry, including several customers who individually account for a significant
portion of consolidated revenues. Services are also provided for clients in the
banking, convenience food, quick service restaurant and government postal
industries. All software development and substantially all of the information
database preparation are performed at the Company's headquarters facility in
Tulsa, Oklahoma.

    Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of MPSI Systems Inc. and its wholly owned
subsidiaries. All significant intercompany transactions and accounts have been
eliminated in consolidation.

    Revenue Recognition: Revenues and costs related to production of market
information databases are recorded based upon the ratio of costs incurred to
total estimated completion costs (percentage-of-completion method). Revenues and
costs related to single site studies, mini-market studies and other projects
which are completed in a short time period are recognized at completion.
Anticipated losses on contracts are charged against earnings at the time such
losses are identified.

    The Company's software products are generally licensed to customers through
noncancelable software license and maintenance contracts with terms of up to
five years. The corresponding long-term receivables and deferred maintenance
revenue from these installment contracts are stated at the discounted present
value of annual license and maintenance payments to be received over the
contract term based upon the prime rate of interest on the effective date of
each contract. The present value discount, related to installments due after one
year, is amortized to interest income using an accelerated method that equates
interest earnings with outstanding receivable balances. Software license
revenues, equal to the present value of the aggregate annual license
installments, are recognized at the latter of contract execution or software
delivery when collection is probable. When it cannot be determined that
collection is probable, or if a contract contains cancellation options, software
revenues are deferred. At the time revenue is recognized, the Company has no
remaining obligations under the software license and maintenance contracts other
than providing postcontract customer support services related to the maintenance
portion of the contract and performance obligations under any optional and
separately priced training or consulting arrangements. Maintenance revenues,
equal to the present value of annual installment payments, are recognized
ratably over the term of the contracts as the postcontract customer support
services are provided and the related costs are incurred and recognized.
Optional training and consulting represents service transactions as to which
revenues and expense are recognized when the earnings process is substantially
complete.

    Statement of Cash Flows: For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.

    Property and Equipment: Property and equipment is stated at cost.
Depreciation is provided using the straight-line method, over the estimated
useful lives of the respective assets, except for leasehold improvements which
are amortized over the lesser of the lease term or the economic life of the
underlying asset. Since such assets are employed in all facets of the Company's
operations, depreciation expense is reflected in cost of sales as well as in
each category of operating expenses. The Company charges the cost of repairs and
maintenance to expense as incurred and capitalizes the cost of replacements,
renewals and betterments. When property or equipment is retired, 






                                       25
<PAGE>   26




the cost and accumulated depreciation are removed from the accounts, and the
resulting gain or loss on the disposition is reflected in other income
(expense).

    Software Products: Cost of software held for resale, which was either
purchased with the intent to incorporate the acquired software in MPSI products
or developed internally, is presented net of accumulated amortization. The costs
of internally developed software include direct labor, materials and overhead,
and relate to significant enhancements to existing software or to development of
new software products. All costs incurred to establish the technological
feasibility of internally developed software are charged to research and
development expense as incurred. Royalties, which may become payable because of
ongoing proprietary interests related to third-party software imbedded in MPSI
products, are charged to cost of sales-software licensing as applicable software
sales are recognized.

    The annual amortization of software products is computed on a
product-by-product basis and is the greater of the amount determined using (1)
the ratio that current gross revenues for a product bear to the total of current
and anticipated future gross revenues for that product or (2) the straight-line
method over the remaining economic life of the product. Historically, the
straight-line method has resulted in a greater amount of amortization in each
accounting period and has, therefore, been the basis for amortization in the
current period and in prior periods. Amortization starts when a product is
available for general release to customers and is reflected in cost of
sales-software licensing.

    In the event that capitalized software development costs are subsequently
determined not to be fully recoverable from future operations, the carrying
value of such software is reduced to an amount equal to its net realizable value
less costs of marketing and distribution. The reduction in carrying value is
recorded in cost of sales-software licensing.

    Inventory: Work-in-process is composed of direct labor, costs of gathering
demographic data, indirect costs and overhead. Indirect costs and overhead are
allocated to each contract based upon the direct labor incurred.

    Income Taxes: The Company applies the liability method of accounting for
income taxes. Under this method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in the results
of operations during the period that includes the enactment date.

    Earnings Per Share: Basic earnings per share are based upon the average
number of common shares outstanding. Diluted earnings per share assume the
issuance of common stock from dilutive stock options. The earnings per share
amounts for 1997 and 1996 have been restated to reflect the adoption of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share"
(see Note 11).

    Foreign Currency Translation: Assets and liabilities of the Company's
foreign operations, except Brazil, are translated from the foreign operating
currency to the U.S. Dollar equivalent for consolidated reporting purposes using
the applicable exchange rates at the balance sheet date. Revenues and expenses
are translated at average rates for the year. Exchange differences from these
translations are included in stockholders' equity. Where amounts denominated in
a foreign currency are or are expected to be converted into dollars by
remittance or repayment, the realized exchange differences are reflected in the
results of operations. Brazil transactions and accounting records are maintained
in U.S. Dollar equivalents.

    Restructuring Expenses: Expenses associated with corporate restructuring are
recognized at the time that the underlying obligations are incurred. Severance
costs are accrued in the accounting period during which management, having
authority to do so, approves severance plans, provided that (1) the specific
individuals or positions to be terminated have been identified and the costs
thereof were reasonably quantifiable and probable of occurrence within the
succeeding twelve months, and (2) prior to release of the financial statements
for the affected period, the affected employees or positions are either
terminated or the general terms of the termination plan have been communicated,
including the benefits to which terminated employees are entitled or will
voluntarily receive. 






                                       26
<PAGE>   27



The net present value of remaining lease obligations related to excess space is
accrued in full at the time the space is abandoned, net of sublease recoveries
which are probable. The costs of other corporate restructuring decisions are
accrued at the time the obligations related thereto are incurred and
quantifiable.

    New Accounting Pronouncements: In June 1997, the Financial Accounting
Standards Board issued two additional accounting standards, FAS No. 130
"Reporting Comprehensive Income" ("FAS 130") and FAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"), effective for
fiscal years beginning after December 15, 1997 (fiscal year 1999 for the
Company). FAS 130 establishes standards for the reporting and display of
comprehensive income. While the Company does have certain comprehensive income
items, primarily foreign currency translation adjustments, adopting FAS 130 will
not materially change the Company's financial reporting and disclosures. FAS 131
establishes standards for reporting financial and descriptive information about
a company's operating segments. Management is currently analyzing the impact of
FAS 131.

    In November 1997, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position 97-2 ("SOP 97-2") entitled "Software Revenue
Recognition." The SOP provides revised and expanded guidance on when software
revenue should be recognized and in what amounts for licensing, selling, and
leasing, or otherwise marketing computer software. The SOP is effective for
transactions entered into by the Company beginning October 1, 1998. However, in
March 1998, the AcSEC issued SOP 98-4 which defers for one year the effective
date of specific provisions within SOP 97-2. Management does not believe that
the impact of adoption will materially impact the current revenue recognition
methods.

    In March 1998, the AICPA issued SOP 98-1, Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use. The SOP is
effective for the Company beginning on October 1, 1999. The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal-use. The Company
currently expenses such costs as incurred. The Company has not yet assessed what
the impact of the SOP will be on the Company's future earnings or financial
position.

    Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.

2.   RECEIVABLES:

    Trade accounts receivable include unbilled amounts of $692,000 at September
30, 1998 and $1,630,000 at September 30, 1997. These amounts represent market
study revenues recognized under the percentage-of-completion method in excess of
amounts billed and will generally be billable during the succeeding twelve
months upon completion of the respective studies.

    Current and noncurrent receivables also include unbilled amounts of
$3,605,000 at September 30, 1998 and $4,196,000 at September 30, 1997 (before
present value discount and excluding $231,000 and $74,000 which had been billed
at September 30, 1998 and 1997, respectively) related to multi-year software
license and maintenance agreements. Since these agreements contain annual
installment billing provisions, the unbilled receivable balance for some
contracts is as much as four years' future annual billings. Of the September 30,
1998 unbilled amounts, $1,248,000 (compared with $1,294,000 at September 30,
1997) will be billed in the succeeding twelve months, and the remainder will be
billed thereafter at such future dates as are specified in the respective
contracts. The portion of such future billings related to maintenance and
support services not yet performed is offset by corresponding amounts in
deferred revenue. The current portions of long-term receivables are reduced by
unamortized present value discount of $204,000 and $247,000 at September 30,
1998 and 1997, respectively. Noncurrent long-term receivables are presented net
of unamortized present value discount in the amount of $156,000 and $259,000 at
September 30, 1998 and 1997, respectively. The present value discount is imputed
based upon the New York prime rate on the effective date of each agreement.
Interest income related to these agreements was $267,000, $177,000, and $160,000
in fiscal years 1998, 1997 and 1996, respectively.







                                       27
<PAGE>   28



    A significant portion of the Company's business activity is with the major
multinational oil companies. At September 30, 1998, 96% ($7,680,000) of the
Company's receivables (before present value discounts) were from petroleum
clients ($8,198,000 or 97% at September 30, 1997). The receivable portfolio is
well diversified geographically which tends to mitigate the potential impact of
fluctuations in petroleum activities which may otherwise result if receivables
were confined to a particular geographic area. Software license agreements are
payable over several years (generally five-year agreements) and are expected to
be paid from operating cash flows of the customers. The Company does not require
collateral or other security to support these contractual receivables. The
carrying value of long-term receivables, net of unearned discount, approximates
market value.

3.   PROPERTY AND EQUIPMENT:

    Property and equipment consists of:
<TABLE>
<CAPTION>
                                                           SEPTEMBER 30,
                                        USEFUL LIFE  --------------------------
                                         IN YEARS       1998            1997
                                        -----------  ----------      ----------
<S>                                     <C>          <C>             <C>
Leasehold improvements.................   Various    $  803,000      $  679,000
Computer equipment and software........       4-5     4,426,000       6,202,000
Office furnishings and equipment ......      3-10     1,309,000       1,586,000
                                                     ----------      ----------
                                                      6,538,000       8,467,000
Accumulated depreciation...............              (5,576,000)     (7,302,000)
                                                     ----------      ----------
   Net property and equipment..........              $  962,000      $1,165,000
                                                     ==========      ==========
</TABLE>

    The provision for depreciation was $425,000, $419,000, and $450,000 for the
years ended September 30, 1998, 1997 and 1996, respectively. At September 30,
1998, fully depreciated assets with an aggregate original cost of approximately
$4,378,000 remain in use.

4.   SOFTWARE PRODUCTS:
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                      -------------------------
                                                          1998           1997
                                                      ----------    -----------
<S>                                                   <C>           <C>
Capitalized software development costs...             $4,299,000     $4,098,000
Accumulated amortization..........                    (4,019,000)    (3,705,000)
                                                      ----------     ----------
          Net software products...                    $  280,000     $  393,000
                                                      ==========     ==========
</TABLE>

The provision for amortization, reflected in Software Licensing cost of sales,
was $314,000, $617,000, and $592,000 for the years ended September 30, 1998,
1997 and 1996, respectively. Based upon current sales forecasts, capitalized
software costs are projected to be recoverable. However, these sales forecasts
are subject to certain vulnerabilities which could potentially affect the
recoverability of those costs.

5.   NOTE PAYABLE TO BANK:

    In May 1998, the Company expanded its bank line of credit through April 1999
in the aggregate amount of $1,500,000 which is secured by billed accounts
receivable and current portions of long-term receivables; $350,000 was
outstanding at September 30, 1998. Outstanding balances bear interest at 9.25%.
The Agreement requires that the Company shall maintain Tangible Net Worth of not
less than $3.5 million, shall maintain reasonable and customary insurance, and
shall not, without authorization of lender, undertake to additional debt (other
than lease indebtedness), lend money, invest in other entities or guarantee debt
of others during the term of the Agreement.






                                       28
<PAGE>   29




6.   INCOME TAXES:

<TABLE>
<CAPTION>

                                                                                       YEAR ENDED SEPTEMBER 30,
                                                                           --------------------------------------------
                                                                                1998            1997           1996
                                                                           -----------      -----------     -----------

<S>                                                                        <C>              <C>             <C>        
Income (loss) from continuing operations before
  income taxes:
  Domestic ...........................................................     $(1,987,000)     $ 1,682,000     $    27,000
  Foreign ............................................................         289,000           50,000        (279,000)
                                                                           -----------      -----------     -----------
          Total ......................................................     $(1,698,000)     $ 1,732,000     $  (252,000)
                                                                           ===========      ===========     ===========
Income taxes (benefits):
  Current:
     Federal .........................................................     $      --        $    27,000     $    15,000
     State ...........................................................            --             81,000         (56,000)
     Foreign .........................................................         155,000          209,000         412,000
                                                                           -----------      -----------     -----------
          Current income taxes .......................................         155,000          317,000         371,000
  Deferred:
     Federal .........................................................        (307,000)         285,000            --
     State ...........................................................         (50,000)          24,000            --
     Foreign .........................................................           3,000            3,000            --
                                                                           -----------      -----------     -----------
     Deferred income taxes ...........................................        (354,000)         312,000            --
                                                                           -----------      -----------     -----------
          Provision for total income taxes ...........................     $  (199,000)     $   629,000     $   371,000
                                                                           ===========      ===========     ===========
</TABLE>

    A reconciliation of the provision for income taxes at the applicable Federal
statutory income tax rate to the actual provision for income taxes follows:
<TABLE>
<CAPTION>

                                                                                       YEAR ENDED SEPTEMBER 30,
                                                                                ---------------------------------------
                                                                                   1998           1997          1996
                                                                                ---------      ---------      ---------

<S>                                                                             <C>            <C>            <C>       
Expense (benefit) at statutory rate........................................     $(595,000)     $ 607,000      $ (88,000)
Alternative minimum tax (credit) ..........................................      (189,000)      (188,000)        15,000
Foreign income and taxes, net .............................................       319,000          9,000        295,000
Loss carryforwards generated ..............................................       320,000         68,000        156,000
State income taxes ........................................................      (119,000)        71,000        (36,000)
Other, net ................................................................        65,000         62,000         29,000
                                                                                ---------      ---------      ---------
  Income taxes ............................................................     $(199,000)     $ 629,000      $ 371,000
                                                                                =========      =========      =========
</TABLE>

    Income taxes of $25,000 were receivable at September 30, 1998 ($35,000
receivable at September 30, 1997). The Company does not accrue income taxes on
undistributed earnings of certain foreign subsidiaries which are permanently
invested. At September 30, 1998 and 1997, the amount of undistributed earnings
for which taxes have not been accrued was insignificant.

    In March 1996, the Internal Revenue Service initiated an examination of tax
years 1993 through 1995. The Company has not yet received a final report of the
results, and believes that the resolution of items raised will not have a
material effect on its financial position.

    At September 30, 1998, the Company has various U.S. tax credits of $451,000
which expire between 1999 and 2003 At September 30, 1998, certain foreign
subsidiaries have net operating loss carryforwards of approximately $7,806,000
which may be utilized in future years.






                                       29
<PAGE>   30




    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 are as follows:
<TABLE>
<CAPTION>

                                                         SEPTEMBER 30,
                                                   --------------------------
                                                      1998            1997
                                                   ----------      ----------
<S>                                                <C>             <C>       
Deferred tax liabilities:
  Software revenue............................     $  730,000      $  873,000
  Depreciation................................        126,000          79,000
  Other.......................................        121,000         130,000
                                                   ----------      ----------
          Total deferred tax liabilities......        977,000       1,082,000
                                                   ----------      ----------
Deferred tax assets:
  Accrued liabilities.........................        379,000         295,000
  U.S. and foreign loss carryforwards.........      2,841,000       2,451,000
  U.S. tax credit carryforwards...............        284,000         652,000
                                                   ----------      ----------
          Total deferred tax assets...........      3,504,000       3,398,000
  Valuation allowance for deferred tax assets.      2,613,000       2,758,000
                                                   ----------      ----------
     Net deferred tax assets..................        891,000         640,000
                                                   ----------      ----------
          Net deferred tax liabilities........     $   86,000      $  442,000
                                                   ==========      ==========
</TABLE>

    Utilization of the Company's tax credit and loss carryforwards is dependent
on realizing taxable income in the appropriate tax jurisdiction. Deferred tax
assets for these carryforwards have been reduced by the valuation allowance to
an amount that is more likely than not to be realized.

7. BUSINESS SEGMENT AND REVENUE FROM MAJOR CUSTOMERS:

    More than 96% of total revenues from continuing operations were derived from
the petroleum industry during each of the years ended September 30, 1998, 1997,
and 1996. Individual customers accounted for MPSI revenues that were in excess
of 10% of consolidated revenues in those years as follows (in millions of
dollars):
<TABLE>
<CAPTION>

                             1998             1997              1996
                      ----------------  ----------------  ----------------
                        AMOUNT      %    AMOUNT       %    AMOUNT       %
                      --------    ----  -------     ----  --------    ----

<S>                   <C>       <C>     <C>         <C>   <C>          <C>
Exxon/Esso/Imperial      $ 3.5     19     $ 5.6      24     $ 6.3      29
Texaco/Caltex......      $  .4      2     $ 2.6      11     $ 2.7      12
Amoco..............      $ 2.1     11     $ 2.0       8     $ 2.1      10

</TABLE>

    Although the Company would be adversely affected if several petroleum
industry customers curtailed their long-term usage of MPSI products or in the
event of a significant long-term economic downturn in the petroleum industry
generally, the Company's petroleum clients are well diversified geographically
which reduces the long-term risk attendant with its industry dependence, and
MPSI has historically experienced high renewal rates for its software license
and maintenance agreements.

    The Company operates in one business segment from its principal production
facility in the United States supported by satellite production facilities in
England and Brazil. Foreign sales offices or representatives are currently
maintained in Australia, Brazil, Japan, South Africa, South Korea, Shanghai, the
United Kingdom and Singapore. The following table sets forth the revenues and
other information related to continuing services provided by each of the
Company's three production centers.




                                       30
<PAGE>   31





<TABLE>
<CAPTION>

                                                                                               YEAR ENDED SEPTEMBER 30,
                                                                                ------------------------------------------------
                                                                                      1998             1997              1996
                                                                                ------------      ------------      ------------

<S>                                                                             <C>               <C>               <C>         
Revenues:
Unaffiliated customers:
  United States ...........................................................     $ 18,102,000      $ 21,845,000      $ 20,248,000
  Europe ..................................................................          550,000           908,000           780,000
  Brazil ..................................................................          449,000           685,000           717,000
Between geographic areas(1):
  United States ...........................................................             --                --             237,000
  Europe ..................................................................           65,000            63,000           673,000
  Asia/Pacific Rim ........................................................        2,072,000         2,097,000         2,228,000
  Brazil ..................................................................          325,000           383,000           387,000
Eliminations ..............................................................       (2,462,000)       (2,543,000)       (3,525,000)
                                                                                ------------      ------------      ------------
          Total revenues ..................................................     $ 19,101,000      $ 23,438,000      $ 21,745,000
                                                                                ============      ============      ============
Operating income (loss):
  United States ...........................................................     $   (984,000)     $  2,383,000      $    795,000
  Europe ..................................................................         (296,000)         (426,000)         (891,000)
  Brazil ..................................................................         (388,000)         (317,000)         (488,000)
                                                                                ------------      ------------      ------------
          Total operating income (loss) ...................................     $ (1,668,000)     $  1,640,000      $   (584,000)
                                                                                ============      ============      ============
Identifiable assets:
  United States ...........................................................     $  8,579,000      $ 10,714,000      $  9,276,000
  Europe ..................................................................          471,000           627,000           436,000
  Brazil ..................................................................          440,000           297,000           607,000
                                                                                ------------      ------------      ------------
          Total assets ....................................................     $  9,490,000      $ 11,638,000      $ 10,319,000
                                                                                ============      ============      ============
Export sales from U.S.:
  Canada ..................................................................     $    478,000      $    462,000      $    952,000
  Central America .........................................................          489,000           408,000           358,000
  South America ...........................................................          295,000           572,000         1,055,000
  Europe ..................................................................          582,000           788,000           521,000
  Asia/Pacific Rim ........................................................        5,991,000        10,815,000         8,873,000
  Africa ..................................................................          829,000           188,000           289,000
                                                                                ------------      ------------      ------------
          Total export sales ..............................................     $  8,664,000      $ 13,233,000      $ 12,048,000
                                                                                ============      ============      ============
Consolidated revenues from foreign customers
  by geographic area are as follows:
  Canada and Central America ..............................................     $    967,000      $    870,000      $  1,310,000
  Singapore, Australia and Japan ..........................................        5,991,000        10,815,000         8,873,000
  Europe and United Kingdom ...............................................        1,002,000         1,384,000         1,172,000
  Africa ..................................................................          959,000           501,000           418,000
  South America ...........................................................          744,000         1,256,000         1,772,000
                                                                                ------------      ------------      ------------
          Consolidated foreign revenues ...................................     $  9,663,000      $ 14,826,000      $ 13,545,000
                                                                                ============      ============      ============
Depreciation and amortization of property and equipment:
  United States ...........................................................     $    387,000      $    379,000      $    402,000
  Europe ..................................................................           26,000            35,000            36,000
  Brazil ..................................................................           12,000             5,000            12,000
Capital expenditures:
  United States ...........................................................     $    238,000      $    262,000      $    563,000
  Europe ..................................................................           17,000              --              20,000
  Brazil ..................................................................             --               5,000            18,000
</TABLE>

----------
(1) Sales between geographic areas are made at prices that generally approximate
    the prices of similar charges to unaffiliated customers.

8.   EMPLOYEE BENEFITS:

    Under an employee stock ownership and investment plan, all qualifying U.S.
employees may contribute up to 16% of their annual earnings. Subject to certain
limitations, the Company will contribute in cash or Common Stock an amount equal
to but not less than 50% or more than 100% of a participant's salary deferral
contributions that are not in excess of 6% of the participant's earnings for the
year. Contributions may be invested in nine equity or fixed-income funds. The
Company recorded expense related to its matching contribution of $155,000,
$153,000, and $143,000 in fiscal years 1998, 1997 and 1996, respectively. At
September 30, 1998 and 1997, the Company had 






                                       31
<PAGE>   32



accrued $120,000 and $122,000 of liabilities for matching contributions to the
401(k) plan (which in each case represented the estimated Company match
attributable to nine months of participant contributions since the Plan year
ends December 31). During fiscal year 1998, the Company liquidated its matching
contribution liability for the Plan year ended December 31, 1997 by contributing
$158,000 in cash. During fiscal year 1997, the Company contributed $138,000 in
cash applicable to the Plan year ended December 31, 1996. The matching
contribution for Plan year 1998 will be paid during fiscal year 1999.

    The Company has reserved 750,000 shares of Common Stock for issuance of
stock options under a 1988 stock option plan covering all employees which
expires in November 1998. Options granted under the plan vest one-third annually
over a three-year period. An additional 27,000 shares are potentially issuable
if outstanding options under a 1984 stock option plan are exercised. The
remaining options under the 1984 plan expire from September 3, 1998 to November
28, 1999 and are fully vested. No further options may be granted under that
plan.

    The Company has elected to follow Accounting Principals Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided under FASB Statement 123, "Accounting
for Stock-Based Compensation," requires the use of option valuation models that
were not developed for use in valuing stock options. Under APB 25, because the
exercise price of the Company's employee stock options equal the market price of
the underlying stock on the date of the grant, no compensation expense is
recognized.

    Pro forma information regarding net income and earnings per share is
required by FASB 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of the grant using a
Black-Scholes option pricing model. The fair value of the options was estimated
at the date of the grants with the following average assumptions: expected life
of the stock options 4 years; volatility of the expected market price of the
Company's common stock price of 106.5% (114% for 1997 and 1996); risk-free
interest rate of 5.77% (6.2% in 1997 and 1996) and a no-dividend yield.

    The Black-Scholes option valuation model was developed for use in estimating
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

    For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

<TABLE>
<CAPTION>

                                           1998                       1997                        1996
                                  ------------------------   -----------------------     ---------------------------
                                   PRO FORMA     REPORTED     PRO FORMA     REPORTED     PRO FORMA      REPORTED
                                  -----------  -----------   ----------   ----------     ----------    -------------

<S>                               <C>          <C>           <C>          <C>            <C>           <C>       
  Net income (loss)......         $(1,675,000) $(1,499,000)  $  941,000   $1,103,000     $(771,000)    $(623,000)
  Basic and diluted earnings      
   (loss) per share....           $      (.59) $      (.53)  $      .33   $      .39     $    (.28)    $    (.23)
</TABLE>





                                       32
<PAGE>   33




    A summary of the Company's stock option activity and related information for
the years ended September 30 follows:
<TABLE>
<CAPTION>

                                                                          WEIGHTED-AVERAGE
                                                 OPTIONS                   EXERCISE PRICE                EXERCISABLE
                                                ---------                ------------------             -------------  
<S>                                             <C>                      <C>                            <C>   
     AT SEPTEMBER 30, 1995                       168,617                         2.83                       62,912
         Granted..............                   139,050                         5.36
         Exercised............                   (19,500)                        2.72
         Forfeited............                    (7,984)                        3.06
         Expired..............                      (900)                       17.50
     AT SEPTEMBER 30, 1996                       279,283                         4.04                       98,288
         Granted..............                     3,000                         3.25
         Exercised............                   (38,782)                        2.53
         Forfeited............                   (28,866)                        4.53
         Expired..............                    (1,100)                        8.75
     AT SEPTEMBER 30, 1997                       213,535                         4.21                      117,810
         Granted..............                     3,000                         4.63
         Exercised............                   (17,516)                        2.82
         Forfeited............                    (5,233)                        3.34
         Expired..............                   (33,967)                        2.25
     AT SEPTEMBER 30, 1998                       159,819                         4.75                      153,597

</TABLE>

    The weighted average grant date fair value for options granted during each
of the three fiscal years ended September 30, 1998, 1997 and 1996 were $3.45,
$2.52, and $4.16, respectively. The exercise price for options outstanding as of
September 30, 1998 ranged from $2.25 to $5.50. The weighted average remaining
contractual life of those options is two years.

    The Company accrued $14,000 at September 30, 1998 ($308,000 accrued at
September 30, 1997); in connection with incentive award programs for certain
employees. The awards were accrued based upon the Company's achievement of
certain revenue and operating income objectives and the respective contributions
of certain employees to the achievement of those objectives. The various
incentive plans specify cash settlement of the accrued liability prior to
December 31, 1998.

    At September 30, 1995, the Company approved discretionary employee
performance awards in the form of deferred compensation. Such amount was earned
based on the employee's performance during the year ended September 30, 1994.
Under related deferred compensation agreements with certain key employees as
approved by the Compensation Committee, the Company agreed to pay future cash
awards to the specified employees upon the achievement, for thirty consecutive
business days, of a $6.00 per share market price for the Company's Common Stock
and upon exercise of the underlying options. Such payments could be made at any
point after November 29, 1995, assuming stock price and other vesting
requirements have been met. Based upon the stock price at September 19, 1997,
which triggered the Company's obligation under the plan, approximately $102,000
of compensation expense was accrued and reflected in G&A expense.

    At September 30, 1998 and 1997, the Company had accrued $573,000 and
$607,000, respectively, related to employee vacations earned but not yet taken.

9.   COMMITMENTS AND CONTINGENCIES:

    The Company leases other office space and equipment under various
agreements, substantially all of which have been accounted for as operating
leases. Rental expense, including the leases described above, of $952,000 was
recorded during the year ended September 30, 1998 ($929,000 and $1,040,000 in
1997 and 1996, respectively). Aggregate future rentals under these commitments
are as follows: 1999 -- $811,000, 2000 -- $775,000, 2001 -- $687,000, 2002 --
$657,000, 2003 -- $487,000 and thereafter -- $1,000.




                                       33
<PAGE>   34




10.  SUPPLEMENTAL CASH FLOW INFORMATION:

     The Company paid interest of $99,000 during fiscal year 1998, $154,000
during fiscal year 1997, and $17,000 during fiscal year 1996. Income taxes of
$105,000, $132,000, and $809,000 were paid during fiscal years 1998, 1997 and
1996, respectively.

11.  BASIC AND DILUTED EARNINGS PER SHARE:

     The following sets forth the computation of basic and diluted earnings
(loss) per share for the years ended September 30:
<TABLE>
<CAPTION>

       In thousands:                                                              1998         1997       1996
                                                                                -------      -------     -------

<S>                                                                             <C>          <C>         <C>     
Net income (loss): ........................................................     $(1,499)     $ 1,103     $  (623)
                                                                                -------      -------     -------
Basic weighted-average shares .............................................       2,844        2,798       2,756
     Effect of dilutive stock options .....................................        --             22        --
Diluted weighted-average shares ...........................................       2,844        2,820       2,756
                                                                                -------      -------     -------
Basic and diluted earnings (loss)
     per common share .....................................................     $  (.53)     $   .39     $  (.23)
                                                                                -------      -------     -------

</TABLE>

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

         There were no changes in accountants or disagreements with accountants
on matters related to accounting or financial disclosure during the fiscal years
ended September 30, 1998 and 1997.


                                    PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Reference is made to the information appearing under the caption
"Directors and Executive Officers" in the Company's Proxy Statement which will
be filed pursuant to Regulation 14A not later than 120 days after the end of the
Company's fiscal year ended September 30, 1998 and is incorporated herein by
reference.

ITEM 11.     EXECUTIVE COMPENSATION

         Reference is made to the information appearing under the caption
"Compensation of Directors and Officers" in the Company's Proxy Statement which
will be filed pursuant to Regulation 14A not later than 120 days after the end
of the Company's fiscal year ended September 30, 1998 and is incorporated herein
by reference.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Reference is made to the information appearing under the caption "Stock
Ownership" in the Company's Proxy Statement which will be filed pursuant to
Regulation 14A not later than 120 days after the end of the Company's fiscal
year ended September 30, 1998 and is incorporated herein by reference.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Reference is made to the information appearing under the caption
"Certain Transactions" in the Company's Proxy Statement which will be filed
pursuant to Regulation 14A not later than 120 days after the end of the
Company's fiscal year ended September 30, 1998 and is incorporated herein by
reference.





                                       34
<PAGE>   35




                                     PART IV

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

(a)    (1)    The  response to this  portion of ITEM 14 is  submitted  as a 
              separate  section of this report  under ITEM 8.

       (2)    The response to this portion of ITEM 14 is set forth in ITEM 
              14(d) below.

       (3)    Exhibits.

     EXHIBIT
     NUMBER                                 DESCRIPTION 
     -------    -------------------------------------------------------------

      *3.1  --  Certificate of Incorporation of MPSI Systems Inc., as
                amended, filed as the same numbered exhibit with the Company's
                Form 10-Q dated March 31, 1987, File No. 0-11527.

      *3.2  --  By-laws, as amended, filed as Exhibit 3.1 with the Company's 
                Form 10-Q dated June 30, 1987, File No. 0-11527.

      *3.3  --  Certificate of Designation dated September 23, 1993
                establishing the rights conferred on $.10 Par Value Convertible
                Preferred Stock, Series 1993, filed as the same numbered exhibit
                with the Company's 1993 Form 10-K, File No. 0-11527.

      *3.4  --  Amendment to Certificate of Incorporation dated November 16,
                1993 to reflect a one-for-ten reverse stock split, filed as the
                same numbered exhibit with the Company's 1993 Form 10-K, File
                No. 0-11527.

      10.1  --  MPSI Systems Inc. 1998 Stock Plan.

     *10.3  --  MPSI Systems Inc. 1984 Stock Option Plan as amended effective
                January 1, 1987, filed as the same numbered exhibit with the
                Company's 1987 Form 10-K, File No. 0-11527.

     *10.4  --  Stock Option Agreement pursuant to MPSI Systems Inc. 1984
                Stock Option Plan, filed as the same numbered exhibit with the
                Company's 1984 Form 10-K, File No. 0-11527.


      10.7  --  Real property lease dated February 11, 1998, between American
                Southwest Properties, Inc., as lessor, and the Company, as
                lessee, relating to the Company's Tulsa, Oklahoma facility.

    *10.15  --  Indemnification Agreements with Directors and Officers of
                MPSI Systems Inc. filed as the same numbered exhibit with the
                Company's 1986 Form 10-K, File No. 0-11527.

    *10.16  --  MPSI Systems Inc. Amended and Restated 1988 Stock Option
                Plan, effective November 29, 1988, filed as Exhibit 4.5 with the
                Company's 1994 Form S-8, File No. 0-11527.

    *10.17  --  Stock Option Agreement pursuant to MPSI Systems Inc. Amended
                and Restated 1988 Stock Option Plan, filed as Exhibit 4.6 with
                the Company's 1994 Form S-8, File No. 0-11527.

    *10.20  --  MPSI Systems Inc. Matching Investment Plan, effective January
                1, 1990, filed as Exhibit 4(c) with Pre-effective Amendment No.
                1 to the Company's Form S-8, filed on December 29, 1989, File
                No. 0-11527.


                                       35




                                       
<PAGE>   36





 (3)   Exhibits. (Continued)

    EXHIBIT
    NUMBER                            DESCRIPTION
    -------     -------------------------------------------------------------
      21.1  --  List of Subsidiaries.

      23.1  --  Consent of Independent Auditors -- Ernst & Young LLP.

      27.1  --  Financial Data Schedule.
----------

* Incorporated by reference.

(b)    No report on Form 8-K was filed by the Company during or applicable to
       the quarter ended September 30, 1998.

(c)    Exhibits - The response to this ITEM is submitted as a separate section
       of this report.

(d)    Financial Statement Schedules - Set forth below are the required
       financial statement schedules together with the Report of Independent
       Auditors on Financial Statement Schedules. All other schedules are
       omitted because they are not applicable or the information is shown in
       the financial statements or notes thereto.


                                       36





<PAGE>   37



         REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES



We have audited the consolidated financial statements of MPSI Systems Inc. and
subsidiaries as of September 30, 1998 and 1997, and for each of the three years
in the period ended September 30, 1998, and have issued our report thereon dated
November 20, 1998 (included elsewhere in this Form 10-K). Our audits also
included the financial statement schedules included in this Form 10-K. These
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.

In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.



                                          ERNST & YOUNG LLP



Tulsa, Oklahoma
November 20, 1998





                                       37
<PAGE>   38


                                                                   SCHEDULE VIII


                       MPSI SYSTEMS INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS

                      THREE YEARS ENDED SEPTEMBER 30, 1998


<TABLE>
<CAPTION>

              COLUMN A                          COLUMN B                 COLUMN C                   COLUMN D         COLUMN E
---------------------------------------      -----------     -------------------------------    ---------------    ------------
                                                                         ADDITIONS
                                                             -------------------------------
                                              BALANCE AT       CHARGED TO                             OTHER           BALANCE
                                               BEGINNING        COSTS AND       REDUCTION OF      (DEDUCTIONS)       AT END OF
             DESCRIPTION                       OF PERIOD        EXPENSES          REVENUES          ADDITIONS         PERIOD
---------------------------------------      -----------     ------------      -------------    ---------------    ------------
<S>                                          <C>             <C>             <C>                <C>                <C>
For the year ended September 30, 1996:
  Accumulated depreciation .............     $ 7,420,000     $   450,000     $      --          $  (901,000)(2)     $ 6,969,000
  Accumulated amortization .............       2,498,000         592,000            --               (2,000)          3,088,000
  Unamortized discount on software
     license agreements ................         321,000            --            77,000(1)        (160,000)(1)         238,000
For the year ended September 30, 1997
  Accumulated depreciation .............     $ 6,969,000     $   419,000     $      --          $   (86,000)(2)     $ 7,302,000
  Accumulated amortization .............       3,088,000         617,000            --                 --             3,705,000
  Unamortized discount on software
    license agreements .................         238,000            --           445,000(1)        (177,000)(1)         506,000
For the year ended September 30, 1998
  Accumulated depreciation .............     $ 7,302,000     $   425,000     $      --          $(2,151,000)(2)     $ 5,576,000
  Accumulated amortization .............       3,705,000         314,000            --                 --             4,019,000
  Unamortized discount on software
    License agreements .................         506,000            --           121,000(1)        (267,000)(1)         360,000

</TABLE>

----------
(1) Reduction of unamortized discount on long-term receivables represents
    current period interest income recognition (see Note 2 to Consolidated
    Financial Statements). Increases to unamortized discount represent the
    present-value-discount on new software license agreements net of adjustment
    for any contract cancellations or revisions.

(2) Reduction is due to retirement of fully amortized assets and to assets sold
    or otherwise disposed.






                                       38
<PAGE>   39




                                                                     SCHEDULE IX

                       MPSI SYSTEMS INC. AND SUBSIDIARIES

                              SHORT-TERM BORROWINGS
                      THREE YEARS ENDED SEPTEMBER 30, 1998

<TABLE>
<CAPTION>


          COLUMN A                  COLUMN B             COLUMN C            COLUMN D            COLUMN E             COLUMN F
          --------                  --------             --------            --------            --------             --------
                                                                              MAXIMUM             AVERAGE             WEIGHTED
                                                         WEIGHTED             AMOUNT              AMOUNT              AVERAGE
    CATEGORY OF AGGREGATE          BALANCE AT            AVERAGE            OUTSTANDING         OUTSTANDING        INTEREST RATE
    SHORT-TERM BORROWINGS         END OF PERIOD     INTEREST RATE (2)      DURING PERIOD       DURING PERIOD     DURING PERIOD (2)
  ------------------------       ---------------    -----------------      -------------       -------------     -----------------
<S>                              <C>                <C>                    <C>                 <C>               <C>
  Note payable to bank (1)            $350,000            9.25%                $600,000             $361,000           9.25%
</TABLE>

(1)      Note payable originated in May 1997 with a borrowing limit of $500,000.
         In May 1998, the note payable to the bank was increased to an aggregate
         amount of $1,500,000. The borrowings as of September 30, 1997 were
         $147,000.

(2)      Calculated by multiplying the number of days applicable to each
         interest rate change times the applicable interest rate and dividing
         the results by 365 days.





                                       39
<PAGE>   40


                                                                      SCHEDULE X


                       MPSI SYSTEMS INC. AND SUBSIDIARIES

                   SUPPLEMENTARY INCOME STATEMENT INFORMATION

                      THREE YEARS ENDED SEPTEMBER 30, 1998

<TABLE>
<CAPTION>

                COLUMN A                                   COLUMN B
----------------------------------------      ------------------------------------
                                                      FISCAL YEAR ENDED
                                                        SEPTEMBER 30,
                                              ------------------------------------
                  ITEM                            1998         1997          1996
----------------------------------------      ------------  ------------  --------

<S>                                          <C>           <C>           <C>      
Maintenance and repairs.................     $  88,000     $ 214,000     $ 172,000
Amortization of internally developed           
software................................       314,000       617,000       592,000
Royalties...............................            --        93,000       125,000
Advertising costs.......................        90,000       112,000       114,000

</TABLE>




                                       40
<PAGE>   41




                                      SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, a corporation organized and existing under
the laws of the State of Delaware, has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Tulsa,
State of Oklahoma, on the 9th day of December, 1998.

                                        MPSI SYSTEMS INC.


                                        By /s/ Ronald G. Harper
                                           -----------------------------------
                                           Ronald G. Harper
                                           Chairman of the Board,
                                           President and Chief
                                           Executive Officer

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

<S>                                     <C>                                   <C> 
        /s/ Ronald G. Harper             Chairman of the Board,                 December 9, 1998
--------------------------------         President and Chief 
          Ronald G. Harper               Executive Officer   
                                         


         /s/ James C. Auten              Vice President and Chief--             December 9, 1998
--------------------------------          Financial Officer   
           James C. Auten                 


      s/ John C. Bumgarner, Jr.          Director                               December 9, 1998
--------------------------------
       John C. Bumgarner, Jr.


          /s/ David L. Huff              Director                               December 9, 1998
--------------------------------
            David L. Huff


         /s/ Joseph C. McNay             Director                               December 9, 1998
--------------------------------
           Joseph C. McNay


         /s/ John J. McQueen             Director                               December 9, 1998
--------------------------------
           John J. McQueen


         /s/ Bryan D. Porto              Director                               December 9, 1998
--------------------------------
           Bryan D. Porto

</TABLE>

    The Company's Proxy Statement for the Annual Meeting of Stockholders to be
held February 1, 1999 has not yet been sent to stockholders. Copies of such
materials will be furnished to the Commission at such time as they are sent to
stockholders.




                                       41
<PAGE>   42


                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                              EXHIBIT
-------                             -------

<S>       <C>            
10.1   -- MPSI Systems Inc. 1998 Stock Plan

10.7   -- MPSI Corporate Headquarters Facility Lease

21.1   -- List of Subsidiaries

23.1   -- Consent of Independent Auditors -- Ernst & Young LLP

27.1   -- Financial Data Schedule

</TABLE>