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SECURITIES AND
EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
   FORM 10-KSB / A AMENDMENT NO. 1 (Mark One) [ X ]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
 For the fiscal year ended December 31, 2003  [    ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
  Commission file number 0-11527 MPSI SYSTEMS INC.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    73-1064024
(I.R.S. Employer
Identification No.)
 4343 South 118th East Avenue, Tulsa, Oklahoma 74146
(Address of principal executive offices and zip code) Registrants telephone number, including area code     (918) 877-6774 Securities registered pursuant to Section 12(b) of the Act:    None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.05 Par Value 
  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.




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TABLE OF CONTENTS  PART IIITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONITEM 7. FINANCIAL STATEMENTSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSPART IIIITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACTITEM 10. EXECUTIVE COMPENSATIONITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 13. EXHIBITS AND REPORTS ON FORM 8-KITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESSIGNATURESINDEX TO EXHIBITSConsent of Independent AuditorsCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of CEO and CFO    Table of Contents  
 PART II 
 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
 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 2




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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. 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. 3




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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.  
    
    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. 4




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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 affect 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. The Company generally bills major consulting and technology customers
a percentage of a total contract up front before services are rendered and
bills the remainder of the contract upon delivery of the final product.
Revenue is recognized and related contract costs are expensed as contract
phases are completed as described above. At December 31, 2003, deferred
revenue resulting from major consulting and technology contracts in progress
totals $1,619,000, all of which is expected to be earned in 2004. The Company continues to remain obligated under long-term software
licensing and maintenance contracts. The Company recognizes revenue on
multi-year software license agreements ratably over the life of the arrangement
as required by U.S. generally accepted accounting principles. At December 31,
2003, deferred revenue to be earned in 2004 totals $193,000 for software
maintenance agreements and $172,000 for right to use licenses. Long-term
deferred revenue for maintenance and right to use licenses totals $205,000
and $176,000, respectively, at December 31, 2003. The Company will earn this
revenue through 2008 as the maintenance and license agreements expire. 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 5




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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. 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 of Critical 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 6




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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. The Companys management reviews the nature of each component of its
deferred income taxes for reasonableness. If management determines that it is
more likely than not that the Company will not realize all or part of its net
deferred tax assets in the future, the Company records a valuation allowance
against the deferred tax assets, which allowance will be charged to income tax
expense in the period of such determination. Management considers all
available evidence, both positive and negative, to determine whether, based on
the weight of the evidence, a valuation allowance is needed. Evidence used
includes information about the Companys current financial position and its
results of operations for the current and preceding years as well as all
currently available information about future years, including anticipated
future performance, the reversal of deferred tax liabilities and tax planning
strategies. To the extent management establishes a valuation allowance or
increases or decreases this allowance in a period, the Company must include an
expense or benefit within the tax provisions in the consolidated statements of
operations. The Companys deferred tax assets at December 31, 2003, primarily
result from domestic and foreign loss and tax credit carryforwards. Due to the
continued history of net losses, the Company has provided a $3,025,000
allowance against deferred tax assets to the extent they exceed deferred tax
liabilities. 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 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 7




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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. ̈
    
    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 8




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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. 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. 9




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ITEM 7. FINANCIAL STATEMENTS 
 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 revised method of estimating percentage of completion was applied to
new contracts entered into in 2003, on a prospective basis. The effect on net
income for the year ended December 31, 2003 of the change in estimation method
was a decrease of $360,000 or $.12 per share (revenue of $472,000 and costs of
$112,000). The Company generally bills major consulting and technology customers a
percentage of a total contract up front before services are rendered and bills
the remainder of the contract upon delivery of the final product. Revenue is
recognized and related contract costs are expensed as contract phases are
completed. At December 31, 2003, deferred revenue resulting from major
consulting and technology contracts in progress totals $1,619,000, all of which
is expected to be earned in 2004. 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 10




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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. At December
31, 2003, deferred revenue to be earned in 2004 totals $193,000 for software
maintenance agreements and $172,000 for right to use licenses. Long-term
deferred revenue for maintenance and right to use licenses totals $205,000
and $176,000, respectively, at December 31, 2003. The Company will earn this
revenue through 2008 as the maintenance and license agreements expire. 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. 11




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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. 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
    )
 12




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##### Table of Contents



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. 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. 13




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PART III 
 ITEM 9.
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Information with Respect to Directors. The following table sets forth the directors, their ages, a brief description
of their recent business experience, including present occupations and
employment, certain directorships held by each and the year in which each
became a director of the Company. Effective October 15, 2002, Dr. David L.
Huff resigned his position on the Board of Directors that had been held since
1982. On November 5, 2003, the Board unanimously agreed to offer a position on
the Board to Dr. Bryan D. Gross. Effective November 11, 2003, Dr. Gross
accepted that position. The remaining five Board members were elected at the
Companys Annual Meeting of Stockholders held on June 20, 2002 and have
continued to serve since that time. Name and Principal Occupation at Present
    
    Directorand for the Past Five Years; Directorships
    
    Since
    
    AgeRonald G. Harper(1)
    
    
    1970
    
    
    
    65Mr. Harper, who founded the Company in 1970, has served as its President, Chairman of the Board and Chief
Executive Officer since inception. Effective February 1, 2004, Mr. Harper stepped down as President and
Chief Executive Officer but will remain the Companys Chairman of the Board.Dr. Bryan D. Gross
    
    
    2003
    
    
    
    47Dr. Gross was named President and Chief Executive Officer of MPSI effective February 1, 2004. Prior to
this appointment, he served as Group Vice President of Technology and led the Core Product Re-engineering
effort and Corporate Research activities. Dr. Gross joined MPSI in 1984 as Project Supervisor in Network
Planning. He joined QuikTrip Corporation in 1991 as Manager of Statistical Research and Site Selection,
returning to MPSI in 1997 as General Manager of Corporate Technology.John C. Bumgarner, Jr.(1)(2)
    
    
    1982
    
    
    
    61Mr. Bumgarner recently retired from Williams Communications where he served as Chief Operating Officer.
Prior to that, he served as Senior Vice President of Corporate Development and Planning of The Williams
Companies, Inc., and President of Williams International. He is also a director of Energy Partners, Ltd.
and James River Coal Company. Williams Communications filed for bankruptcy on April 22, 2002.Joseph C. McNay(1)(2)
    
    
    1982
    
    
    
    70Mr. McNay has been the President, Director and Chairman of the Board of Essex Investment Management
Company, Inc., a company engaged in investment and advisory services, since 1976. Mr. McNay is also a
director of Regenerx Biopharmaceutical, Inc.John J. McQueen(2)
    
    
    1982
    
    
    
    83Mr. McQueen has been in the private practice of law in the Tulsa area since 1959, retiring in 2002. He
has also served as a certified public accountant with KPMG Peat Marwick, as a tax specialist with Warren
Petroleum Corp., and as controller of Davis Investments, a company engaged in oil and real estate
activities.Bryan D. Porto
    
    
    1998
    
    
    
    54Mr. Porto was appointed Group Vice President of Regional Sales for the developing markets in 2002. He
previously served as Group Vice President of Operations and Leveraged Diversification, Executive Vice
President of MPSIs Petroleum Services Division, and as Sr. Vice
President  Retail Petroleum. He has
served in marketing and network planning positions since joining MPSI in the Rio de Janeiro office in
1985.
  (1)
    
    The individual identified is a member of the Compensation Committee. 14




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(2)
    
    The individual identified is a member of the Audit Committee. Meetings of the Board and Committees of the Board. During the fiscal year ended December 31, 2003, the Board of Directors held two
regular meetings, one special meeting and had five Actions by Consent. All of
the directors attended at least 75% of the meetings of the Board. To assist it
in carrying out its duties, the Board of Directors has standing Compensation
and Audit Committees. The Board of Directors does not have a standing
Nominating Committee or a formal policy for shareholder communications to the
Board of Directors. The Companys small Board of Directors collectively
considers nominations to the Board of Directors. The relatively small size and
simple administrative structure of the Company permits shareholders easy access
to the Companys management and Board of Directors for any communications,
including those pertaining to director nominations. On May 18, 2000, the Board of Directors unanimously approved a written charter
for the Audit Committee. The Audit Committee is comprised of three Board
members considered to be independent of management and the Company as they have
no relationship that may interfere with exercise of their independence.
Information regarding the functions performed by the Committee, its
memberships, and the number of meetings held during the fiscal year is set
forth in the Board Audit Committee Report included in this proxy statement.
Both Joseph McNay and John McQueen of the Audit Committee qualify as audit
committee financial experts. The Committee annually reviews service fees from the Companys independent
auditors. A breakdown of those fees by category over the last two years is set
forth in Appointment of Independent Auditors below. The Audit Committee has
reviewed the fees and they do not believe that the provision of non-audit
related fees impaired the independence of Tullius Taylor Sartain & Sartain LLP. It is the policy and practice of the Audit Committee to pre-approve the
provision of all audit and non-audit services of the Companys independent
auditors. The Compensation Committees functions are to develop and monitor compensation
arrangements. In performing these functions, the Compensation Committee
approves salary ranges and actual salaries for all executive officers, monitors
the effectiveness of and adopts changes as appropriate for all executive
compensation programs, sets requirements for and evaluates performance under
the executive compensation plans and approves all awards under such plans, and
administers and makes awards, interpretations and other decisions under certain
other employee benefit and compensation plans. The Compensation Committee held
one meeting during the fiscal year ended December 31, 2003 and covered
additional compensation matters during the regular Board meetings. See also
Compensation of Directors and OfficersBoard Compensation Committee Report on
Executive Compensation. Board Audit Committee Report. The Audit Committee oversees the Companys financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility
for the financial statements and the reporting process including the systems of
internal controls. In fulfilling its oversight responsibilities, the Committee
reviewed the audited financial statements in the Annual Report with management
including a discussion of the quality, not just the acceptability, of the
accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements. The Committee reviewed with the independent auditors, who are responsible for
expressing an opinion on the conformity of those audited financial statements
with generally accepted accounting principles, their judgments as to the
quality, not just the acceptability, of the Companys accounting principles and
such other matters as are required to be discussed with the Committee under
generally accepted auditing standards. In addition, the Committee has
discussed with the independent auditors the auditors independence from
management and the Company including the matters in the written disclosures
required by the Independence Standards Board and considered the compatibility
of nonaudit services with the auditors independence. The Committee discussed with the Companys independent auditors the overall
scope and plans for their audits. The Committee meets with the independent
auditors, with and without management present, to discuss the results of their
examinations, their evaluations of the Companys internal controls, and the
overall quality of the Companys financial reporting. The Committee held four
meetings during fiscal year 2003. John McQueen attended all four meetings, and
John Bumgarner and Joseph McNay attended one meeting. 15




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In reliance on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors (and the Board has approved) that the
audited financial statements be included in the Annual Report on Form 10-KSB
for the year ended December 31, 2003 for filing with the Securities and
Exchange Commission. The Audit Committee
John C. Bumgarner, Jr.
Joseph C. McNay
John J. McQueen Information With Respect to Certain Executive Officers. The following table sets forth the executive officers who are not also
directors of the Company. Similar information regarding executive officers who
are also directors is set forth above in the section Information with Respect
to Directors. If such officer has been employed by the Company for less than
five years, other background information and experience is listed. All
officers of the Company serve at the pleasure of its Board of Directors, and
there exists no arrangement or understanding among any of the Companys
executive officers with any other person pertaining to their selection to serve
in such position. Serving inName and All Positions
    
    CurrentAnd Office Held Within The Company
    
    Position Since
    
    AgeJames C. Auten.
    
    
    1996
    
    
    
    55Mr. Auten was appointed Vice President and Chief Financial Officer in 1996. Mr. Auten joined
MPSI in 1984 as Corporate Controller and held such position until December 1992 when he was
appointed Principal Accounting Officer. Prior to joining MPSI, Mr. Auten was with KPMG Peat
Marwick accounting team.Richard K. Abrams.
    
    
    2001
    
    
    
    55Mr. Abrams was appointed Group Vice President, Regional Sales in 2001. Prior to joining MPSI in 2000
as Managing Director of Europe and Africa, he served in various executive positions with Caltex
Corporation around the world. Mr. Abrams currently resides in Bristol, England.
 Section 16(a) Beneficial Ownership Reporting Compliance. Based upon a review of Forms 3, 4 and 5 furnished to the Company with respect
to its most recent fiscal year, the Company has determined that reports
required pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended, were filed on a timely basis. Code of Ethics The Company has not adopted a Code of Ethics as described in Item 406(b) of
Regulation S-B because it believes such a code is unnecessary in light of the
Companys size, history and other employee policies. 
 ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table. The following table summarizes the compensation paid over the last three
completed fiscal years to the Companys CEO and the other executive officers of
the Company who received compensation of $100,000 or more during the fiscal
year ended December 31, 2003. 16




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Summary Compensation Table Long Term CompensationAnnual Compensation
    
    Awards
    
    
    
    
    
    PayoutsOther
    
    
    
    
    
    
    
    
    
    
    
    
    
    AllAnnual
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherCompen-
    
    Restricted
    
    
    
    
    
    LTIP
    
    Compen-Name and
    
    
    
    
    
    
    
    
    
    Bonus
    
    sation
    
    Stock
    
    Options/
    
    Payouts
    
    sationPrincipal Position
    
    Year
    
    Salary
    
    ($)
    
    ($) (1)
    
    Awards
    
    SARS (#)
    
    ($)
    
    ($) (2)($)Ronald G. Harper
    
    
    2003
    
    
    $
    208,434
    
    
    
    
    
    
    $
    9,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    12,218Chairman of the Board
    
    
    2002
    
    
    
    231,285
    
    
    
    
    
    
    
    9,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,3182001
    
    
    
    220,298
    
    
    
    
    
    
    
    9,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,218Bryan D. Gross
    
    
    2003
    
    
    
    140,470
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,560President and CEO
    
    
    2002
    
    
    
    151,315
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,8372001
    
    
    
    145,340
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,240Bryan D. Porto
    
    
    2003
    
    
    
    137,193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,455Group Vice President,
    
    
    2002
    
    
    
    147,791
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,421Operations & Diversification
    
    
    2001
    
    
    
    145,002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,719James C. Auten
    
    
    2003
    
    
    
    98,178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,628Group Vice President and
    
    
    2002
    
    
    
    107,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,609Chief Financial Officer
    
    
    2001
    
    
    
    105,482
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,774Richard K. Abrams
    
    
    2003
    
    
    
    136,000
    
    
    
    
    
    
    
    6,888
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,336Group Vice President,
    
    
    2002
    
    
    
    144,996
    
    
    
    
    
    
    
    6,888
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,861Convenience Retailing
    
    
    2001
    
    
    
    144,996
    
    
    
    4,929
    
    
    
    6,888
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,839
   (1)
    
    Represents automobile lease paid/auto allowance.(2)
    
    The components of All Other Compensation for the fiscal years ended
December 31, 2003, 2002, and 2001 include (a) Company matching
contributions to the Companys 401(k) defined contribution plan (Mr.
Harper$6,000, $5,100, and $5,000; Mr. Porto$4,434, $4,400, and
$4,698; Mr. Auten$1,607, $1,588, and $1,753; and
Dr. Gross$4,539,
$4,816 and $3,219, respectively); and (b) supplemental life insurance
premiums paid by the Company (Mr. Harper$6,218, $6,218, and $6,218, Mr.
Porto$1,021, $1,021, and $1,021; Mr. Auten$1,021, $1,021, and $1,021,
and Dr. Gross$1,021, $1,021 and $1,021, respectively). Mr. Abrams is a resident of the United Kingdom and participates in comparable
plans  Company match for the pension plan was $7,198 in 2003, $9,360 in 2002,
and $4,329 in 2001. Supplemental life insurance premiums paid by the Company
were $4,138 in 2003, $4,501 in 2002, and $1,580 in 2001. Options Exercised Table. The following table sets forth information concerning each exercise of stock
options by the named executive officers during the fiscal year ended December
31, 2003, together with information concerning unexercised options held by the
named executive officers: 17




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##### Table of Contents



Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Options/SAR Values (a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)Shares
    
    
    
    Number of Securities
    
    Value of Unexercised In-the-Acquired
    
    Value
    
    Underlying Unexercised
    
    Money Options/SARs at FY-on Exercise
    
    Realized
    
    Options/SARs at FY-End(#)
    
    End ($)Name
    
    (#)
    
    ($)
    
    Exercisable/Unexercisable
    
    Exercisable/UnexercisableJames C. Auten
    
    *
    
    *
    
    -- / --
    
    -- / --Bryan D. Porto
    
    *
    
    *
    
    -- / --
    
    -- / --Bryan D. Gross
    
    *

    
    *
    
    13,000/ --
    
    -- / --Richard K. Abrams
    
    *
    
    *
    
    10,000/ --
    
    -- / --
   * None exercised during the period.
 Employment Contracts and Severance Arrangements. Historically the Companys employees are employed at will and are not subject
to employment agreements, except with respect to certain European employees.
Executive officers who are subject to employment agreements include MPSIs new
President and Chief Executive Officer, Dr. Bryan Gross, and the Vice President
of MPSIs Europe/Africa operations, Richard Abrams. Dr. Gross employment agreement was effective February 1, 2004 at which time
his appointment to the indicated positions became effective. The term of the
employment agreement is for three years. It establishes a base salary of
$182,000 annually subject to periodic adjustment based on a change in the
Consumer Price Index. All other benefits are in accordance with MPSIs
standard benefit plans applicable to all employees except that (a) Dr. Gross
will receive 90 days notice in the event of termination together with
severance at double the rate applicable to the general employee population, (b)
Dr. Gross is eligible for certain bonus payments relative to 2004 liquidity
growth, revenue growth, and industry diversification, and (c) Dr. Gross is to
be paid 5% of all proceeds in excess of $3.0 million in the event the Company
is sold. Richard Abrams is a resident of the United Kingdom and in accordance with
standard employment practices in that country is employed subject to an
employment agreement between he and MPSI Systems Ltd. The agreement was
effective May 29, 2000 and continues in force subject to 90 days notice of
termination by either party. Annual salary reviews are required and have
resulted in the compensation benefits set forth in the Summary Compensation
Tableherein. The agreement further entitles Mr. Abrams to standard employment
benefits in the UK, including pension, healthcare, life insurance, a company
car and various office equipment. The agreement contains confidentiality and
non-competition provisions in the event of termination. The Company maintains a severance policy applicable to all full-time regular
employees with at least one year of full-time service. Eligible employees are
those who are terminated as the result of (1) a reduction of the Companys work
force, (2) elimination of a job or position, (3) inability to satisfactorily
perform required responsibilities, or (4) relocation of applicable Company
facilities. The amount of severance paid is based upon the employees base
salary and length of service, and includes payment for vested but unused
vacations and pro rated automobile allowances, if applicable. In March 2003,
the Company revised its severance policy for all employees. As a result of
that revision, no employee was entitled to severance in excess of $100,000 in
2003; however, effective in 2004, Dr. Gross will be entitled to severance in
the amount of $105,000. Board Compensation Committee Report on Executive Compensation. The Compensation Committee of the Board of Directors (the Committee) is
composed of Ronald G. Harper, Chairman of the Board of Directors and
independent outside directors, John C. Bumgarner, Jr. and Joseph C. McNay. The
Committee held one meeting during fiscal year 2003 and all of the members of
the Committee attended the meeting. The Committee is responsible for
overseeing and administering the Companys executive compensation program
described below. The executive compensation program of the Company is reviewed and approved
annually by the Committee and is designed to serve the interests of the Company
and its stockholders by aligning executive compensation with stockholder
objectives and to encourage and reward management initiatives and good
performance. Specifically, the executive compensation program seeks to: (i) implement compensation practices which allow the Company to attract and
retain highly qualified executives and maintain a competitive position in the
executive marketplace with employers of comparable size and in similar lines of
business; 18




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##### Table of Contents



(ii) enhance the compensation potential of executives who are in the best
position to contribute to the development and success of the Company by
providing the flexibility to compensate individual performance; and (iii) directly align the interest of executives with the long-term interest of
stockholders through compensation opportunities in the form of common stock
ownership. These objectives are met through a program comprised of base salary and annual
cash or stock incentive awards, which are tied to operating performance, and
long-term incentive opportunities primarily in the form of incentive stock
options. Salary. The Committee considers annual salary adjustments for the Companys executive
officers, including those named in the Summary Compensation Table. Salary
adjustments are designed to reflect internal comparability, organizational
considerations and competitive data provided by outside surveys. As a general
rule, salary ranges are targeted toward the median of survey results. Incentive Awards. Executives are periodically eligible for cash awards annually based upon
financial and nonfinancial results relative to pre-established performance
targets and objectives. No such cash awards were paid to executive officers in
any of the years during the three-year period ended December 31, 2003 due to
the Companys vulnerable operating position. For fiscal year 2004, incentive
bonus plans have been put into place for Ronald Harper and Dr. Bryan Gross.
Mr. Harper is eligible for incentive bonuses in the event that he is successful
in achieving certain strategic business diversification objectives. Dr. Gross
is eligible for incentive bonuses tied to growth in Company liquidity and
revenues as well as to the achievement of business diversification. As amounts
potentially due under such incentive plans are variable depending upon the
degree of uplift experienced by the Company, it is not possible at this time to
quantify the potential bonuses that could be awarded, if any. Stock Options. The Companys 1998 Stock Option Plan, approved by the stockholders in 1998,
permits the Committee to grant incentive or nonstatutory stock options to
executive officers. The plan provides for stock option awards giving
executives the right to purchase common stock over a five-year period at the
fair market value per share as of the date the option is granted. Options
generally become exercisable in three equal annual installments beginning one
year after grant. Neither Mr. Harper nor any other members of the Compensation
Committee are eligible to participate in the stock option plan. At April 2,
2004 there are options representing 23,000 shares outstanding under The 1998
Stock Plan applicable to the named executive officers. Chief Executive Officer Compensation. During 2003, the Company implemented an across-the-board salary reduction of
approximately 10% applicable to all employees. This was one of several
measures undertaken in order to reduce the Companys expense base in light of
revenue trends. Accordingly, the compensation of Ronald Harper was reduced
from $231,285 in 2002 to $208,434 effective April 1, 2003. Effective February
1, 2004, Mr. Harper relinquished the responsibilities of day-to-day operational
management to Dr. Bryan Gross who became the Companys President and Chief
Executive Officer on that date. The Compensation Committee has retained the
same level of base salary for Mr. Harper during 2004 (subject to incentive
bonuses as described above) in recognition of transitional assistance he will
provide to Dr. Gross and for his ongoing activities associated with Company
diversification initiatives. The Compensation Committee established new
compensation parameters for Dr. Gross as described under Employment Agreements
and Severance Arrangementsabove, which took effect from February 1, 2004. The Compensation Committee
John C. Bumgarner, Jr.
Ronald G. Harper
Joseph C. McNay Compensation Committee Interlocks and Insider Participation. Ronald G. Harper, Chief Executive Officer of the Company, is the only member of
the Compensation Committee who is also an employee or officer of the Company. 19




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##### Table of Contents



Directors Compensation. Members of the Board of Directors who are employees of the Company receive no
additional compensation as a result of their service as directors. Directors
who are not employees of the Company are compensated at the rate of $1,500 for
each board meeting attended and are reimbursed for any out-of-pocket expenses
incurred in attending meetings. 
 ITEM 11.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS As of April 2, 2004, the Company had 2,911,780 shares of common stock issued
and outstanding. The following table sets forth, to the Companys knowledge as
of April 2, 2004, the beneficial ownership of shares by each person or entity
beneficially owning more than 5% of the common stock, each director, each
nominee, and certain executive officers, individually, and all directors and
executive officers as a group. Amount and Nature of
Beneficial Ownership Beneficial Ownershipof Common StockNumber
    
    PercentName of Common Stockholder
    
    of Shares
    
    of ClassRonald G. Harper (1)(2)
    
    
    1,266,724
    
    
    
    43
    %John C. Bumgarner, Jr.
    
    
    205,322
    
    
    
    7
    %Joseph C. McNay
    
    
    242,722
    
    
    
    8
    %Bank of Oklahoma, N.A.
    
    
    284,714
    
    
    
    10
    %RS Investment Management Co., LLC (3)
    
    
    225,838
    
    
    
    8
    %Sanford Orkin
    
    
    222,222
    
    
    
    8
    %James C. Auten (2)
    
    
    1,166
    
    
    
    *Bryan D. Porto (2)
    
    
    4,057
    
    
    
    *Bryan D. Gross (2)
    
    
    13,893
    
    
    
    *Richard K. Abrams (2)
    
    
    10,000
    
    
    
    *All officers and directors as a group (7 persons)
    
    
    1,743,884
    
    
    
    59
    %
   *
    
    Less than 1%.(1)
    
    Includes 201,024 shares of common stock held in trust for the benefit of
Mr. Harpers family, 479,209 shares held in trust for the benefit of
certain charities. Mr. Harper has sole voting and investment power over
all of the trust shares except for 198,524 shares over which he shares
investment or voting power. Mr. Harpers immediate family owns 194,253
shares. Mr. Harper disclaims beneficial ownership of these trust and
family-held shares.(2)
    
    The indicated individuals are executive officers of the Company.(3)
    
    As reported in the Schedule 13G filed by the named person (among
others), voting and dispositive power over the listed shares may be
deemed shared among the RS Value Group, RSIM, LP, the RS Orphan Fund, LP
and the RS Orphan Offshore Fund and the named person by reason of
corporate relationships. Each such beneficial owner has the same address
as that set forth above for the named person. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Related Transactions. In February 1999, the Company obtained an exclusive license to incorporate in a
new suite of products a software modeling engine, Huff 2000, developed by Dr.
David L. Huff, a member of the Companys Board of Directors since 1982. Since
Dr. Huffs resignation from the Board effective October 2002, this agreement
has been inactive. 20




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##### Table of Contents



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 Subsidiaries filed as Exhibit 21 to the Companys Form 10-KSB for the year ended December 31, 2003.23
    
    
    
    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. 21




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##### Table of Contents



(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. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees. The aggregate audit fees billed or to be billed by Tullius Taylor Sartain &
Sartain LLP for the audit of the Companys annual financial statements and
review of financial statements included in the Companys Forms 10-QSB and
services that are normally provided by the accountant in connection with
performance of the annual audit were approximately $77,000 and $60,000 for the
years ended December 31, 2002 and 2003, respectively. Audit Related Fees. The aggregate fees billed for professional services rendered by Tullius Taylor
Sartain & Sartain LLP for audit related services rendered in connection with
the audits of the Companys 401(k) Plan and consultation on accounting
standards or transactions were approximately $10,000 and $1,000 for the years
ended December 31, 2002 and 2003, respectively. Tax Fees. The aggregate fees billed or to be billed for professional services rendered by
Tullius Taylor Sartain & Sartain LLP for tax compliance, tax advice and tax
planning were approximately $10,000 and $1,000 for the years ended December 31,
2002 and 2003, respectively. All Other Fees. There were no other fees billed by Tullius Taylor Sartain & Sartain LLP for
professional services other than those reported in the categories above for the
years ended December 31, 2002 and 2003, respectively. 22




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##### Table of Contents



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 22nd day of April 2004. MPSI SYSTEMS INCBy
    
    /s/ Bryan D. GrossBryan D. GrossPresident 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/ Ronald G. Harper

Ronald G. Harper
    
    Chairman of the Board
    
    April 22, 2004/s/ James C. Auten

James C. Auten
    
    Vice President and ChiefFinancial Officer and
Principal Accounting
Officer
    
    April 22, 2004s/ John C. Bumgarner, Jr.

John C. Bumgarner, Jr.
    
    Director
    
    April 22, 2004/s/ Joseph C. McNay

Joseph C. McNay
    
    Director
    
    April 22, 2004/s/ John J. McQueen

John J. McQueen
    
    Director
    
    April 22, 2004/s/ Bryan D. Porto

Bryan D. Porto
    
    Director
    
    April 22, 2004
 The Companys proxy statement for the Annual Meeting of Stockholders to be
held later this year has not yet been sent to stockholders of record. Copies
of such materials will be furnished to the Commission at such time as they are
sent to stockholders. 23




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##### Table of Contents



INDEX TO EXHIBITS ExhibitNumber
    
    
    
    Exhibit23
    
    
    
    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
 24