##### Table of Contents



---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




---

FORM 10-K


|    |  |                                                                                      
|--- |  | -------------------------------------------------------------------------------------
|/X/ |  | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the fiscal year ended December 31, 2002 or

|    |  |                                                                                          
|--- |  | -----------------------------------------------------------------------------------------
|/_/ |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from ___to___.

Commission file number: 1-9158



---

MAI Systems Corporation


(Exact name of registrant as specified in its charter)


|                                |  |                                  
|------------------------------- |  | ---------------------------------
|Delaware                        |  | 22-2554549                       
|(State or other jurisdiction of |  | (IRS Employer Identification No.)
|incorporation or organization)  |  |                                  

26110 Enterprise Way, Lake Forest, CA 92630
Address of principal executive offices
Registrants telephone number including area code (949) 598-6000

|                                                            |  |                                 
|----------------------------------------------------------- |  | --------------------------------
|                                                           
|Securities registered pursuant to Section 12(b) of the Act: |  | None                            
|                                                           
|Securities registered pursuant to Section 12(g) of the Act: |  | Common Stock, Par Value $0.01   
|                                                            |  | Preferred Stock, Par Value $0.01
|                                                            |  | (Title of Class)                

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No /_/

Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /X/

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes /_/ No /X/


The aggregate market value of the common stock held by non-affiliates of the registrant, based upon the last sale price of the Common Stock reported on the National
Association of Securities Dealers Automated Quotation National Market System on April 4, 2003 was $2,461,635.

The number of shares of common stock
outstanding as of April 4, 2003 was 14,675,752. The aggregate
market value of the common stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock
reported on the AMEX on June 28, 2002 was $10,599,000.



---

DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)


Registrants Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Registrants 2003 Annual Meeting
of Stockholders to be held on June 12, 2003 is incorporated by reference in Part III, Items 10 (as to directors), 11, 12 and 13 of this Form 10-K.



---

---





---

TABLE OF CONTENTS



|               |                                                                                               |  |  |  |  |  |  | 
|-------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I        
|               | ITEM 1. BUSINESS                                                                             
|               | ITEM 2. PROPERTIES                                                                           
|               | ITEM 3. LEGAL PROCEEDINGS                                                                    
|               | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II       
|               | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.               
|               | ITEM 6. SELECTED FINANCIAL INFORMATION                                                       
|               | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|               | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|               | ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                             
|               | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III      
|               | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|               | ITEM 11. EXECUTIVE COMPENSATION                                                              
|               | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|               | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|               | ITEM 14. CONTROLS AND PROCEDURES                                                             
|PART IV       
|               | ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND REPORTS ON FORM 8-K                 
|SIGNATURES    
|CERTIFICATIONS
|EXHIBIT INDEX 
|EXHIBIT 10.13 
|EXHIBIT 10.22 
|EXHIBIT 10.23 
|EXHIBIT 10.24 
|EXHIBIT 10.25 
|EXHIBIT 10.30 
|EXHIBIT 21.1  
|EXHIBIT 23.1  
|EXHIBIT 23.2  
|EXHIBIT 23.3  



---



##### Table of Contents






PART I




ITEM 1. BUSINESS

THE COMPANY

We provide total information technology solutions primarily to the hospitality,
resort and destination industry. The solutions provided by us typically
include applications software, computer hardware, peripherals and wide and
local area network design, implementation, installation and support. The
software applications are generally our proprietary software, or software which
is licensed to us on an exclusive basis. The hardware, peripherals and
networking systems are generally third-party products, which we distribute.
Directly and through arrangements with third parties, we provide on-site and
off-site service and support to users of our solutions. We were incorporated
under the laws of the State of Delaware on September 6, 1984. Our name was
changed from MAI Basic Four, Inc. to MAI Systems Corporation on November 6,
1990. We commenced operations on January 29, 1985.

DESCRIPTION OF THE BUSINESS

Our mission is to put in place long-term information technology systems for our
customers by designing, installing and supporting industry-specific total
information management solutions. Focusing on the hotel, motel and resort
destinations industry, we design, sell, install and support enterprise
information management solutions. We provide a wide array of products and
services to our installed base of customers and continue to make direct sales
of certain products and services which enhance, upgrade and extend the useful
life and functionality of our installed systems.

We market our products and services primarily through a team selling approach,
which utilizes our nationwide network of sales offices. This approach involves
a coordinated effort between our field sales personnel, and our corporate
office software development, marketing, contract administration and financial
staff. All of our products and services are also available through a limited
number of distributors, independent value-added resellers (VARs), authorized
service representatives and independent software vendors (ISVs).

Our activities are conducted principally in the United States, the United
Kingdom, Malaysia, Hong Kong, Singapore and Mexico. We also operate offices in
the Peoples Republic of China in Beijing and Shanghai.

We provide software support services (both procedural and technical support) to
our hospitality customers from our offices in the United States, the United
Kingdom, Kuala Lumpur, Singapore and Hong Kong. In some countries, we rely on
certain foreign distributors of our products to provide software support
services to customers located within the distributors territories.

Products and Services

We provide complete enterprise products and services to serve the needs of
local and multinational chains, franchisees and independent operators of
hotels, resorts and destination properties. Our products have been installed in
over 4,000 properties, throughout 83 countries, and in properties up to 5,000
rooms from limited service and business hotels to convention centers and five
star luxury resorts or urban luxury hotels.

Our HIS epitome Enterprise
Solutions, including our established products (epitome for windows,
formerly LodgingTouch, epitome for Unix, formerly CLS and epitome for
i-series, formerly Paragon), which represented all of our revenue
during the three-year period ended December 31, 2002, as well as our new internet native suite
of products written in java which are currently under development and not yet
available for general release, enables hospitality enterprises to increase
revenue, improve guest loyalty and reduce costs by centralizing and
streamlining their operations while maximizing existing technology investments.
A majority of our history revenue relates to our property management
systems applications associated with our established products. Our
new internet native corporate application suite is a component-based
architecture, which has not been installed as December 31, 2002. The enterprise suite includes software, services and integration for Business
Intelligence, Corporate Information, Channel Reservation, Channel Management
and Property Management systems. The products are deployable on multiple
platforms using intelligent transport and messaging technology.

Our enterprise services include systems integration, consulting, project
management, implementation, training, documentation, online help, long-term
support, maintenance and specialized engineering, with particular expertise in
the implementation of local and wide-area networks for the hospitality
industry.

The epitome Strategic Analysis Tools

Our epitome multidimensional Business Intelligence (BI) provides a suite of
sophisticated Multidimensional Online Analytical Processing (MOLAP) tools for
strategic analysis and planning for the entire enterprise. Not only can
hoteliers analyze and report on data consolidated from multiple sources, they
can perform complex modeling against industry standard Key Performance
Indicators (KPIs), including Revenue Per Available Room (RevPAR) and
Revenue Per Available Customer (RevPAC). These tools include a relational
data warehouse, subject-specific data marts, MOLAP

2



---



##### Table of Contents



tools and a library of standard analyses and reports. This combination results
in a system that provides executives with just-in-time strategic intelligence
to analyze operations and grow market share, revenue and occupancy.

The epitome Corporate Management Tools

Our epitome Central Information Systems (CIS) provides essential information
and management tools to centralize operations at a corporate headquarters. With
the increasing number of mergers, acquisitions and individual properties
desiring to associate with an established chain or flag, centralizing the data
for consolidated marketing, accounting and reporting tasks have become popular
cost-savings tools. Additionally, hotel guests now expect their preferences and
history to be available at local properties, corporate locations and online. To
accomplish this, corporate systems must capture and share all guest information
to provide quality service during the reservation process as well as
comprehensive marketing and financial information to facilitate corporate
marketing and finance strategies. Our HIS corporate tools consolidate
information about each guest such as identity, spending patterns, preferred
accommodations, amenity requests, billing details, commission accumulations and
more.

Specialized functionality of the CIS includes centralized travel agency
production statistics and transaction payments, more accurate and effective
corporate Accounts Receivable invoicing and collections, and consistent guest
spending patterns to better facilitate corporate affinity programs and more.

The epitome Reservation and Channel Management Tools

Our epitome Central Reservation Systems (CRS) provides chains and management
companies with the functionality required to process reservations and
availability from a centralized location. Over time, CRS products have evolved
to provide the same features and functions as reservation modules in Property
Management Systems. However, a CRS must be more efficient at guest preference
requirements, multiple property itineraries, history retrievals, travel agent
processing and general corporate billing and transaction processing. These
products are perfectly suited for small and medium reservation call centers.

Hoteliers are reducing the cost of guest acquisition and improving guest
loyalty through branded Internet booking engines. However, we understand that
the explosion of Internet channels and travel procurement software has been
difficult for hoteliers to manage effectively. Our epitome Channel Reservation
and Channel Management Tools deliver more benefits than a simple branded
booking engine or any one wholesale reservation portal. It allows hoteliers the
tools to manage their rates, availability and guests through all their channels
of distribution. The goal and foundation of the design are to provide a more
cost-effective and efficient tool for the properties using the epitome
enterprise suite of applications.

It also provides guests with the ability to search multiple (related)
properties, to check availability of rooms and to maintain reservations for
rooms, and allows the property the ability to use room allocation features
already in the epitome PMS, to modify or customize its web reservations screens
and to reduce transaction fees of costly intermediaries.

The epitome Property Management Tools

Our epitome Property Management Systems (PMS) provide a complete solution for
the management of rates, availability and affinity programs for single and
multi-property enterprises. These tools are specifically designed and optimized
for comprehensive guest management, including modules for web and central
reservations, room and revenue management and group and wholesaler management.

Specialized functionality offers flexible guest-focused features including
guest service notification, availability and occupancy controls for long-term
stay and gender-specific environments, sophisticated revenue and taxation
capabilities, casino accounting and condominium management. Multi-property
integration of availability, itinerary reservations and guest accounting is
also available. Additional tools include modules for report writing, emulation,
data extraction and transfer and more.

The epitome Integration and Data Exchange Tools

The HIS epitome Interfaces and Integrations provide multiple levels of data
exchange and application integration, from simple send and receive interfaces
to intelligent business application integration. The high-level of integration
available between the HIS PMS, CRS, CIS and BI enables chains and management
companies to deploy an enterprise solution with customizable functionality at
each location, while consolidating critical controls, statistics and revenue
analysis. Our HIS epitome Enterprise Solutions includes a library of over 400
device-type interfaces. Some examples include Call Accounting, Energy
Management, In-room Facsimile, In-room Internet, Mini Bar, Point Of Sale,
Telephone Management, Video Services and Voice Mail.

We also specialize in application-type integrations, which are typically more
complex than device-type interfaces, requiring

3



---



##### Table of Contents



additional management and auditing of the data exchange. It often includes the
exchange of guest and group information, availability, contractual room rates
and more. Each product also adds complexity, as the platform, data and method
of communication vary from product to product. It is very rare that any of
these elements are similar to the platform, database and method of
communication in the core business applications.

Our integration solutions offer integration of the core business applications
(PMS, CRS and CIS) with other disparate business applications (Sales, Catering,
Revenue Management and more). It allows for standardized communication
processes, configuration controls and audit trails. The data mapping is
accomplished through a series of application-specific and common industry
Application Programming Interfaces (APIs). All communication and data
exchange are actually handled through a central integration product, providing
our core business applications and the third party products with a common
ground for data exchange and consolidation.

From property transactions to corporate intelligence our HIS epitome Enterprise
Solutions provides complete products and services for every level of the
enterprise. With different platforms, applications, deployment methods and
database management technologies, hoteliers can implement the epitome of
technology for their enterprise.

Marketing and Sales

We market our products and services primarily through a team-selling approach,
which utilizes our worldwide network of sales offices and our Irvine,
California-based account representatives. We also market certain products and
services through limited numbers of distributors, authorized service
representatives and ISVs.

In the United States, our systems are marketed by a direct sales and marketing
organization which included, 12 sales and marketing personnel located in the
corporate headquarters and satellite offices. In addition, we market our
systems internationally through our subsidiaries which operate in the United
Kingdom, Mexico, Hong Kong, Malaysia and Singapore, and through various
distributors that are exclusive in their jurisdictions. Our international
subsidiaries employed 21 sales and marketing personnel who are engaged in the
marketing of MAI products from sales offices in Mexico, the United Kingdom,
Hong Kong, Singapore, Malaysia and the Peoples Republic of China.

During 2002, our aggregate revenue was derived from geographic areas as
follows:

|               |       |  |               |       |  
|-------------- | ----- |  | ------------- | ----- | -
|               |       |  | Percentage of
|               |       |  | Total Revenue
|               |       |  |              
|United States  |       |  | 80.2          | %    
|Asia           |       |  | 12.7          | %    
|United Kingdom |       |  | 5.0           | %    
|Canada         |       |  | 2.1           | %    
|               |       |  |               |      
|               | Total |  |               | 100.0 | %
|               |       |  |               |      

Our financial performance is affected by the fluctuation in value of the US
dollar in relation to the local currencies of the countries in which we do
business. In addition, our foreign operations are subject to the usual risks
that may affect such operations, including possible expropriation or other
governmental actions, taxes and political changes. However, as only 19.8% of
our 2002 revenue was generated outside the United States, the risk associated
with these foreign operations in relation to our overall financial performance
is limited.

Support and Maintenance

The provision of around-the-clock customer service is a cornerstone of our
business. As of December 31, 2002, we had support and maintenance agreements
with approximately 2,025 customers. We employ approximately 71 technicians to
provide support for our applications software products.

Telephonic support, which is primarily to assist licensees of our applications
products, is provided from our response centers located in Irvine, California,
Concord, California, Singapore, Hong Kong, Malaysia and the United Kingdom. We
utilize current developments in telephony and call center technology to enable
our support technicians to quickly identify and resolve customers software
related computing problems.

Our maintenance services are generally provided pursuant to individual
maintenance contracts with customers, although time and material services are
provided in some areas. Such support and maintenance are of varying duration,
provide prospective cancellation rights and require advance payment of fees to
us. Substantially all of the revenue earned by maintenance operations is
invoiced to customers in advance and recognized evenly over the related
contract period.

4



---



##### Table of Contents



Production and Procurement

In response to market demand for standardized hardware and software products,
all of our current systems offerings utilize open systems architecture, which
means that they will operate on a wide variety of third-party hardware
equipment. At present, we have relationships with a number of suppliers
including Microsoft, Cognos, BEA, Compaq Computer, Data General, Hewlett
Packard, Seagull Software, Visual Legacy, IBM and distributors such as MicroAge
and Ingram Micro. Management believes that these relationships have enabled us
to reduce product costs, permit earlier availability of new technology and
offer customers products with superior performance at competitive prices. We
no longer manufacture proprietary hardware products.

Delay or failure in the delivery of products or components purchased from third
parties could adversely affect our shipments and our ability to conclude sales.
We have purchased many products and components from single sources of supply.
Because our current products are industry standard, or are comprised of
industry-standard components, management believes that alternative sources of
supply of similar products would be available to us in the event of any
interruption of delivery of a single source supplier.

Order, Shipment and Backlog

We record and enter into backlog a purchase order for equipment and software
when we receives a customers written order requesting delivery within twelve
months, and systems configuration and contract provisions are verified. Orders
that are canceled by the customer and orders that are not shipped within one
year are removed from backlog. Orders that are removed from backlog for
non-shipment are restored if they are reinstated by the customer.

Set forth below is certain information concerning orders, shipments and backlog
for 2001 and 2002:

|                                       |  |                       |      |      |  |  |     | 
|-------------------------------------- |  | --------------------- | ---- | ---- |  |  | --- | 
|                                       |  | (dollars in millions)
|                                       |  | 2001                  |      | 2002
|                                       |  |                       |      |     
|Orders received (net of cancellations) |  | $                     | 10.5 |      |  |  | 8.3 | 
|Shipments                              |  |                       | 6.1  |      |  |  | 9.5 | 
|Backlog (at year end)                  |  |                       | 4.4  |      |  |  | 3.2 | 

Our backlog is not necessarily indicative of future revenues.

Research and Development

Our research and development activities are focused on the development of
products for the hospitality, resort and destination industry.

As of December 31, 2002, we employed 51 engineers, programmers and other
technical personnel in research and development activities. We also utilized
external third party resources for development. During 2000, 2001, and 2002,
we incurred $3,068,000, $4,209,000, and $3,307,000, (net of capitalized
software of $861,000) respectively, for research and development activities.
Our research and development expenditures related to the support and extension
of existing software products and the development of new products.

Customers

Our customers in hospitality are both chain and independent hotels and resorts.
During 2000, 2001 and 2002, the Joint Armed Services was the only customer
accounting for ten percent or more of our revenues. Total revenue from the
Joint Armed Services for 2000, 2001 and 2002 was $3,147,000, $ 2,937,000 and
$2,880,000 respectively.

Competition

Competition is vigorous in all sectors of the worldwide market for
computer-based applications systems, networked solutions and the maintenance
and support of the software and hardware, which comprise those systems. We
have numerous competitors (and potential competitors) varying widely in their
size, capabilities, market segment and geographic area, many of which are
larger and have financial resources far greater than ours.

Within our targeted application markets, we have positioned ourselves to sell
complete enterprise solutions to our customers. Within this marketplace,
competition comes primarily from vendors of competing information technology in
the markets in which we compete. There are several providers of information
technology to the hotel, resort and destination

5



---



##### Table of Contents



industry against which we regularly compete. We have several primary
competitors, which are substantially larger than us, and provide application
software that is similar to ours in quality but have the ability to
aggressively compete on price.

Trademarks, Copyrights and Licenses

We are the owner or licensee of certain trademarks, copyrights and other
property rights associated with our businesses, including rights associated
with our proprietary application software. We own or have licensing rights,
generally with terms of three years, to the principal application software
products marketed by us. Such licensing rights are generally renewable.
Although there is some risk that independent vendors who own such products may
elect not to renew their licensing agreements with us and enter into exclusive
arrangements with, or elect to install their software on systems sold by
competitors of ours, such vendors generally tend to continue to support our
marketing efforts so long as our systems provide a good opportunity for them to
market their products. These independent vendors do not represent a
significant part of our revenues.

We are party to license agreements with IBM relating to a variety of patents,
with Novell, Inc. relating to UNIX and with a number of other suppliers of
software products. These licenses are terminable at our option and certain of
the licenses require us to make royalty payments.

Employees

As of December 31, 2002, we had 218 employees, of which 135 were employed in
the United States, 3 in Mexico, 14 in the United Kingdom and 66 in Asia (Hong
Kong, Singapore, Malaysia and the Peoples Republic of China). We have not
experienced any work stoppages and consider our relationship with our employees
to be good.

1993 CHAPTER 11 BANKRUPTCY PROCEEDINGS

We filed for Chapter 11 bankruptcy protection on April 12, 1993, shortly after
our banks foreclosed on all of the outstanding capital stock of certain of our
former European subsidiaries in satisfaction of all amounts due under certain
loan agreements. On January 27, 1994, our Plan of Reorganization became
effective. The summary of the material features of the Plan of Reorganization,
contained in our Annual Report on Form 10-K for the year ended December 31,
1993 under the heading CHAPTER 11 BANKRUPTCY PROCEEDINGS, is included herein
by this reference.

Under the Plan of Reorganization, there was no recovery for holders of our
$0.01 par value old Common Stock, and all classes of Preferred Stock
outstanding prior to the Effective Date. The interests evidenced by these
securities were extinguished by operation of the Plan of Reorganization. We
commenced distribution of Common Stock to holders of unsecured claims on April
14, 1994. Through December 31, 2002, we had distributed 6,758,251 shares of
Common Stock (approximately 49.4% of our current issued and outstanding shares)
to our former creditors in settlement of all outstanding claims, except for the
tax claim discussed below. The Plan of Reorganization provided holders of
unsecured claims the right to elect a limited cash recovery, and through
December 31, 2002, $74,570 in cash had been distributed pursuant to such
provision. As of December 31, 2002, all claimants rights to elect a cash
recovery have expired.

We do not believe that the Plan of Reorganization has any current material
impact on our business operations. We have been able to secure revolving
credit facilities and other financing during the period in which the Plan of
Reorganization has been pending. In addition, suppliers and customers have not
requested any extraordinary contractual provisions during this period.

At December 31, 2002, there is only one material claim to be settled before the
Chapter 11 proceedings can be formally closed, a tax claim with the United
States Internal Revenue Service (the Service) in the amount of $712,000. The
amount of this claim is in dispute. We reserved $712,000 for settlement of
this claim, which upon settlement, it is anticipated would be payable to the
Service, interest only at 6% per annum for a period of 72 months, at which time
the entire outstanding balance would be due and payable. The accrual of
interest will commence upon the effective date of the settlement with the
Service. The dispute relates to complex alternative minimum tax and interest
calculations covering the period 1988 though 1989.

RISK FACTORS

The following discussion should be read in conjunction with the audited
consolidated financial statements contained herein. In addition to the factors
set forth herein, there may be other factors, or factors that arise in the
future which may affect our future performance.

6



---



##### Table of Contents



Effects of the September 11, 2001 Terrorist Attacks and Other Events

Our operating results for the twelve months ended December 31, 2002 were
negatively affected by the September 11, 2001 terrorist attacks. Weakness in
the hospitality and tourism industries as a result of the terrorist attacks and
armed conflicts arising therefrom have caused the Company to experience
cancellations, delays and reductions in certain purchases by its hospitality
customers. There can be no guarantee that this slow-down will be only
short-term. Many of our hospitality customers experienced severe declines in
occupancy and room rates at most of their hotels in the weeks following the
attacks. We are operating our business under the assumption that the weakness
in the hospitality industry will be medium-term. It is not possible, however,
to predict the magnitude or duration of the declines or the potential impact on
our results of operations, financial condition or cash flow, if the existing
political and economic risks continue unabated, or if there is future major
terrorist activity.

We cannot yet determine the impact on our business of the recent war in Iraq
and the recent outbreak of SARS in Asia.

We Have Recently Settled Litigation and Issued A Substantial Number of Shares
to a Shareholder Who May Be Able to Exercise Significant Influence

In February 2001 we settled certain litigation which required that we issue and
register with the United States Securities and Exchange Commission (the
Commission) a substantial number of shares to an existing shareholder, CSA
Private Limited (CSA). CSA received these shares pursuant to our acquisition
of our Hotel Information Systems subsidiary as described under Legal
Proceedings  CSA Private Limited versus MAI Systems Corporation. Based upon
this settlement, CSA has become our largest shareholder and beneficially owns
approximately 16.6% of our Common Stock. If this shareholder decides not to
sell its shares of Common Stock or sells the shares in a block to a third
party, either this shareholder or the party or parties it sells to in any
block sale may be able to exert significant influence over our affairs
because they have approximately 16.6% of the voting control on any matter that
may be submitted for a shareholder vote. This concentration of ownership could
have the effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquirer from attempting to obtain control of us,
which in turn could have a material and adverse effect on the market price of
our Common Stock.

The Price of Our Common Stock May Decline Due to Sales by Certain
Shareholders

Approximately 40% of our issued and outstanding Common Stock is held by five
shareholders which includes CSA. Sales by these shareholders of a part or
substantially all of their shares of our Common Stock in the market or the
perception that sales may occur could cause the market price of our Common
Stock to drop.

At April 4, 2003, we had 14,675,752 shares of Common Stock outstanding.
Approximately 56% of our outstanding shares are freely tradable, The remaining
shares are either held by affiliates, as defined under Rule 144 under the
Securities Act of 1933, or are restricted securities under such rule. In
such cases, shares may be sold pursuant to registration under the Securities
Act, or to the extent permitted by Rule 144 or another exemption under the
Securities Act.

Our Agreements with our Primary Lender and Two Other Substantial Creditors
Require Substantial On-Going Payments

We have agreements with Coast Business Credit (Coast) and two other creditors
that require substantial on-going payments and affect the availability of our
cash flow to be used for other material company operations. We were in default
under the terms of our secured debt agreements as of December 31, 2002. On
January 13, 2003 we restructured our debt with Coast and Canyon. We are
currently in negotiations with CSA to restructure the term of the subordinated
note. Currently, these obligations are follows:



| |  |  | A balance due to Coast of approximately $1,801,000 under a term
loan with a current monthly principal and interest payment obligation
of approximately $58,000, maturing in February 28, 2005;                                                                                                                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A balance due under our 11% subordinated notes payable to an
investment fund managed by Canyon Capital Management LP (Canyon) of
approximately $5,634,000, with a current monthly interest payment
obligation of $52,000;                                                                                                          
|
| |  |  | A balance due under a 10% secured promissory note due to CSA in
the amount of $2,800,000, with monthly payments of $37,500 commencing
on March 1, 2002 and ending on September 1, 2002, and monthly
payments of $107,500 commencing on October 1, 2002 until October 1,
2003 when all remaining unpaid principal and interest is due.

As of December 31, 2002 we were current on our payment obligations to Coast and
Canyon. In connection with the

7



---



##### Table of Contents



restructuring of the Coast and Canyon debt, the covenants were revised and will
be effective commencing with the quarter ended March 31, 2002. We are currently
in default with our payment obligations to CSA and have not made any payments
since September 2002. Under the terms of the subordination agreement between
Coast, Canyon and CSA, we are not allowed to make any principal or interest
payments to CSA until the Coast and Canyon debt, including any accrued
interest, is repaid in full or the CSA debt is restructured and approved by
Coast and Canyon. There can be no assurance that CSA and MAI will come to
terms on a restructuring or that Coast and Canyon will ultimately approve the
terms of the restructuring. In the event that we are unable to meet the
required payments to our primary lenders or meet our payment obligations to our
other secured creditors, they are entitled to exercise certain rights under the
respective agreements we have with them, including but not limited to,
foreclosing on all of our tangible and intangible assets. Such action would
have a substantial adverse effect on our ability to continue as a going
concern.

Our Limited Period of Profitability May Not Continue

Although we were profitable for the years ended December 31, 2000 and 2001, we
incurred net losses for the year ending December 31, 2002 as well as net losses
on an annual basis for the four fiscal years previous to 2000. We cannot
assure you that we will attain profitability on a consistent basis or avoid
losses on a quarterly or annual basis in the future.

Our Operating Results In One or More Future Periods Are Likely to Fluctuate
Significantly and May Negatively Impact Our Stock Price

Our annual and quarterly operating results may fluctuate significantly in the
future as a result of numerous factors, including:



| |  |  | the timing of significant orders,                                                                                  
| | - |  | -------------------------------------------------------------------------------------------------------------------
|
| |  |  | the timing of product enhancements and new product
introductions by us, our technology vendors and our competitors,
|
| |  |  | the pricing of our products and services, and                                                                      
|
| |  |  | economic and competitive conditions specific to our industry.                                                      

Typically, the orders we receive in one quarter are delivered and installed by
the following quarter. However, many of our sales involve lengthy sales cycles.
Consequently, it is not possible to predict with any reliability the periods
within which a sale may close or when we will recognize revenue. As a result,
our operating results may be materially affected if a single large transaction
is earlier or later than expected. It is likely that in some future periods
our operating results will be below the expectations of securities analysts and
investors. If this happens, the trading price of our Common Stock would likely
be materially adversely affected.

We May Need and Be Unable to Obtain Additional Funding on Satisfactory Terms,
Which Could Dilute Our Stockholders or Impose Burdensome Financial Restrictions
on Our Business

As stated above, the Company has successfully restructured the terms of certain
secured debt, including extending the maturity dates. The restructured debt
pursuant to an intercreditor agreement between Canyon Capital and Coast
Business Credit, contains various restrictions and covenants, including a
minimum quick ratio of 0.30 to 1.00 and minimum debt service coverage ratio of
0.90 to 1.00 as of and for the three-month period ended March
31, 2003. The minimum quick ratio increases to 0.31 to 1.00 as of
June 30, 2003 and September 30, 2003 and to 0.34 to 1.00 as
of December 31, 2003 and for each and every fiscal quarter
ending thereafter. The minimum debt coverage ratio increases to 1.10
to 1.00 for the three-month period ending June 30, 2003 and to
1.25 to 1.00 for the three-month period ending September 30,
2003 and for each and every fiscal quarter thereafter. In the event that
we were not in compliance with the various
restrictions and covenants and were unable to receive waivers for
non-compliance, the term and subordinated debt would be immediately due and
payable. We believe that we will be in compliance with the covenants
as of March 31, 2003 and for every fiscal quarter thereafter.
However, any additional debt financing or other financing of
securities senior to Common Stock will likely include financial and other
covenants that will restrict our flexibility. At a minimum, we expect these
covenants to include restrictions on our ability to pay dividends on our Common
Stock. Any failure to comply with these covenants or to repay such indebtedness
when due would have a material adverse effect on our business, prospects,
financial condition and results of operation.

On February 7, 2003, the Federal
Deposit Insurance Corporation (FDIC) put Coast and its
parent company, Southern Pacific Bank, into receivership and is
currently holding all of Coasts assets for sale to third parties,
which includes our term loan with Coast. This receivership and
ultimate sale of the loan by the FDIC does not change any of the
terms of our current loan agreement.

The Market In Which We Operate is Highly Competitive, and We May Face Increased
Competition From New Entrants and Established Industry Competitors With
Significantly Greater Financial Resources

We face significant competition in all sectors of the market for computer-based
solutions and support and maintenance services which we offer. We have
numerous competitors, which vary widely in their size, capabilities, market
segments and geographical areas, many of which are larger and have financial
resources far greater than we have. Within our market, competition comes
primarily from competing software applications vendors and from local
value-added resellers and independent software vendors, who usually resell
hardware or networking products of larger original equipment

8



---



##### Table of Contents



manufacturers. Many of our services are provided by our customers in-house
information services departments. There can be no assurance that we can
effectively compete with any or all of our competitors in our business line.
Our competitors may be able to adapt more swiftly to new or emerging
technologies and changes in customer requirements, take advantage of
acquisition and other opportunities more readily and devote greater resources
to the marketing and sale of their products and services than we can. There
can be no assurance that additional competitors will not enter markets that we
plan to serve or that we will be able to compete effectively.

The Software Industry for Hospitality Management is Undergoing Rapid
Technological Changes and New Software Introduced by Third Parties May Be
Superior to the Software That We Own or License

The software industry for hospitality management is subject to rapid and
significant technological change. We cannot predict the effect of
technological changes on our business. We expect that new products and
services will emerge in the markets in which we compete. These new products
and services may be superior to the products and services that we use or these
products and services may render our products and services obsolete. Our
failure to anticipate or respond adequately to the changes in technology and
customer preferences, or to develop and introduce new products in a timely
fashion, could materially adversely affect our business and operating results.

Trading in Our Common Stock is Limited

The recent trading volume for our Common Stock has been small, and the market
for our common stock has been less liquid than that of many other publicly
traded companies. During the twelve months ended December 31, 2002, the
average daily trading volume has been approximately 17,500 shares, whereas the
average daily trading volume for an American Stock Exchange listed stock is
substantially higher. There can be no assurance that a stockholder who desires
to sell shares of Common Stock can sell all of the shares that the stockholder
desires to sell, either at all or at the desired times or prices.

Our International Operations Are Subject to Additional Risks

Approximately 20% of our revenues in the year ended December 31, 2002 were
derived from foreign operations and approximately 38% of our work force is
based outside the United States. Our financial performance is affected to some
extent by the fluctuation in value of the US dollar in relation to the local
currencies of the countries in which we do business. In addition, our foreign
operations are subject to the usual risks that may affect such operations,
including import and export restrictions, possible expropriation or other
governmental actions, taxes and political changes. International sales are
subject to inherent risks, including:



| |  |  | recessions in economies outside the United States,                                      
| | - |  | ----------------------------------------------------------------------------------------
|
| |  |  | limited protection of intellectual property rights in some countries,                   
|
| |  |  | political instability,                                                                  
|
| |  |  | terrorism,                                                                              
|
| |  |  | unexpected changes in regulatory requirements and tariffs,                              
|
| |  |  | difficulties in staffing and managing foreign operations,                               
|
| |  |  | the possibility of subsidization of our competitors and the nationalization of business,
|
| |  |  | longer payment cycles,                                                                  
|
| |  |  | greater difficulty in accounts receivable collection, and                               
|
| |  |  | potentially adverse tax consequences.                                                   

We May Be Unable to Enforce or Defend Our Ownership and Use of Proprietary
Technology

Our success depends to a significant degree upon our proprietary technology
upon and our licensing rights to the principal application software products
that we market. We rely on a combination of trademark, trade secret and
copyright law and contractual restrictions to protect our proprietary
technology. However, these measures provide only limited protection, and we
may not be able to detect unauthorized use or take appropriate steps to enforce
our intellectual property rights, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States.
Any litigation to enforce our intellectual property rights would be expensive
and time-consuming, would divert management resources and may not be adequate
to protect our business.

We could be subject to claims that we have infringed the intellectual property
rights of others. In addition, we may be required to indemnify our resellers
and users for similar claims made against them. Any claims against us could
require us to spend significant time and money in litigation, pay damages,
develop new intellectual property or acquire licenses to

9



---



##### Table of Contents



intellectual property that is the subject of the infringement claims. These
licenses, if required, may not be available at all or on acceptable terms. As
a result, intellectual property claims against us could have a material adverse
effect on our business, prospects, financial condition and results of
operations.

American Stock Exchange Market Listing

We were notified in 2000 by The American Stock Exchange (AMEX) that we no
longer comply with the minimum stockholders equity requirements for continued
listing and have subsequently met with exchange officials to review such
requirements. We cannot provide any assurance that we will remain listed on
the American Stock Exchange or that we will not be delisted at some later time.
In the event of a delisting, we will attempt to have our Common Stock listed
on the over-the-counter electronic bulletin board sponsored by Nasdaq. In such
event, investors may find it more difficult to trade in our Common Stock or to
obtain accurate, current information concerning market prices. This could have
a substantially negative impact on the trading prices and the liquidity of the
market for our Common Stock. In addition, there would likely be a more
negative perception of our company by investors, customers and third parties
doing business or considering doing business with us. Also, following
delisting, our company would be treated less favorably with respect to
regulatory requirements that are dependent upon listing on a national stock
exchange. For example, our Common Stock would cease to be a covered security
for purposes of Section 18 of the Securities Act of 1933, which provides an
exemption from state securities registration or qualification requirements. We
believe that it is likely that we will be delisted from AMEX and apply for a
listing on the electronic bulletin board sponsored by Nasdaq in 2003.

Forward-Looking Statements are Inherently Uncertain

Some statements under the caption Risk Factors, and elsewhere in this
prospectus or in the documents incorporated by reference in this prospectus are
forward-looking statements. These forward-looking statements include, but are
not limited to, statements about our industry, plans, objectives, expectations,
intentions and assumptions and other statements that are not historical facts.
When used in this prospectus or in the incorporated documents, the words
expect, anticipate, intend, plan, believe, seek, estimate and
similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, including those described in this Risk Factors section, actual
results may differ materially from those expressed or implied by these
forward-looking statements. We do not intend to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.

Access to Company Information

We electronically file our annual report on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K with the Securities and Exchange
Commission (SEC). The public may read and copy any of the reports that are
filed with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains
an Internet site (www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers that file electronically.

We make available, free of charge, through our website at www.hotelinfosys.com,
and by responding to requests addressed to our investor relations department
the annual report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K. These reports are available as soon as reasonably
practicable after such material is electronically filed with or furnished to
the SEC. Our website address is www.hotelinfosys.com and these reports are
available for review at or downloading from that site. The information
contained on our website is not part of this document.

10



---



##### Table of Contents






ITEM 2. PROPERTIES

As of April 4, 2002, the principal properties utilized by the Company were as
follows:

|                                                                                                               |  |                   |        |          |  |                        
|-------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | -------- |  | -----------------------
|                                                                                                               |  | Approximate Total |        |         
|Type of Facility                                                                                               |  | Square Footage    |        | Location
|                                                                                                               |  |                   |        |         
|Corporate and Hospitality Headquarters, warehousing,
administration, marketing, sales, development and support |  |                   | 26,955 |          |  | Lake Forest, California
|Sales and support                                                                                              |  |                   | 600    |          |  | Boston, Massachusetts  
|Product development, sales and support                                                                         |  |                   | 3,151  |          |  | Concord, California    
|Hotel Information Systems (Ltd) Hong Kong headquarters,
marketing, sales, and support                          |  |                   | 2,902  |          |  | Hong Kong              
|Hotel Information Systems (Ltd) Singapore sales and support                                                    |  |                   | 4,529  |          |  | Singapore              
|Hospitality Services & Solutions (Ltd) Malaysia support
and development                                        |  |                   | 1,760  |          |  | Malaysia               
|MAI Information Solutions Limited, European Headquarters,
marketing, sales and support                         |  |                   | 2,225  |          |  | London                 

All of the properties noted above were occupied by the Company pursuant to
leases with various expiration dates. In addition to the premises identified
above, the Company leases five other locations around the world. Generally
such leases are for terms of five years or less. We believe that our current
facilities are suitable for our needs.




ITEM 3. LEGAL PROCEEDINGS

Chapter 11 Bankruptcy Proceedings

At December 31, 2002, there was only one material claim to be settled regarding
our Chapter 11 proceedings, a tax claim with the United States Internal Revenue
Service (the Service). The amount of this claim is in dispute. The Company
has reserved $712,000 for settlement of this claim, which it is anticipated
would be payable to the Service in equal monthly installments over a period of
six (6) years from the settlement date at an interest rate of 6%.

CSA Private Limited

CSA is a MAI shareholder. On August 9, 1996, MAI acquired from Hotel
Information Systems, Inc. (HIS) substantially all their assets and certain of
their liabilities (the HIS Acquisition). At the time of our acquisition of
HIS in 1996, CSA was a shareholder of HIS and, in connection with the purchase,
we agreed to issue to CSA shares of its Common Stock worth approximately $4.8
million in August 1996, which amount had increased to approximately $6.8
million as of December 31, 2000, pursuant to the agreement. We entered into a
settlement agreement with CSA in February, 2001 whereby we (i) issued CSA
1,916,014 additional shares of our Common Stock to bring CSAs total share
ownership to 2,433,333 shares; (ii) filed a registration statement for all of
CSAs shares of our Common Stock which has been declared effective by the SEC
so that such shares are now freely tradable; and (iii) executed a secured debt
instrument in favor of CSA in the principal sum of $2,800,000 which is
subordinate only to our present group of two (2) senior secured leaders and
required cash installment payments to commence in March 2002 (see note 9 to the
financial statements).

In connection with the settlement agreement with CSA, we recorded the $2.8
million debt issuance as a reduction in paid in capital and the 1,916,014
additional shares at par as an addition to Common Stock and a reduction to
additional paid in capital.

Cher-Ae Heights Indian Community

A lawsuit was filed by Cher-Ae Heights Indian Community (Cher-Ae Heights)
against Logix Development Corporation (Logix), now known as MAI Development
Corporation, as a co-defendant for a breach of contract by the Companys
formerly owned gaming subsidiary along with the new owners, Monaco
Informatiques Systemes (MIS), who acquired the assets and certain liabilities
of the gaming subsidiary on July 27, 2001. Based upon this suit, MIS has
informed the Company that it did not intend to pay the Company under a
promissory note and security agreement. On October 24, 2002 the Company
entered into a settlement agreement with Cher-Ae Heights and MIS to resolve and
dismiss any and all outstanding legal claims between the parties including
payment of approximately $796,000 to MAI by January 10, 2003, which was
received by the Company.

11



---



##### Table of Contents



Logix Development Corporation

We entered into a settlement agreement with Logix Development Corporation
(Logix) in July of 2002 whereby we (i) issued Logix 200,000 shares of our
Common Stock (ii) required the Company to make various cash installment
payments totaling $175,000 to be paid within 1 year and (iii) executed a
contract with Logix for a consulting project in the amount of $50,000.

Other Litigation

We were also involved in various other legal proceedings that are incident to
its business. Management believes the ultimate outcome of these matters will
not have a material adverse effect on our consolidated financial position,
results of operations or liquidity.




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

None.

12



---



##### Table of Contents






PART II




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

Our shares are traded on the American Stock Exchange, Inc. under the AMEX
symbol NOW. Prior to listing on the AMEX, which occurred August 29, 1995,
our shares were traded over-the-counter by various market makers under the
ticker symbol MAIS. The following table sets forth the high and low closing
sales prices for our Common Stock for the indicated periods during 2001 and
2002, as reported by the AMEX. On April 4, 2003, the closing price of our
Common Stock as reported by the AMEX was $0.08 and there were 550 stockholders
of record (See Risk Factors  American Stock Exchange Market Listing).

We have never paid any dividends and do not anticipate declaring or paying cash
dividends in the foreseeable future. We intend to retain future earnings, if
any, to reinvest in our business. The covenants in our current or future
financing agreements may prohibit or limit our ability to declare or pay cash
dividends.

|             |                |      |   |      |  |  |  |     |  |  |   |      |  | 
|------------ | -------------- | ---- | - | ---- |  |  |  | --- |  |  | - | ---- |  | 
|Period       |                | High |   |      |  |  |  | Low
|             |                |      |   |      |  |  |  |    
|Fiscal 2001: |                |      |   |      |  |  |  |     |  |  |   |     
|             | First Quarter  |      | $ | 0.67 |  |  |  |     |  |  | $ | 0.19 | 
|             | Second Quarter |      | $ | 0.58 |  |  |  |     |  |  | $ | 0.26 | 
|             | Third Quarter  |      | $ | 0.68 |  |  |  |     |  |  | $ | 0.30 | 
|             | Fourth Quarter |      | $ | 0.40 |  |  |  |     |  |  | $ | 0.22 | 
|Fiscal 2002  |                |      |   |      |  |  |  |     |  |  |   |     
|             | First Quarter  |      | $ | 0.34 |  |  |  |     |  |  | $ | 0.24 | 
|             | Second Quarter |      | $ | 0.45 |  |  |  |     |  |  | $ | 0.25 | 
|             | Third Quarter  |      | $ | 0.34 |  |  |  |     |  |  | $ | 0.16 | 
|             | Fourth Quarter |      | $ | 0.18 |  |  |  |     |  |  | $ | 0.08 | 
|Fiscal 2003  |                |      |   |      |  |  |  |     |  |  |   |     
|             | First Quarter  |      | $ | 0.29 |  |  |  |     |  |  | $ | 0.06 | 




ITEM 6. SELECTED FINANCIAL INFORMATION

The information required by this item is incorporated by reference to our
Annual Report under the heading, Selected Financial Information.




ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information required by this item is incorporated by reference to our
Annual Report under the heading, Managements Discussion and Analysis of
Financial Condition and Results of Operations.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Disclosures

The following discussion about our market risk disclosures contains
forward-looking statements. Forward-looking statements are subject to risks
and uncertainties. Actual results could differ materially from those discussed
in the forward-looking statements. We are exposed to market risk related to
changes in interest rates and foreign currency exchange rates. We do not have
derivative financial instruments for hedging, speculative, or trading purposes.

Interest Rate Sensitivity

Of our $10.6 million principal amount of indebtedness at December 31, 2002,
none bears interest at a variable rate. However, $5.7 million bears interest
at a fixed rate of 11%, $2.8 million bears interest at a fixed rate of 10%,
$1.8 million bears interest at 9.25% and $0.3 million bears fixed interest
rates ranging from 6% to 17.5%. Since these debt instruments bear interest at
fixed rates, we have exposure to decreases in interest rates because we still
are required to pay the fixed rate even if current interest rates are lower.

13



---



##### Table of Contents



Foreign Currency Risk

We believe that our exposure to currency exchange fluctuation risk is reduced
because our transactions with international vendors and customers are generally
transacted in US dollars. The currency exchange impact on intercompany
transactions was immaterial in 2000, 2001, and 2002.




ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is incorporated by reference to our
Annual Report under the headings, Consolidated Balance Sheets, Consolidated
Statements of Operations, Consolidated Statements of Stockholders Deficiency
and Comprehensive Income (Loss), Consolidated Statements of Cash Flows,
Notes to Consolidated Financial Statements and Independent Auditors
Report.

Schedule II Valuation and Qualifying Accounts is set forth in this Annual
Report on Form 10-K.

All other schedules and financial statements are omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.




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

Information required by this Item may be found in our Form 8-K filed November
21, 2002, our Form 8-K/A filed December 6, 2002, in connection with our
termination of KPMG LLP as our independent auditors and our Form 8-K filed on
December 9, 2002, in connection with our appointment of BDO Seidman, LLP as our
independent auditors. Following is Item 4 of the respective Form 8-Ks:

Form 8-K filed on November 21, 2002:

On November 14, 2002 the Company dismissed KPMG LLP, the Registrants
independent public accountants. KPMG LLPs reports on the Companys
consolidated financial statements for the past two years, contained no adverse
opinion or disclaimer of opinion, and were not qualified as to uncertainty,
audit scope, or accounting principles.

During the Companys two most recent fiscal years and the subsequent interim
periods to the date of KPMG LLPs dismissal, there were no disagreements
between the Company and KPMG LLP on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreement(s) if not resolved to the satisfaction of KPMG LLP would
have caused that firm to make reference in connection with its reports to the
subject matter of the disagreement(s). At the time of its dismissal, KPMG LLP
had not completed its review of the Registrants financial statements for the
three-months ended June 30, 2002 pursuant to Statement on Auditing Standards
No. 71, Interim Financial Information. In connection with its review, KPMG LLP
had requested that the Registrant provide to KPMG LLP additional documentation
and information related to the capitalization of software development costs
recorded by the Registrant during the period. Due to KPMG LLPs dismissal, the
issue had not been resolved to their satisfaction prior to their termination as
the Registrants independent public accountants.

The Registrant has requested that KPMG LLP furnish it with a letter addressed
to the Commission stating whether it agrees with the above statements.

Form 8-K filed on December 6, 2002:

On November 14, 2002 the Company dismissed KPMG LLP (KPMG or the former
accountant), the Registrants independent public accountants. KPMGs reports
on the Companys consolidated financial statements for the past two years,
contained no adverse opinion or disclaimer of opinion, and were not qualified
as to uncertainty, audit scope, or accounting principles. The Companys
dismissal of KPMG was reviewed and approved by the Companys Audit Committee.

The Company requested a letter from KPMG at the time of their dismissal which
would be addressed to the Securities and Exchange Commission (SEC). At the
time of the initial Form 8-K Report filing on November 21, 2002 the Company had
not yet received KPMGs letter.

The Registrant is hereby filing as an exhibit to this Form 8-K/A Report a
letter dated December 4, 2002 from KPMG to the SEC. Prior to filing the
original Form 8-K Report on November 21, 2002, the Registrant furnished a copy
of the disclosures it was proposing to make to the former accountant as
required by Regulation S-K, Item 304. The former accountant

14



---



##### Table of Contents



suggested changes to the Registrants proposed disclosures responsive to
paragraph (a)(1)(v) of Item 304, and the Registrant made the requested changes.
Specifically, the Form 8-K Report filed on November 21, 2002 included, as
suggested by the former accountant, the following disclosure:



| |  | At the time of its dismissal, KPMG LLP had not completed its review of
the Registrants financial statements for the three-months ended June 30,
2002 pursuant to the Statement on Auditing Standards No. 71, Interim
Financial Information. In connection with its review, KPMG LLP had
requested that the Registrant provide to KPMG LLP additional
documentation and information related to the capitalization of software
development costs recorded by the Registrant during the period. Due to
KPMG LLPs dismissal, the issue had not been resolved to their
satisfaction prior to their termination as the Registrants independent
public accountants.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The former accountant did not request any changes responsive to paragraph
(a)(1)(iv) of Item 304. Based on discussions between the Registrant and the
former accountant in the period up to November 21, 2002, and a draft of the
response letter of the former accountant (i.e., letter stating whether it
agreed with the statements made by the Registrant), which the former accountant
provided to the Registrant on November 19, 2002, the Registrant understood from
the former accountant that there were no disagreements required to be reported
pursuant to Section (a)(1)(iv) of Item 304. The Registrant understood that any
input received from KPMG through the filing deadline for the Report on Form 8-K
remained subject to KPMG national office review.

Therefore, to the extent paragraph a. of the former accountants December 4
letter implies a disagreement prior to dismissal, the Registrant is unable to
agree with the former accountant.

The Registrants Form 10-Q Report for the three months ended June 30, 2002 was
previously amended by a Form 10-Q/A dated August 23, 2002. In preparing the
Form 10-Q/A filed on August 23, 2002, the Registrant verbally cleared the text
with the KPMG engagement partner before making the filing. In fact, the text
dealing with the SAS 71 review not being complete was substantially similar to
wording provided by KMPG. At no time before December 4, 2002 did KPMG suggest
that the Form 10-Q/A should have included additional wording that completion
of [KPMGs] SAS No. 71 review was pending the receipt of satisfactory
corroborative evidence supporting the capitalization of software development
costs recorded by the Registrant during the three months ended June 30, 2002.

Therefore, to the extent paragraph b. of the former accountants letter implies
a second disagreement prior to dismissal, the Registrant is again unable to
agree with the former accountant.

Prior to the dismissal of the former accountant, the issues respecting the
Registrants capitalization of software development costs were discussed
between the Registrants senior management and the engagement partner of KPMG,
but such discussion did not include the board or audit committee of the
Registrant. When a successor accountant has been engaged, the Registrant will
authorize the former accountant to respond fully to inquiries of the successor
accountant concerning the capitalization of software development costs.

If the Company had not capitalized software development costs of $359,000 and
$256,000 for the three-month periods ended June 30, 2002 and September 30,
2002, respectively, net income (loss) and net income (loss) per share for the
three and six month periods June 30, 2002 would have been ($13,000) and $0.00
per share and $314,000 and $0.02 per share, respectively, and ($419,000) and
($0.03) per share and ($106,000) and ($0.01) per share for the three and nine
month periods ended September 30, 2002, respectively.

Additionally, the Registrants Form 10-Qs for the June and September quarters
of 2002 disclosed in detail the effect of capitalizing such software
development costs. Such reports contained the following statements:



| |  | 6/30/02 Report                                                                                                                                                                                                                                                                       
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | MDA                                                                                                                                                                                                                                                                                  
|
| |  | . . . The decrease in research and development costs in 2002 was due to
the capitalization of approximately $359,000 of software development costs
mainly associated with the Companys new product development for
hospitality. There were no such costs capitalized in 2001 . . .
|
| |  | 9/30/02 Report                                                                                                                                                                                                                                                                       

15



---



##### Table of Contents





| |  | MDA                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | . . . Net cash used in investing activities for the nine months ended
September 30, 2002, totaled $743,000 which represented capital
expenditures of $128,000 and capitalized software of $615,000 . . .                                                                                                                                                                                                                                                                                                                            
|
| |  | Critical Accounting Policies & Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | . . . The Company capitalized $256,000 and $615,000 of software

development costs during the three and nine month periods ended September
30, 2002, respectively, relating to its new N-Tier, Internet-native
corporate application suite of products written. Although the Company has
not yet sold any of the modules to this suite of applications, the Company
believes that its new product will produce new sales adequate to recover
amounts capitalized . . .                                                             
|
| |  | The Registrant expects to engage a new principal accountant within the
next 10 business days and to provide the required disclosures pursuant to
Form 8-K and Regulation S-K, Item 304, with respect to such engagement.                                                                                                                                                                                                                                                                                                             
|
| |  | Exhibit to Form 8-K filed
on December 6, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The following is the text of KPMG,
LLPs letter filed as an exhibit to Form 8-K filed on
December 6, 2002:                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | December 4, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
|
| |  | Securities and Exchange
Commission
Washington, D.C. 20549                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Ladies and Gentlemen:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | We were previously principal accountants for MAI Systems Corporation (the
Registrant) and, under the date of March 31, 2002, we reported on the
consolidated financial statements of MAI Systems Corporation as of and for
the years ended December 31, 2001 and 2000. On November 14, 2002, our
appointment as principal accountants was terminated. We have read MAI
Systems Corporations statements included under Item 4 of its Form 8-K
dated November 21, 2002, and we agree with such statements except as
described below:
|
| |  | During the Registrants two most recent fiscal years and the subsequent
interim periods to the date of our dismissal, there were no disagreements
between the Registrant and KPMG LLP on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedure, which disagreements(s) if not resolved to our satisfaction
would have caused us to make reference in connection with our reports to
the subject matter of the disagreements except for the following matters:            



| | a. |  | We advised management of the Registrant, based on the evidence
provided to us through the date of our dismissal, that we did not
concur with the Registrants capitalization of software development
costs during the three months ended June 30, 2002.                                                                                                                                                                                                                                                                                                                                        
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | The Registrant filed its Form 10-Q for the three months ended
June 30, 2002 (Form 10-Q) on August 14, 2002 and did not disclose
that we had not completed our review of the Registrants financial
statements for the three months ended June 30, 2002 pursuant to
Statement on Auditing Standards (SAS) No. 71, Interim Financial
Information. We informed management that if they did not amend the
Form 10-Q promptly to disclose this fact, we would consider their
inaction to be an illegal act. When the Registrant amended the Form
10-Q on August 23, 2002, the Registrant stated:



| |  |  | .... Due to the late engagement of KPMG to commence the review
process and KPMGs unanticipated backlog of work, the Company filed
its Form 10-Q in advance of KPMGs completion of the SAS 71 review.
KPMG anticipates completion of its review shortly...
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We believe that the Registrant should have disclosed that the
completion of our SAS No. 71 review was pending the receipt of
satisfactory corroborative evidence supporting the capitalization of
software development costs recorded by the Registrant during the three
months ended June 30, 2002.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Very truly yours,
| |  | -----------------
|
| |  | /s/ KPMG LLP     

16



---



##### Table of Contents



Form 8-K filed on December 9, 2002:

On December 9, 2002 the Registrant engaged the accounting firm of BDO Seidman,
LLP as the independent public accountants to audit the Registrants financial
statements for the fiscal year ending December 31, 2002, as well as future
financial statements, to replace the firm of KPMG LLP, which was the
Registrants principal independent accountant as reported in the Registrants
Form 10-K as filed with the Securities and Exchange Commission for the period
ending December 31, 2001. As reported in the Registrants Form 8-K filed
November 21, 2002, KPMG LLP was terminated as the Registrants independent
public accountants on November 14, 2002.

The selection of BDO Seidman, LLP to replace KPMG LLP as the Registrants
independent public accountants was approved by the Board of Directors of the
Registrant and its Audit Committee.

During the years ended December 31, 2001 and 2000 and through December 9, 2002,
neither the Registrant nor anyone on its behalf consulted BDO Seidman, LLP
regarding the application of accounting principles to a specific transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on the Registrants financial statements, or any other matters or
reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation
S-K.

17



---



##### Table of Contents






PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item with respect to Directors may be found in the
section captioned Election of Directors appearing in the definitive Proxy
Statement to be delivered to stockholders in connection with the Annual Meeting
of Stockholders to be held in 2003. Information required by this Item with
respect to executive officers may be found in the section captioned Proposal 1
- Election of Directors appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held in 2003. Such information is incorporated herein by reference.




ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item may be found in the section captioned
Executive Compensation appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held in 2003. Such information is incorporated herein by reference.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to this Item may be found in the section captioned
Security Ownership of Management appearing in the definitive Proxy Statement
to be delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held in 2003. Such information is incorporated herein by
reference.

Security authorized for issuance under equity compensation plans

The following table provides information as of December 31, 2002 regarding
compensation plans (including individual compensation arrangements) under which
equity securities of the Company are authorized for issuance.

|                                                       |  |                            |           |                           |  |                        |      |                              |  |                         |         | 
|------------------------------------------------------ |  | -------------------------- | --------- | ------------------------- |  | ---------------------- | ---- | ---------------------------- |  | ----------------------- | ------- | 
|                                                       |  |                            |           |                           |  |                        |      |                              |  | Number of securities   
|                                                       |  |                            |           |                           |  |                        |      |                              |  | remaining available for
|                                                       |  | Number of securities to be |           |                           |  |                        |      | future issuance under equity
|                                                       |  | issued upon exercise of    |           | Weighted-average exercise |  | compensation plans    
|                                                       |  | outstanding options and    |           | price of outstanding      |  | (excluding securities 
|                                                       |  | warrants                   |           | options and warrants      |  | reflected in column a)
|                                                       |  | (a)                        |           | (b)                       |  | (c)                   
|Plan Category                                          |  |                            |           |                           |  |                       
|Equity Compensation Plans Approved
By Security Holders |  |                            | 2,763,855 |                           |  | $                      | 1.26 |                              |  |                         | 201,397 | 
|                                                       |  |                            |           |                           |  |                        |      |                              |  |                         |         | 
|Total                                                  |  |                            | 2,763,855 |                           |  | $                      | 1.26 |                              |  |                         | 201,397 | 
|                                                       |  |                            |           |                           |  |                        |      |                              |  |                         |         | 

See note 14 to the Consolidated Financial Statements for information
regarding the material features of the above plans.

18



---



##### Table of Contents






ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to this Item may be found in the sections captioned
Proposal 1  Election of Directors, and   Compensation Committee Interlocks
and Insider Participation and Executive Compensation - Employment Contracts
and Change of Control Arrangements appearing in the definitive Proxy Statement
to be delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held in 2003. Such information is incorporated herein by
reference.




ITEM 14. CONTROLS AND PROCEDURES

The Company maintains controls and procedures designed to ensure that it is
able to collect the information it is required to disclose in the reports it
files with the SEC, and to process, summarize and disclose this information
within the time periods specified in the rules of the SEC. The Companys Chief
Executive and Chief Financial Officers are responsible for establishing and
maintaining these procedures, and, as required by the rules of the SEC,
evaluate their effectiveness. Based on their evaluation of the Companys
disclosure controls and procedures which took place as of a date within 90 days
of the filing date of this report, the Chief Executive and Chief Financial
Officers believe that these procedures are effective to ensure that the Company
is able to collect, process and disclose the information it is required to
disclose in the reports it files with the SEC within the required time periods.

Internal Controls

The Company maintains a system of internal controls designed to provide
reasonable assurance that: transactions are executed in accordance with
managements general or specific authorization; transactions are recorded as
necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles, and to maintain accountability for
assets; access to assets is permitted only in accordance with managements
general or specific authorization; and the recorded accountability for assets
is compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.

Since the date of the most recent evaluation of the Companys internal controls
by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including and corrective actions with
regard to significant deficiencies and material weaknesses.

19



---



##### Table of Contents






PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND REPORTS ON FORM 8-K

|    |  |  |    |                                                                                                                                                                                        |  |                                                                                    
|--- |  |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------
|(a) |  |  | 1. | Financial Statements                                                                                                                                                                  
|   
|    |  |  |    |                                                                                                                                                                                        |  | Report of Independent Certified Public Accountants from BDO Seidman,
LLP           
|    |  |  |    |                                                                                                                                                                                        |  | Independent Auditors Report from KPMG LLP                                         
|    |  |  |    |                                                                                                                                                                                        |  | Consolidated Balance Sheets                                                        
|    |  |  |    |                                                                                                                                                                                        |  | Consolidated Statements of Operations                                              
|    |  |  |    |                                                                                                                                                                                        |  | Consolidated Statements of Stockholders Deficiency and
Comprehensive Income (Loss)
|    |  |  |    |                                                                                                                                                                                        |  | Consolidated Statements of Cash Flows                                              
|    |  |  |    |                                                                                                                                                                                        |  | Notes to Consolidated Financial Statements                                         
|   
|    |  |  |    | The consolidated financial statements of the Company, the notes thereto
and the Independent Auditors Report are incorporated herein by
reference to the Companys 2002 Annual Report.
|   
|    |  |  | 2. | Financial Statement Schedule                                                                                                                                                          
|   
|    |  |  |    |                                                                                                                                                                                        |  | Schedule II Valuation and Qualifying Accounts                                      
|   
|    |  |  | 3. | Exhibits:                                                                                                                                                                             

|       |  |                                                                                                                                                                                                                                                                                                                                      
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                      
|2.1    |  | First Amended Joint Chapter II Plan of Reorganization of MAI Systems
Corporation, Brooke Acquisition Corp. and CLS Software, Inc., as confirmed
by the United States Bankruptcy Court for the District of Delaware, on
November 13, 1993, filed as Exhibit 2.1 to the Registrants Current Report
on Form 8-K dated January 15, 1994.
|       |  |                                                                                                                                                                                                                                                                                                                                      
|2.2    |  | Consent Order Modifying Confirmed Plan of Reorganization and Fixing
Effective Date, as entered by the United States Bankruptcy Court for the
district of Delaware on January 27, 1994, as filed as Exhibit 2.2 to the
Registrants Current Report on form 8-K dated February 9, 1994.                                                
|       |  |                                                                                                                                                                                                                                                                                                                                      
|3.1    |  | Amended and Restated Certificate of Incorporation of MAI Systems
Corporation, filed as Exhibit 3.1 to the Companys 1996 Annual Report on
Form 10-K.                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                      
|3.2    |  | Amendment No. 1 to the Amended and Restated Certificate of Incorporation
of MAI Systems Corporation, filed as Exhibit 3.2 to the Companys 1996
Annual Report on Form 10-K.                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                      
|3.3    |  | By-laws of MAI Systems Corporation, filed as Exhibit 2(b) to the
Registrants Registration Statement on Form 8-A/A filed with the
Securities and Exchange Commission on February 24, 1994.                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                      
|3.4    |  | Amendment No. 2 to the Amended and Restated Certificate of Incorporation
of MAI Systems Corporation, filed as Exhibit 3.4 to the Companys 1998
Annual Report on Form 10-K.                                                                                                                                                          

| |      |                                                                     
| | ---- | --------------------------------------------------------------------
| |      |                                                                     
| | 10.1 | Amended and Restated MAI Systems Corporation 1993 Stock Option Plan.
| |      |                                                                     
| | 10.2 | Amended and Restated 1995 Non-Employee Directors Stock Option Plan. 
| |      |                                                                     
| | 10.3 | MAI Systems Corporations 2001 Restricted Stock Plan.               
| |      |                                                                     

|     |  |                                                                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.4 |  | Coast Business Credit Loan and Security Agreement, dated April 23, 1998,
filed as Exhibit 10.2 to the Companys 1998 Annual Report on Form 10-K.                                                                                                               
|     |  |                                                                                                                                                                                                                                                                
|10.5 |  | Amendment Number One dated September 30, 1998 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998, filed as Exhibit 10.2 to the Companys 1999 Annual Report on Form
10-K.                                   
|     |  |                                                                                                                                                                                                                                                                
|10.6 |  | Amendment Number Two dated March 2, 1999 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998, filed as Exhibit 10.3 to the Companys 1999 Annual Report on Form
10-K.                                        
|     |  |                                                                                                                                                                                                                                                                
|10.7 |  | Amendment Number Three dated June 16, 1999 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998, filed as Exhibit 10.4 to the Companys 1999 Annual Report on Form
10-K.                                      
|     |  |                                                                                                                                                                                                                                                                
|10.8 |  | Amendment Number Four dated July 28, 1999 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998, filed as Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q
for the period ending September 30, 1999.
|     |  |                                                                                                                                                                                                                                                                
|10.9 |  | Letter Agreement Amendment dated October 1, 1999 to the Loan and Security
Agreement between Coast Business Credit and                                                                                                                                          

20



---



##### Table of Contents



|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |  | 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Number |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |  | 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |  | 
|       |  | the Company dated April 23, 1998, filed as Exhibit 10.6 to the Companys
1999 Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.10  |  | Amendment Number Five dated April 13, 2000, to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998, filed as Exhibit 10.20 to the Companys 1999 Annual Report on Form
10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.11  |  | Amendment Number Six dated September 12, 2000, to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998, filed as Exhibit 10.31 to the Companys 2000 Annual Report on Form
10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.12  |  | Amendment Number Seven dated September 13, 2001, to the Loan and
Security Agreement between Coast Business Credit and the Company dated
April 23, 1998, filed as Exhibit 10.12 to the Companys 2001 Annual Report
on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.13  |  | Amendment Number Eight dated January 13, 2003, to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.14  |  | Pledge, Assignment and Security Agreement dated September 7, 2001
between Coast Business Credit, the Company, MAI Systems International and
MAI Development Corporation, filed as Exhibit 10.13 to the Companys 2001
Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.15  |  | Collateral Release Agreement dated September 28, 2001 between Coast
Business Credit and the Company filed as Exhibit 10.14 to the Companys
2001 Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.17  |  | Forebearance Agreement between MAI Systems Corporation and CPI
Securities LP, The Value Realization Fund, L.P., The Canyon Value
Realization Fund and GRS Partners II dated October 28, 1999, filed as
Exhibit 10.7 to the Companys Quarterly Report on Form 10-Q for the period
ending September 30, 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.18  |  | Amendment No. 1 dated February 14, 2000 to Forebearance Agreement
between MAI Systems Corporation and CPI Securities LP, The Value
Realization Fund, L.P., The Canyon Value Realization Fund and GRS Partners
II dated October 28, 1999, filed as Exhibit 10.18 to the Companys 1999
Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.19  |  | Amendment No. 2 dated April 13, 2000 to Forebearance Agreement between
MAI Systems Corporation and CPI Securities LP, The Value Realization Fund,
L.P., The Canyon Value Realization Fund and GRS Partners II dated October
28, 1999, filed as Exhibit 10.19 to the Companys 1999 Annual Report on
Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.20  |  | Supplement and Amendment dated January 31, 2001 to Forebearance
Agreement between MAI Systems Corporation and CPI Securities LP, The Value
Realization Fund, L.P., The Canyon Value Realization Fund and GRS Partners
II dated October 28, 1999, filed as Exhibit 10.32 to the Companys 2000
Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.21  |  | Collateral Release Agreement dated September 28, 2001 between MAI
Systems Corporation and CPI Securities LP, The Value Realization Fund,
L.P., The Canyon Value Realization Fund and GRS Partners II.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.22  |  | Amendment No. 3 dated January 13, 2003 to Note Purchase Agreement
between MAI Systems Corporation and CPI Securities LP, The Value
Realization Fund, L.P., The Canyon Value Realization Fund and GRS Partners
II dated October 28, 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.23  |  | Amendment No. One dated January 13, 2003 to Intercreditor and
Subordination Agreement dated April 23, 1998 between MAI Systems
Corporation and CPI Securities LP, The Value Realization Fund, L.P., The
Canyon Value Realization Fund, GRS Partners II and Coast Business Credit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.24  |  | Warrant Agreement between CPI Securities LP, The Value Realization Fund,
L.P., The Canyon Value Realization Fund and GRS Partners II.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.25  |  | Registration Rights Agreement between CPI Securities LP, The Value
Realization Fund, L.P., The Canyon Value Realization Fund and GRS Partners
II.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.26  |  | Settlement Agreement dated December 1, 2000 between CSA and MAI Systems
Corporation, filed as Exhibit 10.27 to the Companys 2000 Annual Report on
Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.27  |  | Security Agreement dated December 1, 2000 between CSA and MAI Systems
Corporation, filed as Exhibit 10.28 to the Companys 2000 Annual Report on
Form 10K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.28  |  | Amendment to Subordinated Note Due 2003 dated as of April 18, 2002
between CSA Private Limited and MAI Systems Corporation, filed as an
Exhibit to the Companys Quarterly Report on Form 10-Q for the period
ending March 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.29  |  | Consulting Agreement dated as of August 15, 1994, as amended as of
October 17, 1994, August 16, 1996, August 31, 1997, August 31, 1998,
August 31, 1999, August 31, 2000, and August 31, 2001 by and between the
Company and Orchard Capital Corporation, relating to the services of
Richard S. Ressler, Chairman of the Board. The original agreement and the
October 17, 1994 amendment are incorporated herein by reference to the
Companys 1994 Annual Report on Form 10-K. The August 16, 1996 amendment
is incorporated herein by reference to the Companys 1996 Annual Report on
Form 10-K. The August 31, 1997 amendment is incorporated herein by
reference to the Companys 1997 Annual Report on Form 10-K. The August 31,
1998 amendment is incorporated herein by reference to the Companys 1998
Annual Report on Form 10-K. The August 31, 1999 amendment is incorporated
herein by reference to the Companys 1999 Annual Report on Form 10-K. The
August 2000 amendment is incorporated herein by reference to the Companys
2000 Annual Report on Form 10-K. The August 2001 amendment is
incorporated herein by reference to the Companys 2001 Annual Report on
Form 10-K.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.30  |  | Premises Lease for MAI Systems Corporation corporate offices dated
January 23, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

21



---



##### Table of Contents



|       |  |                                                                                                                                                                                                                                                                                                                               |  |  |  | 
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Number |  | Exhibit                                                                                                                                                                                                                                                                                                                       |  |  |  | 
|       |  |                                                                                                                                                                                                                                                                                                                               |  |  |  | 
|13.1   |  | Portions of the Companys Annual Report to Stockholders for the year
ended December 31, 2002, but only to the extent such report is expressly
incorporated by reference into Items 10, 11, 12, 13 and 15(a)(1) of this
report and such report is not otherwise deemed to be filed as part of this
Annual Report on Form 10-K.
|       |  |                                                                                                                                                                                                                                                                                                                              
|21.1   |  | Subsidiaries of MAI Systems Corporation.                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                              
|23.1   |  | Report of Independent Certified Public Accountants from BDO Seidman LLP.                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                              
|23.2   |  | Consent of BDO Seidman, LLP.                                                                                                                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                              
|23.3   |  | Independent Auditors Report on Schedule and Consent from KPMG LLP                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                              
|99.1   |  | Certification of Chief Executive Officer, W. Brian Kretzmer, as required
by Sections 3.02 and 9.06 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                              
|99.2   |  | Certification of Chief Financial Officer, James W. Dolan, as required by
Sections 3.02 and 9.06 of the Sarbanes Oxley Act of 2002                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                              
|(b)    |  | Reports on Form 8-K during 2002:                                                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                              
|1.     |  | Current Report on Form 8-K dated December 10, 2002.                                                                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                              
|2.     |  | Amended Current Report on Form 8-K dated December 6, 2002.                                                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                              
|3.     |  | Current Report on Form 8-K dated November 21, 2002.                                                                                                                                                                                                                                                                          

22



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                      |  |     |                         |                                                          
|--------------------- |  | --- | ----------------------- | ---------------------------------------------------------
|                      |  |     |                         | MAI SYSTEMS CORPORATION                                  
|                      |  |     |                         |                                                          
|                      |  | By: | /s/ William B. Kretzmer
|                      |  |     |                         |                                                          
|                      |  |     |                         | William B.
Kretzmer
Chief Executive Officer and President
|Dated: April 15, 2003 |  |     |                         |                                                          

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on April 15, 2003.

|                                            |  |                                                                                                 
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|Signatures                                  |  | Title                                                                                           
|                                            |  |                                                                                                 
|                                           
|/s/Richard S. Ressler

Richard S. Ressler   |  | Chairman, Director                                                                              
|                                            |  |                                                                                                 
|/s/William B. Kretzmer

William B. Kretzmer |  | Chief Executive Officer and President
(Principal Executive Officer)                             
|                                            |  |                                                                                                 
|/s/James W. Dolan

James W. Dolan           |  | Chief Operating Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)
|                                            |  |                                                                                                 
|/s/Zohar Loshitzer

Zohar Loshitzer         |  | Director                                                                                        
|                                            |  |                                                                                                 
|/s/Stephen Ross

Stephen Ross               |  | Director                                                                                        
|                                            |  |                                                                                                 
|/s/Steven F. Mayer

Steven F. Mayer         |  | Director                                                                                        

23



---



##### Table of Contents






CERTIFICATIONS

I, William B. Kretzmer, certify that:

1.     I have reviewed this annual report on Form 10-K of MAI Systems Corporation;

2.     Based on my knowledge, this annual 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 annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the Evaluation Date); and                                                                                                  
| |    |                                                                                                                                                                                                                                                                                             
| | c) | presented in this annual 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
annual 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: April 15, 2003 |  |  | By: | /s/ William B. Kretzmer                    
|                     |  |  |     |                                            
|                     |  |  |     | William B. Kretzmer
Chief Executive Officer

24



---



##### Table of Contents



I, James W. Dolan, certify that:

1.     I have reviewed this annual report on Form 10-K of MAI Systems Corporation;

2.     Based on my knowledge, this annual 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 annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the Evaluation Date); and                                                                                                  
| |    |                                                                                                                                                                                                                                                                                             
| | c) | presented in this annual 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
annual 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: April 15, 2003 |  |  | By: | /s/ James W. Dolan                                  
|                     |  |  |     |                                                     
|                     |  |  |     | James W. Dolan
Chief Financial and Operating Officer

25



---



##### Table of Contents



In connection with the Annual Report on Form 10-K of MAI Systems Corporation
(the Company) for the year ended December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I, William B.
Kretzmer, Chief Executive Officer of the Company, certify pursuant to 18 U. S.
C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that :



| | 1. |  | The Report fully complies with the requirements of Section 13 (a)
or 15 (d) of the Securities Exchange Act of 1934, as amended; and                 
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.

|                     |  |  |     |                                            
|-------------------- |  |  | --- | -------------------------------------------
|Date: April 15, 2003 |  |  | By: | /s/ William B. Kretzmer                    
|                     |  |  |     |                                            
|                     |  |  |     | William B. Kretzmer
Chief Executive Officer

26



---



##### Table of Contents



In connection with the Annual Report on Form 10-K of MAI Systems Corporation
(the Company) for the year ended December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I, James D. Dolan,
Chief Financial and Operating Officer of the Company, certify pursuant to 18 U.
S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that :



| | 1. |  | The Report fully complies with the requirements of Section 13 (a)
or 15 (d) of the Securities Exchange Act of 1934, as amended; and                 
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.

|                     |  |  |     |                                                     
|-------------------- |  |  | --- | ----------------------------------------------------
|Date: April 15, 2003 |  |  | By: | /s/ James W. Dolan                                  
|                     |  |  |     |                                                     
|                     |  |  |     | James W. Dolan
Chief Financial and Operating Officer

27



---



##### Table of Contents



Exhibit 13.1     THE COMPANYS ANNUAL REPORT TO STOCKHOLDERS

Sections of the Registrants Annual Report to Stockholders Incorporated by Reference:

|         |  |                                                                                      
|-------- |  | -------------------------------------------------------------------------------------
|13.1.1   |  | Selected Financial Information                                                       
|         |  |                                                                                      
|13.1.2   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|         |  |                                                                                      
|13.1.3.1 |  | Independent Auditor Report                                                           
|         |  |                                                                                      
|13.1.3.2 |  | Independent Auditor Report                                                           
|         |  |                                                                                      
|13.1.4   |  | Consolidated Balance Sheets                                                          
|         |  |                                                                                      
|13.1.5   |  | Consolidated Statements of Operations                                                
|         |  |                                                                                      
|13.1.6   |  | Consolidated Statements of Stockholders Deficiency and Comprehensive Income (Loss)  
|         |  |                                                                                      
|13.1.7   |  | Consolidated Statements of Cash Flows                                                
|         |  |                                                                                      
|13.1.8   |  | Notes to Consolidated Financial Statements                                           

28



---



##### Table of Contents



Exhibit 13.1.1     SELECTED FINANCIAL INFORMATION

The following table summarizes our selected financial data derived from our
financials statements.

The financial data set forth below should be read in conjunction with, and is
qualified in reference to, Managements Discussion and Analysis of Financial
Condition and Results of Operations, our consolidated financial statements and
the related notes to those financial statements, included elsewhere in this
report.

SELECTED FINANCIAL DATA

(in thousands, except per share data)

STATEMENT OF OPERATIONS DATA

|                                                                            |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |        |       |  
|--------------------------------------------------------------------------- | ------- | ------------------------------- | ------ | -------------------------------- | ----- | ---- | ------- | ------ | ----- | ---- | ------- | ------ | ----- | - | ------- | ------ | ----- | - | ------- | ------ | ----- | -
|                                                                            |         |                                 |        | For the Years Ended December 31,
|                                                                            |         |                                 |        |                                 
|                                                                            |         |                                 |        | 1998                             |       | 1999 |         | 2000   |       | 2001 |         | 2002  
|                                                                           
|Revenue                                                                     |         | $                               | 36,389 |                                  |       | $    | 37,335  |        |       | $    | 27,321  |        |       | $ | 23,768  |        |       | $ | 21,937  |       
|Income (loss) from continuing operations                                    |         |                                 | (4,881 | )                                |       |      | (13,770 | )      |       |      | 1,444   |        |       |   | 3,657   |        |       |   | 417     |       
|Income (loss) and gain (loss) from discontinued
operations                  |         |                                 | 2,565  |                                  |       |      | 2,997   |        |       |      | (627    | )      |       |   | (1,525  | )      |       |   | (1,767  | )     
|Net income (loss)                                                           |         |                                 | (2,316 | )                                |       |      | (10,773 | )      |       |      | 817     |        |       |   | 2,132   |        |       |   | (1,350  | )     
|Income (loss) per share from continuing operations:                         |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|                                                                            |         | Basic income (loss) per share   |        | $                                | (0.46 | )    |         | $      | (1.26 | )    |         | $      | 0.13  |   |         | $      | 0.28  |   |         | $      | 0.03  |  
|                                                                            |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|                                                                            |         | Diluted income (loss) per share |        | $                                | (0.46 | )    |         | $      | (1.26 | )    |         | $      | 0.13  |   |         | $      | 0.28  |   |         | $      | 0.03  |  
|                                                                            |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|Income (loss) per share from discontinued operations:                       |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|                                                                            |         | Basic income (loss) per share   |        | $                                | 0.23  |      |         | $      | 0.27  |      |         | $      | (0.06 | ) |         | $      | (0.12 | ) |         | $      | (0.13 | )
|                                                                            |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|                                                                            |         | Diluted income (loss) per share |        | $                                | 0.23  |      |         | $      | 0.27  |      |         | $      | (0.06 | ) |         | $      | (0.12 | ) |         | $      | (0.12 | )
|                                                                            |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|Net Income (loss) per share:                                                |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|                                                                            |         | Basic income (loss) per share   |        | $                                | (0.23 | )    |         | $      | (0.99 | )    |         | $      | 0.07  |   |         | $      | 0.16  |   |         | $      | (0.10 | )
|                                                                            |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|                                                                            |         | Diluted income (loss) per share |        | $                                | (0.23 | )    |         | $      | (0.99 | )    |         | $      | 0.07  |   |         | $      | 0.16  |   |         | $      | (0.09 | )
|                                                                            |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|Weighted average common shares used
in determining income (loss) per share: |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|                                                                            | Basic   |                                 |        | 10,587                           |       |      |         | 10,889 |       |      |         | 10,923 |       |   |         | 13,091 |       |   |         | 13,945 |      
|                                                                            |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|                                                                            | Diluted |                                 |        | 10,587                           |       |      |         | 10,889 |       |      |         | 11,206 |       |   |         | 13,263 |       |   |         | 14,395 |      
|                                                                            |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|BALANCE SHEET DATA                                                          |         |                                 |        |                                  |       |      |         |        |       |      |         |        |       |   |         |        |       |   |         |       
|Working capital deficiency                                                  |         |                                 | (8,010 | )                                |       |      | (14,381 | )      |       |      | (10,811 | )      |       |   | (3,787  | )      |       |   | (8,649  | )     
|Total assets                                                                |         |                                 | 35,757 |                                  |       |      | 24,630  |        |       |      | 16,445  |        |       |   | 8,288   |        |       |   | 6,177   |       
|Long-term debt                                                              |         |                                 | 8,333  |                                  |       |      | 8,114   |        |       |      | 7,792   |        |       |   | 10,966  |        |       |   | 10,523  |       
|Stockholders deficiency (1)                                                |         |                                 | (2,366 | )                                |       |      | (12,569 | )      |       |      | (12,110 | )      |       |   | (12,992 | )      |       |   | (14,782 | )     

(1)     No cash dividends have been declared by the Company.

29



---



##### Table of Contents



QUARTERLY DATA (Unaudited)

(in millions, except share data)

|                                                                                           |                          |         |        |             |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |   |       |  
|------------------------------------------------------------------------------------------ | ------------------------ | ------- | ------ | ----------- | ----- | ----------- | ------ | ----------- | ----- | ----------- | ------ | ----------- | ----- | ----------- | ------ | ----------- | ----- | ----------- | ------ | - | ---- | - | ------ | - | ---- | - | ------ | - | ----- | - | ------ | - | ----- | -
|                                                                                           |                          |         |        | 1st Quarter |       | 2nd Quarter |        | 3rd Quarter |       | 4th Quarter |        | 1st Quarter |       | 2nd Quarter |        | 3rd Quarter |       | 4th Quarter
|                                                                                           |                          |         |        | 2001        |       | 2001        |        | 2001        |       | 2001(1)     |        | 2002        |       | 2002        |        | 2002        |       | 2002(1)    
|Revenue                                                                                    |                          | $       | 6.5    |             |       | $           | 6.3    |             |       | $           | 6.1    |             |       | $           | 4.9    |             |       | $           | 5.7    |   |      | $ | 5.5    |   |      | $ | 5.7    |   |       | $ | 5.0    |  
|Gross profit                                                                               |                          |         | 4.3    |             |       |             | 4.4    |             |       |             | 4.3    |             |       |             | 3.5    |             |       |             | 3.8    |   |      |   | 3.7    |   |      |   | 3.9    |   |       |   | 3.7    |  
|Income (loss) from
continuing operations                                                   |                          |         | 1.9    |             |       |             | 0.8    |             |       |             | 0.6    |             |       |             | 0.3    |             |       |             | 0.2    |   |      |   | 0.3    |   |      |   | 0.1    |   |       |   | (0.2   | )
|Income (loss) from
discontinued operations                                                 |                          |         | (0.5   | )           |       |             | (0.5   | )           |       |             | (0.2   | )           |       |             | (0.3   | )           |       |             | 0.1    |   |      |   | 0.1    |   |      |   | (0.2   | ) |       |   | (1.7   | )
|Net income (loss)                                                                          |                          |         | 1.4    |             |       |             | 0.3    |             |       |             | 0.4    |             |       |             | 0.0    |             |       |             | 0.3    |   |      |   | 0.3    |   |      |   | (0.2   | ) |       |   | (1.8   | )
|Income (loss) per share(1):                                                                |                          |         |        |             |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |  
|                                                                                           | Continuing Operations:   |         |        |             |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |   |      
|                                                                                           |                          | Basic   |        | $           | 0.16  |             |        | $           | 0.06  |             |        | $           | 0.05  |             |        | $           | 0.02  |             |        | $ | 0.02 |   |        | $ | 0.02 |   |        | $ | 0.00  |   |        | $ | 0.01  |  
|                                                                                           |                          | Diluted |        |             | 0.16  |             |        |             | 0.06  |             |        |             | 0.05  |             |        |             | 0.02  |             |        |   | 0.02 |   |        |   | 0.02 |   |        |   | 0.00  |   |        |   | 0.01  |  
|                                                                                           | Discontinued Operations: |         |        |             |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |   |      
|                                                                                           |                          | Basic   |        |             | (0.04 | )           |        |             | (0.04 | )           |        |             | (0.02 | )           |        |             | (0.02 | )           |        |   | 0.00 |   |        |   | 0.01 |   |        |   | (0.01 | ) |        |   | (0.12 | )
|                                                                                           |                          | Diluted |        |             | (0.04 | )           |        |             | (0.04 | )           |        |             | (0.02 | )           |        |             | (0.02 | )           |        |   | 0.00 |   |        |   | 0.01 |   |        |   | (0.01 | ) |        |   | (0.12 | )
|                                                                                           | Income (loss) per share: |         |        |             |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |   |      
|                                                                                           |                          | Basic   |        |             | 0.12  |             |        |             | 0.02  |             |        |             | 0.03  |             |        |             | 0.00  |             |        |   | 0.02 |   |        |   | 0.02 |   |        |   | (0.01 | ) |        |   | (0.13 | )
|                                                                                           |                          | Diluted |        |             | 0.12  |             |        |             | 0.02  |             |        |             | 0.03  |             |        |             | 0.00  |             |        |   | 0.02 |   |        |   | 0.02 |   |        |   | (0.01 | ) |        |   | (0.13 | )
|Weighted average common
shares used in determining
income (loss) per share (in
thousands): |                          |         |        |             |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |  
|Basic                                                                                      |                          |         | 11,395 |             |       |             | 13,679 |             |       |             | 13,691 |             |       |             | 13,656 |             |       |             | 13,656 |   |      |   | 13,852 |   |      |   | 14,119 |   |       |   | 14,154 |  
|                                                                                           |                          |         |        |             |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |  
|Diluted                                                                                    |                          |         | 11,563 |             |       |             | 13,847 |             |       |             | 13,928 |             |       |             | 13,692 |             |       |             | 13,663 |   |      |   | 14,361 |   |      |   | 14,569 |   |       |   | 14,604 |  
|                                                                                           |                          |         |        |             |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |  

(1) During the fourth quarter of 2002, the Company recorded a $1,021,000 loss
on the sale of its Legacy and Process Manufacturing businesses. During the
fourth quarter of 2001, the Company recorded a $1,262,000 gain on the sale of
certain assets relating to its Legacy business. Additionally, the Company also
recorded a charge of $1,351,000 in the fourth quarter of 2001 relating to the
write down of intangible assets relating to its Process Manufacturing business
which was held for sale with the Legacy business as of December 31, 2001.

---

30



---



##### Table of Contents



|               |  |                                                                                      
|-------------- |  | -------------------------------------------------------------------------------------
|Exhibit 13.1.2 |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the audited
consolidated financial statements included elsewhere herein. Except for the
historical information contained herein, the matters discussed in this Annual
Report are forward-looking statements that involve a number of risks and
uncertainties. There are certain important factors and risks, including the
rapid change in hardware and software technology, market conditions,
competitive factors, seasonality and other variations in the buying cycles of
certain of our customers, the timing of product announcements, the release of
new or enhanced products, the introduction of competitive products and services
by existing or new competitors, the significant risks associated with the
acquisition of new products, product rights, technologies or businesses, our
ability to retain technical, managerial and other personnel, and the other
risks detailed from time to time in our SEC reports, including reports on Form
10-K and Form 10-Q, that could cause results to differ materially from those
anticipated by the statements made herein. Therefore, historical results and
percentage relationships will not necessarily be indicative of the operating
results of any future period. See Risk Factors elsewhere in this Annual
Report on Form 10-K.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues and expenses. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, accounts receivable and
intangible assets. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. This forms the basis of judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.

We believe the following critical accounting policies and the related judgments
and estimates affect the preparation of our consolidated financial statements:

Software Development Costs

We capitalize costs related to the development of certain software products.
Capitalization of costs begins when technological feasibility is established
and ends when the product is available for general release to customers.
Technological feasibility is reached upon the earlier of completion of a
detailed program design or working model.

Amortization is computed on an individual product basis and is recognized over
the greater of the remaining economic lives of each product or the ratio that
current gross revenues for a product bear to the total of current and
anticipated revenues for that product, commencing when the products become
available for general release to customers. Software development costs are
generally being amortized over a three-year period. We continually assess the
recoverability of software development costs by comparing the carrying value of
individual products to their net realizable value.

We capitalized $861,000 of software development costs during 2002 relating to
our new N-Tier, Internet-native corporate application suite of products written
in java. Although we have not yet sold any of the modules to this suite of
applications, we believe that these new products will produce new sales adequate
to recover amounts capitalized.

Revenue Recognition

We record revenue in accordance with Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended. We license our products through our direct
sales force and indirectly through resellers. We recognize revenue from sales
of hardware, software and professional services and from arrangements
involving multiple elements of each of the above. Revenue for multiple element
arrangements are recorded by allocating revenue to the various elements based
on their respective fair values as evidenced by vendor specific objective
evidence. The fair value in multi-element arrangements is determined based upon
the price charged when sold separately. Revenue is not recognized until
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collectibility is probable. Sales of network and
computer equipment are recorded when title and risk of loss transfers. Software
revenues are recorded when application software programs are shipped to end
users, resellers and distributors, provided the Company is not required to
provide services essential to the functionality of the software and/or
significantly modify, customize or produce the software. Professional services
fees for software development, training and installation are recognized as the
services are provided. Maintenance revenues are initially deferred and
recognized evenly over the related contract period.

31



---



##### Table of Contents



Accounts Receivable

We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. The amount of
our reserves is based on historical experience and our analysis of the accounts
receivable balances outstanding. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required which would result in an
additional general and administrative expense in the period such determination
was made. While such credit losses have historically been within our
expectations and the provisions established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have in the past.

Intangible Assets

We record goodwill arising from acquisitions as the excess of the purchase
price over the fair value of assets acquired and such goodwill was being
amortized over a useful life of five to seven years. In July 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinationsand SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method and
provides new criteria for recording intangible assets separately from goodwill.
Existing goodwill and intangible assets will be evaluated against these new
criteria, which may result in certain intangible assets being subsumed into
goodwill. SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Goodwill and intangible assets that have
indefinite useful lives will not be amortized into results of operations, but
instead will be evaluated at least annually for impairment and written down
when the recorded value exceeds the estimated fair value. The Company adopted
the provisions of SFAS No. 142 on January 1, 2002. As a result, the Company has
ceased amortization of goodwill. In addition, impairment reviews may result in
charges against earnings to write down the value of goodwill.

The Company did not record an impairment charge upon completion of the initial
impairment reviews on January 1, 2002 or upon its annual impairment reviews at
December 31, 2002.

Liquidity and Capital Resources

At December 31, 2002, working capital decreased from a working capital
deficiency of $3,787,000 at December 31, 2001 to a working capital deficiency
of $8,649,000. Excluding unearned revenue of $3,693,000, the Companys working
capital deficiency at December 31, 2002 would be $4,956,000. Excluding unearned
revenue of $1,743,000, working capital deficiency at December 31, 2001 was
$2,044,000. Excluding unearned revenue,
the increase in the working capital deficiency of $2,912,000 was primarily
attributable to increases in customer deposits of $647,000, current portion of
long term debt of $3,177,000 and decreases in cash of $679,000, current assets
held for sale of $204,000, accounts receivable of $562,000, notes receivable of
$250,000 and prepaids and other assets of $290,000 offset by decreases in
accounts payable of $826,000, accrued liabilities of $395,000, income taxes
payable of $146,000 and current liabilities held for sale of $1,560,000.

Cash was $545,000 at December 31, 2002, as compared to $1,224,000 at December
31, 2001. On January 13, 2003, the Company converted its secured revolving
credit facility which was based on a calculation using a rolling average of
certain cash collections to a two-year term loan. At December 31, 2002,
approximately $1,801,000 was drawn down under this facility. The consolidated
balance sheet reflects the reclass of the secured revolving credit facility to
a term loan in 2002.

Net cash used in investing activities for the year ended December 31, 2002
totaled $462,000, which is comprised of capital expenditures of $101,000 and
capitalized software of $861,000, offset by payments received on notes
receivable of $500,000.

Net cash used in financing activities for the year ended December 31, 2002
totaled $725,000, which was comprised of a $623,000 decrease in the secured
revolving credit facility and $102,000 in repayments of long-term debt. The
revolving credit facility required monthly interest only payments on the
average outstanding balance for the period. The Company was required to make
weekly payments of $12,500 on the subordinated debt. On January 13 2003, the
Company converted its credit facility to a term loan which requires monthly
principal and interest payments of $58,000 and matures on February 28, 2005.
In addition, the Company amended its subordinated note to require monthly
interest only payments of $52,000 through February 28, 2005, at which time it
will convert to a term loan to be amortized over a three year period. The
restructured debt pursuant to an intercreditor agreement between Canyon Capital
and Coast Business Credit, contains various restrictions and covenants,
including a minimum quick ratio of 0.30 to l.00 and minimum debt service
coverage ratio of 0.90 to l.00 which commence as of and for the three-month
period ended March 31, 2003. The minimum quick ratio increases
to 0.31 to 1.00 as of June 30, 2003 and September 30, 2003
and to 0.34 to 1.00 as of December 31, 2003 and for each and
every fiscal quarter ending thereafter. The minimum debt coverage
ratio increases to 1.10 to 1.00 for the three-month period ending
June 30, 2003 and to 1.25 to 1.00 for the three-month period
ending September 30, 2003 and for each and every fiscal quarter
thereafter. In the event that we were not in compliance with
the various restrictions and covenants and were unable to receive waivers for
non-compliance, the term and subordinated debt would be immediately due and
payable. We believe that we will be in compliance with the covenants
as of March 31, 2003 and for every fiscal quarter thereafter.

32



---



##### Table of Contents



Stockholders deficiency increased from $12,992,000 at December 31, 2001 to
$14,782,000 at December 31, 2002, mainly as a result of net loss of $1,350,000,
an increase in accumulated other comprehensive loss of $588,000 offset by
unearned compensation of $91,000, issuance of common stock of $77,000 and
exercise of stock options of $9,000.

Net cash provided by continuing operations for the year ended December 31, 2002
totaled $3,028,000 and was mainly related to an increase in unearned revenue of
$1,700,000 and decreases in accounts receivable of $592,000, prepaids and other
assets of $395,000, loss on discontinued operations of $746,000, loss on the
disposal of discontinued operations of $1,021,000 and non-cash charges for
depreciation and amortization of tangible and intangible assets of $819,000
offset by a net loss for the year of $1,350,000, decreases in accounts payable
and customer deposits of $445,000, accrued liabilities of $522,000, and income
taxes payable of $151,000.

Although the Company has a net stockholders deficiency of $14,782,000 and a
working capital deficit of $8,649,000 (which includes subordinated debt due to
CSA of $2,800,000) at December 31, 2002, the Company believes it will continue
to generate sufficient funds from operations and obtain additional financing or
restructure its subordinated note with CSA to meet its operating and capital
requirements. The Company is currently in negotiations with CSA to restructure
the terms of the existing debt, including extending the maturity date. The
Company expects to generate positive cash flow from its continuing operations
during 2003 from shipping out products and services from its current backlog as
of December 31, 2002 as well as new orders. In the event that the Company
cannot generate positive cash flow from its continuing operations during 2003,
the Company can substantially reduce its research and development efforts to
mitigate cash outflow to help sustain its operations. There can be no
assurance that the Company will be able to sustain profitability, generate
positive cash flow from operations or restructure its debt as necessary. These
financial statements have been prepared assuming the Company will continue to
operate as a going concern. If the Company is unsuccessful in the
aforementioned efforts, the Company could be forced to liquidate certain of its
assets, reorganize its capital structure and, if necessary, seek other remedies
available to the Company, including protection under the bankruptcy laws.

Contractual Obligations and Commercial Commitments

The following table summarizes the Companys obligations and commitments as of
December 31, 2002:

|                             |  |                                       |        |                  |  |           |       |           |  |               |       |  |  |   |       |  |  |   |     | 
|---------------------------- |  | ------------------------------------- | ------ | ---------------- |  | --------- | ----- | --------- |  | ------------- | ----- |  |  | - | ----- |  |  | - | --- | 
|                             |  | Payments Due by Period (in thousands)
|                             |  |                                       |        |                  |  |           |       |           |  |              
|Contractual Cash Obligations |  | Total                                 |        | Less Than 1 Year |  | 1-3 Years |       | 4-5 Years |  | After 5 Years
|                             |  |                                       |        |                  |  |           |       |           |  |              
|Long-Term Debt               |  | $                                     | 10,523 |                  |  | $         | 3,289 |           |  | $             | 2,633 |  |  | $ | 4,012 |  |  | $ | 589 | 
|Operating Leases             |  |                                       | 2,646  |                  |  |           | 839   |           |  |               | 1,169 |  |  |   | 516   |  |  |   | 122 | 
|Consulting Agreements        |  |                                       | 336    |                  |  |           | 336   |           |  |               |      |  |  |   |      |  |  |   |    | 
|                             |  |                                       |        |                  |  |           |       |           |  |               |       |  |  |   |       |  |  |   |     | 
|                             |  | $                                     | 13,505 |                  |  | $         | 4,464 |           |  | $             | 3,802 |  |  | $ | 4,528 |  |  | $ | 711 | 
|                             |  |                                       |        |                  |  |           |       |           |  |               |       |  |  |   |       |  |  |   |     | 

33



---



##### Table of Contents



Results of Operations

Year Ended December 31, 2001 Compared to Year Ended December 31, 2002.

|                                                   |  |              |        |               |  |              |       |               |  |  |        |   |  |  |       |   
|-------------------------------------------------- |  | ------------ | ------ | ------------- |  | ------------ | ----- | ------------- |  |  | ------ | - |  |  | ----- | --
|                                                   |  | December 31, |        | Percentage of |  | December 31, |       | Percentage of
|(dollars in
thousands)                             |  | 2001         |        | Revenue       |  | 2002         |       | Revenue      
|                                                   |  |              |        |               |  |              |       |              
|Revenue:                                           |  |              | 23,768 |               |  |              | 100.0 | %             |  |  | 21,937 |   |  |  | 100.0 | % 
|Gross profit                                       |  |              | 16,530 |               |  |              | 69.5  | %             |  |  | 15,017 |   |  |  | 68.5  | % 
|Selling, general and administrative expenses       |  |              | 7,927  |               |  |              | 33.3  | %             |  |  | 9,363  |   |  |  | 42.7  | % 
|Research and development costs                     |  |              | 4,209  |               |  |              | 17.7  | %             |  |  | 3,307  |   |  |  | 15.1  | % 
|Amortization of intangibles                        |  |              | 731    |               |  |              | 3.1   | %             |  |  | 134    |   |  |  | 0.6   | % 
|Other operating expense (income)                   |  |              | (1,643 | )             |  |              | (6.9  | %)            |  |  | 276    |   |  |  | 1.3   | % 
|Interest expense, net                              |  |              | 1,473  |               |  |              | 6.2   | %             |  |  | 1,490  |   |  |  | 6.8   | % 
|Income taxes                                       |  |              | 176    |               |  |              | 0.7   | %             |  |  | 30     |   |  |  | 0.1   | % 
|Income from continuing operations                  |  |              | 3,657  |               |  |              | 15.4  | %             |  |  | 417    |   |  |  | 1.9   | % 
|Gain (loss) on disposal of discontinued operations |  |              | 1,262  |               |  |              | 5.3   | %             |  |  | (1,021 | ) |  |  | (4.7  | %)
|Loss from discontinued operations                  |  |              | (2,787 | )             |  |              | (11.7 | )%            |  |  | (746   | ) |  |  | (3.4  | %)
|Net income (loss)                                  |  |              | 2,132  |               |  |              | 9.0   | %             |  |  | (1,350 | ) |  |  | (6.2  | %)

Revenue for 2002 was $21,937,000 compared to $23,768,000 in 2001 or a 7.7%
decrease. Revenue decreased $1,831,000 in 2002, as a result of decreased
professional services and maintenance services mainly due to decreased capital
spending on information technology in 2002 due to the effects of the September
11, 2001 terrorist attacks on the hospitality industry.

The decrease in revenue in 2002 was mainly attributable to a decrease in
service volume and rates as many hotels have reduced their operating costs by
canceling or reducing contracted services, including support, in a post
September 11, 2001 economy. Many hotels have requested that their suppliers
reduce the cost of service or delay any price increases while they are
experiencing reduced guest occupancy and lower average daily rates on their
inventory of rooms. Certain hotels have also established their own help desks
to further reduce costs. As a result, the Company did not raise support prices
in 2002 and agreed, with certain of its clients, to provide a second line of
support versus a first line of support that was previously provided to such
clients. Our continuing hospitality business unit continues to generate
sufficient cash from operations to adequately fund its ongoing operating
activities.

Gross profit for 2002 decreased to $15,017,000 (68.5%) from $16,530,000 (69.5%)
in 2001. The decrease in gross profit is mainly due to the decrease in
professional services and maintenance services revenues during the period in
excess of the Companys cost reductions.

Selling, general and administrative expenses (SG&A) increased from
$7,927,000 in 2001 to $9,363,000 in 2002. The increase is mainly due to an
increase in selling & marketing, expenses for trade shows, advertisements and
additional head count and other employee related expenses as the Company
actively markets components of its newly developed enterprise suite of
applications.

The decrease in net research and development costs in 2002 was mainly due to
the capitalization of approximately $861,000 of software development costs
associated with the Companys new product development for hospitality. There
were no such costs capitalized in 2001.

The decrease in amortization of intangibles in 2002 versus the comparable
period of 2001 is due to the fact that goodwill is no longer amortized to
expense commencing January 1, 2002. Goodwill amortization was $420,000 for the
year ended December 31, 2001.

Other operating (income) expense was ($1,643,000) in 2001 and $276,000 in 2002.
The decrease in other operating income in 2002 is mainly due to the Company
issuing Common Stock to certain creditors to satisfy its obligations, which
resulted in a gain of $1,377,000 in the first quarter of 2001. There were no
such transactions in 2002.

Net interest expense net was $1,473,000 in 2001 compared to $1,490,000 in 2002.
The slight increase is mainly due a decrease in interest income of $67,000 for
2001 compared to 2002.

The income tax provision only reflects a tax provision for our foreign
operations and alternative minimum taxes for domestic operations due to the
utilization of net operating loss carryforwards in 2001.

In 2001, the Company sold certain assets and liabilities relating to its
domestic Legacy hardware maintenance division to a third party, resulting in a
gain of $1,262,000. In the fourth quarter of 2002, the Company sold all the
assets and liabilities of its Process Manufacturing and Canadian subsidiaries
to third parties, resulting in a loss of $1,021,000.

34



---



##### Table of Contents



Results from discontinued operations improved from a loss of $2,787,000 in 2001
to loss of $746,000 in 2002 mainly as a result of decreased Process
Manufacturing operating expenses from $4,871,000 in 2001 to $1,486,000 in 2002.

Revenue from discontinued operations decreased from $5,078,000 in 2001 to
$2,344,000 in 2002. Revenue from Process Manufacturing decreased from
$1,980,000 in 2001 to $1,443,000 in 2002 reflecting the process ERP industry
stagnation and decline.

Results of Operations

Year Ended December 31, 2000 Compared to Year Ended December 31, 2001.

|                                             |  |              |        |               |  |              |       |               |  |   |        |   |  |  |       |   
|-------------------------------------------- |  | ------------ | ------ | ------------- |  | ------------ | ----- | ------------- |  | - | ------ | - |  |  | ----- | --
|                                             |  | December 31, |        | Percentage of |  | December 31, |       | Percentage of
|(dollars in
thousands)                       |  | 2000         |        | Revenue       |  | 2001         |       | Revenue      
|                                             |  |              |        |               |  |              |       |              
|Revenue                                      |  | $            | 27,321 |               |  |              | 100.0 | %             |  | $ | 23,768 |   |  |  | 100.0 | % 
|Gross profit                                 |  |              | 15,666 |               |  |              | 57.3  | %             |  |   | 16,530 |   |  |  | 69.5  | % 
|Selling, general and administrative expenses |  |              | 8,942  |               |  |              | 32.7  | %             |  |   | 7,927  |   |  |  | 33.3  | % 
|Research and development costs               |  |              | 3,068  |               |  |              | 11.2  | %             |  |   | 4,209  |   |  |  | 17.7  | % 
|Amortization of intangibles                  |  |              | 740    |               |  |              | 2.7   | %             |  |   | 731    |   |  |  | 3.1   | % 
|Other operating (income) expense             |  |              | 50     |               |  |              | 0.2   | %             |  |   | (1,643 | ) |  |  | (6.9  | %)
|Interest expense, net                        |  |              | 1,260  |               |  |              | 4.6   | %             |  |   | 1,473  |   |  |  | 6.2   | % 
|Income taxes                                 |  |              | 162    |               |  |              | 0.6   | %             |  |   | 176    |   |  |  | 0.7   | % 
|Gain on disposal of discontinued operations  |  |              |       |               |  |              |      |               |  |   | 1,262  |   |  |  | 5.3   | % 
|Loss from discontinued operations            |  |              | (627   | )             |  |              | (2.3  | %)            |  |   | (2,787 | ) |  |  | (11.7 | )%
|Net income                                   |  | $            | 817    |               |  |              | 3.0   | %             |  | $ | 2,132  |   |  |  | 9.0   | % 

Revenue for 2001 was $23,768,000 compared to $27,321,000 in 2000 or a 13.0%
decrease. Revenue decreased from 2000, as a result of decreased software sales
and professional services mainly due to decreased market spending on
information technology in the fourth quarter of 2001 due to the effects of the
September 11, 2001 terrorist attacks on the hospitality industry.

The decrease in revenue in 2001 was mainly attributable to a decrease in the
volume of sales. Our respective business units continue to generate sufficient
cash from operations to adequately fund the respective ongoing operating
activities.

Revenue in our Asian operations decreased from $3,960,000 in 2000 to $2,585,000
in 2001. The deterioration of revenue from 2000 to 2001 is mainly due to the
continued generally depressed condition of the Asian economies resulting in a
decrease in sales in the region.

Gross profit increased to $16,530,000 (69.5%) in 2001 from $15,666,000 (57.3%)
in 2000 primarily due to the implementation of several cost reduction measures
which included a significant decrease in the use of outside consultants for
professional services in 2001 compared to 2000. Additionally, the company was
no longer required to pay royalties on its LTS product line in 2001, which
resulted in improved gross profit percentages on software.

Selling, general and administrative expenses (SG&A) decreased 11.4% from
$8,942,000 in 2000 to $7,927,000 in 2001. The decrease is related to the
implementation of several cost reduction measures, including our reduction in
payroll in the third quarter of 2001. Marketing expenses decreased from 2000 to
2001 as a result of decreasing our product advertising in trade publications
and attending fewer trade shows.

Research and development costs increased 37.2% over the comparable period of
2000. This is primarily a result of increased headcount in the Companys
hospitality division and an increase in the use of contracted
research and development personnel in 2001. Research and development costs
increased from $3,068,000 in 2000 to $4,209,000 in 2001 as a result of the
Companys efforts and focus on new product development as well as enhancements
to its current products.

Other operating (income) expense improved from $50,000 in 2000 to ($1,643,000)
in 2001 primarily as a result of the Company issuing Common Stock to certain
creditors to satisfy its obligations, which resulted in a gain of $1,377,000 in
2001. There were no such transactions in 2000.

Net interest expense was $1,260,000 in 2000 compared to $1,473,000 in 2001.
The increase in 2001 is mainly due to the increased debt resulting from the
companys settlement with CSA, which required the Company to issue $2.8 million
of secured debt in February 2001 bearing interest at 10% per annum.

The income tax provision only reflects a tax provision for our foreign
operations and alternative minimum taxes for domestic operations due to the
utilization of net operating loss carry forwards in 2000 and 2001.

In 2001, the Company sold certain assets and liabilities relating to its
domestic Legacy hardware maintenance division to a

35



---



##### Table of Contents



third party, resulting in a
gain of $1,262,000. There was no such transaction in 2000.

The increase in the loss from discontinued operations consisting of Process
Manufacturing and Legacy divisions from $627,000 in 2000 to $2,787,000 in 2001
is due to increased losses incurred at the Process Manufacturing business from
approximately $2.0 million in 2000 to $3.7 million in 2001. The increase in
losses of $1.7 million mainly related to the write off of approximately $1.4
million of intangible assets in 2001. There were no such charges in 2000.

Recent Accounting Pronouncements

In August 2001, the FASB issued FAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. FAS No. 144 supersedes FAS No. 121, Accounting
for the Impairment of Long-Lived Assets, and the accounting and reporting
provisions of APB No. 30, Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment
of a business. The provisions of FAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company elected to adopt FAS No. 144 early, and it is effective as of January
1, 2001. The adoption of this statement did not have a material effect on the
Companys consolidated financial statements.

In April 2002, the FASB issued FAS No. 145, Rescission of FAS Statements No.
4, 44 and 64, Amendment of FAS Statement No. 13, and Technical Corrections, to
update, clarify and simplify existing accounting pronouncements. FAS No. 4,
which required all gains and losses from debt extinguishment to be aggregated
and, if material, classified as an extraordinary item, net of related tax
effect, was rescinded. Consequently, FAS No. 64, which amended FAS No. 4, was
rescinded because it was no longer necessary. The adoption of this statement
did not have a material effect on the Companys consolidated financial
statements.

In June 2002, the FASB issued FAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. FAS No. 146 addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring). FAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred. FAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company will adopt
the provisions of FAS 146 for exit or disposal activities that are initiated
after December 31, 2002.

In December 2002, the FASB issued FAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which amended FAS No. 123,
Accounting for Stock-Based Compensation. The new standard provides
alternative methods of transition for a voluntary change to the fair market
value based method for accounting for stock-based employee compensation.
Additionally, the statement amends
the disclosure requirements of FAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. This statement is effective for financial statements for the year
ended December 31, 2002. In compliance with FAS No. 148, the Company has
elected to continue to follow the intrinsic value method in accounting for its
stock-based employee compensation plan as defined by APB No. 25 and has made
the applicable disclosures in Note 14.

36



---



##### Table of Contents



Exhibit 13.1.3.1

Report of Independent Certified Public Accountants

The Board of Directors
MAI Systems Corporation:

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

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of MAI
Systems Corporation and subsidiaries as of December 31, 2002 and the results of
their operations and their cash flows for the year ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States
of America.

As discussed in note 1 to the consolidated financial statements, effective
January 1, 2002, MAI Systems Corporation and subsidiaries adopted the
provisions of SFAS No. 142, Goodwill and other Intangible Assets.



| | /s/ BDO Seidman, LLP
| | --------------------

Costa Mesa, California
April 14, 2003

37



---



##### Table of Contents



Exhibit 13.1.3.2

Independent Auditors Report

The Board of Directors
MAI Systems Corporation:

We have audited the accompanying consolidated balance sheets of MAI Systems
Corporation and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, stockholders deficiency and cash flows
for each of the years in the two-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MAI Systems
Corporation and subsidiaries as of December 31, 2001, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.

/s/ KPMG LLP

Costa Mesa, California
March 31, 2002

38



---



##### Table of Contents



Exhibit 13.1.4     Consolidated Balance Sheets

MAI SYSTEMS CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                                                                     |                                                                                                                                                                            |   |                                |          |                                   |         |       |          |   |         |  
|------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------ | -------- | --------------------------------- | ------- | ----- | -------- | - | ------- | -
|                                                                                     |                                                                                                                                                                            |   |                                |          | As of December 31,               
|                                                                                     |                                                                                                                                                                            |   |                                |          | (in thousands, except share data)
|                                                                                     |                                                                                                                                                                            |   |                                |          |                                  
|                                                                                     |                                                                                                                                                                            |   |                                |          | 2001                              |         | 2002 
|ASSETS                                                                               |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|Current assets:                                                                      |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|Cash                                                                                 |                                                                                                                                                                            | $ | 1,224                          |          |                                   | $       | 545   |         
|Receivables, less allowance for doubtful accounts of
$1,023 in 2001 and $336 in 2002 |                                                                                                                                                                            |   | 2,396                          |          |                                   |         | 1,834 |         
|Inventories                                                                          |                                                                                                                                                                            |   | 90                             |          |                                   |         | 60    |         
|Note receivable                                                                      |                                                                                                                                                                            |   | 500                            |          |                                   |         | 250   |         
|Prepaids and other assets                                                            |                                                                                                                                                                            |   | 918                            |          |                                   |         | 628   |         
|Current assets held for sale                                                         |                                                                                                                                                                            |   | 204                            |          |                                   |         |      |         
|                                                                                     |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|                                                                                     |                                                                                                                                                                            |   | Total current assets           |          |                                   | 5,332   |       |          |   | 3,317   |  
|Furniture, fixtures and equipment, net                                               |                                                                                                                                                                            |   | 1,221                          |          |                                   |         | 843   |         
|Note receivable                                                                      |                                                                                                                                                                            |   | 250                            |          |                                   |         |      |         
|Intangibles, net                                                                     |                                                                                                                                                                            |   | 799                            |          |                                   |         | 1,823 |         
|Assets held for sale                                                                 |                                                                                                                                                                            |   | 613                            |          |                                   |         |      |         
|Other assets                                                                         |                                                                                                                                                                            |   | 73                             |          |                                   |         | 194   |         
|                                                                                     |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|                                                                                     |                                                                                                                                                                            |   | Total assets                   |          | $                                 | 8,288   |       |          | $ | 6,177   |  
|                                                                                     |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|LIABILITIES AND STOCKHOLDERS DEFICIENCY                                             |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|Current liabilities:                                                                 |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|                                                                                     | Current portion of long-term debt                                                                                                                                          |   | $                              | 112      |                                   |         | $     | 3,289    |  
|                                                                                     | Accounts payable                                                                                                                                                           |   |                                | 1,903    |                                   |         |       | 1,077    |  
|                                                                                     | Customer deposits                                                                                                                                                          |   |                                | 1,164    |                                   |         |       | 1,811    |  
|                                                                                     | Accrued liabilities                                                                                                                                                        |   |                                | 2,402    |                                   |         |       | 2,007    |  
|                                                                                     | Income taxes payable                                                                                                                                                       |   |                                | 235      |                                   |         |       | 89       |  
|                                                                                     | Unearned revenue                                                                                                                                                           |   |                                | 1,743    |                                   |         |       | 3,693    |  
|                                                                                     | Current liabilities held for sale                                                                                                                                          |   |                                | 1,560    |                                   |         |       |         |  
|                                                                                     |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|                                                                                     |                                                                                                                                                                            |   | Total current liabilities      |          |                                   | 9,119   |       |          |   | 11,966  |  
|Line of credit                                                                       |                                                                                                                                                                            |   | 2,424                          |          |                                   |         |      |         
|Long-term debt                                                                       |                                                                                                                                                                            |   | 8,542                          |          |                                   |         | 7,234 |         
|Other liabilities                                                                    |                                                                                                                                                                            |   | 1,195                          |          |                                   |         | 1,759 |         
|                                                                                     |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|                                                                                     |                                                                                                                                                                            |   | Total liabilities              |          |                                   | 21,280  |       |          |   | 20,959  |  
|                                                                                     |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|Stockholders deficiency:                                                            |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|                                                                                     | Preferred
Stock, par value $0.01 per share;
1,000,000 shares authorized, none issued and outstanding                                                                       |   |                                |         |                                   |         |       |         |  
|                                                                                     | Common Stock, par value $0.01 per share; authorized
24,000,000 shares; 13,656,085 and 14,675,752 shares
issued and outstanding at December 31, 2001 and 2002,
respectively |   |                                | 140      |                                   |         |       | 150      |  
|                                                                                     | Additional paid-in capital                                                                                                                                                 |   |                                | 218,022  |                                   |         |       | 218,251  |  
|                                                                                     | Accumulated other comprehensive income (loss):                                                                                                                             |   |                                |          |                                   |         |       |          |  
|                                                                                     |                                                                                                                                                                            |   | Minimum pension liability      |          |                                   | (461    | )     |          |   | (918    | )
|                                                                                     |                                                                                                                                                                            |   | Foreign currency translation   |          |                                   | 100     |       |          |   | (31     | )
|                                                                                     | Unearned compensation                                                                                                                                                      |   |                                |         |                                   |         |       | (91      | )
|                                                                                     | Accumulated deficit                                                                                                                                                        |   |                                | (230,793 | )                                 |         |       | (232,143 | )
|                                                                                     |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|                                                                                     |                                                                                                                                                                            |   | Total stockholders deficiency |          |                                   | (12,992 | )     |          |   | (14,782 | )
|                                                                                     |                                                                                                                                                                            |   |                                |          |                                   |         |       |         
|Total liabilities and stockholders deficiency                                       |                                                                                                                                                                            | $ | 8,288                          |          |                                   | $       | 6,177 |         
|                                                                                     |                                                                                                                                                                            |   |                                |          |                                   |         |       |         

The accompanying notes are an integral part of these consolidated financial statements.

39



---



##### Table of Contents



Exhibit 13.1.5 Consolidated Statements of Operations

MAI SYSTEMS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |       |        |  
|----------------------------------------------------- | ---------------------------- | --------------------------------------------------------------------------- | ------------------------------- | --------------------------------------- | ------ | ------------------------------------- | ------ | ---- | ------ | ----- | ------ | - | ------ | ----- | ------ | -
|                                                      |                              |                                                                             |                                 |                                         |        | For the Years Ended December 31,     
|                                                      |                              |                                                                             |                                 |                                         |        | (in
thousands, except per share data)
|                                                      |                              |                                                                             |                                 |                                         |        | 2000                                  |        | 2001 |        | 2002 
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |      
|Revenue:                                              |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |  
|                                                      |                              | Software                                                                    |                                 | $                                       | 6,857  |                                       |        | $    | 5,329  |       |        | $ | 4,585  |      
|                                                      |                              | Network and computer equipment                                              |                                 |                                         | 1,301  |                                       |        |      | 789    |       |        |   | 996    |      
|                                                      |                              | Services                                                                    |                                 |                                         | 19,163 |                                       |        |      | 17,650 |       |        |   | 16,356 |      
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|                                                      |                              |                                                                             |                                 | Total revenue                           |        |                                       | 27,321 |      |        |       | 23,768 |   |        |       | 21,937 |  
|Direct costs:                                         |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |  
|                                                      |                              | Software                                                                    |                                 |                                         | 1,106  |                                       |        |      | 269    |       |        |   | 437    |      
|                                                      |                              | Network and computer equipment                                              |                                 |                                         | 1,041  |                                       |        |      | 479    |       |        |   | 770    |      
|                                                      |                              | Services                                                                    |                                 |                                         | 9,508  |                                       |        |      | 6,490  |       |        |   | 5,713  |      
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|                                                      |                              |                                                                             |                                 | Total direct costs                      |        |                                       | 11,655 |      |        |       | 7,238  |   |        |       | 6,920  |  
|                                                      |                              |                                                                             |                                 | Gross profit                            |        |                                       | 15,666 |      |        |       | 16,530 |   |        |       | 15,017 |  
|Selling, general and administrative expenses          |                              |                                                                             | 8,942                           |                                         |        |                                       | 7,927  |      |        |       | 9,363  |  
|Research and development costs                        |                              |                                                                             | 3,068                           |                                         |        |                                       | 4,209  |      |        |       | 3,307  |  
|Amortization of intangibles                           |                              |                                                                             | 740                             |                                         |        |                                       | 731    |      |        |       | 134    |  
|Other operating expense (income)                      |                              |                                                                             | 50                              |                                         |        |                                       | (1,643 | )    |        |       | 276    |  
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|                                                      |                              |                                                                             |                                 | Operating income                        |        |                                       | 2,866  |      |        |       | 5,306  |   |        |       | 1,937  |  
|Interest income                                       |                              |                                                                             | 263                             |                                         |        |                                       | 72     |      |        |       | 5      |  
|Interest expense                                      |                              |                                                                             | (1,523                          | )                                       |        |                                       | (1,545 | )    |        |       | (1,495 | )
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|Income from continuing operations before
income taxes |                              |                                                                             | 1,606                           |                                         |        |                                       | 3,833  |      |        |       | 447    |  
|Income taxes                                          |                              |                                                                             | (162                            | )                                       |        |                                       | (176   | )    |        |       | (30    | )
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|                                                      |                              | Income from continuing operations                                           |                                 |                                         | 1,444  |                                       |        |      | 3,657  |       |        |   | 417    |      
|Discontinued operations:                              |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |  
|                                                      |                              | Gain (loss) on disposal of discontinued
operations                          |                                 |                                         |       |                                       |        |      | 1,262  |       |        |   | (1,021 | )    
|                                                      |                              | Loss from discontinued operations                                           |                                 |                                         | (627   | )                                     |        |      | (2,787 | )     |        |   | (746   | )    
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|                                                      |                              |                                                                             |                                 | Total loss from discontinued operations |        |                                       | (627   | )    |        |       | (1,525 | ) |        |       | (1,767 | )
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|                                                      |                              |                                                                             |                                 | Net income (loss)                       |        | $                                     | 817    |      |        | $     | 2,132  |   |        | $     | (1,350 | )
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|Income (loss) per share:                              |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |  
|                                                      | Continuing Operations:       |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |       
|                                                      |                              |                                                                             | Basic income per share          |                                         | $      | 0.13                                  |        |      | $      | 0.28  |        |   | $      | 0.03  |       
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|                                                      |                              |                                                                             | Diluted income per share        |                                         | $      | 0.13                                  |        |      | $      | 0.28  |        |   | $      | 0.03  |       
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|                                                      | Discontinued Operations:     |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |       
|                                                      |                              |                                                                             | Basic (loss) per share          |                                         | $      | (0.06                                 | )      |      | $      | (0.12 | )      |   | $      | (0.13 | )     
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|                                                      |                              |                                                                             | Diluted (loss) per share        |                                         | $      | (0.06                                 | )      |      | $      | (0.12 | )      |   | $      | (0.12 | )     
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|                                                      | Net income (loss) per share: |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |       
|                                                      |                              |                                                                             | Basic income (loss) per share   |                                         | $      | 0.07                                  |        |      | $      | 0.16  |        |   | $      | (0.10 | )     
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|                                                      |                              |                                                                             | Diluted income (loss) per share |                                         | $      | 0.07                                  |        |      | $      | 0.16  |        |   | $      | (0.09 | )     
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|                                                      |                              | Weighted average common shares used in
determining income (loss) per share: |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|Basic                                                 |                              |                                                                             | 10,923                          |                                         |        |                                       | 13,091 |      |        |       | 13,945 |  
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      
|Diluted                                               |                              |                                                                             | 11,206                          |                                         |        |                                       | 13,263 |      |        |       | 14,395 |  
|                                                      |                              |                                                                             |                                 |                                         |        |                                       |        |      |        |       |        |   |        |      

The accompanying notes are an integral part of these consolidated financial statements.

40



---



##### Table of Contents



Exhibit 13.1.6 Consolidated Statements of Stockholders Deficiency

MAI SYSTEMS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY
(in thousands)

|                                      |  |              |     |                 |  |               |         |               |  |             |      |             |  |               |      |               |  |   |          |       |  |       |         |   |  |   |        |  
|------------------------------------- |  | ------------ | --- | --------------- |  | ------------- | ------- | ------------- |  | ----------- | ---- | ----------- |  | ------------- | ---- | ------------- |  | - | -------- | ----- |  | ----- | ------- | - |  | - | ------ | -
|                                      |  |              |     |                 |  |               |         |               |  | Accumulated |      |             |  |               |      |               |  |   |          |       |  |       |         |   |  |  
|                                      |  |              |     |                 |  |               |         |               |  | Other       |      |             |  |               |      |               |  |   |          | Total |  | Total
|                                      |  |              |     |                 |  | Additional    |         | Comprehensive |  | Unearned    |      | Accumulated |  | Stockholders' |      | Comprehensive
|                                      |  | Common Stock |     | Paid-In Capital |  | Income (Loss) |         | Compensation  |  | Deficit     |      | Deficiency  |  | Income (Loss)
|                                      |  |              |     |                 |  |               |         |               |  |             |      |             |  |              
|Balance at December 31, 1999          |  | $            | 112 |                 |  | $             | 220,567 |               |  | $           | 494  |             |  | $             |     |               |  | $ | (233,742 | )     |  | $     | (12,569 | ) |  |   |        |  
|Stock option compensation             |  |              | 1   |                 |  |               | 55      |               |  |             |     |             |  |               |     |               |  |   |         |       |  |       | 56      |   |  |   |       |  
|Translation adjustments               |  |              |    |                 |  |               |        |               |  |             | (414 | )           |  |               |     |               |  |   |         |       |  |       | (414    | ) |  |   | (414   | )
|Net income                            |  |              |    |                 |  |               |        |               |  |             |     |             |  |               |     |               |  |   | 817      |       |  |       | 817     |   |  |   | 817    |  
|                                      |  |              |     |                 |  |               |         |               |  |             |      |             |  |               |      |               |  |   |          |       |  |       |         |   |  |   |        |  
|Balance at December 31, 2000          |  |              | 113 |                 |  |               | 220,622 |               |  |             | 80   |             |  |               |     |               |  |   | (232,925 | )     |  |       | (12,110 | ) |  |   | 403    |  
|                                      |  |              |     |                 |  |               |         |               |  |             |      |             |  |               |      |               |  |   |          |       |  |       |         |   |  |   |        |  
|Issuance of Common Stock              |  |              | 8   |                 |  |               | 219     |               |  |             |     |             |  |               |     |               |  |   |         |       |  |       | 227     |   |  |   |       |  
|Legal settlement                      |  |              | 19  |                 |  |               | (2,819  | )             |  |             |     |             |  |               |     |               |  |   |         |       |  |       | (2,800  | ) |  |   |       |  
|Minimum pension liability             |  |              |    |                 |  |               |        |               |  |             | (461 | )           |  |               |     |               |  |   |         |       |  |       | (461    | ) |  |   | (461   | )
|Translation adjustments               |  |              |    |                 |  |               |        |               |  |             | 20   |             |  |               |     |               |  |   |         |       |  |       | 20      |   |  |   | 20     |  
|Net income                            |  |              |    |                 |  |               |        |               |  |             |     |             |  |               |     |               |  |   | 2,132    |       |  |       | 2,132   |   |  |   | 2,132  |  
|                                      |  |              |     |                 |  |               |         |               |  |             |      |             |  |               |      |               |  |   |          |       |  |       |         |   |  |   |        |  
|Balance at December 31, 2001          |  |              | 140 |                 |  |               | 218,022 |               |  |             | (361 | )           |  |               |     |               |  |   | (230,793 | )     |  |       | (12,992 | ) |  |   | 1,691  |  
|                                      |  |              |     |                 |  |               |         |               |  |             |      |             |  |               |      |               |  |   |          |       |  |       |         |   |  |   |        |  
|Issuance of Common Stock              |  |              | 3   |                 |  |               | 74      |               |  |             |     |             |  |               |     |               |  |   |         |       |  |       | 77      |   |  |   |       |  
|Minimum pension liability             |  |              |    |                 |  |               |        |               |  |             | (457 | )           |  |               |     |               |  |   |         |       |  |       | (457    | ) |  |   | (457   | )
|Exercise of stock options             |  |              | 1   |                 |  |               | 8       |               |  |             |     |             |  |               |     |               |  |   |         |       |  |       | 9       |   |  |   |       |  
|Unearned compensation                 |  |              | 6   |                 |  |               | 147     |               |  |             |     |             |  |               | (153 | )             |  |   |         |       |  |       |        |   |  |   |       |  
|Amortization of unearned
compensation |  |              |    |                 |  |               |        |               |  |             |     |             |  |               | 62   |               |  |   |         |       |  |       | 62      |   |  |   |       |  
|Translation adjustments               |  |              |    |                 |  |               |        |               |  |             | (131 | )           |  |               |     |               |  |   |         |       |  |       | (131    | ) |  |   | (131   | )
|Net loss                              |  |              |    |                 |  |               |        |               |  |             |     |             |  |               |     |               |  |   | (1,350   | )     |  |       | (1,350  | ) |  |   | (1,350 | )
|                                      |  |              |     |                 |  |               |         |               |  |             |      |             |  |               |      |               |  |   |          |       |  |       |         |   |  |   |        |  
|Balance at December 31, 2002          |  | $            | 150 |                 |  | $             | 218,251 |               |  | $           | (949 | )           |  | $             | (91  | )             |  | $ | (232,143 | )     |  | $     | (14,782 | ) |  | $ | (1,938 | )
|                                      |  |              |     |                 |  |               |         |               |  |             |      |             |  |               |      |               |  |   |          |       |  |       |         |   |  |   |        |  

The accompanying notes are an integral part of these consolidated financial statements.

41



---



##### Table of Contents



Exhibit 13.1.7 Consolidated Statements of Cash Flows

MAI SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |        |      |        |   | 
|------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------------------------------- | ------ | ----- | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ---- | ------ | - | 
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       | 2000   |       | 2001   |        | 2002  
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |       
|Cash flows from operating activities: |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|                                      | Net income (loss)                                                                                                                                                 |                                            | $                                                             | 817    |       |        | $     | 2,132  |        |        | $     | (1,350 | )   
|                                      | Loss from discontinued operations                                                                                                                                 |                                            |                                                               | 627    |       |        |       | 2,787  |        |        |       | 746    |     
|                                      | Loss (gain) on disposal of discontinued operations                                                                                                                |                                            |                                                               |       |       |        |       | (1,262 | )      |        |       | 1,021  |     
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|                                      |                                                                                                                                                                   | Income from continuing operations          |                                                               |        | 1,444 |        |       |        | 3,657  |        |       |        | 417  |       
|                                      | Adjustments to reconcile income from continuing operations to net
cash provided by (used in) operating activities, net of business
acquisitions and dispositions: |                                            |                                                               |        |       |        |       |        |        |        |       |        |     
|                                      |                                                                                                                                                                   | Gain on creditor settlements               |                                                               |        |      |        |       |        | (1,377 | )      |       |        |     |       
|                                      |                                                                                                                                                                   | Gain on sale of GSI                        |                                                               |        |      |        |       |        | (245   | )      |       |        |     |       
|                                      |                                                                                                                                                                   | Amortization of intangibles                |                                                               |        | 740   |        |       |        | 731    |        |       |        | 134  |       
|                                      |                                                                                                                                                                   | Depreciation and amortization              |                                                               |        | 749   |        |       |        | 721    |        |       |        | 685  |       
|                                      |                                                                                                                                                                   | Stock option compensation expense          |                                                               |        | 56    |        |       |        |       |        |       |        | 62   |       
|                                      |                                                                                                                                                                   | Provision for doubtful accounts receivable |                                                               |        | 350   |        |       |        | 47     |        |       |        | 89   |       
|                                      |                                                                                                                                                                   | Changes in assets and liabilities:         |                                                               |        |       |        |       |        |        |        |       |        |      |       
|                                      |                                                                                                                                                                   |                                            | (Increase) decrease in receivables                            |        |       | 748    |       |        |        | 1,697  |       |        |      | 592    |  
|                                      |                                                                                                                                                                   |                                            | (Increase) decrease in inventories                            |        |       | 29     |       |        |        | (13    | )     |        |      | 30     |  
|                                      |                                                                                                                                                                   |                                            | (Increase) decrease in prepaids and other asset               |        |       | 190    |       |        |        | (110   | )     |        |      | 327    |  
|                                      |                                                                                                                                                                   |                                            | (Increase) decrease in other assets                           |        |       | 40     |       |        |        | (6     | )     |        |      | 68     |  
|                                      |                                                                                                                                                                   |                                            | (Decrease) increase in accounts payable and customer deposits |        |       | (3,646 | )     |        |        | (4,699 | )     |        |      | (445   | )
|                                      |                                                                                                                                                                   |                                            | (Decrease) increase in accrued liabilities                    |        |       | 107    |       |        |        | (255   | )     |        |      | (522   | )
|                                      |                                                                                                                                                                   |                                            | (Decrease) increase in income taxes payable                   |        |       | (261   | )     |        |        | 20     |       |        |      | (151   | )
|                                      |                                                                                                                                                                   |                                            | (Decrease) increase in unearned revenue                       |        |       | (1,314 | )     |        |        | (2,051 | )     |        |      | 1,700  |  
|                                      |                                                                                                                                                                   |                                            | (Decrease) increase in other liabilities                      |        |       | 27     |       |        |        | 452    |       |        |      | 42     |  
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|                                      |                                                                                                                                                                   |                                            | Net cash provided by continuing operations                    |        |       | (741   | )     |        |        | (1,431 | )     |        |      | 3,028  |  
|                                      |                                                                                                                                                                   |                                            | Net cash provided by (used in) discontinued operations        |        |       | 989    |       |        |        | (17    | )     |        |      | (2,509 | )
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|                                      |                                                                                                                                                                   |                                            | Net cash provided by (used in) operating activities           |        |       | 248    |       |        |        | (1,448 | )     |        |      | 519    |  
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|Cash flows from investing activities: |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|                                      |                                                                                                                                                                   | Capital expenditures                       |                                                               |        | (127  | )      |       |        | (158   | )      |       |        | (101 | )     
|                                      |                                                                                                                                                                   | Payments received on note receivable       |                                                               |        |      |        |       |        | 2,495  |        |       |        | 500  |       
|                                      |                                                                                                                                                                   | Software development costs                 |                                                               |        |      |        |       |        |       |        |       |        | (861 | )     
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|                                      |                                                                                                                                                                   |                                            | Net cash used in investing activities                         |        |       | (127   | )     |        |        | 2,337  |       |        |      | (462   | )
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|Cash flows from financing activities: |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|                                      | Repayments of long-term debt                                                                                                                                      |                                            |                                                               | (245   | )     |        |       | (321   | )      |        |       | (102   | )   
|                                      | Repayments of Bridge Loan                                                                                                                                         |                                            |                                                               | (1,230 | )     |        |       | (220   | )      |        |       |       |     
|                                      | Net decrease in line of credit                                                                                                                                    |                                            |                                                               | (312   | )     |        |       | (155   | )      |        |       | (623   | )   
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|                                      |                                                                                                                                                                   |                                            | Net cash provided by (used in) financing                      |        |       | (1,787 | )     |        |        | (696   | )     |        |      | (725   | )
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|                                      |                                                                                                                                                                   |                                            | Effect of exchange rate changes on cash                       |        |       | 40     |       |        |        | 12     |       |        |      | (11    | )
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|                                      |                                                                                                                                                                   |                                            | Net increase (decrease) in cash                               |        |       | (1,626 | )     |        |        | 205    |       |        |      | (679   | )
|Cash at beginning of year             |                                                                                                                                                                   |                                            | 2,645                                                         |        |       |        | 1,019 |        |        |        | 1,224 |       
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|Cash at end of year                   |                                                                                                                                                                   | $                                          | 1,019                                                         |        |       | $      | 1,224 |        |        | $      | 545   |       
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|Cash paid during the period for:      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|                                      | Interest                                                                                                                                                          |                                            | $                                                             | 1,190  |       |        | $     | 1,504  |        |        | $     | 990    |     
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       
|                                      | Income taxes                                                                                                                                                      |                                            | $                                                             | 148    |       |        | $     | 96     |        |        | $     | 176    |     
|                                      |                                                                                                                                                                   |                                            |                                                               |        |       |        |       |        |        |        |       |       

Supplemental disclosure of non-cash investing and financing activities (see notes 6, 8, 9, 14 and 18).

The accompanying notes are an integral part of these consolidated financial statements.

42



---



##### Table of Contents



Exhibit 13.1.8 Notes to Consolidated Financial Statements

MAI SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Business

MAI Systems Corporation (the Company or MAI) provides total information
technology solutions to the hospitality, resort and destination industry. The
solutions provided by the Company typically include applications software,
computer hardware, peripherals and wide and local area network design,
implementation, installation and support. The software applications are
generally the Companys proprietary software, or software which is licensed to
the Company on an exclusive basis. The hardware, peripherals and networking
systems are generally third-party products, which we distribute. Directly and
through arrangements with third parties, we provide on-site and off-site
service and support to users of network and systems hardware.

Liquidity

Although the Company has a net stockholders deficiency of $14,782,000 and a
working capital deficit of $8,649,000 (which includes subordinated debt due to
CSA of $2,800,000) at December 31, 2002, the Company believes it will continue
to generate sufficient funds from operations and obtain additional financing or
restructure its subordinated note with CSA to meet its operating and capital
requirements. The Company is currently in negotiations with CSA to restructure
the terms of the existing debt, including extending the maturity date (see note
9). The Company expects to generate positive cash flow from its continuing
operations during 2003 from products and services from its current backlog as
of December 31, 2002 as well as new orders. In the event that the Company
cannot generate positive cash flow from its continuing operations during 2003,
the Company can substantially reduce its research and development efforts to
mitigate cash outflow to help sustain its operations. There can be no
assurance that the Company will be able to sustain profitability, generate
positive cash flow from operations or obtain the necessary restructure of its
debt. These financial statements have been prepared assuming the Company will

continue to operate as a going concern. If the Company is unsuccessful in the
aforementioned efforts, the Company could be forced to liquidate certain of its
assets, reorganize its capital structure and, if necessary, seek other remedies
available to the Company including protection under the bankruptcy
laws. We believe that it is likely that we will delist
from AMEX and apply for a listing on the electronic bulletin board sponsored by
Nasdaq in 2003.

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of
its domestic operations and its majority and wholly owned subsidiaries. All
significant intercompany transactions and accounts have been eliminated in
consolidation.

Use of Estimates

The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the dates
of the balance sheets and revenues and expenses for the periods. Actual
results could materially differ from those estimates.

Revenue Recognition

The Company earns revenue from sales of hardware, software and professional
services and from arrangements involving multiple elements of each of the
above. Revenue for multiple element arrangements are recorded by allocating
revenue to the various elements based on their respective fair values as
evidenced by vendor specific objective evidence. The fair value in
multi-element arrangements is determined based upon the price charged when sold
separately. Revenue is not recognized until persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and
collectibility is probable. Sales of network and computer equipment are
recorded when title and risk of loss transfers. Software revenues are recorded
when application software programs are shipped to end users, resellers and
distributors, provided the Company is not required to provide services
essential to the functionality of the software or significantly modify,
customize or produce the software. Professional services fees for software
development, training and installation are recognized as the

43



---



##### Table of Contents



services are provided. Maintenance revenues are recorded evenly over the
related contract period.

Cash Equivalents

Cash equivalents consist of highly liquid investments which are readily
convertible into known amounts of cash and have original maturities of three
months or less, when purchased.

Allowance for Doubtful Accounts

The Company records an allowance for doubtful accounts based on specifically
identified amounts that it believes is uncollectible. The Company also records
additional allowances based upon certain percentages of our aged receivables,
which are determined based on historical experience and or assessment of the
general financial conditions affecting our customer base. If the Companys
actual collection experience changes, revisions to its allowance may be
required. Any unanticipated change in the Companys customers credit
worthiness or other matters affecting the collectibility of amounts due from
such customers, could have a material affect on its results of operations in
the period in which such changes or events occur. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance.

Inventories

Inventories are valued at the lower of first in, first out cost or market.

Furniture, Fixtures and Equipment

Furniture, fixtures and equipment are recorded at cost and depreciated on a
straight-line basis over estimated useful lives ranging from 3 to 5 years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the lease term or their estimated useful lives.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of

Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets provides a single accounting
model for long-lived assets to be disposed of. SFAS No. 144 also changes the
criteria for classifying an asset as held for sale, and broadens the scope of
businesses to be disposed of that qualify for reporting as discontinued
operations and changes the timing of recognizing losses on such operations.

The Company adopted SFAS No. 144 on January 1, 2001. The adoption of SFAS
No.144 did not affect the Companys financial statements. In accordance with
SFAS No. 144, long-lived assets, such as furniture, fixtures and equipment are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, and impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of would be separately presented in the balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the appropriate
asset and liability sections of the balance sheet.

Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets to be disposed of in accordance with SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.

Goodwill

Prior to 2002, goodwill, representing the excess of the purchase price over the
estimated fair value of the net assets of the acquired business, was amortized
over the period of expected benefit of five to seven years. Long-lived assets
and certain identifiable intangibles to be held and used by the
Company were
reviewed for impairment whenever events or changes in circumstances
indicated
that the carrying amount of the asset may not be recoverable. Recoverability of
assets to be held and used was assessed by a comparison of the carrying amount
of an asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets were considered to be impaired, the impairment
recognized was measured by the amount by which the carrying amount of the assets
exceeded the fair value of the assets. Assets that were to be
disposed of were
reported at the lower of the carrying amount or fair value less cost to sell.

However, effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, (SFAS
No. 142) which requires that the Company cease amortization of goodwill and
all intangible assets having indefinite useful economic lives. Such assets are
not to be amortized until their

44



---



##### Table of Contents



lives are determined to be finite, however, a recognized intangible asset with
an indefinite useful life should be tested for impairment annually or on an
interim basis if events or circumstances indicate that the fair value of the
asset has decreased below its carrying value. At December 31, 2002, the Company
evaluated its goodwill and determined that fair value had not decreased below
carrying value and no adjustment to impair goodwill was necessary in accordance
with SFAS No. 142.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The
realizability of the deferred tax asset is assessed throughout the year and a
valuation allowance is established accordingly.

Comprehensive Income (Loss)

Comprehensive income (loss) comprises net income (loss) plus the unrealized
gains and losses associated with foreign currency translations and minimum
pension liability.

Stock Option Plans

The Company accounts for stock-based compensation in accordance with Accounting
Principles Board, APB, No. 25, Accounting for Stock Issued to Employees. The
Company has adopted the disclosure-only provisions of FAS No. 123 Accounting
for Stock-Based Compensation. Under APB No. 25, compensation expense relating
to employee stock options is determined based on the excess of the market price
of the Companys stock over the exercise price on the date of grant, the
intrinsic value method, versus the fair value method as provided under FAS No.
123.

At December 31, 2002, the Company had two stock-based employee compensation
plans, which is described more fully in Note 14. The Company accounts for that
plan under the recognition and measurement principles of APB No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, 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 the market value of the underlying common stock on the date of grant.
Had compensation cost for the Companys stock option plan been determined based
on the fair value at the grant date for awards for years ended December 31,
2000, 2001 and 2002, consistent with the provisions of FAS No. 123, the
Companys net loss and loss per share or net income and net income and net
income per share would have increased or decreased respectively. See Note 14
for the effect on net income (loss) and income (loss) per share if the Company
had applied the fair value recognition provisions of FAS No. 123.

The following table represents the effect on net income and earnings per share
if the Company had applied the fair value based method and recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.

|                               |  |                                                                                            |  |   |        |                                       |  |      |       |      |  |   |        |   |  | 
|------------------------------ |  | ------------------------------------------------------------------------------------------ |  | - | ------ | ------------------------------------- |  | ---- | ----- | ---- |  | - | ------ | - |  | 
|                               |  |                                                                                            |  |   |        | Years ended December 31,             
|                               |  |                                                                                            |  |   |        | (in
thousands, except per share data)
|                               |  |                                                                                            |  |   |        | 2000                                  |  | 2001 |       | 2002
|                               |  |                                                                                            |  |   |        |                                       |  |      |       |     
|Net income (loss):             |  | As reported                                                                                |  | $ | 817    |                                       |  | $    | 2,132 |      |  | $ | (1,350 | )
|                               |  | Add: Stock-based employee compensation expense recorded                                    |  |   | 56     |                                       |  |      |      |      |  |   | 62     |  
|                               |  | Less:  Stock based employee compensation  expense determined under fair value calculations |  |   | (1,439 | )                                     |  |      | (793  | )    |  |   | (193   | )
|                               |  |                                                                                            |  |   |        |                                       |  |      |       |      | 
|                               |  | Pro forma                                                                                  |  |   | (566   | )                                     |  |      | 1,339 |      |  |   | (1,481 | )
|                               |  |                                                                                            |  |   |        |                                       |  |      |       |      | 
|Basic income (loss) per share: |  | As reported                                                                                |  | $ | 0.07   |                                       |  | $    | 0.16  |      |  | $ | (0.09  | )
|                               |  | Add: Stock-based employee compensation expense recorded                                    |  |   |       |                                       |  |      |      |      |  |   |       |  
|                               |  | Less:  Stock based employee compensation expense determined under fair value calculations  |  |   | (0.12  | )                                     |  |      | (0.06 | )    |  |   | (0.01  | )
|                               |  |                                                                                            |  |   |        |                                       |  |      |       |      | 
|                               |  | Pro forma                                                                                  |  |   | (0.05  | )                                     |  |      | 0.10  |      |  |   | (0.10  | )
|                               |  |                                                                                            |  |   |        |                                       |  |      |       |      | 

45



---



##### Table of Contents



|                                 |  |                                                                                           |  |   |       |                                       |  |      |       |      |  |   |       |   |  | 
|-------------------------------- |  | ----------------------------------------------------------------------------------------- |  | - | ----- | ------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | - |  | 
|                                 |  |                                                                                           |  |   |       | Years ended December 31,             
|                                 |  |                                                                                           |  |   |       | (in
thousands, except per share data)
|                                 |  |                                                                                           |  |   |       | 2000                                  |  | 2001 |       | 2002
|                                 |  |                                                                                           |  |   |       |                                       |  |      |       |     
|Diluted income (loss) per share: |  | As reported                                                                               |  | $ | 0.07  |                                       |  | $    | 0.16  |      |  | $ | (0.09 | )
|                                 |  | Add: Stock-based  employee compensation expense recorded                                  |  |   |      |                                       |  |      |      |      |  |   |      |  
|                                 |  | Less:  Stock based employee compensation expense determined under fair value calculations |  |   | (0.12 | )                                     |  |      | (0.06 | )    |  |   | (0.01 | )
|                                 |  |                                                                                           |  |   |       |                                       |  |      |       |      |  |   |       |   |  | 
|                                 |  | Pro forma                                                                                 |  | $ | (0.05 | )                                     |  | $    | 0.10  |      |  | $ | (0.10 | )
|                                 |  |                                                                                           |  |   |       |                                       |  |      |       |      |  |   |       |   |  | 

Pension Plan

The Company established a defined benefit plan for employees that were employed
by the Companys maintenance service business acquired in 1988. The plan
provides benefits based upon a percentage of the participants career income
with the Company or years of service while an employee of the Company. The
funding policy is to contribute annually an amount to fund pension costs as
actuarially determined by an independent pension consulting firm.

Foreign Currency Translation

The functional currency for all foreign subsidiaries is the applicable local
currency. Accordingly, all translation adjustments for foreign subsidiaries,
and gains and losses on intercompany foreign currency transactions that are of
a long-term nature, are included in accumulated other comprehensive income
(loss) as a separate component of stockholders deficiency.

There were no material net foreign currency transaction gains (losses) in 1999,
2000 and 2001. These amounts are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.

Software Development Costs

The Company capitalizes costs related to the development of certain software
products. Capitalization of costs begins when technological feasibility is
established and ends when the product is available for general release to
customers. Technological feasibility is reached upon the earlier of completion
of a detailed program design or working model.

Amortization is computed on an individual product basis and is recognized over
the greater of the remaining economic lives of each product or the ratio that
current gross revenues for a product bear to the total of current and
anticipated revenues for that product, commencing when the products become
available for general release to customers. Software development costs are
generally being amortized over a three-year period. The Company continually
assesses the recoverability of software development costs by comparing the
carrying value of individual products to their net realizable value.

The Company capitalized $861,000 of software development costs during 2002
relating to its new N-Tier, Internet-native corporate application suite of
products written in java. Although the Company has not yet sold any of the
modules to this suite of applications, the Company believes that its new
product will produce new sales adequate to recover amounts capitalized.

Research and Development Costs

During 2000, 2001, and 2002, we incurred $3,068,000, $4,209,000, and
$3,307,000, (net of capitalized software of $861,000) respectively, for
research and development activities, which are expensed as incurred. Our
research and development expenditures related to the support and extension of
existing software products and the development of new products.

Fair Value of Financial Instruments

As of December 31, 2001 and 2002, the carrying value of cash receivables, notes
receivable, accounts payable, accrued liabilities, income taxes payable and
other liabilities approximate fair value due to the short-term nature of such
instruments. The carrying value of long-term debt, including the Companys
line of credit, approximates fair value as the related interest rates
approximate rates currently available to the Company.

Income (Loss) per Share of Common Stock

Basic and diluted income (loss) per share is computed using the weighted
average shares of common stock outstanding

46



---



##### Table of Contents



during the period. Consideration is
also given in the dilutive income per share calculation for the dilutive effect
of common stock equivalents which might result from the exercise of stock
options and warrants.

Recent Accounting Pronouncements

In August 2001, the FASB issued FAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. FAS No. 144 supersedes FAS No. 121, Accounting
for the Impairment of Long-Lived Assets, and the accounting and reporting
provisions of APB No. 30, Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment
of a business. The provisions of FAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company elected to adopt FAS No. 144 early, and it is effective as of January
1, 2001. The adoption of this statement did not have a material impact on the
Companys financial position or results of operations.

In April 2002, the FASB issued FAS No. 145, Rescission of FAS Statements No.
4, 44 and 64, Amendment of FAS Statement No. 13, and Technical Corrections, to
update, clarify and simplify existing accounting pronouncements. FAS No. 4,
which required all gains and losses from debt extinguishment to be aggregated
and, if material, classified as an extraordinary item, net of related tax
effect, was rescinded. Consequently, FAS No. 64, which amended FAS No. 4, was
rescinded because it was no longer necessary. The adoption of this statement
did not have a material effect on the Companys consolidated financial
statements.

In June 2002, the FASB issued FAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. FAS No. 146 addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring). FAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred. FAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company will adopt
the provisions of FAS 146 for exit or disposal activities that are initiated
after December 31, 2002.

In December 2002, the FASB issued FAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which amended FAS No. 123,
Accounting for Stock-Based Compensation. The new standard provides
alternative methods of transition for a voluntary change to the fair market
value based method for accounting for stock-based employee compensation.
Additionally, the statement amends the disclosure requirements of FAS No. 123
to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. This statement is
effective for financial statements for the year ended December 31, 2002. In
compliance with FAS No. 148, the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee compensation
plan as defined by APB No. 25 and has made the applicable disclosures in Note
14.

Reclassifications

Certain prior year amounts have been reclassified to conform with the 2002
presentation.

NOTE 2  INVENTORIES

Inventories are summarized as follows:

|                  |  |                |    |      |  |   |    | 
|----------------- |  | -------------- | -- | ---- |  | - | -- | 
|                  |  | December 31,  
|                  |  |               
|                  |  | (in thousands)
|                  |  | 2001           |    | 2002
|                  |  |                |    |     
|Finished goods    |  | $              | 75 |      |  | $ | 45 | 
|Replacement parts |  |                | 15 |      |  |   | 15 | 
|                  |  |                |    |      |  |   |    | 
|                  |  | $              | 90 |      |  | $ | 60 | 
|                  |  |                |    |      |  |   |    | 

The Company has purchased many products and components from single sources of
supply. Because the Companys current products are industry standard, the
Company believes that alternative sources of supply of similar products would
be available to the Company in the event of any interruption of delivery of a
single source supplier.

47



---



##### Table of Contents



NOTE 3  BUSINESSES HELD FOR SALE

In the fourth quarter of 2001, the Companys Board of Directors adopted a plan
to sell its Process manufacturing and Legacy divisions. The Process
manufacturing business division designs, sells, installs and supports total
technology
solutions featuring complex wide and local area networks to the process
manufacturing industry. The Legacy business provides a wide array of products
and services to its customers who continue to use its proprietary host-based
computer systems, including field engineering services, new and replacement
equipment, operating systems and software application products. These products
and services upgrade, enhance and integrate the legacy systems with currently
available computer technologies.

During the fourth quarter of 2002, the Company successfully sold its Process
Manufacturing and Legacy businesses (see note 6).

In accordance with SFAS No. 144, the Company has reflected all of the assets
and liabilities of Process Manufacturing and Legacy in the consolidated balance
sheets as held for sale and the operating results of these businesses have been
reflected as discontinued operations in the consolidated statements of
operations for all periods presented.

Summarized below is historical financial information about Process
Manufacturing and Legacy (in thousands):

|                         |  |      |        |      |  |      |        |   |  |   |        |  
|------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                         |  | 2000 |        | 2001 |  | 2002
|                         |  |      |        |      |  |     
|Revenue                  |  | $    | 10,266 |      |  | $    | 5,078  |   |  | $ | 2,344  |  
|Loss, net of tax of zero |  |      | (627   | )    |  |      | (1,525 | ) |  |   | (1,767 | )

NOTE 4  FURNITURE, FIXTURES AND EQUIPMENT

The major classes of furniture, fixtures and equipment are as follows:

|                                                |  |                |        |      |  |   |        |  
|----------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                |  | 2001           |        | 2002
|                                                |  |                |        |     
|                                                |  | (in thousands)
|Furniture, fixtures and equipment               |  | $              | 2,760  |      |  | $ | 3,238  |  
|Office equipment                                |  |                | 3,178  |      |  |   | 2,542  |  
|Leasehold improvements                          |  |                | 262    |      |  |   | 246    |  
|                                                |  |                |        |      |  |   |        |  
|                                                |  |                | 6,200  |      |  |   | 6,026  |  
|Less: accumulated depreciation and amortization |  |                | (4,979 | )    |  |   | (5,183 | )
|                                                |  |                |        |      |  |   |        |  
|                                                |  | $              | 1,221  |      |  | $ | 843    |  
|                                                |  |                |        |      |  |   |        |  

NOTE 5  JOINT VENTURES

The Company is a joint venture partner with Metro Systems Corporation Limited
(MSC) for the purpose of marketing and selling the Companys software in
Thailand. The Company has a 49.9% interest in the joint venture and accounted
for this investment using the equity method of accounting. During 1998 the
investment in MSC, recorded at $76,000, was written off by the Company.
Summarized financial information of the investees has not been provided, as
such combined amounts are not material.

NOTE 6  ACQUISITIONS, DIVESTITURE, AGREEMENTS AND FINANCING

Hotel Information Systems, Inc.

Effective August 9, 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of Hotel Information Systems, Inc. (HIS)
pursuant to an asset purchase agreement dated June 30, 1996 (as amended July
10, 1996) for 1,179,000 unregistered shares of the Companys common stock
valued at $10,900,000. The net assets acquired from HIS are used in the
business of software design, engineering and service relating to hotel
information systems. The net assets also included subsidiaries of HIS in
Singapore, Hong Kong, Australia and Mexico. The acquisition of HIS has been
accounted for by the purchase method of accounting. The total purchase price
for HIS was $21,373,000, which included net liabilities assumed of HIS of
$7,873,000 and acquisition costs of approximately $2,600,000.

During 1996, the Company entered into arbitration proceedings regarding the
purchase price of HIS. The Company placed

48



---



##### Table of Contents



approximately 1,100,000 shares of
Common Stock issued in connection with the acquisition of HIS in an escrow
account to be released in whole, or in part, upon final resolution of post
closing adjustments.

In November 1997, the purchase price for the acquisition of HIS was reduced by
$931,000 pursuant to arbitration
proceedings. As a result, goodwill was reduced by $931,000 and approximately
100,650 shares were required to be released from the escrow account and
returned to the Company (this has not occurred as of December 31, 2002). In
addition, the Company had further claims against HIS relating to legal costs
and certain disbursements inappropriately made by HIS prior to the closing
estimated at $650,000. The Company was required, as needed, pursuant to the
asset purchase agreement and related documents, to issue additional shares of
Common Stock in order that the recipients ultimately receive shares worth a
fair value of $9.25 per share. This adjustment applied to a maximum of 73,466
shares of Common Stock. As of December 31, 2002, the fair market value of the
Companys common stock was $0.08 per share, which would result in approximately
10,788,771 additional shares being issued. Also, included in the escrow
account at December 31, 2002 are 200,000 shares of the Companys common stock,
which do not have a guarantee of value.

On March 25, 2003, the Company entered into a settlement agreement with HIS and
one of its former corporate officers whereby (i) the parties dismissed all
claims, known and unknown, against each other; (ii) the Company forgave and
wrote off a note receivable from the former corporate officer of HIS in the
amount of $66,000 (which was expensed to other expense in the 2002 consolidated
statement of operations); (iii) the Company paid $50,000 in cash and issued a
non-interest bearing unsecured promissory note which requires 35 consecutive
monthly payments of $5,000 each commencing April 1, 2003; and (iv) the
remaining 374,116 shares in the escrow account will be released to the Company.
If the Company is delinquent four times in any twelve month period during the
term of the unsecured promissory note in making its $5,000 monthly payments to
HIS, and HIS issues respective valid default notices, the Company will be
subject to a $225,000 penalty. The settlement agreement will become effective
upon the legal transfer of the 374,116 shares to MAI, which has not yet
occurred.

Hospitality Services & Solutions

On June 23, 2002, the Company acquired substantially all of the assets and
assumed certain liabilities of Hospitality Services & Solutions (HSS)
pursuant to a stock purchase agreement for 100,000 shares of common stock
valued at $32,000 (the quoted market price of the common stock at the time the
terms were agreed), and $75,000 in cash. Additionally, the shareholders of HSS
received a 20% minority interest in the Companys combined operations in Asia.
HSS was acquired for the Company to expand its operations in the Asian
marketplace, strengthen its management team n the territory and create new
opportunities for its new enterprise capable suite of products. The net assets
acquired from HSS are used in the business of software design, engineering and
service relating to hotel information systems. The net assets also include
subsidiaries of HSS in Malaysia, Singapore and Thailand. The Company recorded
$297,000 of goodwill (deductible for tax purposes) in connection with the
acquisition of HSS. Pro forma results of operations as if this acquisition had
occurred at the beginning of 2001 and 2002 are not shown because its impact
would have been immaterial.

Gaming Systems International

On June 19, 1999, the Company sold Gaming Systems International (GSI) for an
amount in excess of the book value of net assets sold. Assets sold of
approximately $3,749,000 consisted of accounts receivable of $1,514,000,
inventories of $364,000, furniture, fixtures and equipment of $218,000,
intangible assets of $1,573,000 and prepaid expenses of $80,000. Liabilities
assumed by the buyer consisted of accounts payable and accrued liabilities of
$197,000, deposits of $100,000, unearned revenue of $351,000 and long-term debt
of 446,000. The Company received three promissory notes totaling $4,925,000
with face values of $1,100,000, $1,500,000 and $2,325,000, respectively.
Interest was paid monthly at the rate of 10% per annum on both the $1,100,000
and $1,500,000 notes, with the principal due and payable on June 19, 2001 and
June 19, 2003, respectively. The $1,100,000 promissory note was guaranteed by
a third party. Principal payments and interest, at prime plus 1%, was to
commence for the $2,325,000 promissory note on October 1, 2002 in 48 monthly
installments of approximately $48,000 of principal, plus accrued interest.

Imputing interest at a rate of 10%, the present value of the $2,325,000
promissory note at the date of sale was $1,682,000 which resulted in a combined
carrying value of $4,282,000 for all three promissory notes. The gain on sale
of $1,227,000 had been deferred until collection of the proceeds representing
the gain can be assured. As of December 31, 2000, the Notes were held for sale
and were written down to an amount which approximated their estimated net
realizable value of $2,700,000.

On April 6, 2001 the Company entered into an agreement with the maker of the
Notes whereby the maker reconveyed 100% of the Common Stock of GSI to the
Company for the purpose of selling GSI to a third party. In connection with the
agreement, the Company canceled the Notes and entered into a new $1.1 million
secured promissory note with the same party. The maker will be paid a
commission of 30% of cash receipts from the third party, which will be first
applied to the

49



---



##### Table of Contents



$1.1 million note and paid in cash to the maker thereafter. On
July 27, 2001, the Company entered into an Asset Purchase Agreement
(Agreement) with the third party for approximately $3.2 million whereby all
of the assets of GSI were acquired and all of the liabilities assumed, except
for approximately $300,000 of obligations, which will remain with GSI.
The payment terms under the Agreement required a $1 million non-refundable cash
payment to the Company, which was received on July 27, 2001 and a $1.5 million
payment, which was received in December 2001. The Company also received a
secured promissory note in the amount of $750,000, of which $500,000 was
received in December 2002 and $250,000 in January 2003. The third party was
also required to pay an additional $250,000 subject to a maximum $250,000
reduction pursuant to the resolution of certain uncertainties as of the date of
the Agreement, which, as part of the settlement, in January 2003 the Company
received $46,000. Due to the uncertainty of collecting the unsecured amount of
$250,000, gain recognition on that part of the proceeds was deferred until
collection was assured. The Company recorded a gain on the sale of GSI of
$245,000 in the fourth quarter of 2001, which is included in other operating
expense (income) in the accompanying consolidated statements of operations

Legacy

On October 9, 2001, the Company sold certain rights under customer contracts
together with the related assets and liabilities of its domestic Legacy
hardware maintenance division to the third party currently providing the
on-site repair and warranty service to the Companys Legacy hardware
maintenance customers. Pursuant to the agreement, the Company retained the
software maintenance component of the customer contracts and will continue to
provide the software support services directly to the domestic Legacy customer
base. Additionally, the third party will be required to pay the Company
approximately 15% of the third partys hardware maintenance revenue stream
relating to the hardware maintenance customer contracts subsequent to October
31, 2003. In connection with the sale, the Company received $328,000 in cash
and sold approximately $157,000 of assets consisting of inventory, spare parts,
fixed assets and certain accounts receivable. The third party also assumed
approximately $1,091,000 of liabilities consisting of accrued liabilities of
approximately $366,000 and deferred revenue of approximately $725,000. The
sale resulted in a gain of approximately $1,262,000 in October 2001.

MAI Canada

On December 6, 2002, the Company sold all the assets and certain liabilities of
its Canadian operations, including all legacy divisions, to the management of
this subsidiary pursuant to a stock purchase agreement. In connection with the
sale, the Company also entered into a software distribution agreement whereby
the buyer has a non-exclusive right and license to market and install the
Companys hospitality products in Canada. The sale resulted in a loss of
approximately $630,000, which is included in the loss on disposal of
discontinued operations. Prior to the sale, the Canadian operations incurred a
net income (loss) of $1,341,000, $910,000 and ($305,000) during 2000, 2001 and
2002, respectively, which is included in loss from discontinued operations in
the accompanying statements of operations.

Process Manufacturing

On December 6, 2002, the Company entered into an Asset Purchase Agreement
whereby all the assets and certain liabilities of its process manufacturing
software division were sold to a third party for cash of $250,000. The sale
resulted in a loss of approximately $391,000, which is included in the loss on
disposal of discontinued operations. Prior to the sale, Process Manufacturing
operations incurred a net loss of $1,968,000, $3,736,000 and $441,000 during
2000, 2001 and 2002, respectively, which is included in loss from discontinued
operations in the accompanying statements of operations.

NOTE 7  INTANGIBLE ASSETS

Intangible assets consist primarily of goodwill and capitalized software.
Intangible assets other than goodwill are amortized on a straight-line basis
over their estimated useful lives. Prior to 2002, goodwill, representing the
excess of the purchase price over the estimated fair value of the net assets of
the acquired business, was amortized over the period of expected benefit of
five to seven years. However, effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, (SFAS No. 142) which requires that the Company cease
amortization of all goodwill and intangible assets having indefinite useful
economic lives. The Company determined that there was no impairment upon
adoption. Such assets are not to be amortized until their lives are
determined to be finite, however, a recognized intangible asset with an
indefinite useful life should be tested for impairment annually or on an
interim basis if events or circumstances indicate that the fair value of the
asset has decreased below its carrying value. At December 31, 2002, the
Company evaluated its goodwill and determined that fair value had not decreased
below carrying value and no adjustment to impair goodwill was necessary in
accordance with SFAS No. 142.

50



---



##### Table of Contents



Net income and net income per share for 2000 and 2001 adjusted to exclude
amortization expense is as follows:

|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |       |      |       |  
|------------------------------------------------------------- | ------------------------------------------ | ---------------------------------------------------------------- | ----------------------------------- | --------------------------------------------------------------------- | ----- | ------------------------ | ----- | ------ | ----- | ---- | ----- | -
|                                                              |                                            |                                                                  |                                     |                                                                       |       | Year Ending December 31,
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                         
|                                                              |                                            |                                                                  |                                     |                                                                       |       | (in
thousands)          
|                                                              |                                            |                                                                  |                                     |                                                                       |       | 2000                     |       | 2001  
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |       
|Net income:                                                   |                                            |                                                                  |                                     |                                                                       |       |                          |       |       
|                                                              | Reported net income                        |                                                                  | $                                   | 817                                                                   |       |                          | $     | 2,132  |      
|                                                              | Goodwill amortization                      |                                                                  |                                     | 420                                                                   |       |                          |       | 420    |      
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|                                                              |                                            |                                                                  |                                     | Adjusted net income                                                   |       | $                        | 1,237 |        |       | $    | 2,552 |  
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|Basic net income per share:                                   |                                            |                                                                  |                                     |                                                                       |       |                          |       |       
|                                                              |                                            | Reported basic net income per share                              |                                     | $                                                                     | 0.07  |                          |       | $      | 0.16  |     
|                                                              |                                            | Goodwill amortization                                            |                                     |                                                                       | 0.04  |                          |       |        | 0.03  |     
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|                                                              |                                            |                                                                  |                                     | Adjusted basic net income per share                                   |       | $                        | 0.11  |        |       | $    | 0.19  |  
|Diluted net income per share:                                 |                                            |                                                                  |                                     |                                                                       |       |                          |       |       
|                                                              |                                            | Reported diluted net income per share                            |                                     | $                                                                     | 0.07  |                          |       | $      | 0.16  |     
|                                                              |                                            | Goodwill amortization                                            |                                     |                                                                       | 0.04  |                          |       |        | 0.03  |     
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|                                                              |                                            |                                                                  | Adjusted diluted earnings per share |                                                                       | $     | 0.11                     |       |        | $     | 0.19 |      
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|Income from continuing operations:                            |                                            |                                                                  |                                     |                                                                       |       |                          |       |       
|                                                              | Reported income from continuing operations |                                                                  | $                                   | 1,444                                                                 |       |                          | $     | 3,657  |      
|                                                              | Goodwill amortization                      |                                                                  |                                     | 420                                                                   |       |                          |       | 420    |      
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|                                                              |                                            |                                                                  |                                     | Adjusted income from continuing operations                            |       | $                        | 1,864 |        |       | $    | 4,077 |  
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|Basic income per share from continuing operations:            |                                            |                                                                  |                                     |                                                                       |       |                          |       |       
|                                                              |                                            | Reported basic income per share from continuing operations       |                                     | $                                                                     | 0.13  |                          |       | $      | 0.28  |     
|                                                              |                                            | Goodwill amortization                                            |                                     |                                                                       | 0.04  |                          |       |        | 0.03  |     
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|                                                              |                                            |                                                                  |                                     | Adjusted basic net income per share from continuing operations        |       | $                        | 0.17  |        |       | $    | 0.31  |  
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|Diluted income per share from continuing operations:          |                                            |                                                                  |                                     |                                                                       |       |                          |       |       
|                                                              |                                            | Reported diluted net income per share from continuing operations |                                     | $                                                                     | 0.13  |                          |       | $      | 0.28  |     
|                                                              |                                            | Goodwill amortization                                            |                                     |                                                                       | 0.04  |                          |       |        | 0.03  |     
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|                                                              |                                            |                                                                  |                                     | Adjusted diluted income per share from continuing operations          |       | $                        | 0.17  |        |       | $    | 0.31  |  
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|Income (Loss) from discontinued operations:                   |                                            |                                                                  |                                     |                                                                       |       |                          |       |       
|                                                              | Reported loss from discontinued operations |                                                                  | $                                   | (627                                                                  | )     |                          | $     | (1,525 | )    
|                                                              | Goodwill amortization                      |                                                                  |                                     | 1,232                                                                 |       |                          |       | 1,233  |      
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|                                                              |                                            |                                                                  |                                     | Adjusted income (loss) from discontinued operations                   |       | $                        | 605   |        |       | $    | (292  | )
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|Basic income (loss) per share from discontinued operations:   |                                            |                                                                  |                                     |                                                                       |       |                          |       |       
|                                                              |                                            | Reported basic loss per share from discontinued operations       |                                     | $                                                                     | (0.06 | )                        |       | $      | (0.12 | )   
|                                                              |                                            | Goodwill amortization                                            |                                     |                                                                       | 0.11  |                          |       |        | 0.10  |     
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|                                                              |                                            |                                                                  |                                     | Adjusted basic income per share from discontinued operations          |       | $                        | 0.05  |        |       | $    | (0.02 | )
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|Diluted income (loss) per share from discontinued operations: |                                            |                                                                  |                                     |                                                                       |       |                          |       |       
|                                                              |                                            | Reported diluted loss per share from discontinued operations     |                                     | $                                                                     | (0.06 | )                        |       | $      | (0.12 | )   
|                                                              |                                            | Goodwill amortization                                            |                                     |                                                                       | 0.11  |                          |       |        | 0.10  |     
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      
|                                                              |                                            |                                                                  |                                     | Adjusted diluted income (loss) per share from discontinued operations |       | $                        | 0.05  |        |       | $    | (0.02 | )
|                                                              |                                            |                                                                  |                                     |                                                                       |       |                          |       |        |      

51



---



##### Table of Contents



Goodwill and capitalized software as of December 31, 2001 and 2002 are as
follows:

|                          |       |   |                |     |      |   |        |       | 
|------------------------- | ----- | - | -------------- | --- | ---- | - | ------ | ----- | 
|                          |       |   | December 31,  
|                          |       |   | (in
thousands)
|                          |       |   | 2001           |     | 2002
|                          |       |   |                |     |     
|Goodwill                  |       | $ | 1,506          |     |      | $ | 962    |      
|Accumulated amortization  |       |   | (841           | )   |      |   |       |      
|                          |       |   |                |     |      |   |        |      
|Goodwill, net             |       |   | 665            |     |      |   | 962    |      
|                          |       |   |                |     |      |   |        |      
|Capitalized software      |       |   | 1,319          |     |      |   | 2,180  |      
|Accumulated amortization  |       |   | (1,185         | )   |      |   | (1,319 | )    
|                          |       |   |                |     |      |   |        |      
|Capitalized software, net |       |   | 134            |     |      |   | 861    |      
|                          |       |   |                |     |      |   |        |      
|                          | Total |   | $              | 799 |      |   | $      | 1,823 | 
|                          |       |   |                |     |      |   |        |      

The Company recorded $297,000 of goodwill in connection with the acquisition of
HSS (see note 6).

The Companys weighted average amortization period for capitalized software is
expected to be three years. The following table shows the estimated
amortization expense for these assets for each of the five succeeding years:

|                         |  |   |     | 
|------------------------ |  | - | --- | 
|Year Ending December 31,
|                        
|(in
thousands)          
|2003                     |  | $ | 72  | 
|2004                     |  |   | 287 | 
|2005                     |  |   | 287 | 
|2006                     |  |   | 215 | 
|                         |  |   |     | 
|                         |  | $ | 861 | 
|                         |  |   |     | 

NOTE 8  LINE OF CREDIT AND BRIDGE LOAN

On July 28, 1999, the Company obtained a Bridge Loan from Coast Business Credit
(Coast) in the amount of $2,000,000. The Bridge Loan originally bore
interest at prime plus 5% (prime plus 8% when default interest rates apply).
Loan origination fees of $75,000 paid to Coast in connection with the Bridge
Loan were amortized to interest expense over the term of the loan. During the
first quarter of 2001, the remaining balance of the Bridge Loan was repaid in
full. In April 1998, the Company negotiated a $5,000,000 secured revolving
credit facility with Coast. The availability of this facility was based on a
calculation using a rolling average of certain cash collections. The facility
is secured by all assets, including intellectual property of the Company, and
bore interest at prime plus 4.5% and was due to expire on April 30, 2003. The
credit facility was amended to allow for aggregate borrowings on an interest
only basis under the credit facility not to exceed $3,360,000. In connection
with the amendment, the Company agreed to pay Coast a fee of $300,000 (Loan
Fee) in weekly installments of $35,000 commencing after the Bridge Loan was
paid in full. The Loan Fee was fully paid by April 23, 2001. At December 31,
2001 and 2002, approximately $2,424,400 and $1,801,000, respectively, was drawn
down under the credit facility.

The Loan Fee of $300,000 is classified in prepaids and other current assets and
was being amortized to interest expense over the original term of the facility.
At December 31, 2001 and 2002, approximately $133,000 and $33,000,
respectively, of the loan fee was classified in prepaids and other current
assets.

On January 13, 2003, the Company re-negotiated the terms of the credit facility
whereby the outstanding balance of $1,828,000 as of that date was converted to
a term loan which accrues interest at 9.25% per annum and requires monthly
payments of $58,000 over a 36 month period commencing March 1, 2003. The new
term loan matures on February 28, 2005, at which time all remaining principal
and accrued interest is due and payable. The Company will also be required to
pay Coast additional principal payments on a quarterly basis based upon an
EBITDA-based formula commencing March 31, 2003. The consolidated balance sheet
as of December 31, 2002 reflects the reclass of the secured revolving credit
facility to a term loan (see note 9). The restructured debt pursuant to an
intercreditor agreement between Canyon Capital and Coast Business Credit,
contains various restrictions and covenants, including a minimum quick ratio of
0.30 to l.00 and minimum debt service coverage ratio of 0.90 to l.00 which
commence as of and for the three-month period ended March 31,
2003. The minimum quick ratio increases to 0.31 to 1.00 as of
June 30, 2003 and September 30, 2003 and to 0.34 to 1.00 as
of December 31, 2003 and for each and every fiscal quarter
ending thereafter. The minimum debt coverage ratio increases to 1.10
to 1.00 for the three-month period ending June 30, 2003 and to
1.25 to 1.00 for the three-month period ending September 30,
2003 and for each and every fiscal quarter thereafter. In the
event that the Company were not in compliance with the various restrictions and
covenants and were unable to receive waivers for non-compliance, the term and
subordinated debt would be immediately due and payable. The Company
believes that it will be in compliance with the covenants as of
March 31, 2003 and for every fiscal quarter thereafter.

On February 7, 2003, the Federal
Deposit Insurance Corporation (FDIC) put Coast and its
parent company, Southern Pacific Bank, into receivership and is
currently holding all of Coast's assets for sale to third parties,
which include the Company's term loan with Coast. This receivership
and ultimate sale of the loan by the FDIC does not change any of the
terms of the Company's current loan agreement.

52



---



##### Table of Contents



NOTE 9  LONG-TERM DEBT

Long-term debt outstanding is as follows:

|                                                                            |  |                |       |      |  |   |        |  
|--------------------------------------------------------------------------- |  | -------------- | ----- | ---- |  | - | ------ | -
|                                                                            |  | December 31,  
|                                                                            |  |               
|                                                                            |  | (in
thousands)
|                                                                            |  | 2001           |       | 2002
|11% subordinated debt, net of discount of $198,000
and 28,000, respectively |  | $              | 5,490 |      |  | $ | 5,634  |  
|10% subordinated debt                                                       |  |                | 2,800 |      |  |   | 2,800  |  
|9.25% subordinated debt (note 8)                                            |  |                |      |      |  |   | 1,801  |  
|Obligations under capital leases                                            |  |                | 57    |      |  |   | 36     |  
|Tax claims                                                                  |  |                | 252   |      |  |   | 252    |  
|Other                                                                       |  |                | 55    |      |  |   |       |  
|                                                                            |  |                |       |      |  |   |        |  
|                                                                            |  |                | 8,654 |      |  |   | 10,523 |  
|Less: current installments                                                  |  |                | (112  | )    |  |   | (3,289 | )
|                                                                            |  |                |       |      |  |   |        |  
|Non-current portion                                                         |  | $              | 8,542 |      |  | $ | 7,234  |  
|                                                                            |  |                |       |      |  |   |        |  

Aggregate maturities of long-term debt are as follows:

|                         |  |   |        | 
|------------------------ |  | - | ------ | 
|Year Ending December 31,
|                        
|(in
thousands)          
|2003                     |  | $ | 3,289  | 
|2004                     |  |   | 591    | 
|2005                     |  |   | 2,042  | 
|2006                     |  |   | 1,953  | 
|2007                     |  |   | 2,059  | 
|Thereafter               |  |   | 589    | 
|                         |  |   |        | 
|                         |  | $ | 10,523 | 
|                         |  |   |        | 

Notes Payable

In March 1997, the Company issued $6,000,000 of 11% subordinated notes payable
due in 2004 to an investment fund managed by Canyon Capital Management LP
(Canyon). In September 1997, this indebtedness was reduced to $5,250,000
through application of a portion of the proceeds realized from the exercise of
warrants by Canyon. The notes called for semi-annual interest payments.

The Company and Canyon subsequently entered into a forbearance agreement
providing that the Company pay Canyon weekly interest payments of $12,500
effective January 1, 2000. In addition, the Company executed a security
agreement, which provided Canyon with a lien on all of the Companys tangible
and intangible property, which lien is junior to the lien granted to Coast
(note 8).

On April 13, 2000, the Company entered into an agreement with Canyon, waiving
all existing events of default, accelerated the maturity date to March 3, 2003
and provided for continued weekly interest payments of $12,500. On January 31,
2001, the Company entered into an agreement with Canyon whereby the specified
accrued interest of $431,000 was added to the principal balance of the
subordinated notes payable. As part of this agreement, the Company also agreed
to pay Canyon an additional $79,000 loan fee, of which $29,000 was added to
principal. The principal balance outstanding on the subordinate notes payable
to Canyon was approximately $5,690,000 and $5,662,000 at December 31, 2001 and
December 31, 2002, respectively.

On January 13, 2003, the Company modified the terms of its agreement with
Canyon, whereby the Company is required to make monthly payments of $52,000,
until the Coast term loan is paid off in full, at which time the note payable
will be converted into a three-year amortizing loan which will accrue interest
at 11% per annum and requires equal monthly payments of principal and interest
such that the subordinated debt will be paid in full at the end of the amended
term. Upon the repayment of the Coast debt in full, the Company will also be
required to pay Canyon additional principal payments on a quarterly basis based
upon an EBITDA-based formula. Additionally, the Company is required to issue
Canyon 200,000 share of its common stock and one million warrants to purchase
its common stock at an exercise price of $0.40 per share.

In connection with a settlement agreement with CSA (see Note 18), the Company
issued $2.8 million of subordinated debt to CSA. The $2.8 million of debt is
secured by all of the Companys assets which is subordinate to Coast and
Canyon,

53



---



##### Table of Contents



accrues interest at 10% per annum and requires payments of $37,500 from March
1, 2002 through September 1, 2002 and monthly payments of $107,500 commencing
on October 1, 2002 until October 2003 when all remaining unpaid principal and
accrued interest is to be paid in full. The balance outstanding on the
subordinate debt to CSA was $2,800,000 at December 31, 2001 and December 31,
2002.

The agreement with CSA was amended whereby the Company shall be required to pay
the required payments under the subordinated note unless and until it paid $1
million by December 31, 2002. Upon payment of the $1 million, contractual
payments under the subordinated note would have ceased until a final payment in
the amount of $400,000 is paid by February 28, 2003. If the Company did not
make all of the modified payments to CSA, the subordinated note will revert
back to its original terms. The Company did not make the modified payment and
have not made any payments since September 2002. Under the terms of the
subordination agreement between Coast, Canyon and CSA, the Company is not
allowed to make any principal or interest payments to CSA until the Coast and
Canyon debt, including any accrued interest, is repaid in full, or the CSA debt
is restructured and approved by Coast and Canyon. The Company is currently in
negotiations with CSA to restructure the terms of the subordinated notes
including extending its maturity date. There can be no assurance that CSA and
MAI will come to terms on a restructuring or that Coast and Canyon will
ultimately approve the terms of the restructuring. In the event that the
Company is unable to meet the required payments to its primary lenders or meet
its payment obligations to its other secured creditors, they are entitled to
exercise certain rights under the respective agreements the Company has with
them, including but not limited to, foreclosing on all of the Companys
tangible and intangible assets. Such action would have a substantial adverse
effect on our ability to continue as a going concern. The CSA debt is
shown as current

CSA has not formally notified the Company of its default. As of December 31,
2001 and 2002, accrued interest relating to the CSA subordinated debt was
$319,000 and $408,000, respectively, and is included in accrued liabilities in
the accompanying consolidated balance sheets.

Tax Claims

Tax claims include pre-petition unsecured tax claims for income and property
taxes from various taxing authorities. Under the terms of the Plan of
Reorganization (see Note 17), such amounts are to be paid in full in cash in
annual installments over six years with interest at 6%. Upon agreement with
the respective taxing authority, tax claims are classified as debt, otherwise
such claims are classified as other long-term liabilities in the accompanying
consolidated balance sheets at December 31, 2001 and 2002. As of December 31,
2001 and 2002, unsettled tax claims of $712,000 are included in long-term
liabilities. The accrual of interest will commence upon the effective date of
the settlement with the IRS.

NOTE 10  ACCRUED LIABILITIES

Accrued liabilities consist of the following:

|                                |       |   |                |       |      |   |     |       | 
|------------------------------- | ----- | - | -------------- | ----- | ---- | - | --- | ----- | 
|                                |       |   | 2001           |       | 2002
|                                |       |   |                |       |     
|                                |       |   | (in
thousands)
|Salaries, wages and commissions |       | $ | 323            |       |      | $ | 289 |      
|Accrued insurance & sales taxes |       |   | 80             |       |      |   | 133 |      
|Accrued vacation                |       |   | 375            |       |      |   | 417 |      
|Accrued interest                |       |   | 321            |       |      |   | 416 |      
|Other                           |       |   | 1,303          |       |      |   | 752 |      
|                                |       |   |                |       |      |   |     |      
|                                | Total |   | $              | 2,402 |      |   | $   | 2,007 | 
|                                |       |   |                |       |      |   |     |      

NOTE 11  INCOME TAXES

The components of income (loss) from continuing operations before income taxes
are as follows:

|        |       |   |                          |       |      |   |       |       |  |   |      |     | 
|------- | ----- | - | ------------------------ | ----- | ---- | - | ----- | ----- |  | - | ---- | --- | 
|        |       |   | Years Ended December 31,
|        |       |   |                         
|        |       |   | (in
thousands)          
|        |       |   | 2000                     |       | 2001 |   | 2002 
|        |       |   |                          |       |      |   |      
|U.S     |       | $ | 1,688                    |       |      | $ | 3,829 |       |  | $ | 702  |    
|Foreign |       |   | (82                      | )     |      |   | 4     |       |  |   | (255 | )  
|        |       |   |                          |       |      |   |       |       |  |   |      |    
|        | Total |   | $                        | 1,606 |      |   | $     | 3,833 |  |   | $    | 447 | 
|        |       |   |                          |       |      |   |       |       |  |   |      |    

54



---



##### Table of Contents



The income tax provision is comprised of the following:

|          |              |   |                          |    |      |   |      |    |  |   |    |    | 
|--------- | ------------ | - | ------------------------ | -- | ---- | - | ---- | -- |  | - | -- | -- | 
|          |              |   | Years Ended December 31,
|          |              |   |                         
|          |              |   | (in
thousands)          
|          |              |   | 2000                     |    | 2001 |   | 2002
|          |              |   |                          |    |      |   |     
|Current:  |              |   |                          |    |      |   |      |    |  |   |    |   
|          | U.S. Federal |   | $                        | 65 |      |   | $    | 81 |  |   | $  |   | 
|          | State        |   |                          |   |      |   |      |   |  |   |    | 3  | 
|          | Foreign      |   |                          | 97 |      |   |      | 95 |  |   |    | 27 | 
|          |              |   |                          |    |      |   |      |    |  |   |    |   
|          |              |   | 162                      |    |      |   | 176  |    |  |   | 30 |   
|          |              |   |                          |    |      |   |      |    |  |   |    |   
|Deferred: |              |   |                          |    |      |   |      |    |  |   |    |   
|          | U.S. Federal |   |                          |   |      |   |      |   |  |   |    |   | 
|          | Foreign      |   |                          |   |      |   |      |   |  |   |    |   | 
|          |              |   |                          |    |      |   |      |    |  |   |    |   
|          |              |   |                         |    |      |   |     |    |  |   |   |   
|          |              |   |                          |    |      |   |      |    |  |   |    |   
|Total     |              | $ | 162                      |    |      | $ | 176  |    |  | $ | 30 |   
|          |              |   |                          |    |      |   |      |    |  |   |    |   

Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The significant components of the deferred income tax assets and
deferred income tax liabilities are as follows:

|                          |                                      |                         |         |                |   |      |         |        |   | 
|------------------------- | ------------------------------------ | ----------------------- | ------- | -------------- | - | ---- | ------- | ------ | - | 
|                          |                                      |                         |         | December 31,  
|                          |                                      |                         |         |               
|                          |                                      |                         |         | (in
thousands)
|                          |                                      |                         |         | 2001           |   | 2002
|                          |                                      |                         |         |                |   |     
|Deferred tax assets:      |                                      |                         |         |                |   |      |         |       
|                          | Net operating loss carryforwards     |                         | $       | 21,448         |   |      | $       | 21,521 |  
|                          | Furniture, fixture and equipment     |                         |         | 1,381          |   |      |         |       |  
|                          | Inventory write-downs                |                         |         | 82             |   |      |         | 2      |  
|                          | Allowance for doubtful accounts      |                         |         | 463            |   |      |         | 144    |  
|                          | Capitalized software and intangibles |                         |         | 1,812          |   |      |         | 370    |  
|                          | Accrued expenses                     |                         |         | 304            |   |      |         | 179    |  
|                          | Other                                |                         |         | 683            |   |      |         | 151    |  
|                          |                                      |                         |         |                |   |      |         |       
|                          |                                      |                         | 26,173  |                |   |      | 22,367  |       
|Less: valuation allowance |                                      |                         | (26,173 | )              |   |      | (22,367 | )     
|                          |                                      |                         |         |                |   |      |         |       
|                          |                                      | Net deferred tax assets |         | $              |  |      |         | $      |  | 
|                          |                                      |                         |         |                |   |      |         |       

The Company has recorded a valuation allowance in the amount set forth above
for certain deductible temporary differences where it is not more likely than
not the Company will receive future tax benefits. The net change in the
valuation allowance for the years ended 2000, 2001 and 2002 was $(941,000),
$(774,000) and $(3,806,000), respectively.

As of December 31, 2002 and 2002, the Company has Federal and state net
operating losses (NOL) carryovers of approximately $62,000,000 and $2,000,000
respectively. These NOL carryovers will expire in the years 2003 through 2019.
The Companys utilization of a portion of its NOL carryovers is subject to
various uncertainties including an annual limitation under Section 382 of the
Internal Revenue Code. The amount of this limitation is not known at this
time. The IRS has asserted deficiencies for the Companys separate federal
income tax returns for the years 1988 and 1989. The Company believes it has
meritorious defenses and does not expect that any liability resulting from
those years will result in a material adverse effect on its results of
operations or financial position.

On September 11, 2002, the State of California enacted one of the budget
trailer bills that implemented the states 2002-2003 Budget Bill (A425). The
new law suspends the NOL carryover deduction for tax years 2002 and 2003. To
compensate for the deduction suspension, the period of availability for these
NOL deductions has been extended for two years.

The provision (benefit) for income taxes differs from the amount computed by
applying the Federal corporate income tax rate of 34% to income (loss) from
continuing operations before income taxes as follows:

55



---



##### Table of Contents



|                                                                                                                                 |  |                          |       |      |  |      |       |   |  |  |        |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  |  | ------ | -
|                                                                                                                                 |  | Years Ended December 31,
|                                                                                                                                 |  | (in
percentages)        
|                                                                                                                                 |  | 2000                     |       | 2001 |  | 2002
|                                                                                                                                 |  |                          |       |      |  |     
|Statutory tax rate                                                                                                               |  |                          | 34.0  | %    |  |      | 34.0  | % |  |  | 34.0   | %
|Change in valuation allowance                                                                                                    |  |                          | (71.2 | )    |  |      | (36.1 | ) |  |  | (679.6 | )
|Amortization and write-off of intangibles                                                                                        |  |                          | 8.9   |      |  |      | 3.7   |   |  |  |       |  
|Expiration of state NOLs                                                                                                         |  |                          | 4.6   |      |  |      |      |   |  |  | 5.0    |  
|Effect of foreign operations                                                                                                     |  |                          | 19.4  |      |  |      | 2.5   |   |  |  | 610.8  |  
|Adjustments of NOL carry forwards and
deferred tax assets pursuant to the
finalization of the IRS examination
and other analysis |  |                          | 15.2  |      |  |      |      |   |  |  |       |  
|Other                                                                                                                            |  |                          | (0.8  | )    |  |      | 0.5   |   |  |  | 36.5   |  
|                                                                                                                                 |  |                          |       |      |  |      |       |   |  |  |        |  
|Effective tax rate                                                                                                               |  |                          | 10.1  | %    |  |      | 4.6   | % |  |  | 6.7    | %
|                                                                                                                                 |  |                          |       |      |  |      |       |   |  |  |        |  

NOTE 12  GEOGRAPHIC AREA INFORMATION

Information with respect to the Companys operations by significant geographic
area is set forth below. Other foreign includes operations in Mexico.
Asia includes operations in Singapore, Malaysia and Hong Kong.

|                                                                    |                |   |        |        |      |   |        |        |   |   |        |        |  
|------------------------------------------------------------------- | -------------- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                    |                |   | 2000   |        | 2001 |   | 2002  
|                                                                    |                |   |        |        |      |   |       
|Revenue from unaffiliated customers (based
on subsidiary location): |                |   |        |        |      |   |        |        |   |   |        |       
|                                                                    | United States  |   | $      | 21,207 |      |   | $      | 19,351 |   |   | $      | 17,592 |  
|                                                                    | Asia           |   |        | 3,960  |      |   |        | 2,585  |   |   |        | 2,783  |  
|                                                                    | Canada         |   |        | 708    |      |   |        | 584    |   |   |        | 452    |  
|                                                                    | United Kingdom |   |        | 1,281  |      |   |        | 1,248  |   |   |        | 1,110  |  
|                                                                    | Other foreign  |   |        | 165    |      |   |        |       |   |   |        |       |  
|                                                                    |                |   |        |        |      |   |        |        |   |   |        |       
|                                                                    |                | $ | 27,321 |        |      | $ | 23,768 |        |   | $ | 21,937 |       
|                                                                    |                |   |        |        |      |   |        |        |   |   |        |       
|United States revenue from foreign affiliates                       |                | $ | 42     |        |      | $ | 343    |        |   | $ | 298    |       
|                                                                    |                |   |        |        |      |   |        |        |   |   |        |       
|Operating income (loss):                                            |                |   |        |        |      |   |        |        |   |   |        |       
|                                                                    | United States  |   | $      | 2,951  |      |   | $      | 5,303  |   |   | $      | 2,192  |  
|                                                                    | Asia           |   |        | (189   | )    |   |        | (32    | ) |   |        | 70     |  
|                                                                    | Canada         |   |        | 204    |      |   |        | 23     |   |   |        | 6      |  
|                                                                    | United Kingdom |   |        | (92    | )    |   |        | 61     |   |   |        | (176   | )
|                                                                    | Other foreign  |   |        | (8     | )    |   |        | (49    | ) |   |        | (155   | )
|                                                                    |                |   |        |        |      |   |        |        |   |   |        |       
|                                                                    |                | $ | 2,866  |        |      | $ | 5,306  |        |   | $ | 1,937  |       
|                                                                    |                |   |        |        |      |   |        |        |   |   |        |       
|Identifiable assets:                                                |                |   |        |        |      |   |        |        |   |   |        |       
|                                                                    | United States  |   | $      | 13,205 |      |   | $      | 6,233  |   |   | $      | 4,329  |  
|                                                                    | Asia           |   |        | 1,078  |      |   |        | 909    |   |   |        | 1,352  |  
|                                                                    | Canada         |   |        | 544    |      |   |        | 383    |   |   |        |       |  
|                                                                    | United Kingdom |   |        | 1,331  |      |   |        | 505    |   |   |        | 422    |  
|                                                                    | Other foreign  |   |        | 287    |      |   |        | 258    |   |   |        | 74     |  
|                                                                    |                |   |        |        |      |   |        |        |   |   |        |       
|                                                                    |                | $ | 16,445 |        |      | $ | 8,288  |        |   | $ | 6,177  |       
|                                                                    |                |   |        |        |      |   |        |        |   |   |        |       
|Long-lived assets:                                                  |                |   |        |        |      |   |        |        |   |   |        |       
|                                                                    | United States  |   | $      | 7,129  |      |   | $      | 2,862  |   |   | $      | 2,315  |  
|                                                                    | Asia           |   |        | 52     |      |   |        | 28     |   |   |        | 492    |  
|                                                                    | United Kingdom |   |        | 56     |      |   |        | 36     |   |   |        | 46     |  
|                                                                    | Canada         |   |        | 27     |      |   |        | 18     |   |   |        |       |  
|                                                                    | Other foreign  |   |        | (8     | )    |   |        | 12     |   |   |        | 7      |  
|                                                                    |                |   |        |        |      |   |        |        |   |   |        |       
|                                                                    |                | $ | 7,256  |        |      | $ | 2,956  |        |   | $ | 2,860  |       
|                                                                    |                |   |        |        |      |   |        |        |   |   |        |       

56



---



##### Table of Contents



United States revenue from foreign affiliates consists of net intercompany
sales and services from the United States to the Companys foreign subsidiaries
and is eliminated from consolidated net revenue. Intercompany sales are based
on current selling prices or list prices less discounts. Discounts typically
are influenced by competitive pricing, market conditions and relative foreign
exchange rates.

NOTE 13  BUSINESS SEGMENT INFORMATION

The Company evaluates performance of each segment based on operating income for
fiscal years ending December 31, 2000, 2001, and 2002.

Year Ending December 31,(in thousands)

2002:

|                 |                       |  |             |        |            |  |              |   |  |  |        |        | 
|---------------- | --------------------- |  | ----------- | ------ | ---------- |  | ------------ | - |  |  | ------ | ------ | 
|                 |                       |  |             |        |            |  | Discontinued |   |  |  |       
|                 |                       |  | Hospitality |        | Operations |  | Total       
|                 |                       |  |             |        |            |  |             
|Revenues from:   |                       |  |             |        |            |  |              |   |  |  |        |       
|                 | Hardware              |  | $           | 996    |            |  | $            |  |  |  | $      | 996    | 
|                 | Software              |  |             | 4,585  |            |  |              |  |  |  |        | 4,585  | 
|                 | Professional Services |  |             | 16,356 |            |  |              |  |  |  |        | 16,356 | 
|Total Revenues   |                       |  | 21,937      |        |            |  |             |   |  |  | 21,937 |       
|Operating Income |                       |  | 1,937       |        |            |  |             |   |  |  | 1,937  |       
|Total Assets     |                       |  | 6,177       |        |            |  |             |   |  |  | 6,177  |       

2001:

|                 |                       |  |             |        |            |  |              |   |  |  |        |        | 
|---------------- | --------------------- |  | ----------- | ------ | ---------- |  | ------------ | - |  |  | ------ | ------ | 
|                 |                       |  |             |        |            |  | Discontinued |   |  |  |       
|                 |                       |  | Hospitality |        | Operations |  | Total       
|                 |                       |  |             |        |            |  |             
|Revenues from:   |                       |  |             |        |            |  |              |   |  |  |        |       
|                 | Hardware              |  | $           | 789    |            |  | $            |  |  |  | $      | 789    | 
|                 | Software              |  |             | 5,329  |            |  |              |  |  |  |        | 5,329  | 
|                 | Professional Services |  |             | 17,650 |            |  |              |  |  |  |        | 17,650 | 
|Total Revenues   |                       |  | 23,768      |        |            |  |             |   |  |  | 23,768 |       
|Operating Income |                       |  | 5,306       |        |            |  |             |   |  |  | 5,306  |       
|Total Assets     |                       |  | 7,471       |        |            |  | 817          |   |  |  | 8,288  |       

2000:

|                 |                       |  |             |        |            |  |              |   |  |  |        |        | 
|---------------- | --------------------- |  | ----------- | ------ | ---------- |  | ------------ | - |  |  | ------ | ------ | 
|                 |                       |  |             |        |            |  | Discontinued |   |  |  |       
|                 |                       |  | Hospitality |        | Operations |  | Total       
|                 |                       |  |             |        |            |  |             
|Revenues from:   |                       |  |             |        |            |  |              |   |  |  |        |       
|                 | Hardware              |  | $           | 1,301  |            |  | $            |  |  |  | $      | 1,301  | 
|                 | Software              |  |             | 6,857  |            |  |              |  |  |  |        | 6,857  | 
|                 | Professional Services |  |             | 19,163 |            |  |              |  |  |  |        | 19,163 | 
|Total Revenues   |                       |  | 27,321      |        |            |  |             |   |  |  | 27,321 |       
|Operating Income |                       |  | 2,866       |        |            |  |             |   |  |  | 2,866  |       
|Total Assets     |                       |  | 11,874      |        |            |  | 4,571        |   |  |  | 16,445 |       

Customers

During 2000, 2001 and 2002, the Joint Armed Services was the only customer
accounting for ten percent or more of our revenues. Total revenue from the
Joint Armed Services for 2000, 2001 and 2002 was $3,147,000, $2,937,000 and
$2,880,000, respectively.

NOTE 14  STOCKHOLDERS DEFICIENCY

Stock Option Plans

In connection with the Plan of Reorganization (see Note 17), the Company
adopted the MAI Systems Corporation 1993 Stock Option Plan (the 1993 Plan)
which became effective on January 27, 1994. Under the 1993 Plan, 2,500,000
authorized shares of Common Stock are reserved for issuance of options. Options
under the 1993 Plan may be granted at exercise prices determined by the
Compensation Committee of the Board of Directors, provided that the exercise
prices

57



---



##### Table of Contents



shall not be less than the fair market value of the Common Stock on the date of
grant. At December 31, 2002, 1,815,500 options under the 1993 Plan were
exercisable and the weighted-average exercise price of these options was $1.03.

In July 1995, the Board of Directors adopted the Non-Employee Directors Stock
Option Plan (the Directors Plan). Under the Directors Plan, certain
directors who are not employees of the Company or any affiliate of the Company
are eligible to receive stock options. The Directors Plan provides that each
non-employee director is also granted an option to purchase 6,250 shares of
Common Stock on the date of each annual meeting of the Companys stockholders
at which the director is reelected to the Companys Board. These options vest
25% on the date of each subsequent annual meeting of the Companys stockholders
which the director is reelected to the Board. The number of shares of Common
Stock reserved for issuance pursuant to the Directors Plan is 250,000 shares.
The exercise price shall not be lower than the fair market value of the Common
Stock on the date of grant. As of December 31, 2002, 206,250 options under the
Directors Plan were exercisable and the weighted-average exercise price of
these options was $2.84.

At December 31, 2002, there were 201,397 additional shares available for grant
under the stock option plans. The per share weighted-average fair value of
stock options granted during 2000, 2001, and 2002 was $0.53, $0.32 and $0.22,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: 2000, 2001, and 2002 
risk-free interest rate of 6.5%, volatility of 80% and an expected life of 5
years.

On April 26, 2002, the Company granted 424,500 options to purchase shares of
the Companys common stock to employees for services rendered. The exercise
price of the options is $0.34 per share. The options vest 33.3% per year and
have a term of 10 years. The Company recorded no expense related to the
granting of options to these employees.

On June 24, 2002, the Company granted 50,000 options to purchase shares of the
Companys common stock to an employee for services rendered. The exercise
price of the options is $0.32 per share. The options vest 33.3% per year and
have a term of 10 years. The Company recorded no expense related to the
granting of options to this employee.

On June 3, 2002, the Company granted 25,000 options to purchase shares of the
Companys common stock to members of the board of directors for services
rendered. The exercise price of the options is $0.32 per share. The options
vest 33.3% per year and have a term of 10 years. The Company recorded no
expense related to the granting of options to the members of the board of
directors.

The Company accounts for stock-based compensation utilizing the intrinsic value
method in accordance with the provisions of Accounting Principles Board Opinion
No. 25 (APB 25) Accounting for Stock Issued to Employees and related
interpretations. Accordingly, no compensation expense is recognized for fixed
option plans because the exercise prices of employee stock options equaled or
exceeded the market prices of the underlying stock on the dates of grant.

58



---



##### Table of Contents



The following is a summary of stock option activity under the Companys stock
option plans:

|                                         |           |  |                  |          |                |   |                  |      | 
|---------------------------------------- | --------- |  | ---------------- | -------- | -------------- | - | ---------------- | ---- | 
|                                         |           |  |                  |          |                |   | Weighted-average
|                                         |           |  | Number of shares |          | Exercise price
|                                         |           |  |                  |          |               
|Options outstanding at December 31, 1999 |           |  | 1,753,380        |          |                | $ | 0.35             |     
|                                         | Granted   |  |                  | 678,746  |                |   |                  | 0.53 | 
|                                         | Exercised |  |                  | (100,000 | )              |   |                  |     | 
|                                         | Canceled  |  |                  | (902,625 | )              |   |                  | 3.91 | 
|                                         |           |  |                  |          |                |   |                  |     
|Options outstanding at December 31, 2000 |           |  | 1,429,501        |          |                | $ | 1.99             |     
|                                         | Granted   |  |                  | 396,250  |                |   |                  | 0.32 | 
|                                         | Canceled  |  |                  | (155,084 | )              |   |                  | 2.20 | 
|                                         |           |  |                  |          |                |   |                  |     
|Options outstanding at December 31, 2001 |           |  | 1,670,667        |          |                | $ | 1.58             |     
|                                         | Granted   |  |                  | 499,500  |                |   |                  | 0.34 | 
|                                         | Exercised |  |                  | (107,167 | )              |   |                  |     | 
|                                         | Canceled  |  |                  | (41,250  | )              |   |                  | 0.67 | 
|                                         |           |  |                  |          |                |   |                  |     
|Options outstanding at December 31, 2002 |           |  | 2,021,750        |          |                | $ | 0.79             |     
|                                         |           |  |                  |          |                |   |                  |     

At December 31, 2002, the exercise prices ranged from $0.28 to $9.75 per share
and the weighted-average remaining contractual life of outstanding options
under the Companys stock option plans was 7.72 years.

The following is a summary of stock options as of December 31, 2002:

|                |  |                    |   |                  |  |                  |      |                    |  |  |           |  |  |                  |      |  |  |   |      |  |  |  |           | 
|--------------- |  | ------------------ | - | ---------------- |  | ---------------- | ---- | ------------------ |  |  | --------- |  |  | ---------------- | ---- |  |  | - | ---- |  |  |  | --------- | 
|                |  |                    |   |                  |  |                  |      |                    |  |  |           |  |  | Weighted Average |      |  |  |   |      |  |  | 
|Range           |  | Number Outstanding |   | Remaining        |  | Weighted Average |      | Number Exercisable
|Exercise Prices |  | December 31, 2002  |   | Contractual Life |  | Exercise Price   |      | December 31, 2002 
|                |  |                    |   |                  |  |                  |      |                   
|$0.28           |  |                    |  |                  |  | $                | 0.63 |                    |  |  | 1,274,750 |  |  | $                | 8.49 |  |  | $ | 0.34 |  |  |  | 430,583   | 
|1.00            |  |                    |  |                  |  |                  | 1.65 |                    |  |  | 131,250   |  |  |                  | 5.54 |  |  |   | 1.03 |  |  |  | 89,583    | 
|2.38            |  |                    |  |                  |  |                  | 2.81 |                    |  |  | 500,000   |  |  |                  | 5.57 |  |  |   | 2.63 |  |  |  | 490,000   | 
|3.25            |  |                    |  |                  |  |                  | 3.75 |                    |  |  | 75,250    |  |  |                  | 5.15 |  |  |   | 3.40 |  |  |  | 57,750    | 
|7.35            |  |                    |  |                  |  |                  | 9.75 |                    |  |  | 40,500    |  |  |                  | 3.10 |  |  |   | 7.90 |  |  |  | 39,250    | 
|                |  |                    |   |                  |  |                  |      |                    |  |  |           |  |  |                  |      |  |  |   |      |  |  |  |           | 
|                |  |                    |   |                  |  |                  |      |                    |  |  | 2,021,750 |  |  |                  |      |  |  |   |      |  |  |  | 1,107,166 | 
|                |  |                    |   |                  |  |                  |      |                    |  |  |           |  |  |                  |      |  |  |   |      |  |  |  |           | 

In July 2000, the Company accelerated the vesting period of 100,000 stock
options granted to an employee of the Company resulting in a new measurement
date of such options. The exercise price of the options was zero and the fair
market value on the date of acceleration was $0.56. Accordingly, earned
compensation of $56,000 has been recorded for the difference between the option
exercise price and fair market value on the date of acceleration in 2000 and
was charged to expense in 2000.

Restricted Stock Plan

In May 2001, the Board of Directors adopted the 2001 Restricted Stock Plan.
Under the plan, 1,250,000 authorized shares of the Companys Common Stock are
reserved for issuance to officers and directors of the Company. The shares
will be issued as Restricted Stock within the meaning of Rule 144 of the
Securities Act of 1933, as amended. The Compensation Committee of the Board of
Directors shall have the discretion to determine what terms and conditions
shall apply, including the imposition of a vesting schedule.

In May 2002, the Company issued 612,500 shares of restricted common stock to
its members of the board of directors and certain of its corporate officers
which vest equally over a four-year period. Recipients are not required to
provide consideration to the Company other than rendering the service and have
the right to vote the shares. Under APB 25, compensation cost is recognized
for the fair value of the restricted stock awarded, which is its quoted market
price at the date of grant, which was $0.25 per share. The total market value
of the shares of $153,000 was treated as unearned compensation and is being
amortized to expense in proportion to the vesting schedule. The unamortized
balance as of December 31, 2002 is $91,000 and is included in accumulated other
comprehensive loss in the accompanying consolidated balance sheet.

59



---



##### Table of Contents



Common Stock

In January and February of 2001, the Company entered into agreements with
several creditors to retire approximately $2.1 million of Company obligations
in exchange for 798,000 shares of Common Stock and $470,000 of cash. This
resulted in a gain of $1,377,000. To fulfill its performance under the
agreement, the Company issued the 798,000 shares of its Common Stock and
registered the shares with the SEC. The Company must also pay the $470,000 to
the creditors as prescribed in the respective agreements. All payments
required under the agreements were made in 2001 and the first quarter of 2002.

Preferred Stock

On May 20, 1997, the Company authorized the issuance of up to 1,000,000 shares
of $0.01 par value preferred stock. The Board of Directors has the authority
to issue the preferred stock, in one or more series, and to fix the rights,
preferences, privileges and restrictions thereof without any further vote by
the holders of Common Stock.

NOTE 15  EMPLOYEE BENEFITS

Savings Plans

On October 1, 1995, the Company established a Savings and Investment Plan
covering substantially all the Companys domestic employees (the Domestic
Plan). The Domestic Plan qualifies under Sections 401(k) and 401(a) of the
Internal Revenue Code. Participating employees are allowed to contribute from
1% to 15% of their annual compensation. During 2000, 2001 and 2002, the
Company did not make contributions to the Domestic Plan.

Defined Benefit Plans

The Company established a defined benefit plan for employees that were employed
by the Companys maintenance service business acquired in 1988.

In April 1992, the Company elected to cease benefit accruals under the defined
benefit plan to current participants. The curtailment had no effect on the
accrued pension cost of the defined benefit plan.

Company contributions under this plan are funded annually. Plan assets are
comprised primarily of guaranteed investment/annuity contracts. Employee
benefits are based on years of service and the employees compensation during
their employment.

The actuarially computed components of net periodic benefit cost included the
following components:

|                                  |  |                         |      |      |  |      |      |   |  |   |      |  
|--------------------------------- |  | ----------------------- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                  |  | Year Ended December 31,
|                                  |  |                        
|                                  |  | (in
thousands)         
|                                  |  | 2000                    |      | 2001 |  | 2002
|                                  |  |                         |      |      |  |     
|Service costs                     |  | $                       |     |      |  | $    |     |   |  | $ |     |  
|Interest costs                    |  |                         | 132  |      |  |      | 137  |   |  |   | 142  |  
|Amortization of unrecognized loss |  |                         |     |      |  |      |     |   |  |   | 16   |  
|Expected return on plan assets    |  |                         | (126 | )    |  |      | (122 | ) |  |   | (107 | )
|                                  |  |                         |      |      |  |      |      |   |  |   |      |  
|Net periodic pension expense      |  | $                       | 6    |      |  | $    | 15   |   |  | $ | 51   |  
|                                  |  |                         |      |      |  |      |      |   |  |   |      |  

60



---



##### Table of Contents



The following table sets forth the funded status and amounts recognized in the
Companys consolidated statements of operations:

|                                                |  |                          |       |      |  |      |       |   |  |   |       |  
|----------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                |  | Years Ended December 31,
|                                                |  | (in
thousands)          
|Change in Benefit Obligation:                   |  | 2000                     |       | 2001 |  | 2002
|                                                |  |                          |       |      |  |     
|Projected Benefit Obligation, beginning of year |  | $                        | 1,695 |      |  | $    | 1,859 |   |  | $ | 1,993 |  
|Service cost                                    |  |                          |      |      |  |      |      |   |  |   |      |  
|Interest cost                                   |  |                          | 131   |      |  |      | 137   |   |  |   | 142   |  
|Benefits paid                                   |  |                          | (62   | )    |  |      | (69   | ) |  |   | (79   | )
|Actuarial loss/(gain)                           |  |                          | 95    |      |  |      | 66    |   |  |   | 98    |  
|                                                |  |                          |       |      |  |      |       |   |  |   |       |  
|Projected Benefit Obligation, end of year       |  | $                        | 1,859 |      |  | $    | 1,993 |   |  | $ | 2,154 |  
|                                                |  |                          |       |      |  |      |       |   |  |   |       |  
|Change in Plan Assets:                          |  |                          |       |      |  |      |       |   |  |   |       |  
|Plan assets, beginning of year                  |  | $                        | 1,830 |      |  | $    | 1,736 |   |  | $ | 1,531 |  
|Actual return on plan assets                    |  |                          | (86   | )    |  |      | (190  | ) |  |   | (279  | )
|Employer contribution                           |  |                          | 54    |      |  |      | 54    |   |  |   | 63    |  
|Benefits paid                                   |  |                          | (62   | )    |  |      | (69   | ) |  |   | (79   | )
|                                                |  |                          |       |      |  |      |       |   |  |   |       |  
|Plan assets, end of year                        |  | $                        | 1,736 |      |  | $    | 1,531 |   |  | $ | 1,236 |  
|                                                |  |                          |       |      |  |      |       |   |  |   |       |  
|Funded status                                   |  | $                        | (123  | )    |  | $    | (461  | ) |  | $ | (918  | )
|Unrecognized (gain)/loss                        |  |                          | 161   |      |  |      | 538   |   |  |   | 1,008 |  
|                                                |  |                          |       |      |  |      |       |   |  |   |       |  
|Net amount recognized                           |  | $                        | 38    |      |  | $    | 77    |   |  | $ | 90    |  
|                                                |  |                          |       |      |  |      |       |   |  |   |       |  

The weighted average discount rates used in determining the actuarial present
value of the benefit obligations were 7.5%, 7.25%, and 6.75% for 2000, 2001 and
2002, respectively. The long-term rate of return on assets was 7%, 7%, and 7%
for 2000, 2001 and 2002, respectively.

NOTE 16  RESTRUCTURING COSTS

During 1999, management authorized and committed the Company to a restructuring
plan to close and reduce certain of its domestic facilities and reduce its
hospitality and process manufacturing workforce to the appropriate levels
sufficient to support the Companys hospitality and process manufacturing
domestic operations of software sales and professional services. In connection
with these actions, the Company recorded a restructuring charge of $2,288,000
in the fourth quarter of 1999. The restructuring charge consisted of (1)
$1,900,000 relating to the write-off of certain furniture, fixtures and
equipment impaired pursuant to the restructuring which were determined to have
a fair value of zero based upon a SFAS No. 121 evaluation, (2) $45,000 of costs
associated with lease obligations relating to exited facilities and, (3)
$343,000 of employee severance and termination benefits associated with 38 of
the terminated employees. The remaining balance of $288,000 as of December 31,
1999 consists of $243,000 of remaining severance and termination benefits and
$45,000 of lease obligations on exited facilities. The remaining balance of
$288,000 was paid in 2000.

NOTE 17  PLAN OF REORGANIZATION

In connection with the Companys Chapter 11 bankruptcy proceedings in 1993,
shares of Common Stock are currently being distributed by the Company to its
former creditors pursuant to the Plan of Reorganization (the Plan) as
approved by United States Bankruptcy Court. The Company does not anticipate
that additional shares will be issued under the plan. As of December 31, 2002,
6,758,251 shares had been issued pursuant to the Plan.

Notwithstanding the confirmation and effectiveness of its Plan of
Reorganization pursuant to which the Company emerged from a voluntary
proceeding under the bankruptcy laws, the United States Bankruptcy Court
continues to have jurisdiction, among other things, to resolve disputed
pre-petition claims against the Company, to resolve matters related to the
assumptions, assignment or rejection of executory contracts pursuant to the
Plan, and to resolve other matters that may arise in connection with the
implementation of the Plan.

61



---



##### Table of Contents



NOTE 18  COMMITMENTS AND CONTINGENCIES

Leases

The Company leases certain facilities and equipment, under both month-to-month
and fixed-term agreements.

The aggregate minimum rentals under operating leases with noncancelable terms
of one year or more are as follows:

|                         |  |   |       | 
|------------------------ |  | - | ----- | 
|Year Ending December 31,
|                        
|(in thousands)          
|2003                     |  | $ | 839   | 
|2004                     |  |   | 618   | 
|2005                     |  |   | 551   | 
|2006                     |  |   | 427   | 
|2007                     |  |   | 89    | 
|Thereafter               |  |   | 121   | 
|                         |  |   |       | 
|                         |  | $ | 2,645 | 
|                         |  |   |       | 

Rental expense was approximately $1,085,000, $ 1,146,000, and $953,000 for the
years ended December 31, 2000, 2001, and 2002, respectively.

Legal Proceedings

Chapter 11 Bankruptcy Proceedings

At December 31, 2002, there was only one material claim to be settled regarding
the Companys Chapter 11 proceedings, a tax claim with the United States
Internal Revenue Service (the Service). The amount of this claim is in
dispute. The Company has reserved $712,000 for settlement of this claim, which
it is anticipated would be payable to the Service in equal monthly installments
over a period of six (6) years from the settlement date at an interest rate of
6%.

CSA Private Limited

CSA is a MAI shareholder. On August 9, 1996, MAI acquired from Hotel
Information Systems, Inc. (HIS) substantially all their assets and certain of
their liabilities (the HIS Acquisition). At the time of MAIs acquisition of
HIS in 1996, CSA was a shareholder of HIS and, in connection with the purchase,
MAI agreed to issue to CSA shares of its Common Stock worth approximately $4.8
million in August 1996, which amount had increased to approximately $6.8
million as of December 31, 2000, pursuant to the agreement. The Company entered
into a settlement agreement with CSA in February, 2001 whereby it (i) issued
CSA 1,916,014 additional shares of our Common Stock to bring CSAs total share
ownership to 2,433,333 shares; (ii) filed a registration statement for all of
CSAs shares of our Common Stock which has been declared effective by the SEC
so that such shares are now freely tradable; and (iii) executed a secured debt
instrument in favor of CSA in the principal sum of $2,800,000 which is
subordinate only to the Companys present group of two (2) senior secured
leaders and required cash installment payments to commence in March 2002 (see
note 7 to the financial statements).

In connection with the settlement agreement with CSA, the Company recorded the
$2.8 million debt issuance as a reduction in paid in capital and the 1,916,014
additional shares at par as an addition to Common Stock and a reduction to
additional paid in capital.

Cher-Ae Heights Indian Community

A lawsuit was filed by Cher-Ae Heights Indian Community (Cher-Ae Heights)
against Logix Development Corporation (Logix), now known as MAI Development
Corporation, as a co-defendant for a breach of contract by the Companys
formerly owned gaming subsidiary along with the new owners, Monaco
Informatiques Systemes (MIS), who acquired the assets and certain liabilities
of the gaming subsidiary on July 27, 2001. Based upon this suit, MIS informed
the Company that it did not intend to pay the next $500,000 due to the Company
under a promissory note and security agreement. On October 24, 2002, the
Company entered into a global settlement agreement between the parties whereby
all claims, known and unknown, between the parties were dismissed and the
Company received $796,000 (see note 6 under Gaming Systems International).

Logix Development Corporation

The Company entered into a settlement agreement with Logix in July of 2002
whereby it (i) issued Logix 200,000 shares of our Common Stock (ii) required
the Company to make various cash installment payments totaling $175,000 to be
paid within 1 year and (iii) executed a contract with Logix for a consulting
project in the amount of $50,000.

62



---



##### Table of Contents



Other Litigation

The Company is also involved in
various other legal proceedings and claims that are
incident to its business. Management believes the ultimate outcome of these
matters will not have a material adverse effect on the consolidated financial
position, results of operations or liquidity of the Company.

Related Party Transactions

Under the terms of a consulting agreement, and subsequent amendments (which
expires on August 31, 2003 but which is automatically renewed each year unless
proper notice is given between either party), between Orchard Capital
Corporation (Orchard) and the Company, Orchard provides the services of
Richard S. Ressler as the Companys Chairman. Orchard is paid a consulting fee
of $24,000 per month. Orchard was granted warrants in 1995 to purchase up to
625,000 shares of Common Stock at a price of $1.90 per share and in March 1997,
was granted additional warrants to purchase up to 50,000 shares of the
Companys Common Stock at a price of $7.50 per share, the fair market values of
Common Stock on the dates of grant (the latter warrants were subsequently
repriced at $3.04 per share). The warrants were fully exercisable on the dates
of the respective grants. In September 1997, Orchard exercised warrants to
purchase 157,895 shares of Common Stock at $1.90 per share and additional
warrants to purchase 50,000 shares of the Companys Common Stock at $3.04 per
share (which warrants had been temporarily re-priced in order to induce
exercises), resulting in $452,000 cash proceeds to the Company. The term of
the remaining warrants to purchase up to 467,105 shares of Common stock was
extended so that they will expire on August 14, 2003. In connection with
extending the term of the warrants in 1999, the Company recorded $280,275 of
compensation expense.

The Company executed a consulting agreement with a member of its Board of
Directors, Zohar Loshitzer, for the purpose of providing technology advisory
services for the Company at its Process Manufacturing Division. The consulting
agreement commenced in August 2000 and was on a month-to-month basis at the
rate of $16,667 per month. The Company paid Mr. Loshitzer approximately
$92,000 and $161,000 in 2000 and 2001, respectively. As of December 31, 2001
Mr. Loshitzer had completed his services on behalf of the Company.

On May 26, 2000, the Company issued warrants to its Chief Executive Officer to
purchase 225,000 shares of Common Stock at $0.56 per share. The exercise price
of these warrants will increase with the fair market value of Common Stock when
the fair market value exceeds $2.81 per share. As the exercise price is not
fixed, the warrants are accounted for as a variable award and, accordingly, are
remeasured at each reporting date. The warrants vest equally over a three-year
period and expire on March 24, 2010.

At December 31, 2000 and 2001, the Company was indebted to its Chief Financial
Officer for $69,000 and $94,000, respectively, for unreimbursed Company related
expenses paid by the Chief Financial Officer on the Companys behalf. These
expenses mainly relate to the travel costs for the Companys professional
service personnel and were fully paid in 2002.

NOTE 19 - INCOME (LOSS) PER SHARE

The following table illustrates the computation of basic and diluted income
(loss) per share under the provisions of SFAS No. 128.

|                                                |                                                                                                                           |   |                          |        |      |   |        |        |  |   |        |        |  
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | - | ------------------------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | -
|                                                |                                                                                                                           |   | Year Ending December 31,
|                                                |                                                                                                                           |   |                         
|                                                |                                                                                                                           |   | (in
thousands)          
|                                                |                                                                                                                           |   | 2000                     |        | 2001 |   | 2002  
|                                                |                                                                                                                           |   |                          |        |      |   |       
|Numerator:                                      |                                                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|                                                | Numerator for basic and diluted income (loss) per share  net income (loss)                                               |   | $                        | 817    |      |   | $      | 2,132  |  |   | $      | (1,350 | )
|                                                |                                                                                                                           |   |                          |        |      |   |        |        |  |   |        |        |  
|Denominator:                                    |                                                                                                                           |   |                          |        |      |   |        |        |  |   |        |       
|                                                | Denominator for basic income (loss) per share - weighted average number of
common shares outstanding during the period    |   |                          | 10,923 |      |   |        | 13,091 |  |   |        | 13,945 |  
|                                                | Incremental
common shares attributable to restricted stock grants and to the exercise of outstanding options
and warrants |   |                          | 283    |      |   |        | 172    |  |   |        | 450    |  
|                                                |                                                                                                                           |   |                          |        |      |   |        |        |  |   |        |        |  
|Denominator for diluted income (loss) per share |                                                                                                                           |   | 11,206                   |        |      |   | 13,263 |        |  |   | 14,395 |       
|                                                |                                                                                                                           |   |                          |        |      |   |        |        |  |   |        |        |  
|Basic income (loss) per share                   |                                                                                                                           | $ | 0.07                     |        |      | $ | 0.16   |        |  | $ | (0.10  | )     
|Diluted income (loss) per share                 |                                                                                                                           | $ | 0.07                     |        |      | $ | 0.16   |        |  | $ | (0.09  | )     

The computation does not consider the additional shares of Common Stock, which
may be issued in connection with past acquisitions (see Note 6). The number of
antidilutive options and warrants that were excluded from the computation of
incremental common shares were 1,415,273, 1,648,272 and 2,676,355 in 2000, 2001
and 2002, respectively.

63



---



##### Table of Contents



NOTE 20  QUARTERLY RESULTS OF OPERATIONS (Unaudited)

(in millions, except share data)

|                                                                                           |                          |         |        |            |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |   |       |  
|------------------------------------------------------------------------------------------ | ------------------------ | ------- | ------ | ---------- | ----- | ----------- | ------ | ----------- | ----- | ----------- | ------ | ----------- | ----- | ----------- | ------ | ----------- | ----- | ----------- | ------ | - | ---- | - | ------ | - | ---- | - | ------ | - | ----- | - | ------ | - | ----- | -
|                                                                                           |                          |         |        | 1stQuarter |       | 2nd Quarter |        | 3rd Quarter |       | 4th Quarter |        | 1st Quarter |       | 2nd Quarter |        | 3rd Quarter |       | 4th Quarter
|                                                                                           |                          |         |        | 2001       |       | 2001        |        | 2001        |       | 2001        |        | 2002        |       | 2002        |        | 2002        |       | 2002       
|Revenue                                                                                    |                          | $       | 6.5    |            |       | $           | 6.3    |             |       | $           | 6.1    |             |       | $           | 4.9    |             |       | $           | 5.7    |   |      | $ | 5.5    |   |      | $ | 5.7    |   |       | $ | 5.0    |  
|Gross Profit                                                                               |                          |         | 4.3    |            |       |             | 4.4    |             |       |             | 4.3    |             |       |             | 3.5    |             |       |             | 3.8    |   |      |   | 3.7    |   |      |   | 3.9    |   |       |   | 3.7    |  
|Income (loss) from
continuing operations                                                   |                          |         | 1.9    |            |       |             | 0.8    |             |       |             | 0.6    |             |       |             | 0.3    |             |       |             | 0.2    |   |      |   | 0.3    |   |      |   | 0.1    |   |       |   | (0.2   | )
|Income (loss) from
discontinued operations                                                 |                          |         | (0.5   | )          |       |             | (0.5   | )           |       |             | (0.2   | )           |       |             | (0.3   | )           |       |             | 0.1    |   |      |   | 0.1    |   |      |   | (0.2   | ) |       |   | (1.7   | )
|Net income (loss)                                                                          |                          |         | 1.4    |            |       |             | 0.3    |             |       |             | 0.4    |             |       |             | 0.0    |             |       |             | 0.3    |   |      |   | 0.3    |   |      |   | (0.2   | ) |       |   | (1.8   | )
|Income (loss) per share:                                                                   |                          |         |        |            |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |  
|                                                                                           | Continuing Operations:   |         |        |            |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |   |      
|                                                                                           |                          | Basic   |        | $          | 0.16  |             |        | $           | 0.06  |             |        | $           | 0.05  |             |        | $           | 0.02  |             |        | $ | 0.02 |   |        | $ | 0.02 |   |        | $ | 0.00  |   |        | $ | 0.01  |  
|                                                                                           |                          | Diluted |        |            | 0.16  |             |        |             | 0.06  |             |        |             | 0.05  |             |        |             | 0.02  |             |        |   | 0.02 |   |        |   | 0.02 |   |        |   | 0.00  |   |        |   | 0.01  |  
|                                                                                           | Discontinued Operations: |         |        |            |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |   |      
|                                                                                           |                          | Basic   |        |            | (0.04 | )           |        |             | (0.04 | )           |        |             | (0.02 | )           |        |             | (0.02 | )           |        |   | 0.00 |   |        |   | 0.01 |   |        |   | (0.01 | ) |        |   | (0.12 | )
|                                                                                           |                          | Diluted |        |            | (0.04 | )           |        |             | (0.04 | )           |        |             | (0.02 | )           |        |             | (0.02 | )           |        |   | 0.00 |   |        |   | 0.01 |   |        |   | (0.01 | ) |        |   | (0.12 | )
|                                                                                           | Income (loss) per share: |         |        |            |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |   |      
|                                                                                           |                          | Basic   |        |            | 0.12  |             |        |             | 0.02  |             |        |             | 0.03  |             |        |             | 0.00  |             |        |   | 0.02 |   |        |   | 0.02 |   |        |   | (0.01 | ) |        |   | (0.13 | )
|                                                                                           |                          | Diluted |        |            | 0.12  |             |        |             | 0.02  |             |        |             | 0.03  |             |        |             | 0.00  |             |        |   | 0.02 |   |        |   | 0.02 |   |        |   | (0.01 | ) |        |   | (0.13 | )
|Weighted average common shares used in
determining income (loss) per share (in
thousands): |                          |         |        |            |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |  
|Basic                                                                                      |                          |         | 11,395 |            |       |             | 13,679 |             |       |             | 13,691 |             |       |             | 13,656 |             |       |             | 13,656 |   |      |   | 13,852 |   |      |   | 14,119 |   |       |   | 14,154 |  
|                                                                                           |                          |         |        |            |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |  
|Diluted                                                                                    |                          |         | 11,563 |            |       |             | 13,847 |             |       |             | 13,928 |             |       |             | 13,692 |             |       |             | 13,663 |   |      |   | 14,361 |   |      |   | 14,569 |   |       |   | 14,604 |  
|                                                                                           |                          |         |        |            |       |             |        |             |       |             |        |             |       |             |        |             |       |             |        |   |      |   |        |   |      |   |        |   |       |   |        |  

64



---



##### Table of Contents

\

Schedule II

Valuation and Qualifying Accounts

Years Ended December 31, 2000, 2001 and 2002(dollars in thousands)

|                                |  |           |       |            |  |             |     |            |  |            |      |          |  |   |      |   |  |   |       | 
|------------------------------- |  | --------- | ----- | ---------- |  | ----------- | --- | ---------- |  | ---------- | ---- | -------- |  | - | ---- | - |  | - | ----- | 
|                                |  |           |       |            |  |             |     |            |  | Reductions |      |          |  |   |      |   |  |  
|                                |  | Balance   |       | Charged to |  | Due to Sale |     |            |  |            |      | Balances
|                                |  | Beginning |       | Costs and  |  | of          |     |            |  |            |      | End of  
|                                |  | of Year   |       | Expenses   |  | Subsidiary  |     | Write-offs |  | Year      
|Year ended December 31, 2000:   |  |           |       |            |  |             |     |            |  |            |      |          |  |   |      |   |  |   |       | 
|Allowance for doubtful accounts |  | $         | 1,590 |            |  | $           | 350 |            |  | $          |     |          |  | $ | (792 | ) |  | $ | 1,148 | 
|                                |  |           |       |            |  |             |     |            |  |            |      |          |  |   |      |   |  |   |       | 
|Year ended December 31, 2001:   |  |           |       |            |  |             |     |            |  |            |      |          |  |   |      |   |  |   |       | 
|Allowance for doubtful accounts |  | $         | 1,148 |            |  | $           | 47  |            |  | $          |     |          |  | $ | (172 | ) |  | $ | 1,023 | 
|                                |  |           |       |            |  |             |     |            |  |            |      |          |  |   |      |   |  |   |       | 
|Year ended December 31, 2002:   |  |           |       |            |  |             |     |            |  |            |      |          |  |   |      |   |  |   |       | 
|Allowance for doubtful accounts |  | $         | 1,023 |            |  | $           | 89  |            |  | $          | (103 | )        |  | $ | (673 | ) |  | $ | 336   | 
|                                |  |           |       |            |  |             |     |            |  |            |      |          |  |   |      |   |  |   |       | 

65



---



##### Table of Contents






EXHIBIT INDEX

|       |  |                                                                                                                                                                                                                                                                                                                                      
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                      
|2.1    |  | First Amended Joint Chapter II Plan of Reorganization of MAI Systems
Corporation, Brooke Acquisition Corp. and CLS Software, Inc., as confirmed
by the United States Bankruptcy Court for the District of Delaware, on
November 13, 1993, filed as Exhibit 2.1 to the Registrants Current Report
on Form 8-K dated January 15, 1994.
|       |  |                                                                                                                                                                                                                                                                                                                                      
|2.2    |  | Consent Order Modifying Confirmed Plan of Reorganization and Fixing
Effective Date, as entered by the United States Bankruptcy Court for the
district of Delaware on January 27, 1994, as filed as Exhibit 2.2 to the
Registrants Current Report on form 8-K dated February 9, 1994.                                                
|       |  |                                                                                                                                                                                                                                                                                                                                      
|3.1    |  | Amended and Restated Certificate of Incorporation of MAI Systems
Corporation, filed as Exhibit 3.1 to the Companys 1996 Annual Report on
Form 10-K.                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                      
|3.2    |  | Amendment No. 1 to the Amended and Restated Certificate of Incorporation
of MAI Systems Corporation, filed as Exhibit 3.2 to the Companys 1996
Annual Report on Form 10-K.                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                      
|3.3    |  | By-laws of MAI Systems Corporation, filed as Exhibit 2(b) to the
Registrants Registration Statement on Form 8-A/A filed with the
Securities and Exchange Commission on February 24, 1994.                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                      
|3.4    |  | Amendment No. 2 to the Amended and Restated Certificate of Incorporation
of MAI Systems Corporation, filed as Exhibit 3.4 to the Companys 1998
Annual Report on Form 10-K.                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                      
|10.1   |  | Amended and Restated MAI Systems Corporation 1993 Stock Option Plan.                                                                                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                      
|10.2   |  | Amended and Restated 1995 Non-Employee Directors Stock Option Plan.                                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                      
|10.3   |  | MAI Systems Corporations 2001 Restricted Stock Plan.                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                      
|10.4   |  | Coast Business Credit Loan and Security Agreement, dated April 23, 1998,
filed as Exhibit 10.2 to the Companys 1998 Annual Report on Form 10-K.                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                      
|10.5   |  | Amendment Number One dated September 30, 1998 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998, filed as Exhibit 10.2 to the Companys 1999 Annual Report on Form
10-K.                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                      
|10.6   |  | Amendment Number Two dated March 2, 1999 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998, filed as Exhibit 10.3 to the Companys 1999 Annual Report on Form
10-K.                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                      
|10.7   |  | Amendment Number Three dated June 16, 1999 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998, filed as Exhibit 10.4 to the Companys 1999 Annual Report on Form
10-K.                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                      
|10.8   |  | Amendment Number Four dated July 28, 1999 to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998, filed as Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q
for the period ending September 30, 1999.                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                                      
|10.9   |  | Letter Agreement Amendment dated October 1, 1999 to the Loan and Security
Agreement between Coast Business Credit and                                                                                                                                                                                                                





---



##### Table of Contents



|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       |  | the Company dated April 23,
1998, filed as Exhibit 10.6 to the Companys 1999 Annual Report on Form
10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.10  |  | Amendment Number Five dated April 13, 2000, to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998, filed as Exhibit 10.20 to the Companys 1999 Annual Report on Form
10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.11  |  | Amendment Number Six dated September 12, 2000, to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998, filed as Exhibit 10.31 to the Companys 2000 Annual Report on Form
10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.12  |  | Amendment Number Seven dated September 13, 2001, to the Loan and
Security Agreement between Coast Business Credit and the Company dated
April 23, 1998, filed as Exhibit 10.12 to the Companys 2001 Annual Report
on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.13  |  | Amendment Number Eight dated January 13, 2003, to the Loan and Security
Agreement between Coast Business Credit and the Company dated April 23,
1998                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.14  |  | Pledge, Assignment and Security Agreement dated September 7, 2001
between Coast Business Credit, the Company, MAI Systems International and
MAI Development Corporation, filed as Exhibit 10.13 to the Companys 2001
Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.15  |  | Collateral Release Agreement dated September 28, 2001 between Coast
Business Credit and the Company filed as Exhibit 10.14 to the Companys
2001 Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.17  |  | Forebearance Agreement between MAI Systems Corporation and CPI
Securities LP, The Value Realization Fund, L.P., The Canyon Value
Realization Fund and GRS Partners II dated October 28, 1999, filed as
Exhibit 10.7 to the Companys Quarterly Report on Form 10-Q for the period
ending September 30, 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.18  |  | Amendment No. 1 dated February 14, 2000 to Forebearance Agreement
between MAI Systems Corporation and CPI Securities LP, The Value
Realization Fund, L.P., The Canyon Value Realization Fund and GRS Partners
II dated October 28, 1999, filed as Exhibit 10.18 to the Companys 1999
Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.19  |  | Amendment No. 2 dated April 13, 2000 to Forebearance Agreement between
MAI Systems Corporation and CPI Securities LP, The Value Realization Fund,
L.P., The Canyon Value Realization Fund and GRS Partners II dated October
28, 1999, filed as Exhibit 10.19 to the Companys 1999 Annual Report on
Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.20  |  | Supplement and Amendment dated January 31, 2001 to Forebearance
Agreement between MAI Systems Corporation and CPI Securities LP, The Value
Realization Fund, L.P., The Canyon Value Realization Fund and GRS Partners
II dated October 28, 1999, filed as Exhibit 10.32 to the Companys 2000
Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.21  |  | Collateral Release Agreement dated September 28, 2001 between MAI
Systems Corporation and CPI Securities LP, The Value Realization Fund,
L.P., The Canyon Value Realization Fund and GRS Partners II.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.22  |  | Amendment No. 3 dated January 13, 2003 to Note Purchase Agreement
between MAI Systems Corporation and CPI Securities LP, The Value
Realization Fund, L.P., The Canyon Value Realization Fund and GRS Partners
II dated October 28, 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.23  |  | Amendment No. One dated January 13, 2003 to Intercreditor and
Subordination Agreement dated April 23, 1998 between MAI Systems
Corporation and CPI Securities LP, The Value Realization Fund, L.P., The
Canyon Value Realization Fund, GRS Partners II and Coast Business Credit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.24  |  | Warrant Agreement between CPI Securities LP, The Value Realization Fund,
L.P., The Canyon Value Realization Fund and GRS Partners II.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.25  |  | Registration Rights Agreement between CPI Securities LP, The Value
Realization Fund, L.P., The Canyon Value Realization Fund and GRS Partners
II.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.26  |  | Settlement Agreement dated December 1, 2000 between CSA and MAI Systems
Corporation, filed as Exhibit 10.27 to the Companys 2000 Annual Report on
Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.27  |  | Security Agreement dated December 1, 2000 between CSA and MAI Systems
Corporation, filed as Exhibit 10.28 to the Companys 2000 Annual Report on
Form 10K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.28  |  | Amendment to Subordinated Note Due 2003 dated as of April 18, 2002
between CSA Private Limited and MAI Systems Corporation, filed as an
Exhibit to the Companys Quarterly Report on Form 10-Q for the period
ending March 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.29  |  | Consulting Agreement dated as of August 15, 1994, as amended as of
October 17, 1994, August 16, 1996, August 31, 1997, August 31, 1998,
August 31, 1999, August 31, 2000, and August 31, 2001 by and between the
Company and Orchard Capital Corporation, relating to the services of
Richard S. Ressler, Chairman of the Board. The original agreement and the
October 17, 1994 amendment are incorporated herein by reference to the
Companys 1994 Annual Report on Form 10-K. The August 16, 1996 amendment
is incorporated herein by reference to the Companys 1996 Annual Report on
Form 10-K. The August 31, 1997 amendment is incorporated herein by
reference to the Companys 1997 Annual Report on Form 10-K. The August 31,
1998 amendment is incorporated herein by reference to the Companys 1998
Annual Report on Form 10-K. The August 31, 1999 amendment is incorporated
herein by reference to the Companys 1999 Annual Report on Form 10-K. The
August 2000 amendment is incorporated herein by reference to the Companys
2000 Annual Report on Form 10-K. The August 2001 amendment is
incorporated herein by reference to the Companys 2001 Annual Report on
Form 10-K.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.30  |  | Premises Lease for MAI Systems Corporation corporate offices dated
January 23, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              





---



##### Table of Contents



|       |  |                                                                                                                                                                                                                                                                                                                              
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit                                                                                                                                                                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                              
|13.1   |  | Portions of the Companys Annual Report to Stockholders for the year
ended December 31, 2002, but only to the extent such report is expressly
incorporated by reference into Items 10, 11, 12, 13 and 15(a)(1) of this
report and such report is not otherwise deemed to be filed as part of this
Annual Report on Form 10-K.
|       |  |                                                                                                                                                                                                                                                                                                                              
|21.1   |  | Subsidiaries of MAI Systems Corporation.                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                              
|23.1   |  | Report of Independent Certified Public Accountants from BDO Seidman LLP.                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                              
|23.2   |  | Consent of BDO Seidman, LLP.                                                                                                                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                              
|23.3   |  | Independent Auditors Report on Schedule and Consent from KPMG LLP                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                              
|99.1   |  | Certification of Chief Executive Officer, W. Brian Kretzmer, as required
by Sections 3.02 and 9.06 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                              
|99.2   |  | Certification of Chief Financial Officer, James W. Dolan, as required by
Sections 3.02 and 9.06 of the Sarbanes Oxley Act of 2002