MPSI SYSTEMS INC - 10-Q Quarterly Report

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

FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003 Commission file no. 0-11527

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

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

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

Registrant's telephone number, including area code (918) 877-6774
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Number of shares of common stock outstanding at March 31, 2003 - 2,911,781
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INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1-FINANCIAL STATEMENTS

MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET

See accompanying notes to condensed consolidated financial statements.

3

MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONT'D)

See accompanying notes to condensed consolidated financial statements.

4

MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

5

MPSI SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

6

MPSI SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 2)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL NOTES:

Certain notes to the December 31, 2002 audited consolidated financial
statements filed with Form 10-K are applicable to the unaudited
consolidated financial statements for the three months ended March 31,
2003. Accordingly, reference should be made to the audited consolidated
financial statements at December 31, 2002.

Revenue Recognition. Effective January 1, 2003, the Company adopted a
revised method of estimating its percentage of completion for its major
consulting and technology projects. In fiscal 2002 and prior periods, the
Company aggregated all phases of a production project together
(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, the 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 change
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.

In the opinion of Management, the unaudited consolidated financial
statements as of March 31, 2003 contain all adjustments (including normal
recurring accruals) necessary to fairly present the financial position and
the results of operations of the Company. The timing of market study
orders and software license agreements can significantly impact quarterly
results of operations and, accordingly, the results of operations for the
three months ended March 31, 2003 are not necessarily indicative of the
results to be expected for the full year.

2. SUPPLEMENTAL CASH FLOW INFORMATION:

The Company paid interest of $3,000 and $124,000 during the three months
ended March 31, 2003 and 2002, respectively. Income taxes of $14,000 and
$63,000 were paid during the three months ended March 31, 2003 and 2002,
respectively.

3. BUSINESS SEGMENTS:

Prior to fiscal 2003, the Company identified its operating segments based
upon line of business, which resulted in three reportable segments:
Convenience Retailing, Pricing, and Business Development. During the first
quarter of fiscal 2003 the Company undertook a reorganization in
connection with a reduction in force aimed at reducing monthly operating
costs. That reorganization resulted in an amalgamation of resources from
the three previous segments, a change in the divisional operating
responsibilities and a different management focus based upon geographic
operating differences and resource requirements. Product offerings,
consisting of decision support modeling technology for multi-outlet
convenience retailers, are essentially equivalent across all segments.

Set forth below is certain condensed financial information presented with
respect to the operational segments that shall carry forward in 2003,
together with a reconciliation to loss before income taxes. These reported
operational segments represent aggregations of certain information
relative to operations in homogenous countries within the defined
geographic segments. All revenue is from external customers as there are
no inter-segment sales. Comparative information for the prior year has
been restated to conform to the new segment definitions.

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5. COMPREHENSIVE INCOME

Comprehensive income is net income, plus certain other items that are
recorded directly to stockholders' equity, bypassing net income. The only
such items currently applicable to the Company are foreign currency
translation adjustments.

Comprehensive loss was $(379,000) and $(150,000) for the quarters ended
March 31, 2003 and 2002, respectively.

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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND QUARTERLY RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

CONSOLIDATED OPERATIONS. MPSI reported a net quarterly loss of $524,000 or
$.18 per share on revenues of $2.2 million for the three months ended March 31,
2003 compared with a net loss of $126,000 or $.04 per share on revenues of $4.0
million for the comparable quarter ended March 31, 2002. The quarterly results
for March 31, 2002 reflect an accrual of estimated shutdown expenses associated
with the closure of the Brazil office of approximately $326,000 (a net increase
of approximately $266,000 over the normal quarterly expense for that office). As
set forth in the Company's recently filed Form 10-K, the negative effects of (1)
poor retail petroleum margins by several multi-national oil company clients and
(2) poor economic performance in the US economy generally have plagued the
Company for the last twelve months. Such factors had not yet begun to affect
MPSI operations during the comparative March 31, 2002 quarter, but were evident
in each quarter thereafter in fiscal 2002 and have carried over into this first
quarter of 2003.

The Company implemented cost saving measures subsequent to March 2002
including closure of certain foreign offices, reductions in force, and travel
curtailment. Such actions allowed the Company to sustain its operations, but
because of declining revenues, debt service (throughout 2002) and fixed costs
associated with operating globally, these actions have not been sufficient to
sustain positive quarterly cash flow or profits. Accordingly, in March 2003,
MPSI further reduced its staffing and implemented changes in its customer
targeting and sales process, both of which measures were necessary to position
the Company for positive future operations. The cost restructuring brought costs
into alignment with present revenue levels and with revenue projections which
take into account expected economic circumstances. Further, the liquidation of
all bank debt in November 2002 now allows cash flow to be utilized for future
operations. This gives management more flexibility and allows the Company to
quickly adjust to changing circumstances, including new business opportunities.
Although it remains to be seen whether such measures are sufficient or their
objectives achieved, management expects to report a better ratio of costs to
revenues (even with the present depressed revenue levels) going forward.

SEGMENT OPERATIONS. The March 2003 restructuring had the further effect of
changing the way management conducts its business, allocates resources and
evaluates the results. In and prior to 2002, management focused on operating
segments oriented to its general lines of business. With the March 2003
restructuring, wherein staff was reduced or reassigned, the focus of management
is now more directly associated with geographic regional operations.
Accordingly, the financial information about operating segments henceforth shall
be presented relative to three general spheres of operations: the Americas
Region, the Europe/Africa/Middle East Region, and the Pacific Rim Region.
Financial information for the comparative quarter ended March 31, 2002 has been
restated in the financial statements to conform to this new 2003 treatment. Set
forth below are commentaries concerning the principal operations of the three
new operating segments:

The 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 over the last six months ended March
31, 2003, most of the revenue and profit potential for this region centers
around 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 has dropped $1.2 million or 48%
compared with the March 31, 2002 quarter. The revenue fall-off has
correspondingly decreased the Company's opportunity to leverage fixed production
costs across the customer base resulting in lower gross margin percentages and
contribution margin. Indeed, 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.

The 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 national retailer while

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maintaining its existing multi-national customer network. However, as such
restructuring and targeting efforts are recent, they have not yet been reflected
in operating results for this segment, which experienced a revenue decline of
$293,000 or 53% and a 10% decline in contribution margin for the quarter ended
March 31, 2003 compared with the comparable quarter last year.

The 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
activities have traditionally centered on the large national and regional
petroleum retailers. Hence, although there has been some degradation in regional
revenue (down $292,000 or 29% for this segment), contribution margins have
increased by 12% for the quarter ended March 31, 2003 compared with the quarter
ended March 31, 2002. This is principally due to customer interest in the region
for national databases in several countries, but especially in Japan where
results for the quarter ended March 31, 2002 were profitable. 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 are highly leverageable and provide the customer with a
considerably broader perspective on their national markets. Activities
associated with these national databases are nominally reflected in the results
for the quarter ended March 31, 2003, but will be an increasing part of the
production and profitability of future quarters.

CONSOLIDATED OPERATING EXPENSES. Consolidated operating expenses were
$1,713,000 for the quarter ended March 31, 2003 as compared with $2,320,000
during the same quarter last fiscal year. This net reduction of $607,000 (26%)
reflects the full benefit of force reduction and office closure actions taken in
2002. (The quarter ended March 31 2002, included accrued shutdown expenses
associated with the Brazil office in excess of normal operations of
approximately $266,000.) In May 2002 the Company reduced its staffing in the US,
and in September 2002 the Singapore office was closed in response to a shift in
geographic business. Despite these fixed-cost reduction measures, the continuing
decline in revenue discussed previously has made it difficult for management to
adequately adjust costs. However, the carryover of continued revenue scarcity
into the March 31, 2003 quarter caused management to again reduce staffing in
late March 2003. Those cost saving actions did not impact the quarterly results
for March 31, 2003, but are expected to save the Company approximately $1.8
million annually (approximately $1.2 million over the remaining months of 2003).
These 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 general and administrative expenses for the quarter ended March
31, 2002 were down $487,000 or 47% as compared to the same fiscal quarter of
last year ($221,000 or 30% excluding the net effect of the Brazil office
closure). The primary contributor to the decrease was reduced overhead
associated with 2002 personnel reductions, foreign office realignment and
decreases in incentive plan costs.

Consolidated marketing and client service expenses for the quarter ended
March 31, 2003 were down $139,000 (15%) as compared to the same fiscal quarter
of last year. Consolidated marketing expenses have been reduced as a result of
(1) increased use of value-added resellers to service smaller customers, (2)
reduction of marketing personnel and related foreign office requirements, and
(3) a shift in client service resources from client support (marketing expense)
to revenue based projects resulting in a shift of dollars to cost of sales.

Consolidated research and development expenses (excluding amounts
capitalized for product development as discussed under Financial Condition and
Liquidity below) for the quarter ended March 31, 2003, were up $19,000 as
compared with the same fiscal period last year. This increase is a result of the
mix of activities between capital development and pure research / maintenance
(which costs are expensed). Total costs, including amounts capitalized for
product development and maintenance of existing products decreased approximately
$65,000 reflecting completion of a web-based software interface (with a
third-party partner) for US customers in 2002 and in 2003 with completed
development of a web-enabled version of LocationXpert software for use in the
Pacific Rim. The Company continues to focus on cost reductions through new
technologies which seek to produce modular products that are easier to develop,
less costly to customize and maintain, and can more readily be transported to
other vertical market applications.

OTHER INCOME AND EXPENSES. Interest expense of $3,000 for the quarter ended
March 31, 2003 was down from $124,000 for the comparable quarter ended March 31,
2002. The Company's bank debt of $550,000 at March 31, 2002, which is the
primary source of interest expense, was liquidated in November 2002.

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
Singapore Dollar and the British Pound Sterling ). This exposes MPSI to exchange
gains or losses depending upon the periodic value of the US

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Dollar relative to the respective foreign currencies. The Company experienced
modest and comparable exchange gains for the quarters ended March 31, 2003 and
2002 ($10,000 and $9,000, respectively, excluding a $4,000 loss related to the
closure of foreign offices in the quarter ended March 31, 2003). 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.

INCOME TAXES. Income taxes were $2,000 for the quarter ended March 31, 2003
as compared to $61,000 during the comparable quarter last year. The changes in
income tax are primarily due to foreign taxes withheld at the source by
customers. The amount of foreign income taxes withheld can fluctuate
significantly between fiscal periods based not only on the geographic areas in
which the Company operates, but on the particular products and services
delivered within an individual country in a given quarterly period.

FINANCIAL CONDITION AND LIQUIDITY

The Company's primary measure of liquidity, working capital, was a deficit
of $(1,735,000) at March 31, 2003 as compared with $(258,000) at March 31, 2002.
The decrease in working capital is attributable to the revenue fall-off in the
intervening twelve months as previously discussed, compounded by the necessity
for the Company to divert approximately $675,000 to debt service and
liquidation. Trade receivables have declined $202,000 during the quarter ended
March 31, 2003 (a normal first quarter fluctuation), but represent only about
50% of the balance last March 31, 2002. Operating accounts payable and accrued
liabilities have also declined ($223,000 or 15%) since December 31, 2002
reflecting reversal of certain previously accrued potential tax liabilities
which will now not be realized with closure of certain foreign offices. The
principal change in working capital components since March 31, 2002 has been
liquidation of the Company's bank debt offset by the 123% increase in deferred
revenue. The liquidation of bank debt in November 2002 allows the Company more
flexibility to respond to operational needs and new business opportunities.
Classified as a current liability, deferred revenue represents customer
prepayments required under product delivery or service contracts for which
services have not yet been provided. Of the $2,938,000 reflected in current
liabilities at March 31, 2003, the Company will be required to fund production
costs of approximately 50% (based on recent project costing trends). The
remainder will help defray general operating expenses that will be incurred
during the period of contract performance. In the absence of a bank line of
credit that could provide some measure of working capital back-up, MPSI
continues to deal with peaks and valleys in cash flow by adjusting payments to
suppliers and other creditors as required. Assuming the Company meets with a
reasonable degree of success in addressing the changing and uncertain markets,
management anticipates that cash flow from operations will be sufficient to meet
operating requirements in fiscal 2003.

Liquidity remains a principal focus of management looking forward in 2003.
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. Management has also acted to
conserve liquidity by closing certain foreign offices, reducing employee costs
and controlling research and development expenditures. In late March 2003,
management implemented a further reduction in force in order to better match
capacity with revenue levels (see previous discussion of $1.8 million cost
saving package). These measures were taken to give the Company time to ramp up
revenue from both traditional and new customer targets. In order to position the
Company to increase its revenues, management reorganized a portion of its sales
force to target new customer segments with 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 is intended to
produce revenues at least at a level comparable to 2002, while cutting costs
significantly with the objective of returning MPSI to profitability. 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 ($17,000 at March 31, 2003 compared with $31,000 at March 31, 2002)
and capitalized product development expenditures ($73,000 for the quarter ended
March 31, 2003 versus $157,000 in the quarter ended March 31, 2002). The lesser
expenditures in the current quarter principally reflect the slowing down of new
development as the Company believes its present REX and Pricing technology far
surpasses competitive technology. The development that has been funded is
primarily related to web enabling certain of MPSI's modeling capabilities.

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MPSI's backlog of market studies at March 31, 2003 in the amount of
approximately $6.4 million, ($7.7 million at March 31, 2002), contained a
substantial number of recurring studies under multi-year client commitments.
Such studies represent a significant amount (approximately 25%) of the estimated
revenues for fiscal year 2003. 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 2003 business plan.

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 (herein after
referred to as "GAAP") and the application of GAAP requires management to make
estimates that affect the Company's reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. In many instances, the Company could have reasonably used different
accounting estimates, and in other instances changes in the accounting estimates
are reasonably likely to occur from period to period. Accordingly, actual
results could differ significantly from the estimates made by management. To the
extent that there are material differences between these estimates and actual
results, the Company's future financial statement presentation of its financial
condition or results of operations will be affected.

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

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

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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.

o Revenue Recognition: Effective January 1, 2003, the Company adopted a
revised method of estimating its percentage of completion for its major
consulting and technology projects. In fiscal 2002 and prior periods, the
Company aggregated all phases of a production project together
(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 change because it is more
conservative and accurate method of determining percentage of project
completion and because this method results in financial information about
internal profit centers which will be critical to performance evaluation of
the production groups and to resource allocation decisions.

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

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

Beginning in fiscal 2001, MPSI changed its software licensing and
maintenance contracting methods. Following the change, 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. This
change in licensing did not materially impact fiscal 2001.

o Stock-Based Compensation: At December 31, 2002, 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.

o 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 uncollectible.
Recoveries of trade receivables previously written off are recorded when
received.

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o 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) are presented net of
accumulated amortization.

The costs of internally developed software held for resale include direct
labor, materials and overhead, and relate to significant enhancements to
existing software or to development of new software products. All costs
incurred to establish the technological feasibility of internally developed
software are charged to research and development expense as incurred.
Royalties, which may become payable because of ongoing proprietary interests
related to third-party software imbedded in MPSI products, are charged to
cost of sales-software licensing as applicable software sales are
recognized.

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

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

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

Foreign Currency Translation: Assets and liabilities of the Company's
foreign operations are translated from the foreign operating currency to the
U.S. Dollar equivalent for consolidated reporting purposes using the applicable
exchange rates at the balance sheet date. Revenues and expenses are translated
at average rates for the year. Exchange differences from these translations are
included in other comprehensive income. 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.

- ----------

Portions of this document may constitute forward-looking statements as defined
by federal law. Although the Company believes any such statements are based on
reasonable assumptions, there is no assurance that actual outcomes will not be
materially different. Additional information about issues that could lead to
material changes in performance is contained in the Company's annual report on
Form 10-K which is filed with the Securities and Exchange Commission.

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ITEM 3 - CONTROLS AND PROCEDURES

MPSI Systems Inc.'s Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90
days prior to the filing date of this quarterly report. Based on such
evaluation, such officers have concluded that the Company's disclosure controls
and procedures are effective in alerting them on a timely basis to material
information relating to MPSI Systems Inc. (including its consolidated
subsidiaries) required to be included in the Company's periodic filings under
the Exchange Act. There have not been any significant changes to the Company's
internal controls or in other factors that could significantly affect such
controls subsequent to the date of this evaluation.

PART II - OTHER INFORMATION

Item 1 -- Legal Proceedings - None.

Item 2 -- Changes in Securities - None.

Item 3 -- Defaults Upon Senior Securities - None.

Item 4 -- Submission of Matters to a Vote of Security Holders - None

Item 5 -- Other Information - None.

Item 6 -- Exhibits and Reports on Form 8-K.

(a) Exhibits:

99.1 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K - None

16

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed in its behalf by the
undersigned hereunto duly authorized.

MPSI SYSTEMS INC.

Date May 14, 2003 By /s/ Ronald G. Harper
------------------ ----------------------------------------------
Ronald G. Harper, President
(Chief Executive Officer) and
Director

Date May 14, 2003 By /s/ James C. Auten
------------------ ----------------------------------------------
James C. Auten, Vice President
(Chief Financial Officer)

17

CERTIFICATIONS

I, Ronald G. Harper, President and Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of MPSI Systems Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: May 14, 2003

/s/ Ronald G. Harper
-----------------------------------
Ronald G. Harper
Chief Executive Officer

18

I, James C. Auten, Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of MPSI Systems Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: May 14, 2003

/s/ James C. Auten
-----------------------------
James C. Auten,
Chief Financial Officer

19

EXHIBIT INDEX