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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-KSB

(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 December 31, 2003o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)


For the transition period from  toCommission file number 0-11527


MPSI SYSTEMS INC.

(Name of small business issuer as specified in its charter)


Delaware
    
    73-1064024(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)


4343 South 118th East Avenue, Tulsa, Oklahoma 74146
(Address of principal executive offices and zip code)

Issuers telephone number, including area code (918) 877-6774

Securities registered pursuant to Section 12(b) of the Act:
    
    NoneSecurities registered pursuant to Section 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-KSB. x

The issuers revenues for fiscal year ended December 31, 2003 were
$10,825,000.

The aggregate market value of common stock held by non-affiliates of the
registrant on December 31, 2003 was approximately $191,000.

The number of shares outstanding of the registrants common stock was
2,911,781 shares of $0.05 Par Value Common Stock as of December 31, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the annual meeting of
shareholders presently anticipated to be held in April 2004 are incorporated by
reference into Part III.

Transitional small business disclosure format: Yes  No X



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|                                                |                                                                                                                         |  |  |  |  |  |  | 
|----------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                         
|                                                | ITEM 1. BUSINESS                                                                                                       
|                                                | ITEM 2. PROPERTIES                                                                                                     
|                                                | ITEM 3.LEGAL PROCEEDINGS                                                                                               
|                                                | ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                             
|PART II                                        
|                                                | ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                                       
|                                                | ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                                                      
|                                                | ITEM 7. FINANCIAL STATEMENTS                                                                                           
|                                                | ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                           
|                                                | ITEM 8A. CONTROLS AND PROCEDURES                                                                                       
|PART III                                       
|                                                | ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
|                                                | ITEM 10. EXECUTIVE COMPENSATION                                                                                        
|                                                | ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                
|                                                | ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                
|                                                | ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                                                              
|                                                | ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                        
|SIGNATURES                                     
|INDEX TO EXHIBITS                              
|List of Subsidiaries                           
|Consent of Independent Auditors                
|Certification of CEO - Rule 13a-14(a)/15d-14(a)
|Certification of CFO - Rule 13a-14(a)/15d-14(a)
|Certification of CEO & CFO - Rule 13a-14(b)    



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MPSI SYSTEMS INC.
FORM 10-KSB

CONTENTS

PagePART IITEM 1.
    
    Business
    
    
    3ITEM 2.
    
    Properties
    
    
    10ITEM 3.
    
    Legal proceedings
    
    
    11ITEM 4.
    
    Submission of matters to a vote of security holders
    
    
    11PART IIITEM 5.
    
    Market for common equity and related stockholder matters
    
    
    11ITEM 6.
    
    Management's discussion and analysis or plan  of operation
    
    
    12ITEM 7.
    
    Financial Statements
    
    
    19ITEM 8.
    
    Changes in and disagreements with accountants on accounting and financial disclosure
    
    
    35ITEM 8A.
    
    Controls and procedures
    
    
    35PART IIIITEM 9.
    
    Directors, executive officers, promoters and control persons; compliance with Section 16(a) of the Exchange Act
    
    
    35ITEM 10.
    
    Executive compensation
    
    
    35ITEM 11.
    
    Security ownership of certain beneficial owners and management and related stockholder matters
    
    
    35ITEM 12.
    
    Certain relationships and related transactions
    
    
    35ITEM 13.
    
    Exhibits and reports on Form 8-K
    
    
    36ITEM 14.
    
    Principal accountant fees and services
    
    
    37Signatures
    
    
    
    
    
    
    37Index to Exhibits
    
    
    
    
    
    
    38






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PART I

All statements other than statements of historical fact included in this Form
10-KSB, including without limitation statements under Managements Discussion
and Analysis or Plan of Operation 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 thisForm 10-KSB, 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, 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

MPSI is a US company founded in 1970 by Ronald G. Harper, its present
chairman. The Company was incorporated under the laws of the state of Delaware
and is also authorized to do business in Oklahoma, the site of its global
headquarters. The operations of MPSI are comprised of one principal business
wherein it provides decision support products and services primarily to
petroleum-oriented convenience retailers. MPSIs core competency is retail
analytics, which encompasses (a) the development of computer software to model
consumer behavior in convenience retail situations, and (b) the development of
strategic geographic information systems (GIS) databases concerning specified
markets (Market Studies) designated by clients. These products and services
are designed to meet retail network planning requirements of the Companys
clients, who have traditionally managed large multi-outlet retail networks.

The Companys decision support services have been 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 provide 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. The Companys
operations are characterized by geographic sales diversification, centralized
management, centralized market study production and centralized product
research and development.

MPSIs flagship product suite centers on its core retail planning
software, Retail ExplorerTM  (REX), a modular and generic high-end spatial
interaction model. Additionally the Company develops and maintains a
considerable data warehouse of business location and operational information
for key markets around the world. 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).

Economic factors such as deregulation in certain foreign petroleum markets
and merger activity among a number of MPSIs traditional clients over the last
three years have severely impacted the levels of orders for MPSI services as
customers struggled with internal organization and profitability issues.
Management has deployed continuing technology upgrades and has introduced a
variety of retail optimization services to meet competition in this period of
declining order volume. Substantial pressure on infrastructure and operating
costs have led to a series of downsizing actions, including the most recent
structural changes effective in March 2003.



| |  |  | The roll out of new Retail Explorer (REX) software for U.S.
customers in 1999, combined with the introduction of new price
management and modeling software for global use positioned MPSI to
combat competition in spite of significant price pressure and client
merger activities from 1999 through 2002. The modeling methodology
inherent in the REX and pricing software made it possible for MPSI to
reduce the amount/types of data necessary for model development. As a
result, the Company was able to streamline its retail database (market
studies) production process, which allowed it to pass through price
savings to its customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | The 1998 formation of DataMetrix Inc. (see further discussions
hereinafter) was intended to leverage MPSIs retail data warehouse as a
vehicle whereby the Company could begin serving a more diverse
population of clients outside its traditional petroleum-oriented
convenience retailing niche. Product and brand development occupied
most of the interval through January 2000, at which time the data suite
of products was commercially released. The revenue growth rate has been
disappointing for DataMetrix, and the burden on corporate liquidity
(both internally generated and from outside sources) was substantial
over the two-year start-up period. (See additional discussion regarding
liquidity in Managements Discussion and Analysis.) In response to
these issues, MPSI significantly downsized this operation in several
phases from 2000 through 2002. MPSI continues DataMetrix product sales
as part of the MPSI product suite going forward, and DataMetrix products
are an integral part of partner development initiatives aimed at
increased sales penetration of the petroleum-oriented retail sector.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Products and Services

The Company markets its services in the United States, Europe, Africa,
Canada, South America, the Caribbean Basin, Japan, India, China and Asia. See
Note 6 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 presently identified by the Companys direct
sales force. In the future, use of the Internet and business partnerships
(value-added resellers) are expected to play an increasingly significant role
in sales and marketing (as well as product delivery) activities.

The Companys operating cycle and cash flow are dependent upon the timing
of client orders for market studies. Many studies are high dollar projects and,
consequently, the timing of market study production and the resulting revenues
are subject to a degree of quarterly 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 had varying degrees of
impact on the Companys products. Volatile oil prices and unsettled economic
conditions in a number of MPSIs target markets negatively affected the
Companys volume of new business in fiscal 2003 and 2002. More than 96% of
consolidated revenues were derived from the petroleum industry during the
fiscal years ended December 31, 2003 and 2002. In each of those fiscal years,
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):

Years Ended December 312003
    
    2002Amount
    
    %
    
    Amount
    
    %ExxonMobil
    
    $
    1.1
    
    
    
    10
    
    
    $
    1.7
    
    
    
    14BP Amoco
    
    
    1.4
    
    
    
    13
    
    
    
    2.0
    
    
    
    16Nisseki-Mitsubishi
    
    
    1.3
    
    
    
    12
    
    
    
    *
    
    
    
    *Caltex-Chevron-Texaco
    
    
    1.9
    
    
    
    18
    
    
    
    *
    
    
    
    *




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|* |  | Below 10% for this period.
|- |  | --------------------------

The Company would be adversely affected if certain petroleum industry
clients curtailed their long-term usage of MPSI products. For example, in
October 2001 ExxonMobil notified MPSI that it would explore alternatives to
certain MPSI convenience retailing products and ultimately elected to utilize
other modeling technology. MPSI was able to partially replace that business
from new customers, but the ExxonMobil decision is a significant component of
the revenue decline in 2002 and 2003.

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The following table shows the percentage of total revenue from operations
that the Company derived from various sources during each of the last two
fiscal years.

Revenue Derived From Key Products and Services (%)

2003
    
    2002Data services
    
    
    67
    
    
    
    57Software technology
    
    
    10
    
    
    
    6Retail Analytics / Consulting
    
    
    23
    
    
    
    37100
    
    
    
    100


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

Data Services

The Company also constructs customized market study databases that are the
primary informational sources used by the retail planning and pricing software.
The database construction process involves (a) acquisition of digitized
geographic street maps, traffic counts, and demographic demand data from
governmental agencies or independent suppliers, (b) on-site field survey of
retail outlet supply information by MPSI personnel or contract surveyors, (c)
collation of all demographic demand and supply information into a specified
data layout, (d) data editing and quality control checking, and (e) preparation
of the client-specific deliverables. Separate contracts govern each database
order by a client and generally require advance payments by the customer to
fund field survey and other start-up costs. There is no retainage provision
relative to these production-type contracts. These databases are available in
the following forms:

National Databases.MPSI has undertaken national databases in countries
like Japan and Korea, which databases include retail information throughout
those countries. These databases 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. National
database projects generally involve segmentation of the target country into
manageable regional sub-units to which MPSI then applies the same basic
process described under Market Area Studiesbelow. Once all regional units
have been added to the data set, MPSI generally contracts to provide periodic
refresh services thereby generating ongoing revenue. Once the data is
available, the client can apply various data analysis technologies (see
Software Technologybelow) in order to glean critical market intelligence for
use in capital and operational planning.

Market Area Studies (MAS).These studies combine retail outlet survey
data gathered by MPSI with street files, demographic data, digital outlet
photos and traffic information. If the customer wishes, they may also
contain client-specific information. Portions of the data can generally be
leveraged as a major part of other projects, including consulting services
discussed below, 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.

For customers who may wish to acquire only certain data components rather
than integrated data/technology, MPSI offers a variety of options:

StreetMetrix®is a geo-spatial road network data set designed for use
with a variety of commercially-available GIS software. Although other more
expensive systems are available for users who require a high degree of
spatial accuracy or secondary street information, StreetMetrix is a cost
effective tool for retailers whose primary interest is the road network
applicable to likely retail outlet locations.

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TrafficMetrix®provides the most extensive and current traffic volume
data available for most major markets in the US.

Demographic datais available across the US through a strategic
partnership with Applied Geographic Solutions.

In addition to the standard data service projects discussed above, MPSI
undertakes custom survey activities. A prime example of such services is
MPSIs PriceTracker service. Clients select a customized list of outlets in
given markets and specify the frequency of price determination. MPSI collects
that data and provides regular data downloads to the customer who can then
refresh any databases used in operational decision making.

Software Technology

The Companys primary convenience retailing applications software is
Retail Explorer (REX), the initial version of which was released in the U.S.
in September 1999. REX versions were released in all MPSI service regions by
the end of fiscal 2002. REX allows clients to maximize their capital planning
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. The dynamic, yet straightforward, user
interface in the Retail Explorer products provides easy access to a suite of
powerful retail analysis applications, including GIS (Geographic Information
System) and predictive modeling. The user can evaluate and predict customer
and retail store behavior and present information in any number of ways,
including thematic maps, dynamic graphs, or HTML reports. Exciting
capabilities include quadrant analysis (evaluate potential sites as investment
and/or divestment candidates), updated or extended databases (revise the data
set to reflect ongoing or theoretical supply and demand changes in the market)
and customization (enhanced marketing strategies based on imported proprietary
data or third-party data). REX products are generally licensed on a perpetual
basis and joined with MPSI market study databases (see Data Services) selected
by the user.

In 2002, MPSI released its first web-enabled retail planning software -
LocationXpert®.It is a complete online modeling, analysis and mapping tool
designed specifically for retailers. This premium package incorporates a
gravity-based model that generates relative site strength indices. It combines
expenditure variables the user considers important with embedded street files,
demographic data and traffic information to assess sites within a 5-mile trade
area that appear to have the best market potential for the users retail
concept. LocationXpert is available in a variety of subscription options which
allows the user to obtain proven retail analytics technology tailored to
planning needs and budget. Online retail gasoline and convenience store data
is available for markets in the US through MPSIs SiteMetrix product. This
newest addition to MPSIs family of LocationXpert products gives the user
scalable access to more than 100 characteristics for each available site.

MPSIs Data Manager system is a simple and straight-forward way to turn
massive amounts of data into meaningful market intelligence in situations where
modeling is too expensive or beyond the users level of sophistication. This
robust, customized information system correlates and geographically displays
such diverse information as retail outlet survey data, digital outlet
photographs, average daily traffic counts, demographics and customer
segmentation data. The user can easily write data queries and create thematic
maps that clearly display key market intelligence for decision making.

In the pricing arena, MPSI offers decision support software to meet
several client planning needs: Price Zones® software (PZS) allows a client
to establish different pricing zones within major markets relative to supplying
its dealer networks with petrol fuels. PriceIt! Pro® allows a client to react
to competitive price changes on a daily/hourly basis at the individual outlet
level in order to set prices for the ultimate consumer. MPSIs newest product,
the StreetBack Pricing® (SBP) system incorporates Price Zone methodology in
order to group outlets for the purpose of identifying competition. Once
competition is identified, the client selects representative outlets for price
tracking surveys and then formats that pricing data into a data set to feed the
SBP software. Based on competitive factors and the clients desired margins by
product, SBP determines the price at which desired sales volume to the dealers
can be achieved. Pricing software is generally licensed on a perpetual basis
for each retail outlet utilizing the software.

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Licensed software clients generally use PC-based software on laptop or
desktop computers but may also utilize certain models in workstation or
Internet environments to facilitate multi-user access. For this type of
activity, 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 networks, the Company
may charge for installation of the software and training of 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.
The Companys software license agreements contain broad restrictions on the use
and disclosure of the software by the client. See Trademarks, Copyrights, and
Licenses below. MPSI provides full maintenance (postcontract customer support)
services for its modeling software globally and, where necessary, training of
and consultation with client staff. Prices for these software products are
based upon formulas which address geographical boundaries, number of retail
outlets, number of software seats and other factors.

Retail Analytics/Consulting

In recognition of the fact that some retailers may prefer assistance from
a retail expert to help meet their planning challenges rather than technology
and data, MPSI provides retail analytic consulting services. Such services
might include market entry strategies (Preferred Market Analysis, benchmarking,
S-curve strength/weakness analysis), optimization analyses (Capital
Optimization, Price Optimization or Operational Optimization) and market exit
strategies (divestment analyses). In contrast to typical opinions from
traditional consultants, MPSIs retail analytic services are based upon
application of proprietary mathematical analyses that provide verifiable
substance to retail recommendations.

Competition

Over the last several years, there has been a worldwide trend toward
product development of a type competitive with MPSI due to the availability of
computer resources and acceptance of retail modeling theory. The Company
believes its competition lies in two areas: first and foremost, in the
information technology and market research staffs of petroleum companies or
potential customers who develop and manage their own software and data; and
second, in consulting firms and data companies which compete for portions of
the Companys business. More recently, low-priced competition has arisen from
traditional GIS data houses and other smaller competitors who offer partial
solutions to customer analysis needs.

The Company has found that the market research staffs of some large
petroleum companies, supported by their internal IT groups, continue to
concentrate on in-house data gathering and customized site selection methods,
while other companies with more limited resources must consider low cost
alternatives for obtaining market information. To be successful, MPSI must
overcome the desire of its customers for total control on the one hand and cost
sensitivity on the other. 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 33-year existence, clients
often find that systems developed in house may be more customized to their
particular situation and may appear to cost less to develop initially (i.e.,
incremental pricing methods do not generally include costs of their internal
development personnel), but are expensive to maintain given changing market
conditions, require market information with an inherent degree of accuracy
which is difficult to obtain with internal resources, and 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 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 the internal solution and the
external consulting firms by providing generic, high-quality, sophisticated
software and reliable, accurate databases at a reasonable cost. MPSI further
believes its historical

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expertise and success in the areas of volume projections and retail
network planning provide a substantial barrier to entry for competitors in the
petroleum and convenience retailing sectors. Further, MPSIs maintenance
programs and its service to multiple clients in multiple geography result in
products that reflect the most up-to-date decision support methodologies and
market information available. 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 and Internet products and services, the Company
believes it is also well positioned to challenge lower cost competitors.
MPSIs data collection techniques allow more timely and regular updating of
market data using handheld data collection technology and PC-based data
transmission and delivery technology. These processes have reduced MPSIs data
collection costs relative to market studies and thereby allowed the Company to
leverage data already collected or to collect custom data for clients who may
not require full market study information. MPSIs ability to take on data
projects involving a single retail site or a national database (as demonstrated
in Japan and Korea) has been an effective weapon against smaller competitors.
The Company believes it is competitive with other companies 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. As an integrated
service provider and trusted advisor that can draw on both its own resources
and also bring to bear specific expertise of its business partners to 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 December 31, 2003 and 2002 backlog consisted principally of
orders for market information databases (2003  $3,244,000 and 2002 
$6,163,000) and multi-year commitments by customers for software and
maintenance services (2003  $746,000 and 2002  $1,134,000). The Company
expects that the market information databases in backlog at December 31, 2003
will be recognized in fiscal year revenues as follows: 2004  $2,505,000,
2005  $478,000, 2006  $227,000, 2007  $33,000 and beyond  $1,000.
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 software and maintenance backlog at December 31,
2003, future fiscal year revenues are expected to be recognized as follows:
2004  $366,000, 2005  $234,000, 2006  $85,000, 2007  $45,000 and 2008
 $16,000.

Employees

As of December 31, 2003, the Company employed 67 people. Of the total
employees, there are 33 in sales/consulting; 14 in research and development
(which includes software development and system support); 9 in database
analysis and production; and 11 in management, administration, and finance. Of
these, 52 are employed in the United States and 15 are employed in foreign
countries.

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Product Development

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 that encompasses various internal systems testing and
user acceptance testing. Once testing is complete, 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.

Over the last three years, the major development efforts of the Company
have been directed toward (1) enhancement of retail planning products in order
to extend petroleum utilization around the world, (2) development of
web-enabled versions of certain products, and (3) incorporation of internally
developed or third-party software in order to enhance the user interface, speed
and efficiency of MPSI technology.

Implicit in the MPSI technology design is (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, (4) a higher degree of predictive accuracy in
geographic areas of sparse housing density (high transient areas) and (5)
improved predictive capabilities with respect to convenience stores.

As noted above, one of MPSIs key initiatives has been the development of
certain software and data products for use and/or delivery via the Internet.
In 2002 this resulted in LocationXpert®, a web-enabled retail analysis tool
with a less complex retail model embedded in it. This product has been
licensed in the US and in Japan (where it was principally responsible for
revitalized business in that service region). Not only has this initiative
allowed the Company to revitalize business with certain clients but has also
provided an opportunity to reach a much broader client base. In late 2003, the
Company introduced SiteMetrix, a web-enabled data acquisition and analysis
subset of LocationXpert.

During the years ended December 31, 2003 and 2002, the Company spent
$1,417,000 and $2,011,000, 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.

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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
in the United States, United Kingdom and Mexico. Set forth below are the
Companys trademarks and final filing dates required to renew trademark status.

PRODUCT
    
    STATUS OF MARK
    
    DATEDollar Sign Design
    
    Registered
    
    April 23, 2008Facility/Location Volume
    
    Registered
    
    February 11, 2007Facility/Location Volume
    
    Registered
    
    February 6, 2006LocationXpert
    
    Registered
    
    November 5, 2008Location Volume
    
    Registered
    
    February 11, 2007Location Volume
    
    Registered
    
    July 23, 2006MPSI
    
    Registered
    
    September 18, 2004MPSI
    
    Registered
    
    October 29, 2011MPSI and Design
    
    Registered
    
    November 5, 2011MPSIs CAPS
    
    Registered
    
    September 18, 2006MPSIs CAPS
    
    Registered
    
    November 12, 2006MPSI Systems
    
    Registered
    
    September 18, 2006Price Zones
    
    Registered
    
    November 5, 2008PriceIt!
    
    Registered
    
    March 12, 2008PriceIt! Pro
    
    Registered
    
    October 29, 2008PriceTracker
    
    Trademark
    
    Common Law RightsPVO
    
    Registered
    
    January 2, 2006PVO
    
    Registered
    
    April 2, 2006Retail Explorer
    
    Registered
    
    March 11, 2009StreetBack Pricing
    
    Registered
    
    January 21, 2009DataMetrix
    
    Registered
    
    September 19, 2006StreetMetrix
    
    Registered
    
    October 31, 2006StreetMetrixPlus
    
    Registered
    
    October 31, 2006TrafficMetrix
    
    Registered
    
    December 19, 2006


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, internal nondisclosure
safeguards, and international treaties, 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 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 potentially associated therewith, 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

All office facilities are leased, including the headquarters lease that
expires in June 2004. The Companys principal facility and corporate
headquarters in Tulsa, Oklahoma (45,000 square feet) is the primary location
for software development and market study production. Small leased offices in
Bristol, England; Johannesburg, South Africa; Tokyo, Japan; Seoul, South Korea
and Shanghai, China remained the Companys principal client liaison facilities
in those areas at December 31, 2003. Management believes that the various
facilities are in good condition and are properly sized to meet anticipated
business levels.

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ITEM 3. LEGAL PROCEEDINGS

None.







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

None.







PART II







ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Companys Common Stock currently trades OTC on the pink sheets
(described in more detail below). The trading symbol is MPSI. Information in
the table below reflects the high and low sales prices reported by Pink Sheets
LLC. Over-the-counter quotations reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not represent actual transactions.
Although an active trading market for MPSI Common Stock has existed for brief
periods in the past, currently MPSI shares are only sporadically traded.
Consequently, the following information may not constitute meaningful market
information.

LOW
    
    HIGHFiscal 2002First Quarter Ended March 31, 2002
    
    $
    0.10
    
    
    $
    0.68Second Quarter Ended June 30
    
    
    0.39
    
    
    
    0.75Third Quarter Ended September 30
    
    
    0.26
    
    
    
    0.36Fourth Quarter Ended December 31
    
    
    0.06
    
    
    
    0.32Fiscal 2003First Quarter Ended March 31
    
    $
    0.11
    
    
    $
    0.28Second Quarter Ended June 30
    
    
    0.11
    
    
    
    0.15Third Quarter Ended September 30
    
    
    0.11
    
    
    
    0.15Fourth Quarter Ended December 31
    
    
    0.11
    
    
    
    0.51


The 2,911,781 shares of Common Stock outstanding at December 31, 2003 were
held by 882 stockholders of record. At that date, an additional 30,500 shares
were subject to options to purchase Common Stock (See Note 7 to the
Consolidated Financial Statements). The per share price on December 31, 2003
was approximately $0.16.

During the years ended December 31, 2003 and 2002, MPSI issued no
additional securities or stock options.

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

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The following table provides information regarding outstanding employee
stock options:

Number of securitiesremaining availableNumber of
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    under stock optionissued upon
    
    Weighted-average
    
    plans (excludingexercise of
    
    exercise price of
    
    securities reflected inoutstanding options
    
    outstanding options
    
    column (a))Plan category
    
    (a)
    
    (b)
    
    (c)Stock option plans
approved by security
holders
    
    
    30,500
    
    
    $
    1.85
    
    
    
    191,000Stock option plans
not approved by
securities holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    30,500
    
    
    $
    1.85
    
    
    
    191,000








ITEM 6.  MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following tables set forth, for the periods indicated, certain items
in the consolidated statements of operations:

Years Ended December 31,2003
    
    2002Operating Data:Revenues
    
    $
    10,825,000
    
    
    $
    12,201,000Net income (loss)
    
    
    1,000
    
    
    
    (1,889,000
    )Per share:Basic income (loss) per common share
    
    $
    0.00
    
    
    $
    (0.65
    )Weighted average common shares outstanding
    
    
    2,912,000
    
    
    
    2,912,000Diluted income (loss) per common and common
equivalent share
    
    $
    0.00
    
    
    $
    (0.65
    )Weighted average shares of common stock and
dilutive common stock equivalents outstanding
    
    
    2,912,000
    
    
    
    2,912,000


The following supplemental unaudited quarterly information is presented in
order to reflect intra-period trends:

In Thousands
    
    2003
    
    2002Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4Revenues
    
    $
    2,239
    
    
    $
    2,927
    
    
    $
    2,968
    
    
    $
    2,691
    
    
    $
    4,023
    
    
    $
    3,060
    
    
    
    $1,686
    
    
    $
    3,432Gross profit
    
    
    1,203
    
    
    
    1,538
    
    
    
    1,662
    
    
    
    1,469
    
    
    
    2,363
    
    
    
    1,764
    
    
    
    648
    
    
    
    1,942Operating expenses
    
    
    1,713
    
    
    
    1,448
    
    
    
    1,339
    
    
    
    1,262
    
    
    
    2,320
    
    
    
    2,376
    
    
    
    1,758
    
    
    
    1,709Operating income (loss)
    
    
    (510
    )
    
    
    90
    
    
    
    323
    
    
    
    207
    
    
    
    43
    
    
    
    (612
    )
    
    
    (1,110
    )
    
    
    233


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Results of Operations

CONSOLIDATED OPERATIONS.MPSI reported net income of $1,000 on revenues
of $10.8 million for the year ended December 31, 2003 compared with a net loss
of $1,889,000 or $.65 per share on revenues of $12.2 million for the comparable
year ended December 31, 2002. The 2003 fourth quarters positive results (net
income of $191,000 or $.07 per share) also represents the third consecutive
quarter of profitability after a significant loss was recorded in the first
fiscal quarter ended March 31, 2003. The March 2003 negative results prompted
management to institute a further reduction in force, which affected all
operating units and has thus far been successful in improving Company
profitability.

While the annual results for 2003 are not on par with management or stockholder
expectations, they do reflect a positive trend compared with net losses over
the previous three fiscal years. MPSI continues to face negative economics in
its principal customer niche, petroleum-oriented convenience retailing. Among
those effects are (1) generally poor retail petroleum margins affecting many
multi-national oil company clients and (2) poor economic performance in the US
and Japanese economies, both of which have plagued the Company for the last
several years. Although revenue declined again in 2003 ($1.4 million or
11% compared with fiscal 2002) the rate of decline versus prior years is
slowing, and if the last three fiscal quarters of 2003 are any indicator
(consistent revenue at approximately $2.9 million per quarter), the Company may
finally be stabilizing its revenue pattern. With the cost reduction measures
undertaken in March 2003 and the improving operating results subsequent to the
first fiscal quarter then ended, management believes the Companys present cost
base to be properly aligned with revenue expectations. These cost reduction
measures were taken mainly in areas of the Company with excess capacity and,
accordingly, resulted in no loss of technology or customer support
capabilities.

Consolidated gross profit for 2003 (54% as a percentage of revenue) was
consistent with 2002 although the 2003 revenue decline noted above generated
approximately $845,000 less gross profit in dollar terms than was experienced
in 2002. Such margins continue to reflect what in managements opinion is a
positive attribute  stabilized variable production costs despite fewer
leverage opportunities inherent in the lower revenue base. Management
continues to develop alternative means of meeting peak production requirements
without increasing fixed staffing levels. Production capacity is, in
managements opinion, sufficient to handle revenue fluctuations in the
foreseeable future.

Comparison of consolidated operating expenses for the year ended December
31, 2003 with 2002 must take into account certain restructuring expenses in
2002 and 2003 which management hopes will not impact future periods. These
measures included closure of certain foreign offices and reduced staffing in
the 2002 comparative period, which resulted in accrued expenses of $717,000.
Similarly in 2003 the Company accrued severance costs of $102,000 associated
with its decision not to recall most employees furloughed in March 2003. Such
expenses have been factored out of the following discussion of ongoing
operating expense fluctuations. Consolidated operating expenses were
$5,762,000 in 2003 as compared with $8,163,000 in 2002. The net reduction of
$2,401,000 (29%) between 2003 and 2002 is attributable in large measure to the
ongoing benefit of force reduction and office closure actions taken in late
March 2003.

Ongoing consolidated general and administrative expenses for 2003,
excluding severance and restructuring costs in each year, were down $695,000 or
29% compared to 2002. The primary contributor to the decrease was reduced
administrative staffing costs and associated benefits.

Consolidated marketing and client service expenses for 2003 were down
$816,000 or 23% as compared to 2002 due primarily to internally imposed travel
constraints and the 2002 closure of certain foreign offices.

Consolidated research and development expenses (excluding amounts
capitalized for product development as discussed under Financial Condition and
Liquiditybelow) in 2003, were down $275,000 compared with 2002. This decline
reflects both the March 2003 staffing reductions and fluctuation in the number
of software development resources dedicated to new capitalized software
technology as discussed hereinafter.

Other income and expenses reflect principally interest and foreign
exchange transactions. Interest expense was $64,000 in 2003 compared with
$257,000 in 2002. Declines reflect bank debt that was outstanding in 2002
until the final $550,000 was liquidated in November of that year. The interest
costs in 2003 are principally related to ad hoc supplier financing
arrangements.

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The Companys operations and contract methods can result in periodic
foreign exchange gains and losses. MPSI enters into multi-year contracts for
market studies, some of which are denominated in foreign currencies
(principally the Japanese Yen 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 gains of $34,000 during 2003 compared with exchange losses in 2002 of
$7,000. Although MPSI anticipates continuing exposure to exchange fluctuations
from these sources, no material adverse effect is expected as the Company
denominates a limited number of contracts in foreign currencies. The Company
does not utilize derivative financial instruments to hedge its foreign currency
risks.

The Company reported an income tax benefit of $65,000 in 2003 compared to
income tax expense of $196,000 last year. Income taxes of $53,000 in 2003 and
$196,000 in 2002 related primarily to foreign taxes withheld at the source by
customers which are subject to significant fluctuation from year to year
depending upon the timing of customer payments from certain geographies abroad.
However, such taxes in 2003 were offset by the reversal of $118,000 deferred
tax liabilities recorded in prior years. The reversal resulted from the
closing of certain foreign offices.

SEGMENT OPERATIONS. With the latest cost control measures and related
restructuring in March 2003, the focus of management is more directly
associated with geographic regional operations. Accordingly, the financial
information about operating segments is presented relative to three general
spheres of operations: the Americas Region, the Europe/Africa/Middle East
Region, and the Pacific Rim Region. MPSI does not allocate corporate overhead
expenses or corporate assets to operating segments. Set forth below are
commentaries concerning the principal operations of the three operating
segments:



| |  | AMERICAS REGION. This operating region encompasses activities in
North America and Latin America. Although MPSI enjoyed an upsurge in
revenue and gross margin from customers in Central America earlier in
fiscal 2003, most of the revenue and profit potential for this region
centers on activities in the US. Poor economic performance by the US
economy and lower retail margins by many of MPSIs traditional
petroleum company customers has resulted in very conservative retail
investment over the last twelve months. As a result, MPSIs revenue
in this segment decreased approximately 32% while contribution margin
improved 4% during 2003 compared with 2002. The revenue decline
directly contributed to lower margin opportunities for the Company,
but that was offset by managements reduction of operating expenses in
March 2003 and by a change in the mix of leveragable multi-client
projects that had the effect of raising contribution margin from this
segment. Large petroleum retailers, historically MPSIs mainstay
customers, are exploring alternative ways to retail, including
expanded dealer organizations and third-party operators. While it is
not true across the board, these tactics suggest that retail
decision-making may ultimately shift more in favor of smaller, more
nimble petroleum / convenience retailers, which is a customer segment
that MPSI has traditionally served only passively. As noted above,
organizational recognition of this dynamic has been given by
management as some sales, marketing and technology resources have been
shifted to focus on this new and potentially significant customer
segment. Those customers who intend to stay in company-operated
retailing are seeking empirical methods of optimizing their networks.
Accordingly, MPSI has introduced optimization technology services and
recently undertaken initial projects in North America. Client
feedback has been very favorable as MPSI has been able to assist
client retail experts in determining how to save millions of capital
investment dollars while maximizing their return on investment.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | EUROPE/AFRICA/MIDDLE EAST REGION. This operating region encompasses
MPSI activities in Europe, Western Asia, Africa and the Middle East.
At present, most activity is concentrated in Eastern Europe and South
Africa. As is the case in the US, MPSIs traditional multi-national
petroleum retail customers in Europe have been increasingly
conservative with their investment dollar. Some customers have chosen
to reduce their retail networks via sell-off. Smaller regional or
country specific petroleum retailers are taking up the slack and these
new customers are now searching for technological assistance
necessary to manage larger networks. Here again, MPSI has
restructured its sales force to more directly target the alternative
retailer while maintaining its existing multi-national customer
network. However, as such restructuring and targeting efforts are
recent, they have not yet been fully reflected in operating results
for this segment, which experienced a significant drop in revenue
($474,000 or 36%), and in contribution margin ($134,000 or 85%) in
2003 compared with 2002. New opportunities in Eastern Europe for 2004
may enhance the recent uplift in South Africa.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | PACIFIC RIM REGION. This operating region encompasses MPSI activities
in Japan, Eastern Asia (including India), Southeast Asia and
Australia/New Zealand. This operating segment has experienced the
least fluctuation from world economic events. Additionally, although
MPSI has traditionally undertaken services in favor of multi-national
petroleum retailers in this region, more of MPSIs 2003 activities
have centered on the large national and regional petroleum retailers
in certain key countries of the region. Hence, MPSI has enjoyed a
significant increase in revenue ($1,752,000 or 66%) and contribution
margin ($1,360,000 or 256%) for 2003 compared with 2002. This is
principally due to customer interest in the region for highly
leveragable national databases in several countries. Based largely on
the coupling of web-enabled modeling technology with national
databases, the Company has been able to improve results in Japan and
elsewhere in this region. These projects maximize the Companys
resources and at the same time provide the customer with a
considerably broader perspective on their national markets.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial Condition and Liquidity

The Companys primary measure of liquidity, working capital, was a deficit of $(741,000) at December 31, 2003 compared with $(1,465,000) at December 31, 2002. MPSI generated positive cash flow from operations during 2003 ($184,000 versus $1,651,000 positive cash flow last year), with the decline primarily related to a large client prepayment in late 2002 that did not recur in 2003 (which was used in part during 2002 to liquidate the Companys bank debt). Cash reserves at December 31, 2003 of $892,000 are up 3% compared with 2002 despite a reduction during 2003 of overall accounts payable and accrued liabilities by $512,000. One of the principal reasons for the improved working capital is that during 2003 the Company successfully worked off its deferred revenue obligation (see below) to several customers who had made significant prepayments to MPSI at December 31, 2002. The Company is satisfactorily meeting its ongoing operating liquidity needs overall, despite an occasional cash pinch and the increasing costs of remaining a public company in light of the Sarbanes-Oxley Act. With respect to the increasing costs and risks associated with being a public company, management has undertaken a privatization initiative. (See ITEM 13(b) which refers to a previously filed Form 8-K that outlines the Companys rationale for privatization.) A shareholder meeting will be held shortly to approve a reverse stock split in order to effect privatization. Aggregate costs of privatization will be funded from operations but are not expected to materially impact corporate liquidity.

As noted above, the increase in working capital (decrease in the deficit)
during 2003 is partially attributable to the successful production and delivery
of prepaid (2002) customer projects, principally in Asia. Further, sales order
patterns during the later half of 2003 were erratic and contributed to lower
accounts receivable and deferred revenue input. The combination of these events
had the effect of reducing deferred revenue by $785,000 or 28% since December
31, 2002. Deferred revenue represents customer prepayments required under
product delivery or service contracts for which services have not yet been
provided. Despite the deferred revenue reduction, MPSIs backlog at December
31, 2003 in the amount of approximately $4.0 million, ($7.3 million at December
31, 2002) is still substantial. Backlog contains a substantial number of
recurring studies under multi-year client commitments. Of the December 31,
2003 backlog amount, the Company expects to turn over approximately $2.9
million during 2004. 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. MPSIs present backlog is
indicative of long-standing customer relationships that are very important to
achievement of the Companys 2004 business plan.

Revenue-driven liquidity remains a principal focus of management looking
forward in 2004. The revenue trends of the last several years and the rise of
competitors in certain regional service areas have challenged management to
continually re-evaluate business strategies, resource allocations, and cost
structure. Management has responded by re-engineering products to be more
flexible in meeting the needs of a more diverse customer base. As previously
discussed, management acted to conserve liquidity by closing certain foreign
offices, reducing employee costs and controlling research and development
expenditures in 2002 and 2003. These measures were taken to give the Company
time to ramp up revenue from both traditional and new customer targets. In
order to position the Company to increase its revenues, management reorganized
a portion of its sales force to target new customer segments within the retail
petroleum sector, which customer segments had only been served passively by the
Company heretofore. Although the average unit sale from the new target
customers will likely be smaller, the number of potential customers far exceeds
the multi-national market sector the Company has relied on. This partial shift
in customer focus should not require any substantial product re-tooling.
Managements plan anticipates only modest revenue improvement in 2004 with
continued emphasis on process improvements that will improve operating margins.
Achievement of these plan objectives depends on the accomplishment of matters
both within and outside MPSIs control, including the strength of the US
economy and the timing of customer decisions. There is risk that adverse
economic conditions could persist to the point where managements plan cannot
overturn the recent trends.

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In view of liquidity constraints, capital expenditures have been limited
for equipment ($44,000 during 2003 compared with $126,000 during 2002) and
capitalized product development expenditures ($113,000 in 2003 versus $436,000
in 2002). The lower product development expenditures in 2003 reflect the
normal cycle of new development primarily related to web-enabling certain MPSI
modeling capabilities. The Company believes its present REX, Pricing, and
Internet retail planning technology far surpass competitive technology.

Off-Balance Sheet Arrangements

None.

APPLICATION
OFCRITICAL
ACCOUNTING
POLICIES AND
USE OF ESTIMATES

Use of Estimates

The Companys consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States (hereinafter referred to as GAAP), and the application of GAAP requires management to
make estimates that affect the Companys reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. In many instances, the Company could have reasonably used
different accounting estimates, and in other instances changes in the
accounting estimates are reasonably likely to occur from period to period.
Accordingly, actual results could differ significantly from the estimates made
by management. To the extent that there are material differences between these
estimates and actual results, the Companys future financial statement
presentation of its financial condition or results of operations will be
affected.

On an ongoing basis, the Company evaluates its estimates, including those
related to revenue recognition, provision for doubtful accounts, recovery of
capitalized product development costs, useful lives of property and equipment,
income taxes, contingencies and litigation, among others. The Company bases
its estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.

In addition to these estimates and assumptions that are utilized in the
preparation of historical financial statements, the inability to properly
estimate the timing and amount of future revenues could significantly impact
the Companys future operations. While the Companys software allows it to
monitor potential revenues and aids in its ability to manage the size of its
operations, management must make assumptions and estimates as to the timing and
amount of future revenue. Specifically, the Companys sales personnel monitor
the status of all proposals, including the estimated closing date and potential
dollar amount of such transactions. The Company aggregates these estimates
periodically to generate a sales pipeline and then evaluates the pipeline to
identify trends in the Companys business. This pipeline analysis and related
estimates of revenue may differ significantly from actual revenues in a
particular reporting period as the estimates and assumptions were made using
the best available data at the time, which is subject to change. Specifically,
the slowdown in the global economy and information technology spending has
caused and may continue to cause customer purchasing decisions to be delayed,
reduced in amount or canceled, all of which have reduced and could continue to
reduce the rate of conversion of the pipeline into contracts. A variation in
the pipeline or in the conversion rate of the pipeline into contracts could
cause the Company to plan or budget inaccurately and thereby could adversely
affect the Companys business, financial condition or results of operations.
In addition, because of unpredictable timing of high-dollar contracts,
management may not be able to adjust the Companys cost structure to respond to
a variation in the conversion of the pipeline in a timely manner, and thereby
the delays may adversely and materially affect the Companys business,
financial condition or results of operations.

Critical Accounting Policies

In addition to making critical accounting estimates, the Company must
ensure that its financial statements are properly stated in accordance with
GAAP. In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require managements judgment in its
application, while in other cases, managements judgment is required in
selecting among available alternative accounting standards that allow different
accounting treatment for similar transactions (e.g., revenue recognition,
stock-based compensation, depreciation methodology, etc.). The Company
believes

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that the following accounting policies are critical to understanding the
Companys historical and future performance, as these policies relate to the
more significant areas involving managements judgments and estimates: revenue
recognition, stock-based compensation, the provision for doubtful accounts,
capitalized product development costs, income taxes, and foreign currency
transactions.

The Companys management has reviewed its critical accounting policies,
its critical accounting estimates, and the related disclosures with its Audit
Committee. These policies, and the Companys procedures related to these
policies, are described in detail below.



| |  | Revenue Recognition:MPSI uses the percentage of completion method of
recognizing revenue for its major consulting and technology projects.
Effective January 1, 2003, the Company adopted a revised method of
estimating its percentage of completion. In fiscal 2002 and prior
periods, the Company aggregated all phases of a production project
(contractually and internally) and made its percentage of completion
calculation based upon the ratio of actual costs incurred at any
measurement date to total estimated costs for the project. Effective for
fiscal 2003 the Company has begun to unbundle its project pricing
(contractually and internally) so that individual phases of the production
process are separately priced (and costed). Accordingly, percentage of
completion will be adjusted as each phase is complete and the aggregation
of completed phases will represent the overall percentage of completion
for the project / contract. Management has elected to make this
modification because it is a more conservative and accurate method of
determining percentage of project completion and because this method
results in financial information about internal profit centers which will
be critical to performance evaluation of the production groups and to
resource allocation decisions.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company recognizes software revenue under the provisions of the
Accounting Standards Executive Committees Statement of Position 97-2 (SOP
97-2) entitled Software Revenue Recognition (as amended by SOP 98-9).
Under the terms of SOPs 97-2 and 98-9, companies are required to defer all
revenue from multiple-element software arrangements if sufficient vendor
specific objective evidence does not exist for the allocation of revenue to
the various elements of the arrangement. As a result, the Company recognizes
revenue on multi-year software license agreements ratably over the life of
the arrangement.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Revenue is recognized when the Company has no remaining obligations under the
software license and maintenance contracts other than providing post-contract
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 are recognized ratably over
the term of the contracts as the post-contract customer support services are
provided and the related costs incurred are recognized. Optional training
and consulting represents service transaction on which revenue and expense
are recognized when the earnings process is substantially complete.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Most of MPSIs software products are perpetually licensed in a fashion that
mandates up-front payment of the license fees. Maintenance is an optional
annual commitment by clients who wish to obtain future upgrades without
additional cost.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Stock-Based Compensation:At December 31, 2003, the Company has one
stock-based employee compensation plan. The Company accounts for the
plan under the recognition and measurement principles of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees,and related Interpretations. No stock-based employee
compensation cost is reflected in net income (loss), as all options
granted under the plan had an exercise price equal to or greater than
the market value of the underlying common stock on the date of grant.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Receivables: Trade receivables are carried at original invoice amount
less an estimate made for doubtful receivables (immaterial in the
condensed statements reflected herein) based on a review of all
outstanding amounts on a monthly basis. Management determines the
allowance for doubtful accounts by regularly evaluating individual
customer receivables and considering a customers financial condition,
credit history, and current economic conditions. Trade receivables
are written off when deemed uncollectable. Recoveries of trade
receivables previously written off are recorded when received.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Capitalized Product Development Costs: 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 held for resale 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 product 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.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Foreign Currency Translation:Assets and liabilities of the Companys
foreign operations 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.
Equity accounts are reflected at historical rates. Exchange
differences from these translations are included in other
comprehensive income until such time as foreign operations are terminated, at which point cumulative foreign exchange gains or losses are reflected in the results of operations. 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.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. This statement requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under previous guidance, a liability for an exit cost was recognized at the
date of the commitment to an exit plan. The provisions of this statement will
be applied prospectively, as applicable, and are effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS No.
146 did not have a material effect on the Companys financial position or
results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). This interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under specified guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure requirements
in this interpretation were effective for financial statements of interim or
annual periods ending after December 15, 2002. Additionally, the recognition of
a guarantors obligation should be applied on a prospective basis to guarantees
issued after December 31, 2002. The adoption of FIN 45 did not have a material
effect on the Companys financial position or results of operations.

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In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, that provides guidance in determining when variable
interest entities should be consolidated in the financial statements of the
primary beneficiary. For the Company, the consolidation provisions of FIN 46,
as revised, are effective in fiscal years beginning after December 15, 2004.
The adoption of FIN 46 is not expected to have a material effect on the
Companys financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments With Characteristics of Both Liabilities and Equity.
SFAS No. 150 changes the classification in the statement of financial position
of certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial
statements to recognize changes in fair value or redemption amount, as
applicable, in earnings. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and with one exception, is
effective at the beginning of the first interim period beginning after June 15,
2003. The effect of adopting SFAS No. 150 will be recognized as a cumulative
effect of an accounting change as of the beginning of the period of adoption.
Restatement of prior periods is not permitted. SFAS No. 150 did not have any
impact on the Companys financial position or results of operations.







ITEM 7. FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:
    
    Page No.Report of Independent Auditors
    
    
    20Consolidated Statements of Operations for the Fiscal Years Ended
December 31, 2003 and 2002
    
    
    21Consolidated Balance Sheet at December 31, 2003
    
    
    22Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 31, 2003 and 2002
    
    
    23Consolidated Statements of Stockholders Equity for the Fiscal
Years Ended December 31, 2003 and 2002
    
    
    24Notes to Consolidated Financial Statements
    
    
    25


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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders MPSI Systems Inc.

We have audited the accompanying consolidated balance sheet of MPSI
Systems Inc. and subsidiaries as of December 31, 2003, and the related
consolidated statements of operations, stockholders equity, and cash flows for
the years ended December 31, 2003 and 2002. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We
conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated 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 December 31, 2003, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2003 and 2002 in conformity with accounting principles
generally accepted in the United States of America.

TULLIUS TAYLOR SARTAIN & SARTAIN LLP


Tulsa, Oklahoma
January 23, 2004

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##### Table of Contents



MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,2003
    
    2002Revenues:Information services and software maintenance
    
    $
    9,956,000
    
    
    $
    11,822,000Software licensing
    
    
    869,000
    
    
    
    379,000Total revenues
    
    
    10,825,000
    
    
    
    12,201,000Cost of sales:Information services and software maintenance
    
    
    4,345,000
    
    
    
    5,154,000Software licensing
    
    
    608,000
    
    
    
    330,000Total cost of sales
    
    
    4,953,000
    
    
    
    5,484,000Gross profit
    
    
    5,872,000
    
    
    
    6,717,000Operating expenses:General and administrative
    
    
    1,789,000
    
    
    
    3,099,000Marketing and client services
    
    
    2,779,000
    
    
    
    3,595,000Research and development
    
    
    1,194,000
    
    
    
    1,469,000Total operating expenses
    
    
    5,762,000
    
    
    
    8,163,000Operating income (loss)
    
    
    110,000
    
    
    
    (1,446,000
    )Other income (expense):Interest income
    
    
    3,000
    
    
    
    18,000Interest expense
    
    
    (64,000
    )
    
    
    (257,000
    )Foreign exchange gains (losses)
    
    
    34,000
    
    
    
    (7,000
    )Other, net
    
    
    (147,000
    )
    
    
    (1,000
    )Income (loss) before income taxes
    
    
    (64,000
    )
    
    
    (1,693,000
    )Income taxes
    
    
    (65,000
    )
    
    
    196,000Net income (loss)
    
    $
    1,000
    
    
    $
    (1,889,000
    )Per share:Basic and diluted income (loss) per common share
    
    $
    .00
    
    
    $
    (.65
    )


See accompanying notes to consolidated financial statements.

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##### Table of Contents



MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS

December 31,2003Current assets:Cash
    
    $
    892,000Receivables:Trade
    
    
    893,000Current portion of long-term receivables, net of
unamortized
discount
    
    
    242,000Work in process inventory
    
    
    142,000Prepayments
    
    
    71,000Total current assets
    
    
    2,240,000Long-term receivables, net of current portion and unamortized
discount
    
    
    157,000Property and equipment, net of accumulated depreciation and
amortization
    
    
    363,000Capitalized product development costs, net
    
    
    621,000Other assets
    
    
    129,000Total assets
    
    $
    3,510,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    313,000Accrued liabilities
    
    
    684,000Deferred revenue
    
    
    1,984,000Total current liabilities
    
    
    2,981,000Noncurrent deferred revenue
    
    
    381,000Total liabilities
    
    
    3,362,000Commitments and contingenciesStockholders equity:Preferred Stock, $.10 par value, 1,000,000 shares authorized,
none issued or outstanding
    
    
    Common Stock, $.05 par value, 20,000,000 shares authorized,
2,912,000 shares issued and outstanding
    
    
    146,000Junior Common Stock, $.05 par value, 500,000 shares
authorized, none issued or outstanding
    
    
    Additional paid-in capital
    
    
    13,145,000Accumulated deficit
    
    
    (13,456,000
    )Other accumulated comprehensive income
    
    
    313,000Total stockholders equity
    
    
    148,000Total liabilities and stockholders equity
    
    $
    3,510,000


See accompanying notes to consolidated financial statements.

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MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,2003
    
    2002Net income (loss)
    
    $
    1,000
    
    
    $
    (1,889,000
    )Adjustments to reconcile income (loss) from
operations to cash provided by operations:Depreciation and amortization of property and
equipment
    
    
    323,000
    
    
    
    357,000Amortization of product development costs
    
    
    568,000
    
    
    
    726,000Deferred income taxes
    
    
    (118,000
    )
    
    
    Loss on sale of assets
    
    
    (1,000
    )
    
    
    Trailing cost of foreign office closures
    
    
    16,000
    
    
    
    Changes in assets and liabilities:Decrease (increase) in assets:Receivables
    
    
    989,000
    
    
    
    1,510,000Inventories
    
    
    (45,000
    )
    
    
    (61,000
    )Other assets
    
    
    (48,000
    )
    
    
    62,000Increase (decrease) in liabilities:Trade payables, accruals and other liabilities
    
    
    (285,000
    )
    
    
    (220,000
    )Taxes payable
    
    
    (12,000
    )
    
    
    9,000Deferred revenue
    
    
    (1,204,000
    )
    
    
    1,157,000Net cash provided by operating activities
    
    
    184,000
    
    
    
    1,651,000Cash flows from investing activities:Purchase equipment
    
    
    (44,000
    )
    
    
    (126,000
    )Capitalized product development costs
    
    
    (113,000
    )
    
    
    (436,000
    )Proceeds from disposition of assets
    
    
    1,000
    
    
    
    Net cash used by investing activities
    
    
    (156,000
    )
    
    
    (562,000
    )Cash flows from financing activities:Cash used for debt service
    
    
    
    
    
    
    (900,000
    )Net cash used by financing activities
    
    
    
    
    
    
    (900,000
    )Increase in cash
    
    
    28,000
    
    
    
    189,000Cash at beginning of period
    
    
    864,000
    
    
    
    675,000Cash at end of period
    
    $
    892,000
    
    
    $
    864,000


See accompanying notes to consolidated financial statements.

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MPSI SYSTEMS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2003 AND 2002

Common Stock
    
    
    
    
    
    
    
    
    
    OtherAdditional
    
    
    
    
    
    Accumulated
    
    TotalCarrying
    
    Paid-In
    
    Accumulated
    
    Comprehensive
    
    Stockholders'Shares
    
    Value
    
    Capital
    
    Deficit
    
    Income
    
    EquityBalance December 31, 2001
    
    
    2,912,000
    
    
    $
    146,000
    
    
    $
    13,145,000
    
    
    $
    (11,568,000
    )
    
    $
    372,000
    
    
    $
    2,095,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,889,000
    )
    
    
    
    
    
    
    (1,889,000
    )Other accumulated
comprehensive income:Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (146,000
    )
    
    
    (146,000
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,035,000
    )Balance December 31, 2002
    
    
    2,912,000
    
    
    $
    146,000
    
    
    $
    13,145,000
    
    
    $
    (13,457,000
    )
    
    $
    226,000
    
    
    $
    60,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    1,000Other accumulated
comprehensive income:Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,000
    
    
    
    87,000Total comprehensiveincome
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,000Balance December 31, 2003
    
    
    2,912,000
    
    
    $
    146,000
    
    
    $
    13,145,000
    
    
    $
    (13,456,000
    )
    
    $
    313,000
    
    
    $
    148,000


See accompanying notes to consolidated financial statements.

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##### Table of Contents



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 6, over 52% 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:MPSI uses the percentage of completion method for
recognizing revenue for its major consulting and technology projects.
Effective January 1, 2003, the Company adopted a revised method of estimating
its percentage of completion. In fiscal 2002 and prior periods, the Company
aggregated all phases of a production project (contractually and internally)
and made its percentage of completion calculation based upon the ratio of
actual costs incurred at any measurement date to total estimated costs for the
project. Effective for fiscal 2003 the Company has begun to unbundle its
project pricing (contractually and internally) so that individual phases of the
production process are separately priced (and costed). Accordingly, percentage
of completion will be adjusted as each phase is complete and the aggregation of
completed phases will represent the overall percentage of completion for the
project / contract. Management has elected to make this modification because
it is a more conservative and accurate method of determining percentage of
project completion and because this method results in financial information
about internal profit centers which will be critical to performance evaluation
of the production groups and to resource allocation decisions.

The Company recognizes software revenue under the provisions of the
Accounting Standards Executive Committees Statement of Position 97-2 (SOP
97-2) entitled Software Revenue Recognition (as amended by SOP 98-9). Under
the terms of SOPs 97-2 and 98-9, companies are required to defer all revenue
from multiple-element software arrangements if sufficient vendor specific
objective evidence does not exist for the allocation of revenue to the various
elements of the arrangement. As a result, the Company recognizes revenue on
multi-year software license agreements ratably over the life of the
arrangement.

Revenue is recognized when the Company has no remaining obligations under
the software license and maintenance contracts other than providing
post-contract 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 are
recognized ratably over the term of the contracts as the post-contract customer
support services are provided and the related costs incurred are recognized.
Optional training and consulting represents service transactions on which
revenue and expense are recognized when the earnings process is substantially
complete.

Under MPSIs software licensing and maintenance contracting methods, most
software products are perpetually licensed in a fashion that mandates up-front
payment of the license fees. Maintenance is an optional annual commitment by
clients who wish to obtain future upgrades without additional cost.

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##### Table of Contents



Receivables: Trade receivables are carried at original invoice amount
less an estimate made for doubtful receivables based on a review of all
outstanding amounts on a monthly basis. Management determines the allowance
for doubtful accounts by regularly evaluating individual customer receivables
and considering a customers financial condition, credit history, and current
economic conditions. Trade receivables are written off when deemed
uncollectable. Recoveries of trade receivables previously written off are
recorded when received.

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.

Property and Equipment:Property and equipment, including the capitalized
cost of software developed for internal use, 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 that 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, 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).

Capitalized Product Development Costs: Costs of software held for resale
(which was either purchased with the intent to incorporate the acquired
software in MPSI products or developed internally) are presented net of
accumulated amortization.

The costs of internally developed software held for resale 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 product 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.

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 is based upon the average
number of common shares outstanding. Diluted earnings per share consider the
dilutive effect of common stock equivalents.

Foreign Currency Translation: Assets and liabilities of the Companys
foreign operations 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. Equity accounts are reflected at historical
rates. Exchange differences from these translations are included in other
comprehensive income until such time as foreign operations are terminated, at which point cumulative foreign exchange gains or losses are reflected in the results of operations. 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.

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##### Table of Contents



Advertising:Costs of advertising were $49,000 and $65,000 in fiscal
years ended December 31, 2003 and 2002, respectively, and are expensed as
incurred.

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.

Stock-Based Compensation:At December 31, 2003, the Company has one
stock-based employee compensation plan, which is described more fully in Note
7. The Company accounts for the plan under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees,and related Interpretations. No stock-based
employee compensation cost is reflected in net income (loss), as all options
granted under the plan had an exercise price equal to or greater than the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income (loss) and earnings per
share if the Company had applied the fair value recognition provisions of
Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for
Stock-Based Compensation,to stock-based employee compensation.

Years Ended December 31,2003
    
    2002Net income (loss), as reported
    
    $
    1,000
    
    
    $
    (1,889,000
    )Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards net of related tax effects
    
    
    
    
    
    
    (2,000
    )Pro Forma net income (loss)
    
    $
    1,000
    
    
    $
    (1,891,000
    )Income (loss) per share:Basic and diluted, as reported
    
    $
    .00
    
    
    $
    (.65
    )Basic and diluted, pro forma
    
    $
    .00
    
    
    $
    (.65
    )


Pro forma information regarding net income and earnings per share has been
estimated at the date of the grant using the 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 123%; risk-free interest rate of 5.73%, and a no-dividend yield.
There were no option grants in the fiscal years ended December 31, 2003
or 2002.

New Accounting Pronouncements:The Financial Accounting Standards Board
(FASB) periodically issues new accounting standards in a continuing effort to
improve standards of financial accounting and reporting. Management has
reviewed the recently issued pronouncements and concluded that the following
new accounting standards are potentially applicable to the Company.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. This statement requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under previous guidance, a liability for an exit cost was recognized at the
date of the commitment to an exit plan. The provisions of this statement will
be applied prospectively, as applicable, and are effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS No.
146 did not have a material effect on the Companys financial position or
results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). This interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under specified guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure requirements
in this interpretation were effective for financial statements of interim or
annual periods ending after December 15, 2002. Additionally, the recognition of a guarantors obligation should be
applied on a prospective basis to guarantees issued after December 31, 2002.
The adoption of FIN 45 did not have a material effect on the Companys
financial position or results of operations.

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In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, that provides guidance in determining when variable
interest entities should be consolidated in the financial statements of the
primary beneficiary. For the Company, the consolidation provisions of FIN 46,
as revised, are effective in fiscal years beginning after December 15, 2004.
The adoption of FIN 46 is not expected to have a material effect on the
Companys financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments With Characteristics of Both Liabilities and Equity.
SFAS No. 150 changes the classification in the statement of financial position
of certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial
statements to recognize changes in fair value or redemption amount, as
applicable, in earnings. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and with one exception, is
effective at the beginning of the first interim period beginning after June 15,
2003. The effect of adopting SFAS No. 150 will be recognized as a cumulative
effect of an accounting change as of the beginning of the period of adoption.
Restatement of prior periods is not permitted. SFAS No. 150 did not have any
impact on the Companys financial position or results of operations.

2. Receivables:

Trade accounts receivable include unbilled amounts of $105,000 at December
31, 2003. 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
$399,000 at December 31, 2003 (before present value discount and excluding
$60,000 which had been billed at December 31, 2003) 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 December 31,
2003 unbilled amounts, $183,000 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 software and maintenance services not yet performed is offset by
corresponding amounts in deferred revenue.

A significant portion of the Companys business activity is with the major
multinational oil companies. At December 31, 2003, 96% ($1,246,000 before
present value discounts) of the Companys receivables were from petroleum
clients. The receivable portfolio is well diversified geographically which
tends to mitigate the potential impact of fluctuations in petroleum activities
that 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.

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3. Property and Equipment:

At December 31, 2003, property and equipment consists of:

Useful LifeIn YearsLeasehold improvements
    
    Various
    
    $
    150,000Computer equipment and internal
use software
    
    
    4-5
    
    
    
    2,522,000Office furnishings and equipment
    
    
    3-10
    
    
    
    509,0003,181,000Accumulated depreciation and
amortization
    
    
    
    
    
    
    (2,818,000
    )Net property and equipment
    
    
    
    
    
    $
    363,000


The provision for depreciation and amortization was $323,000 and $357,000
for the years ended December 31, 2003 and 2002, respectively. At December 31,
2003, fully depreciated assets with an aggregate original cost of approximately
$3,930,000 remain in use.

4. Capitalized Product Development Costs:

Software held for resale
    
    $
    4,335,000U.S. geographic database
    
    
    1,187,000Total capitalized costs
    
    $
    5,522,000Accumulated amortization
    
    
    (4,901,000
    )Net capitalized product development costs
    
    $
    621,000


Amortization of capitalized product development costs is generally based
upon useful lives of 18 to 36 months. The provision for amortization totaling
$568,000 and $726,000 for the fiscal years ended December 31, 2003 and 2002,
respectively, is reflected partially in cost of sales-software licensing
(fiscal years 2003  $535,000 and 2002  $330,000) and partially in cost of
sales-information services and software maintenance (fiscal years 2003 -
$33,000 and 2002  $396,000). Based upon current sales forecasts, capitalized
product development costs are projected to be recoverable. However, these sales
forecasts are subject to certain vulnerabilities that could potentially affect
the recoverability of those costs.

5. Income Taxes:

Years Ended December 31,2003
    
    2002Income (loss) before income taxes:Domestic
    
    $
    160,000
    
    
    $
    (1,449,000
    )Foreign
    
    
    (224,000
    )
    
    
    (244,000
    )Total
    
    
    (64,000
    )
    
    
    (1,693,000
    )Income taxes (benefits):Current:Federal
    
    $
    
    
    
    $
    State
    
    
    (8,000
    )
    
    
    Foreign
    
    
    61,000
    
    
    
    193,000Current income taxes
    
    
    53,000
    
    
    
    193,000Deferred:Federal
    
    
    (118,000
    )
    
    
    (3,000
    )State
    
    
    
    
    
    
    Foreign
    
    
    
    
    
    
    6,000Deferred income taxes
    
    
    (118,000
    )
    
    
    3,000Provision for total income
taxes
    
    $
    (65,000
    )
    
    $
    196,000


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

Years Ended December 31,2003
    
    2002Expense (benefit) at statutory rate
    
    $
    (22,000
    )
    
    $
    (576,000
    )Foreign income taxes, net
    
    
    61,000
    
    
    
    193,000State income taxes
    
    
    (8,000
    )
    
    
    Expiration of foreign NOL
    
    
    
    
    
    
    938,000Other, net
    
    
    (96,000
    )
    
    
    (359,000
    )Income taxes (benefit)
    
    $
    (65,000
    )
    
    $
    196,000


Income taxes of $4,000 were payable at December 31, 2003. The Company does not accrue income taxes on
undistributed earnings of certain foreign subsidiaries that are permanently
invested. At December 31, 2003 the amount of
undistributed earnings for which taxes have not been accrued was insignificant.

At December 31, 2003, the Company has foreign tax credits of $304,000
which expire between 2004 and 2005. The Company also has minimum tax credits
of $213,000 which carry forward indefinitely. At December 31, 2003, certain
foreign subsidiaries have net operating loss carryforwards of approximately
$6,364,000 which may be utilized in future years.

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 at December 31, 2003 are
as follows:

Deferred tax liabilities:Software revenue
    
    $
    223,000Depreciation
    
    
    20,000Inventory
    
    
    54,000Other
    
    
    35,000Total deferred tax liabilities
    
    
    332,000Deferred tax assets:Accrued liabilities and other
miscellaneous items
    
    
    149,000U.S. and foreign loss carryforwards
    
    
    2,691,000U.S. and foreign tax credit carryforwards
    
    
    517,000Total deferred tax assets
    
    
    3,357,000Valuation allowance for deferred tax assets
    
    
    3,025,000Net deferred tax assets
    
    
    332,000Net deferred tax liabilities
    
    $
    


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.

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6. Business Segment and Revenue from Major Customers:

The Company identifies segments based upon line of business that results
in three reportable geographic segments: the Americas Region (encompasses
activities in North America and Latin America); the Europe/Africa/Middle East
Region; and the Pacific Rim Region. The Companys measure of segment profit is
operating income. Amortization is only specifically assigned to each reported
segment as capitalized development costs solely attributable to a specific
region are written off to segmented cost of sales. Most amortization relates to
generic products and is, therefore, reflected in corporate administrative cost,
which is not allocated to specific regions. Identifiable assets are managed as
shared resources and are not identifiable to specific reporting segments.
Accordingly, depreciation is carried as a corporate cost only.

Information on segments and a reconciliation to income before taxes are as
follows:

SEGMENTSYear Ended
    
    
    
    
    
    Europe / Africa /
    
    PacificDecember 31, 2003
    
    Americas
    
    Middle East
    
    Rim
    
    TotalsRevenues
    
    $
    5,575,000
    
    
    $
    837,000
    
    
    $
    4,413,000
    
    
    $
    10,825,000Contribution Margin
    
    $
    1,917,000
    
    
    $
    23,000
    
    
    $
    1,891,000
    
    
    $
    3,831,000Reconciling items not allocated to
operating segments:Corporate administration, sales and
technology expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,721,000
    )Other income (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174,000
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (64,000
    )Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,510,000


SEGMENTSYear Ended
    
    
    
    
    
    Europe / Africa /
    
    PacificDecember 31, 2002
    
    Americas
    
    Middle East
    
    Rim
    
    TotalsRevenues
    
    $
    8,229,000
    
    
    $
    1,311,000
    
    
    $
    2,661,000
    
    
    $
    12,201,000Contribution Margin
    
    $
    3,202,000
    
    
    $
    157,000
    
    
    $
    531,000
    
    
    $
    3,890,000Reconciling items not allocated to
operating segments:Corporate administration, sales and
technology expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,336,000
    )Other income (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (247,000
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,693,000
    )Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,256,000


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The Companys principal production facility is in the United States,
although limited regional production is also performed in England (and in
Brazil during early 2002 prior to closure of that company). Satellite
facilities in England, Japan, South Africa, South Korea, and China assist with
data acquisition and client liaison. The following table sets forth the
revenues by each of the Companys primary production centers, export sales from
the United States and long-lived assets.

For the Years EndedDecember 31,2003
    
    2002Revenues from external customers:United States
    
    $
    10,640,000
    
    
    $
    11,524,000Europe
    
    
    185,000
    
    
    
    539,000South America
    
    
    
    
    
    
    138,000Total revenues
    
    $
    10,825,000
    
    
    $
    12,201,000Export sales from the United States:Canada
    
    $
    217,000
    
    
    $
    194,000Central America
    
    
    379,000
    
    
    
    737,000South America
    
    
    179,000
    
    
    
    129,000Europe
    
    
    113,000
    
    
    
    581,000Asia/Pacific Rim
    
    
    4,117,000
    
    
    
    2,535,000Africa
    
    
    538,000
    
    
    
    229,000Total export sales
    
    $
    5,543,000
    
    
    $
    4,405,000Long-lived assets:United States
    
    $
    1,181,000
    
    
    $
    2,353,000Foreign offices
    
    
    85,000
    
    
    
    90,000Total long-lived assets
    
    $
    1,266,000
    
    
    $
    2,443,000


More than 96% of total revenues from continuing operations were derived
from the petroleum industry during each of the years ended December 31, 2003
and 2002. Individual customers accounted for MPSI revenues that were in excess
of 10% of consolidated revenues in those years as follows (in millions of
dollars):

For the Years EndedDecember 312003
    
    2002Amount
    
    %
    
    Amount
    
    %ExxonMobil
    
    $
    1.1
    
    
    
    10
    
    
    $
    1.7
    
    
    
    14BP Amoco
    
    
    1.4
    
    
    
    13
    
    
    
    2.0
    
    
    
    16Nisseki-Mitsubishi
    
    
    1.3
    
    
    
    12
    
    
    
    *
    
    
    
    *Caltex-Chevron-Texaco
    
    
    1.9
    
    
    
    18
    
    
    
    *
    
    
    
    *




---

|* |  | Below 10% for this period.
|- |  | --------------------------

Although the Company would be adversely affected if certain 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.

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7. Employee Benefits:

Under an employee stock ownership and investment plan, all qualifying U.S.
employees may contribute up to 75% but not to exceed IRS maximum contribution
limitation 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 various equity or fixed-income funds. The
Company recorded expense related to its matching contribution of $74,000 and
$112,000 in fiscal years ended December 31, 2003 and 2002, respectively. At
December 31, 2003, the Company had accrued $80,000 of liabilities for matching
contributions to the 401(k) plan.

The Company has reserved 750,000 shares under a 1998 stock plan. Options
under the 1998 plan expire from 2004 to 2005 and also vest one-third annually
over a three-year period beginning on the grant date.

A summary of the Companys stock option activity and related information
for the years ended December 31, 2003 and 2002 follows:

Weighted-AverageOptions
    
    Exercise Price
    
    ExercisableAt December 31, 2001
    
    
    66,500
    
    
    $
    1.69
    
    
    
    58,133Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (12,000
    )
    
    
    2.19Expired
    
    
    (3,000
    )
    
    
    3.25At December 31, 2002
    
    
    51,500
    
    
    
    1.50
    
    
    
    48,166Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (3,000
    )
    
    
    1.00Expired
    
    
    (18,000
    )
    
    
    1.00At December 31, 2003
    
    
    30,500
    
    
    
    1.85
    
    
    
    30,500


The following table summarizes information about stock options outstanding
as of December 31, 2003:

Weighted
    
    
    
    
    
    WeightedWeighted
    
    average
    
    
    
    
    
    averageRange
    
    Number of
    
    average
    
    exercise price
    
    Number of
    
    exercise priceof exercise
    
    options
    
    remaining life
    
    of options
    
    options
    
    of exercisableprices
    
    outstanding
    
    in years
    
    outstanding
    
    exercisable
    
    options$1.16 to $2.50
    
    
    30,500
    
    
    
    0.82
    
    
    $
    1.85
    
    
    
    30,500
    
    
    $
    1.85


The Company has accrued $12,000 at December 31, 2003 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.

At December 31, 2003, the Company has accrued $264,000 related to employee
vacations earned but not yet taken.

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8. Commitments and Contingencies:

The Company leases 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 $749,000 was recorded during
the year ended December 31, 2003 ($788,000 in 2002). Aggregate future rentals
under these commitments are as follows: 2004  $362, 000, 2005  $101,000,
2006  $16,000, and 2007  $1,000.

A few former employees who were initially furloughed in March 2003 and
then ultimately severed in September 2003 have filed claims for additional
separation payments with the Oklahoma Department of Labor. The 2003 results of
operations reflect accrual of all separation expenses in accordance with MPSI
Personnel Policies, and payments of all but $3,000 of such amounts were made by
December 31, 2003. Management has responded to the claims and believes them to
be without merit and does not anticipate any material assessment.

9. Supplemental Cash Flow Information:

The Company paid interest of $64,000 and $257,000 during fiscal years
ended December 31, 2003 and 2002, respectively. Income taxes of $54,000 and
$194,000 were paid during fiscal years 2003 and 2002, respectively.

10. Basic and Diluted Earnings Per Share:

The following sets forth the computation of basic and diluted earnings
(loss) per share for the years ended December 31, 2003 and 2002:

Years Ended December 31,2003
    
    2002Net income (loss):
    
    $
    1,000
    
    
    $
    (1,889,000
    )Basic and diluted income (loss) per common share
    
    $
    .00
    
    
    $
    (.65
    )Basic and diluted weighted-average shares
    
    
    2,912,000
    
    
    
    2,912,000


Exercisable antidilutive options for 30,500 and 48,166 shares were
outstanding at December 31, 2003 and 2002, respectively.

11. Liquidity and Managements Plan

In 2003 MPSI reported continuation of a declining trend in revenue ($10.8 million in 2003 versus $12.2 million in 2002) and lower cash flow from operations ($184,000 in 2003 versus $1,651,000 in 2002). MPSIs revenues have declined over the past several years due mainly to (a) poor retail petroleum margins that limited discretionary spending by customers in key geographic markets, (b) the merger of petroleum companies that resulted in a loss of customers, and (c) the emergence of competition. The decline in cash flow from operations is principally attributable to significant customer prepayments at the end of 2002 that did not recur in 2003. The profit portion of those 2002 prepayments was used, however, to liquidate MPSIs bank debt thus relieving 2003 operations of that burden.

Despite lower revenue and less cash flow from operations, the Company significantly improved its operating results (operating income of $110,000 for 2003 versus an operating loss of $1,446,000 in 2002). This improvement demonstrates a better matching of cost base with the present revenue availability and reflects realization of the benefits from staff reductions, operational efficiencies and foreign office closures undertaken in 2002 and 2003.

The challenge is not over. In order to position the Company to increase its revenues and profitability, management has implemented initiatives during 2003 strategic planning that are aimed at revitalization of certain long-standing customer relationships, deeper penetration into a customer segment comprised of smaller retailers and the development of strategic business alliances with potential product distributors who can touch areas of the retail market that MPSI is not presently structured to service efficiently. Leveraging the Companys retail analytics expertise and product suite without substantially increasing the cost base will be the key to successful near-term growth. These initiatives, though conceptualized in 2003, had little impact on that years results. Further, implementation of these plans will take place over more than one future period. It is managements intention that the benefit of initial implementation should result in revenue stability for 2004 with growth taking hold thereafter. Achievement of this plan depends on the accomplishment of matters both within and outside MPSIs control, including the strength of critical geographic economies and the timing of customer decisions. There is risk that adverse economic conditions could persist to the point where managements plans cannot overturn the recent trends.

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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.







ITEM 8A. CONTROLS AND PROCEDURES

The Company has carried out an evaluation within 90 days prior to the date of this report, under the supervision and with
the participation of the Companys management, including the Companys Chief
Executive Officer and the Companys Chief Financial Officer, of the
effectiveness of MPSIs disclosure controls and procedures, as such term is
defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities and
Exchange Act of 1934, as amended. Based upon the evaluation, the Companys
Chief Executive Officer and the Companys Chief Financial Officer concluded
that the Companys disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) that is required to be included in the Companys
periodic SEC filings. There have been no significant changes in our internal
controls or in other factors that could significantly affect those
controls subsequent to the date of such evaluation. There were no significant
deficiencies or material weaknesses identified in the evaluation and therefore,
no corrective actions were taken.







PART III







ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Reference is made to the information appearing under the caption Election
of Directors 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 December 31, 2003 and is incorporated herein by reference.







ITEM 10. 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 December 31, 2003 and is incorporated herein
by reference.







ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Reference is made to the information appearing under the caption
Beneficial Ownership of Shares; Recent Stock 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 December 31, 2003 and
is incorporated herein by reference..







ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Reference is made to the information appearing under the caption Election
of Directors 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 December 31, 2003 and is incorporated herein by reference.

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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)(3) Exhibits.

ExhibitNumber
    
    
    
    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, filed as the same numbered exhibit with the Companys 1998
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, filed as the
same numbered exhibit with the Companys 1998 Form 10-K, File No. 0-11527.*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.
0-11527.21
    
    
    
    List of Subsidiaries23
    
    
    
    Consent of Independent Auditors  Tullius Taylor Sartain & Sartain LLP.31.1
    
    
    
    Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a)31.2
    
    
    
    Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a)32
    
    
    
    Certification of Chief Executive Officer and Chief Financial Officer
required by Rule 13a-14(b) and 18 U.S.C. 1350




|* |  | Incorporated by reference.
|- |  | --------------------------



|(b) |  | Two reports on Form 8-K were filed during the last quarter of 2003. In
the first report filed October 7, 2003, the appointment of Bryan D. Gross
as President and Chief Executive Officer of MPSI, effective February 1,
2004, was reported. In the second, filed November 12, 2003, the
appointment of Bryan D. Gross to the Board of Directors and the decision
of the Board to take MPSI private, subject to obtaining shareholder
approval, were reported.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents









ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Reference is made to the information appearing under the captions
Election of Directors and Appointment of Independent Auditors 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 December
31, 2003 and is incorporated herein by reference.







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 13th day of February, 2004.

MPSI SYSTEMS INC.By
    
    /s/ Bryan D. GrossBryan D. GrossDirector,President and ChiefExecutive 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.

/s/ James C. Auten

James C. Auten
    
    Vice President, Chief
Financial Officer and Principal Accounting Officer
    
    February 13, 2004/s/ Ronald G. Harper

Ronald G. Harper
    
    Director, Chairman
    
    February 13, 2004/s/ John C. Bumgarner, Jr.

John C. Bumgarner, Jr.
    
    Director
    
    February 13, 2004/s/ Joseph C. McNay

Joseph C. McNay
    
    Director
    
    February 13, 2004/s/ John J. McQueen

John J. McQueen
    
    Director
    
    February 13, 2004/s/ Bryan D. Porto

Bryan D. Porto
    
    Director
    
    February 13, 2004


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INDEX TO EXHIBITS

ExhibitNumber
    
    Exhibit21
    
     List of Subsidiaries23
    
     Consent of Independent Auditors31.1
    
     Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a)31.2
    
     Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a)32
    
     Certification of Chief Executive Officer and Chief Financial
Officer required by Rule 13a-14(b) and 18 U.S.C. 1350


38