**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549**

 

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**Amendment No. 1to**

 

**FORM 10-K**

 

**ý**            Annualreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934. 

 

**For the fiscalyear ended December 31, 2004 or**

 

**o**            Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934.

 

**For thetransition period from      to     .**

 

**Commissionfile number: 1-9158**

 

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**MAI Systems Corporation**

**(Exact name of registrant as specified in itscharter)**

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

 

**26110Enterprise Way, Lake Forest, CA 92630**

**Address of principal executive offices**

 

**Registrant’s telephone number including areacode **(949) 598-6000

 

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| **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 bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.   Yes  **ý    No  o

 

**Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.**ý

 

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

**Yes**o   No ý

 

**Theaggregate market value of the common stock held by non-affiliates of theregistrant, based upon the last sale price of the Common Stock reported on theNational Association of Securities Dealers Automated Quotation National MarketSystem on June 27, 2003 was $1,403,684.**

 

**The numberof shares of common stock outstanding as of July 18, 2005 was57,847,862.  The aggregate market valueof the common stock held by non-affiliates of the registrant, based upon thelast sale price of the Common Stock reported on the Over-the-counter BulletinBoard on September 16, 2005 was $510,669. **

 

**DOCUMENTS INCORPORATED BY REFERENCE**

**(To the Extent Indicated Herein)**

 

 

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**EXPLANATORYNOTE**

 

The amendmentis due to the Goodwill allocation of purchase price that should be $6,372,000and the total should be $13,819,000. Both figures were wrong on the original filing.

 

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**PART IV**

** **

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

 
| (a)    | 1. Financial  Statements         |                                                                                                                                                                                                                          |
|--------|----------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                             |                                                                                                                                                                                                                          |
|   |                             | Report of Independent  Registered Public Accounting Firm                                                                                                                                                                      |   |
|   |                             | 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 Report of the  Independent Registered Public Accounting Firm are incorporated herein by  reference to the Company’s 2004 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.                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 3.5        |       | Amendment  No. 3 to the Amended and Restated Certificate of Incorporation of MAI  Systems Corporation, filed on August 25, 2004 as Appendix B to the  Company’s Definitive Proxy Statement.                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                                     |
| *10.1      |       | Amended  and Restated MAI Systems Corporation 1993 Stock Option Plan (previously  filed).                                                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                                     |
| *10.2      |       | Amended  and Restated 1995 Non-Employee Directors Stock Option Plan (previously filed).                                                                                                                                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3       |       | Amended  and Restated 2001 Restricted Stock Plan, filed on August 25, 2004 as  Appendix C to the Company’s Definitive Proxy Statement.                                                                                                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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.                                                                                                                      |

 

1

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| 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 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 (previously  filed)                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 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 (previously filed).                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| *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 (previously filed).                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| *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 (previously filed).                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| *10.24 |   | Warrant  Agreement between CPI Securities LP, The Value Realization Fund, L.P., The  Canyon Value Realization Fund and GRS Partners II (previously filed).                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| *10.25 |   | Registration  Rights Agreement between CPI Securities LP, The Value Realization Fund, L.P.,  The Canyon Value Realization Fund and GRS Partners II (previously filed).                                                                                                                                                                                 |

 

2

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| 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, August 31, 2001, August 31, 2002 and August 31,  2003 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. The August 2002  amendment is incorporated herein by reference to the Company’s 2002 Annual  Report on Form 10-K. The August 2003 amendment is incorporated  herein by reference to the Company’s 2003 Annual Report on Form 10-K. |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.30       |   | Stock  Purchase Agreement dated March 31, 2004 between CSA Private Limited and  HIS Holding, LLC; filed on April 20, 2004 as Exhibit 99.1 to the Schedule 13D  filed by HIS Holding, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.31       |   | Stock  Purchase Agreement between MAI Systems Corporation and HIS Holding, LLC for  the acquisition of 10,000,000 shares of MAI Systems Corporation common stock  by HIS Holding, LLC, filed on November 12, 2004 as Exhibit 99(a) to  the Schedule 13D filed by HIS Holding, LLC;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.32       |   | Secured  Subordinated Promissory Note dated March 31, 2004 which has been  converted to 33,172,110 shares of MAI Systems Corporation common stock,.  filed on November 12, 2004 as Exhibit 99(b) to the Schedule 13D  filed by HIS Holding, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|  10.33 |   | Limited  Liability Company (Operating) Agreement for HIS Holding, LLC, filed on March 18,  2005 as Exhibit 99D to Amendment No. 2 to the Company’s Schedule 13E-3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
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| *14.1       |   | Code  of Ethics (All Employees)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
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| *14.2       |   | Code  of Ethics (Chief Executive and Chief Financial Officers and Other Senior  Accounting Personnel)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
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| *21.1       |   | Subsidiaries  of MAI Systems Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
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| 23.1        |   | Report of  Independent Registered Public Accounting Firm from BDO Seidman LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
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| 23.2        |   | Consent  of BDO Seidman, LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
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| 31.1        |   | Certification  of Chief Executive Officer as required by Section 302 of Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
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| 31.2        |   | Certification of Chief  Financial Officer as required by Section 302 of Sarbanes-Oxley Act of  2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
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| 32.1        |   | Certification of Chief  Executive Officer as required by 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
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| 32.2        |   | Certification of Chief  Financial Officer as required by 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
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| *           |   | previously filed                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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| (b)         |   | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
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|        |   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Filed April 5,  2004 |
|        |   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Filed April 12,  2004 |
|        |   | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Filed June 3, 2004 |
|        |   | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Filed September 28,  2004 |
|        |   | 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Filed October 1,  2004 |
|        |   | 6.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Filed December 2, 2004 |
|        |   | 7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Filed December 8,  2004 |

 

3

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities and ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
|                            |   | MAI  SYSTEMS CORPORATION                     |
|---------------------------------|--------|----------------------------------------------|
|                            |   |                                         |
|                            |   |                                         |
|                            | By:    |  /s/  William B. Kretzmer               |
|                            |   |                                         |
|                            |   |  William  B. Kretzmer                   |
|                            |   |                                         |
|                            |   |  Chief  Executive Officer and President |
|                            |   |                                         |
| Dated:  September 21, 2005 |   |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacitiesindicated on September 19, 2005.

 
| **Signatures**                | ** ** | **Title**                                            |
|-------------------------------|------------|------------------------------------------------------|
| ** **                    | ** ** | ** **                                           |
|  /s/Richard  S. Ressler  |       | Chairman,  Director                                  |
|  Richard  S. Ressler     |       |                                                 |
|                          |       |                                                 |
|                          |       |                                                 |
|  /s/William  B. Kretzmer |       | Chief  Executive Officer and President               |
|  William  B. Kretzmer    |       | (Principal  Executive Officer)                       |
|                          |       |                                                 |
|                          |       |                                                 |
|  /s/James  W. Dolan      |       | Chief  Operating Officer and Chief Financial Officer |
|  James  W. Dolan         |       | (Principal  Financial and Accounting Officer)        |
|                          |       |                                                 |
|                          |       |                                                 |
|  /s/Zohar  Loshitzer     |       | Director                                             |
|  Zohar  Loshitzer        |       |                                                 |
|                          |       |                                                 |
|                          |       |                                                 |
|  /s/Stephen  Ross        |       | Director                                             |
|  Stephen  Ross           |       |                                                 |
|                          |       |                                                 |
|                          |       |                                                 |
|  /s/Steven  F. Mayer     |       | Director                                             |
|  Steven  F. Mayer        |       |                                                 |

 

4

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**QUARTERLYDATA (Unaudited)**

 

**(inmillions, except share data)**

 
| ** **                                                                                   | ** ** | **1stQuarter  2003** | ** ** | **2ndQuarter  2003** | ** ** | **3rdQuarter  2003** | ** ** | **4thQuarter  2003** | ** ** | **1stQuarter  2004** | ** ** | **2ndQuarter  2004** | ** ** | **3rdQuarter  2004** | ** ** | **4thQuarter  2004(1)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|-------------------------|------------|
|                                                                                         |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                    |       |
| Revenue                                                                                      |       | $                    | 5.2        |                 | $          | 4.8                  |       | $                    | 4.8        |                 | $          | 4.6                  |       | $                    | 5.2        |                    | $          | 4.9 |   | $ | 4.9 |   | $ | 5.1 |   |
| Gross profit                                                                                 |       | 3.7                  |       | 3.5                  |       | 3.5                  |       | 3.1                  |       | 3.7                  |       | 3.7                  |       | 3.5                  |       | 3.6                     |       |
| Income  (loss) before income taxes                                                           |       | 0.2                  |       | (0.1                 | )          | 0.1                  |       | 0.1                  |       | 0.2                  |       | 0.1                  |       | (0.1                 | )          | (1.3                    | )          |
| Net income  (loss)                                                                           |       | 0.3                  |       | (0.1                 | )          | 0.1                  |       | 0.1                  |       | 0.2                  |       | 0.1                  |       | (0.1                 | )          | (1.3                    | )          |
|                                                                                         |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                    |       |
| Income  (loss) per share:                                                                    |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                    |       |
|                                                                                         |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                    |       |
| Basic                                                                                        |       | $                    | 0.02       |                 | $          | (0.01                | )          | $                    | 0.01       |                 | $          | —               |       | $                    | 0.01       |                    | $          | 0.01 |   | $ | — |   | $ | (0.03 | ) |
| Diluted                                                                                      |       | 0.02                 |       | (0.01                | )          | 0.01                 |       | —               |       | 0.01                 |       | 0.01                 |       | —               |       | $                       | (0.03      | ) |
|                                                                                         |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                    |       |
| Weighted  average common shares used in determining income (loss) per share (in  thousands): |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                    |       |
|                                                                                         |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                    |       |
| Basic                                                                                        |       | 14,426               |       | 14,426               |       | 14,575               |       | 14,575               |       | 14,575               |       | 14,676               |       | 14,676               |       | 43,458                  |       |
|                                                                                         |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |                    |       |
| Diluted                                                                                      |       | 14,876               |       | 14,426               |       | 14,875               |       | 14,875               |       | 14,875               |       | 14,676               |       | 14,676               |       | 43,458                  |       |

 

----

(1)   Thefourth quarter ended December 31, 2004 represents the combined pre- andpost- recapitalization periods of January 1, 2004 through October 31,2004 and November 1, 2004 through December 31, 2004, respectively, asa result of the Management Equity/Conversion Transaction.  Additionally, in connection with theManagement Equity/Conversion Transaction, in the fourth quarter of 2004, thecompany recorded a $995,000 debt modification charge and a $187,500 stockcompensation charge (see note 2 to the consolidated financial statements).

 

5

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**Exhibit 13.1****                               THECOMPANY’S ANNUAL REPORT TO STOCKHOLDERS**

 

Sections of theRegistrant’s Annual Report to Stockholders Incorporated by Reference:

 

13.1.1                  SelectedFinancial Information

 

13.1.2                  Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

13.1.3                  Report of Independent Registered PublicAccounting Firm

 

13.1.4                  ConsolidatedBalance Sheets

 

13.1.5                  ConsolidatedStatements of Operations

 

13.1.6                  ConsolidatedStatements of Stockholders’ Deficiency and Comprehensive Income (Loss)

 

13.1.7                  ConsolidatedStatements of Cash Flows

 

13.1.8                  Notes toConsolidated Financial Statements

 

6

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**Exhibit 13.1.1****                     SELECTEDFINANCIAL INFORMATION**

 

The following tablesummarizes our selected financial data derived from our financials statements.

 

The financial data setforth below should be read in conjunction with, and is qualified in referenceto, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” our consolidated financial statements and the related notes tothose financial statements, included elsewhere in this report.

 

**SELECTED FINANCIALDATA**

** **

(in thousands, except pershare data)

 

STATEMENT OF OPERATIONSDATA

 
| ** **                                                                   | ** ** | ** ** | ** ** | **For the Periods**                               | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | ** ** | ** ** | **Jan. 1, 2004 –   Oct. 31, 2004** | ** ** | **Nov. 1, 2004  – Dec. 31,  2004** | ** ** |
| **For the Years Ended December 31,**                                    |
| **2000**                                                                     | ** ** | **2001**   | ** ** | **2002**                                          | ** ** | **2003** |
|                                                                         |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
| Revenue                                                                      |       | $          | 27,321     |                                              | $          | 23,768 |   | $ | 21,937 |   | $ | 19,346 |   | $ | 16,317 |   | $ | 3,754 |   |
| Income  (loss) from continuing operations                                    |       | 1,444      |       | 3,657                                             |       | 417 |   | 353 |   | (1,158 | ) | (37 | ) |
| Income  (loss) from discontinued operations                                  |       | (627       | )          | (1,525                                            | )          | (1,767 | ) | — |   | — |   | — |   |
| Net income  (loss)                                                           |       | 817        |       | 2,132                                             |       | (1,350 | ) | 353 |   | (1,158 | ) | (37 | ) |
|                                                                         |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
| Income  (loss) per share from continuing operations:                         |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
|                                                                         |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
| Basic income  (loss) per share                                               |       | $          | 0.13       |                                              | $          | 0.28 |   | $ | 0.03 |   | $ | 0.02 |   | $ | (0.08 | ) | $ | — |   |
| Diluted  income (loss) per share                                             |       | $          | 0.13       |                                              | $          | 0.28 |   | $ | 0.03 |   | $ | 0.02 |   | $ | (0.08 | ) | $ | — |   |
|                                                                         |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
| Income  (loss) per share from discontinued operations:                       |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
|                                                                         |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
| Basic income  (loss) per share                                               |       | $          | (0.06      | )                                                 | $          | (0.12 | ) | $ | (0.13 | ) | $ | — |   | $ | — |   | $ | — |   |
| Diluted  income (loss) per share                                             |       | $          | (0.06      | )                                                 | $          | (0.12 | ) | $ | (0.13 | ) | $ | — |   | $ | — |   | $ | — |   |
|                                                                         |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
| Net Income  (loss) per share:                                                |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
|                                                                         |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
| Basic income  (loss) per share                                               |       | $          | 0.07       |                                              | $          | 0.16 |   | $ | (0.10 | ) | $ | 0.02 |   | $ | (0.08 | ) | $ | — |   |
| Diluted  income (loss) per share                                             |       | $          | 0.07       |                                              | $          | 0.16 |   | $ | (0.10 | ) | $ | 0.02 |   | $ | (0.08 | ) | $ | — |   |
|                                                                         |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
| Weighted  average common shares used in determining income (loss) per share: |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
|                                                                         |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                        |       | 10,923     |       | 13,091                                            |       | 13,945 |   | 14,538 |   | 14,676 |   | 57,848 |   |
| Diluted                                                                      |       | 11,206     |       | 13,263                                            |       | 13,945 |   | 14,838 |   | 14,676 |   | 57,848 |   |
|                                                                         |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
| BALANCE  SHEET DATA                                                          |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
|                                                                         |       |       |       |                                              |       |   |   |   |   |   |   |   |   |
| Working  capital deficiency                                                  |       | (10,811    | )          | (3,787                                            | )          | (8,649 | ) | (10,399 | ) | (7,311 | )(2) | (7,536 | ) |
| Total assets                                                                 |       | 16,445     |       | 8,288                                             |       | 6,177 |   | 7,465 |   | 16,611 | (2) | 15,921 |   |
| Long-term  debt                                                              |       | 7,792      |       | 10,966                                            |       | 10,523 |   | 10,781 |   | 7,781 | (2) | 7,652 |   |
| Stockholders’  deficiency (1)                                           |       | (12,110    | )          | (12,992                                           | )          | (14,782 | ) | (14,586 | ) | (1,086 | )(2) | (2,213 | ) |

 

----

(1)          Nocash dividends have been declared by the Company.

(2)          Unaudited

 

7

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**Exhibit 13.1.2****       MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionshould be read in conjunction with the audited consolidated financialstatements included elsewhere herein. Except for the historical information contained herein, the mattersdiscussed in this Annual Report are forward-looking statements that involve anumber of risks and uncertainties.  Thereare certain important factors and risks, including the rapid change in hardwareand software technology, market conditions, competitive factors, seasonality andother variations in the buying cycles of certain of our customers, the timingof product announcements, the release of new or enhanced products, theintroduction of competitive products and services by existing or newcompetitors, the significant risks associated with the acquisition of newproducts, product rights, technologies or businesses, our ability toretain  technical, managerial and otherpersonnel, 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 causeresults to differ materially from those anticipated by the statements madeherein.  Therefore, historical resultsand percentage relationships will not necessarily be indicative of theoperating results of any future period. See “Risk Factors” elsewhere in this Annual Report on Form 10-K.

 

**Critical Accounting Policies and Estimates**

 

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates andjudgments that affect our reported assets, liabilities, revenues and expenses.On an on-going basis, we evaluate our estimates, including those related torevenue recognition, accounts receivable and intangible assets. We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances. This forms the basis ofjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may materially differ fromthese estimates under different assumptions or conditions.

 

We believe the followingcritical accounting policies and the related judgments and estimates affect thepreparation of our consolidated financial statements:

 

**Software Development Costs**

 

All costs incurred toestablish the technological feasibility of software products to be sold toothers are expensed as research and development. Once technological feasibilityhas been established, all software production costs are capitalized.  Amortization is computed on an individualproduct basis and is recognized over the greater of the remaining economiclives of each product or the ratio that current gross revenues for a productbear to the total of current and anticipated revenues for that product,commencing when the products become available for general release tocustomers.  Software development costsare generally amortized over a three-year period.  The Company continually assesses therecoverability of software development costs by comparing the carrying value ofindividual products to their net realizable value.

 

The Company capitalized$896,000 and $1,065,000 of software development costs during 2003 and 2004respectively, relating to our new N-Tier, Internet-native corporate applicationsuite of products written in java.  Themodules to this suite of applications became available for general release inthe first quarter of 2005 at which time amortization of such costs shallcommence.  We believe that these newproducts will produce new sales adequate to recover amounts capitalized.

 

**Revenue Recognition**

 

The Company earns revenuefrom sales of hardware, software and professional services and fromarrangements involving multiple elements of each of the above. Revenue formultiple element arrangements are recorded by allocating revenue to the variouselements based on their respective fair values as evidenced by vendor specificobjective evidence. The fair value in multi-element arrangements is determinedbased upon the price charged when sold separately. Revenue is not recognizeduntil persuasive evidence of an arrangement exists, delivery has occurred, thefee is fixed or determinable and collectibility is probable. Sales of networkand computer equipment are recorded when title and risk of loss transfers.Software revenues are recorded when application software programs are shippedto end users, resellers and distributors, provided the Company is not requiredto provide services essential to the functionality of the software orsignificantly modify, customize or produce the software. Professional servicesfees for software development, training and installation are recognized as theservices are provided. Maintenance revenues are recorded evenly over therelated contract period.

 

8

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**Accounts Receivable**

 

We maintain allowancesfor doubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments. The amount of our reserves is based onhistorical experience and our analysis of the accounts receivable balances outstanding.If the financial condition of our customers were to deteriorate, resulting inan impairment of their ability to make payments, additional allowances may berequired which would result in an additional general and administrative expensein the period such determination was made. While such credit losses havehistorically been within our expectations and the provisions established, wecannot guarantee that we will continue to experience the same credit loss ratesthat we have in the past.

 

**Intangible and Long-Lived Assets**

 

At December 31,2003 and 2004, goodwill and other long-lived assets represented 49% and   80%, respectively, of the Company’s totalassets.

 

Goodwill mustbe tested at least annually for impairment at a level of reporting referred toas the reporting unit and more frequently if adverse events or changes incircumstances indicate that the asset may be impaired.   The Company did not record an impairmentcharge upon its annual impairment reviews at December 31, 2002, 2003 and2004.

 

Long-lived assets consistof property and equipment and other identifiable intangible assets.  These assets are depreciated or amortizedover their estimated useful life, and are subject to impairment reviews.  The Company periodically reviews long-livedassets whenever adverse events or changes in circumstances indicate thecarrying value of such assets may not be recoverable.  In assessing recoverability, the Company mustmake assumptions regarding estimated future cash flows and other factors todetermine if an impairment loss may exist, and, if so, estimate fairvalue.  The Company also must estimateand make assumptions regarding the useful lives assigned to its long-livedassets.  If these estimates, or theirrelated assumptions, change in the future, the Company may be required torecord impairment losses or change the useful life including acceleratingdepreciation or amortization for these assets.

 

**Accrued Expenses**

 

TheCompany reviews its contingent liabilities, which arise primarily fromlitigation and litigation defense costs, in accordance with Statement ofFinancial Accounting Standards No. 5 (SFAS 5), “Accounting forContingencies”.  Contingent liabilitiesare recorded as liabilities when it is probable that a liability has beenincurred and the amount of the loss is reasonably estimable.  Contingent liabilities are often resolvedover long periods.  Estimating probablelosses requires judgments about both the amount of liability, which may or maynot be readily determinable, and the likelihood of liability, which involvesranges of probability that can at times be broad and depend on the potentialactions of third parties.

 

**Provision for Income Taxes**

 

Provision forincome taxes is based upon the Company’s estimate of taxable income or loss foreach respective accounting period.  Anasset or liability is recognized for the deferred tax consequences of temporarydifferences between the tax bases of assets and liabilities and their reportedamounts in the financial statements. These temporary differences will result in taxable or deductible amountsin future periods when the reported amounts of assets are recovered orliabilities are settled. The Company regularly reviews its deferred tax assetsto determine the amount that is more likely than not to be realized. When thisamount is less than the deferred tax asset recorded, the Company records avaluation allowance to reduce the asset to its estimated realizable value.  If the Company determined that it was not goingto be able to fully realize its recorded deferred tax assets, it would make anadjustment to the valuation allowance. This would reduce net income in the period that the Company made itsdetermination.  Similarly, if the Companyrealized that it was going to be able to fully realize a deferred tax asset inexcess of its net recorded value, net income would be increased in the periodthat the Company made its determination.

 

The Companyalso reviews its deferred tax liabilities on a regular basis to determine thatthe amount recorded is adequate to cover the expected reversal of temporaryincome tax liabilities.  In the eventthat the amount recorded was less than adequate, the deferred tax liabilitywould be increased to its estimated realizable value and net income would bedecreased accordingly.  In the event thatthe deferred tax liability was determined to be overstated, it would be reducedto its estimated realizable value and net income would increase accordingly.

 

The Company generallydetermines its effective tax rate by considering the statutory federal incometax rate, the statutory state and local tax rates (net of the federal incometax benefit) and any nondeductible expenses. This rate could also be affected by increases or decreases to deferredtax assets or liabilities as described above.

 

9

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**Liquidity and Capital Resources**

 

At December 31,2004, our working capital deficiency improved from a working capital deficiencyof $10,399,000 at December 31, 2003 to a working capital deficiency of$7,536,000.  Excluding unearned revenueof $3,456,000, working capital deficiency at December 31, 2004 was$4,080,000.  Excluding unearned revenueof $3,209,000, the Company’s working capital deficiency at December 31,2003 would be $7,190,000.  Excludingunearned revenue, the decrease in the working capital deficiency of $3,110,000was primarily attributable to decreases in current portion of long term debt of$2,643,000, customer deposits of $1,088,000, accrued liabilities of $158,000offset by an increase in accounts payable of $173,000 and decreases in cash of$469,000, accounts receivable of $77,000 and prepaids and other assets of$66,000.  The decrease in the currentportion of long term debt was mainly attributable to the conversion of approximately$3,317,000 indebtedness to common stock on November 1, 2004.

 

Net cash used ininvesting activities for the period ended December 31, 2004 totaled$1,260,000, which is comprised of capital expenditures of $195,000 andcapitalized software of $1,065,000.

 

Net cash provided byfinancing activities for the period ended December 31, 2004 totaled$124,000, which represents $1,000,000 of new cash proceeds into the companyfrom a private placement in September 2004 offset by $876,000 inrepayments on long-term debt.  On January 13,2003, the Company converted its credit facility to a term loan which requiresmonthly principal and interest payments of $58,000 and matures on February 28,2006.  In addition, the Company amendedits subordinated note to require monthly interest only payments of $52,000through February 28, 2006, at which time it will convert to a term loan tobe amortized over a three year period. The restructured debt, pursuant to the original intercreditor agreementbetween Canyon and Coast, which was sold to Wamco on May 15, 2003,contains various restrictions and covenants, including a minimum quick ratio of0.20 to 1.00 and minimum debt service coverage ratio of .50 to l.00.  In the event that we were not in compliancewith the various restrictions and covenants and were unable to receive waiversfor non-compliance, the term debt would be immediately due and payable. TheCompany was not in compliance with but received waivers for its covenantsthrough December 31, 2004. There is no guaranty that the Company will meetits debt covenants in the future.

 

Stockholders’ deficiencydecreased from $14,586,000 at December 31, 2003 to $2,213,000 at December 31,2004, mainly as a result of the purchase accounting adjustments recorded inconnection with the Management Equity/Conversion Transaction (see note 2 to theconsolidated financial statements).

 

Although the Company hasa net stockholders’ deficiency of $2,213,000 and a working capital deficit of$7,536,000 at December 31, 2004, the Company believes it will generatesufficient funds from operations or obtain additional financing to meet itsoperating and capital requirements for at least the next 12 months.    The Company expects to generate positivecash flow from its continuing operations during 2005 from shipping out productsand services from its current backlog as of December 31, 2004 as well asnew orders.  In the event that theCompany cannot generate positive cash flow from its continuing operationsduring 2005, the Company can substantially reduce its research and developmentefforts to mitigate cash outflow to help sustain its operations.  There can be no assurance that the Companywill be able to sustain profitability generate positive cash flow fromoperations or obtain additional financing as necessary.  These financial statements have been preparedassuming the Company will continue to operate as a going concern.  If the Company is unsuccessful in theaforementioned efforts, the Company could be forced to liquidate certain of itsassets, reorganize its capital structure and, if necessary, seek other remediesavailable to the Company.

 

10

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**ContractualObligations and Commercial Commitments**

 

The following tablesummarizes the Company’s obligations and commitments as of December 31,2004:

 
| ** **                       | ** ** | **Payments Due by Period (in  thousands)** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|
| **Contractual Cash Obligations** | ** ** | **Total**                                  | ** ** | **Less Than 1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
|                             |       |                                       |       |   |   |   |   |   |   |   |   |
| Long-Term Debt                   |       | $                                          | 7,652      |   | $ | 1,003 |   | $ | 3,496 |   | $ | 2,570 |   | $ | 583 |   |
| Operating Leases                 |       | 3,160                                      |       | 594 |   | 885 |   | 804 |   | 877 |   |
| Consulting Agreements            |       | 96                                         |       | 96 |   | — |   | — |   | — |   |
|                             |       | $                                          | 10,908     |   | $ | 1,693 |   | $ | 4,381 |   | $ | 3,374 |   | $ | 1,460 |   |

 

**FactorsAffecting Future Operating Results**

 

Demandfor the Company’s Products and Operating Efficiencies 

 

The Company’s futureoperating results will depend, in large part, upon the Company’s ability toachieve and maintain a significant market demand and presence for its productsand to operate profitably and efficiently. The Company’s ability to accomplish these objectives will depend on anumber of factors, including the following:

 

•      Marketdemand for information technology in the hospitality industry in general;

•      Completionof development, launch and market success and acceptance of our softwaresolutions;

•      Price,performance, quality and other characteristics of the Company’s products and ofcompeting and substitute products rumored, announced or introduced by othervendors;

•      Emergenceof any competing solutions as industry standards;

•      Successof the Company in meeting targeted availability dates for new and enhancedproducts;

•      Successof the Company’s efforts to provide and maintain customer service andsatisfaction;

•      Publicperception of the Company and its products, including statements made byindustry analysts or consumers and adverse publicity resulting from suchstatements or from litigation filed against the Company;

•      Worldwideeconomic conditions, including overall market demand for information technologyand other products with which the Company’s products can be used;

•      Abilityof the Company to profitably and efficiently manage its development of productsand key components, and to avoid disruptions in the development thereof;

•      Abilityof the Company to maintain profitable relationships with distributors and otherresellers of the Company’s products;

•      TheCompany’s ability to attract and retain competent, motivated employees;

•      Abilityof the Company to comply with applicable laws, regulations, ordinances andother legal requirements in the numerous countries in which it does business;

•      Abilityof the Company to successfully manage litigation, including enforcing itsrights, protecting its interests and defending itself from claims made againstit and;

•      Abilityof the Company to successfully implement its restructuring of debt, to achieveand maintain an appropriate cost structure and to minimize unforeseen andextraordinary expenses.

 

The Company cannotprovide any assurance that it will be able to successfully manage, satisfy orinfluence any of these factors.

 

11

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### *Year Ended December 31,2003 Compared to Year Ended December 31, 2004.*

 
| **(dollars in thousands)**                    | ** ** | **December 31,  2003** | ** ** | **Percentage of  Revenue** | ** ** | **December 31,  2004(1)** | ** ** | **Percentage of  Revenue** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|--------------------------------|------------|----------------------------|------------|
|                                          |       |                        |       |                       |       |                           |       |                       |       |
| Revenue                                       |       | 19,346                      |       | 100.0                      | %          | 20,071                         |       | 100.0                      | %          |
| Gross profit                                  |       | 13,826                      |       | 71.5                       | %          | 14,487                         |       | 72.2                       | %          |
| Selling, general and administrative  expenses |       | 9,596                       |       | 49.6                       | %          | 9,427                          |       | 47.0                       | %          |
| Research and development costs                |       | 2,828                       |       | 14.6                       | %          | 3,708                          |       | 18.5                       | %          |
| Amortization of intangibles                   |       | —                      |       | —                     |       | 96                             |       | 0.5                        | %          |
| Stock compensation expense                    |       | —                      |       | —                     |       | 188                            |       | 0.9                        | %          |
| Other operating expense                       |       | 62                          |       | 0.3                        | %          | 92                             |       | 0.5                        | %          |
| Interest expense, net                         |       | 1,217                       |       | 6.3                        | %          | 2,112                          |       | 10.5                       | %          |
| Other non-operating expense                   |       | 81                          |       | 0.4                        | %          | 28                             |       | 0.1                        | %          |
| Income tax (benefit) expense                  |       | (311                        | )          | (1.6                       | )%         | 31                             |       | 0.2                        | %          |
| Net income (loss)                             |       | 353                         |       | 1.8                        | %          | (1,195                         | )          | (6.0                       | )%         |

 

----

(1)    The year ended December 31, 2004 represents the combined pre- andpost- recapitalization periods of January 1, 2004 through October 31,2004 and November 1, 2004 through December 31, 2004, respectively, asa result of the Management Equity/Conversion Transaction (see note 2 to theconsolidated financial statements).

 

The increase in revenuein 2004 was mainly attributable to an increase in service volume and rates asthe general health of the hospitality industry continues to improve from thedetrimental effects of “9/11” that severely affected the hospitality and travelindustries, which resulted in an increase of approximately $726,000.  Revenue for 2004 was $20,071,000 compared to$19,346,000 in 2003 or a 3.8% increase. The increase was mainly a result ofincreased professional and software support services driven by an increase inthe number of customers combined with slight price increases. Our continuinghospitality business is expected to generate sufficient cash from operations toadequately fund its ongoing operating activities.

 

Gross profit for 2004increased to $14,487,000 from $13,826,000 in 2003.  The increase in gross profit is mainly due tothe increase in professional and support services revenues.

 

Selling, general andadministrative expenses (“SG&A”) decreased from $9,596,000 in 2003 to$9,427,000 in 2004.  The decrease ismainly due to the closing of the Company’s Mexico office in January, 2004 andthe ongoing effects of the management cost control program resulting inreduced, building rent and consulting services.

 

Research and developmentcosts increased from $2,828,000 in 2003 to $3,708,000 in 2004.  The company capitalized $896,000 and$1,065,000 of software development costs in 2003 and 2004, respectively. Theincrease is mainly due to the Company continued efforts to invest in productdevelopment of its new internet native suite of applications as well as ourcore product offerings.  The increase wasprimarily the result of the addition of approximately 15 engineers and qualityassurance personnel in the Company’s Malaysia operations, including associatedoverhead costs as well as engineering consulting services contracted in theUnited States.

 

Amortization ofintangibles was $96,000 in 2004 as a result of the Company recordingapproximately $10.1 million of intangible assets in connection with theManagement Equity/Conversion Transaction on November 1, 2004, of whichapproximately $7,684,000 related to identifiable intangible assets whichcommenced amortization in November 2004 over their estimated useful livesof seven to fifteen years.

 

The Company incurred acharge of $187,500 of non-cash compensation expense relating to the privateplacement of $1 million into the Company by the Investor Group at a belowmarket price.  There was no suchtransaction during 2003.

 

Net interest expense was$1,217,000 in 2003 compared to $2,112,000 in 2004.  The increase was due to a $995,000 debtmodification charge relating to the conversion of approximately $3.3 million ofindebtedness by the Investor Group to the Company’s common stock at a belowmarket price recorded to interest expense during 2004.  There was no such transaction during 2003.  This charge was offset by lower balances ofinterest bearing debt during 2004 as compared to 2003 mainly due to theconversion of approximately $3.3 million of indebtedness by the Investor Groupto the Company’s common stock on November 1, 2004.

 

The income tax benefit in2003 is due to the Company recording a domestic income tax receivable duringthe period to recover taxes previously paid. There were no such receivablesrecorded in 2004.

 

12

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**Results ofOperations**

 

### *Year Ended December 31,2002  Compared to Year Ended December 31,2003.*

 
| **(dollars in thousands)**                    | ** ** | **December 31,  2002** | ** ** | **Percentage of  Revenue** | ** ** | **December 31,  2003** | ** ** | **Percentage of  Revenue** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|-----------------------------|------------|----------------------------|------------|
|                                          |       |                        |       |                       |       |                        |       |                       |       |
| Revenue                                       |       | 21,937                      |       | 100.0                      | %          | 19,346                      |       | 100.0                      | %          |
| Gross profit                                  |       | 15,017                      |       | 68.5                       | %          | 13,826                      |       | 71.5                       | %          |
| Selling, general and administrative  expenses |       | 9,363                       |       | 42.7                       | %          | 9,596                       |       | 49.6                       | %          |
| Research and development costs                |       | 3,307                       |       | 15.1                       | %          | 2,828                       |       | 14.6                       | %          |
| Amortization of intangibles                   |       | 134                         |       | 0.6                        | %          | —                      |       | —                     |       |
| Other operating expense                       |       | 212                         |       | 1.0                        | %          | 62                          |       | (0.3                       | )%         |
| Interest expense, net                         |       | 1,490                       |       | 6.8                        | %          | 1,217                       |       | 6.3                        | %          |
| Other non-operating expense                   |       | 64                          |       | 0.3                        | %          | 81                          |       | 0.4                        | %          |
| Income tax expense (benefit)                  |       | 30                          |       | 0.1                        | %          | (311                        | )          | (1.6                       | )%         |
| Income from continuing operations             |       | 417                         |       | 1.9                        | %          | 353                         |       | 1.8                        | %          |
| Loss on disposal of discontinued operations   |       | (1,021                      | )          | (4.7                       | )%         | —                      |       | —                     |       |
| Loss from discontinued operations             |       | (746                        | )          | (3.4                       | )%         | —                      |       | —                     |       |
| Net income (loss)                             |       | (1,350                      | )          | (6.2                       | )%         | 353                         |       | 1.8                        | %          |

 

Revenuefor 2003 was $19,346,000 compared to $21,937,000 in 2002 or a 12.0% decrease.  Revenue decreased $2,591,000 in 2003, as aresult of decreased  professionalservices and maintenance services mainly due to decreased capital spending oninformation technology in 2003 due to the effects of a downturn and post “9/11”economy on the hospitality industry.

 

Thedecrease in revenue in 2003 was mainly attributable to a decrease in servicevolume and rates as many hotels have reduced their operating costs by cancelingor reducing contracted services, including support, as well as reduced volumeof product purchases, in a post “9/11” economy, which resulted in a decrease ofapproximately $1.1 million in the volume of revenue from professional servicesand a decrease of approximately $1.2 million in software and hardware revenuefrom 2002 to 2003.  Many hotels haverequested that their suppliers reduce the cost of service or delay any priceincreases while they are experiencing reduced guest occupancy and lower averagedaily rates on their inventory of rooms. Certain hotels have also established their own help desks to furtherreduce costs.  As a result, the Companypostponed increasing its support prices until the first quarter of 2003 andagreed, with certain of its clients, to provide, at reduced rates, a secondline of support versus a first line of support that was previously provided tosuch clients, which resulted in a decrease in support revenues of approximately$285,000 from 2002 to 2003.  Ourcontinuing hospitality business is expected to generate sufficient cash fromoperations to adequately fund its ongoing operating activities.

 

Grossprofit for 2003 decreased to $13,826,000 (71.5%) from $15,017,000 (68.5%) in2002.  The decrease in gross profit ismainly due to the decrease in software and maintenance services revenues, whichwas offset by the Company’s cost reductions during the period.

 

Selling,general and administrative expenses (“SG&A”) increased from $9,363,000 in2002 to $9,596,000 in 2003.  The increaseis mainly due to an increase in marketing expenses for trade shows, advertisementand travel as the Company continues to actively and aggressively market itsenterprise suite of applications and services which are scheduled for generalrelease in the first quarter of 2005.

 

Researchand development costs decreased from $3,307,000 in 2002 to $2,828,000 in2003.  The decrease is due to thecapitalization of $861,000 and $896,000 of software development costs in 2002and 2003, respectively, associated with the Company’s product development ofits new internet native suite of applications. The decrease is also due to a decrease in headcount associated with theCompany’s focus on reducing costs.

 

Otheroperating expense was $212,000 in 2002 and $62,000 in 2003.  Other operating expense in 2003 was offsetdue to receipt of approximately $46,000 of cash resulting from a legalsettlement.

 

Thedecrease in amortization of intangibles in 2003 versus the comparable period of2002 is due to the fact that the Company amortized $134,000 of softwaredevelopment costs in 2002 relating to costs capitalized in 1999.  These costs were fully amortized during 2002.

 

Netinterest expense was $1,490,000 in 2002 compared to $1,217,000 in 2003.  The decrease is due to lower balances ofinterest bearing debt during 2003 as compared to 2002.

 

Othernon-operating expense increased from $64,000 in 2002 to $81,000 in 2003.  Non-operating expense relates to pensionexpense under a defined benefit plan for former employees.

 

Theincome tax benefit in 2003 is due to a settlement agreement on a tax claim withthe United States Internal Revenue Service that resulted in a one-time gain of$262,000 (see note 8 to the consolidated financial statements), as well as theCompany recording a domestic income tax receivable during the period to recovertaxes previously paid.

 

During2002, loss from discontinued operations was $746,000. In the fourth quarter of2002, the Company sold all the assets and liabilities of its ProcessManufacturing and Canadian subsidiaries to third parties, resulting in a losson disposal of discontinued operations of $1,021,000.

 

13

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**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2004,the FASB issued SFAS No. 123r, “Share-Based Payment” (“SFAS 123r”). SFAS123r provides accounting guidance for stock-based payments to employees. SFAS123r revises SFAS 123 by eliminating the choice of using the recognition andmeasurement provisions of APB No. 25 and requiring all companies to usethe fair value method of measuring stock compensation expense. SFAS 123rclarifies and expands SFAS 123’s guidance in several areas, including measuringfair value, classifying an award as equity or a liability, attributingcompensation cost to reporting periods as well as adding several new disclosurerequirements. SFAS 123r also changes the accounting for the tax effects ofoptions, including the presentation of the tax effects on the consolidatedstatements of cash flows. SFAS 123r is effective for public companies with thefirst interim or annual period that begins after June 15, 2005. Asdiscussed above, the Company is currently accounting for all of its stock-basedcompensation under the intrinsic value method as outlined in APB 25 and willadopt SFAS 123r beginning in the first quarter of 2006. The Company still needsto evaluate the impacts of SFAS 123r.

 

InDecember 2004, the FASB issued SFAS No. 153 (SFAS 153), *“Exchanges of Nonmonetary Assets, an amendment of APBOpinion No. 29, Accounting for Nonmonetary Transactions.”*SFAS 153eliminates the exception from fair value measurement for nonmonetary exchangesof similar productive assets in paragraph 21(b) of APB Opinion No. 29,*“Accounting for Nonmonetary Transactions,”*andreplaces it with an exception for exchanges that do not have commercialsubstance. SFAS 153 specifies that a nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. SFAS 153 is effective forperiods beginning after June 15, 2005. We do not expect that adoption ofSFAS 153 will have a material effect on our consolidated financial position,consolidated results of operations, or liquidity.

 

14

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**Exhibit 13.1.3**

 

## **Report of Independent Registered Public AccountingFirm**

 

The Board of Directorsand Stockholders of

 

MAISystems Corporation

LakeForest, California

 

We have audited theaccompanying consolidated balance sheets of MAI Systems Corporation andsubsidiaries as of December 31, 2003 and 2004 and the related consolidatedstatements of operations, stockholders’ deficiency and comprehensive income(loss) and cash flows for each of the years in the two-year period ended December 31,2003 and for the period from January 1, 2004 to October 31, 2004 andfor the period from November 1, 2004 to December 31, 2004.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, anaudit of its internal control over financial reporting.  Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of MAI SystemsCorporation and subsidiaries as of December 31, 2003 and 2004 and theresults of their operations and their cash flows for each of the years in thetwo-year period ended December 31, 2003 and for the period from January 1,2004 to October 31, 2004 and for the period from November 1, 2004 to December 31,2004, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

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

 

 

Costa Mesa, California

April 25, 2005

 

15

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**Exhibit 13.1.4****                     ConsolidatedBalance Sheets**

 

**MAI SYSTEMSCORPORATION**

** **

**CONSOLIDATEDBALANCE SHEETS**

** **
| ** **                                                                                                                                                                         | ** ** | **As of December 31,**            | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **(in thousands, except share  data)** | ** ** |
| ** **                                                                                                                                                                         | ** ** | **2003**                               | ** ** | **2004** | ** ** |
|                                                                                                                                                                               |       |                                   |       |   |   |
| **ASSETS**                                                                                                                                                                         |       |                                   |       |   |   |
| Current assets:                                                                                                                                                                    |       |                                   |       |   |   |
| Cash                                                                                                                                                                               |       | $                                      | 664        |   | $ | 195 |   |
| Receivables,  less allowance for doubtful accounts of $335 in 2003 and $321 in 2004                                                                                                |       | 2,248                                  |       | 2,171 |   |
| Inventories,  net                                                                                                                                                                  |       | 47                                     |       | 71 |   |
| Prepaids and  other assets                                                                                                                                                         |       | 814                                    |       | 748 |   |
|                                                                                                                                                                               |       |                                   |       |   |   |
| Total  current assets                                                                                                                                                              |       | 3,773                                  |       | 3,185 |   |
|                                                                                                                                                                               |       |                                   |       |   |   |
| Furniture, fixtures and equipment, net                                                                                                                                             |       | 758                                    |       | 629 |   |
| Intangibles, net                                                                                                                                                                   |       | 1,755                                  |       | 7,470 |   |
| Goodwill                                                                                                                                                                           |       | 1,121                                  |       | 4,622 |   |
| Other assets                                                                                                                                                                       |       | 58                                     |       | 15 |   |
|                                                                                                                                                                               |       |                                   |       |   |   |
| Total assets                                                                                                                                                                       |       | $                                      | 7,465      |   | $ | 15,921 |   |
|                                                                                                                                                                               |       |                                   |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIENCY**                                                                                                                                  |       |                                   |       |   |   |
| Current liabilities:                                                                                                                                                               |       |                                   |       |   |   |
| Current  portion of long-term debt                                                                                                                                                 |       | $                                      | 3,646      |   | $ | 1,003 |   |
| Accounts  payable                                                                                                                                                                  |       | 904                                    |       | 1,077 |   |
| Customer  deposits                                                                                                                                                                 |       | 3,269                                  |       | 2,181 |   |
| Accrued  liabilities                                                                                                                                                               |       | 3,059                                  |       | 2,901 |   |
| Income taxes  payable                                                                                                                                                              |       | 85                                     |       | 103 |   |
| Unearned  revenue                                                                                                                                                                  |       | 3,209                                  |       | 3,456 |   |
|                                                                                                                                                                               |       |                                   |       |   |   |
| Total  current liabilities                                                                                                                                                         |       | 14,172                                 |       | 10,721 |   |
|                                                                                                                                                                               |       |                                   |       |   |   |
| Long-term debt                                                                                                                                                                     |       | 7,135                                  |       | 6,649 |   |
| Other liabilities                                                                                                                                                                  |       | 744                                    |       | 764 |   |
|                                                                                                                                                                               |       |                                   |       |   |   |
| Total  liabilities                                                                                                                                                                 |       | 22,051                                 |       | 18,134 |   |
|                                                                                                                                                                               |       |                                   |       |   |   |
| Stockholders’ deficiency:                                                                                                                                                     |       |                                   |       |   |   |
| Preferred  Stock, par value $0.01 per share; 1,000,000 shares authorized, none issued or  outstanding                                                                              |       | —                                 |       | — |   |
| Common  Stock, par value $0.01 per share; authorized 99,000,000 shares; 14,675,752  and 57,847,862 shares issued and outstanding at December 31, 2003 and  2004, respectively |       | 152                                    |       | 584 |   |
| Additional  paid-in capital                                                                                                                                                        |       | 218,112                                |       | 47,856 |   |
| Accumulated  other comprehensive loss:                                                                                                                                             |       |                                   |       |   |   |
| Minimum  pension liability                                                                                                                                                         |       | (1,005                                 | )          | (1,250 | ) |
| Foreign  currency translation                                                                                                                                                      |       | (2                                     | )          | (69 | ) |
| Unearned  compensation                                                                                                                                                             |       | (53                                    | )          | — |   |
| Accumulated  deficit                                                                                                                                                               |       | (231,790                               | )          | (49,334 | ) |
| Total  stockholders’ deficiency                                                                                                                                               |       | (14,586                                | )          | (2,213 | ) |
|                                                                                                                                                                               |       |                                   |       |   |   |
| Total liabilities and stockholders’  deficiency                                                                                                                               |       | $                                      | 7,465      |   | $ | 15,921 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

16

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**Exhibit 13.1.5****                     ConsolidatedStatements of Operations**

 

**MAI SYSTEMSCORPORATION**

** **

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

** **
| ** **                                                                   | ** ** | **For the Years Ended  December 31,** | *** *** | **For the Periods**                              | *** *** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|--------------|--------------------------------------------------|--------------|
| **(in thousands, except per share data)**                                    | ** ** | ** **                                 | ** **   | **Jan. 1, 2004 –  Oct. 31, 2004** | ** **   | **Nov. 1, 2004 –  Dec. 31, 2004** | ** ** |
| **2002**                                                                     | ** ** | **2003**                                   |
| ** **                                                                   | ** ** | ** **                                 | ** **   | ** **                                       | ** **   | ** ** | ** ** | ** ** | ** ** |
| Revenue:                                                                     |       |                                       |         |                                             |         |   |   |   |   |
| Software                                                                     |       | $                                          | 4,585        |                                             | $            | 3,855 |   | $ | 3,223 |   | $ | 766 |   |
| Network and  computer equipment                                              |       | 996                                        |         | 485                                              |         | 386 |   | 87 |   |
| Services                                                                     |       | 16,356                                     |         | 15,006                                           |         | 12,708 |   | 2,901 |   |
| Total  revenue                                                               |       | 21,937                                     |         | 19,346                                           |         | 16,317 |   | 3,754 |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Direct costs:                                                                |       |                                       |         |                                             |         |   |   |   |   |
| Software                                                                     |       | 437                                        |         | 587                                              |         | 381 |   | 111 |   |
| Network and  computer equipment                                              |       | 770                                        |         | 370                                              |         | 318 |   | 79 |   |
| Services                                                                     |       | 5,713                                      |         | 4,563                                            |         | 3,823 |   | 872 |   |
| Total direct  costs                                                          |       | 6,920                                      |         | 5,520                                            |         | 4,522 |   | 1,062 |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Gross profit                                                                 |       | 15,017                                     |         | 13,826                                           |         | 11,795 |   | 2,692 |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Selling, general and administrative  expenses                                |       | 9,363                                      |         | 9,596                                            |         | 7,656 |   | 1,771 |   |
| Research and development costs                                               |       | 3,307                                      |         | 2,828                                            |         | 3,039 |   | 669 |   |
| Amortization of intangibles                                                  |       | 134                                        |         | —                                           |         | — |   | 96 |   |
| Stock compensation charge                                                    |       | —                                     |         | —                                           |         | 188 |   | — |   |
| Other operating expense                                                      |       | 212                                        |         | 62                                               |         | 64 |   | 28 |   |
| Operating  income                                                            |       | 2,001                                      |         | 1,340                                            |         | 848 |   | 128 |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Interest income                                                              |       | 5                                          |         | 2                                                |         | 1 |   | — |   |
| Interest expense (including debt  modification charge)                       |       | (1,495                                     | )            | (1,219                                           | )            | (1,966 | ) | (147 | ) |
| Other non-operating expense                                                  |       | (64                                        | )            | (81                                              | )            | (26 | ) | (2 | ) |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Income  (loss) from continuing operations before income taxes                |       | 447                                        |         | 42                                               |         | (1,143 | ) | (21 | ) |
| Income tax  benefit (expense)                                                |       | (30                                        | )            | 311                                              |         | (15 | ) | (16 | ) |
| Income  (loss) from continuing operations                                    |       | 417                                        |         | 353                                              |         | (1,158 | ) | (37 | ) |
| Discontinued  operations:                                                    |       |                                       |         |                                             |         |   |   |   |   |
| Loss on  disposal of discontinued operations                                 |       | (1,021                                     | )            | —                                           |         | — |   | — |   |
| Loss from  discontinued operations                                           |       | (746                                       | )            | —                                           |         | — |   | — |   |
| Total loss  from discontinued operations                                     |       | (1,767                                     | )            | —                                           |         | — |   | — |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Net income  (loss)                                                           |       | $                                          | (1,350       | )                                                | $            | 353 |   | $ | (1,158 | ) | $ | (37 | ) |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Income  (loss) per share:                                                    |       |                                       |         |                                             |         |   |   |   |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Continuing  Operations:                                                      |       |                                       |         |                                             |         |   |   |   |   |
| Basic income  (loss) per share                                               |       | $                                          | 0.03         |                                             | $            | 0.02 |   | $ | (0.08 | ) | $ | — |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Diluted income  (loss) per share                                             |       | $                                          | 0.03         |                                             | $            | 0.02 |   | $ | (0.08 | ) | $ | — |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Discontinued  Operations:                                                    |       |                                       |         |                                             |         |   |   |   |   |
| Basic (loss)  per share                                                      |       | $                                          | (0.13        | )                                                | $            | — |   | $ | — |   | $ | — |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Diluted  (loss) per share                                                    |       | $                                          | (0.13        | )                                                | $            | — |   | $ | — |   | $ | — |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Net income  (loss) per share:                                                |       |                                       |         |                                             |         |   |   |   |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Basic income  (loss) per share                                               |       | $                                          | (0.10        | )                                                | $            | 0.02 |   | $ | (0.08 | ) | $ | — |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Diluted  income (loss) per share                                             |       | $                                          | (0.10        | )                                                | $            | 0.02 |   | $ | (0.08 | ) | $ | — |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Weighted  average common shares used in determining income (loss) per share: |       |                                       |         |                                             |         |   |   |   |   |
|                                                                         |       |                                       |         |                                             |         |   |   |   |   |
| Basic                                                                        |       | 13,945                                     |         | 14,538                                           |         | 14,676 |   | 57,848 |   |
| Diluted                                                                      |       | 13,945                                     |         | 14,838                                           |         | 14,676 |   | 57,848 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

17

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**Exhibit 13.1.6****                     ConsolidatedStatements of Stockholders’ Deficiency**

 

**MAI SYSTEMSCORPORATION**

** **

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ DEFICIENCY AND COMPREHENSIVE INCOME (LOSS)**

(inthousands)

 
| ** **                                               | ** ** | **Common Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Unearned  Compensation** | ** ** | **Accumulated  Deficit** | ** ** | **Total  Stockholders’  Deficiency** | ** ** | **Total  Comprehensive  Income (Loss)** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|----------------------------------|------------|------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
|                                                     |       |             |       |                             |       |                                                 |       |                       |       |                     |       |                                      |       |                                    |       |
| 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 | ) |
|                                                     |       |             |       |                             |       |                                                 |       |                       |       |                     |       |                                      |       |                                    |       |
| Issuance of common stock                                 |       | 2                |       | 18                               |       | —                                               |       | —                     |       | —                   |       | 20                                        |       | —                                  |       |
| Issuance of warrants                                     |       | —           |       | 42                               |       | —                                               |       | —                     |       | —                   |       | 42                                        |       | —                                  |       |
| Legal settlement                                         |       | —           |       | (199                             | )          | —                                               |       | —                     |       | —                   |       | (199                                      | )          | —                                  |       |
| Minimum pension liability                                |       | —           |       | —                           |       | (87                                                  | )          | —                     |       | —                   |       | (87                                       | )          | (87                                     | )          |
| Amortization of unearned compensation                    |       | —           |       | —                           |       | —                                               |       | 38                         |       | —                   |       | 38                                        |       | —                                  |       |
| Translation adjustments                                  |       | —           |       | —                           |       | 29                                                   |       | —                     |       | —                   |       | 29                                        |       | 29                                      |       |
| Net loss                                                 |       | —           |       | —                           |       | —                                               |       | —                     |       | 353                      |       | 353                                       |       | 353                                     |       |
|                                                     |       |             |       |                             |       |                                                 |       |                       |       |                     |       |                                      |       |                                    |       |
| Balance at December 31, 2003                        |       | $                | 152        |                             | $          | 218,112                                              |       | $                          | (1,007     | )                        | $          | (53                                       | )          | $                                       | (231,790   | ) | $ | (14,586 | ) | $ | 295 |   |
|                                                     |       |             |       |                             |       |                                                 |       |                       |       |                     |       |                                      |       |                                    |       |
| Push down accounting adjustments                         |       | —           |       | (175,324                         | )          | 835                                                  |       | 17                         |       | 183,651                  |       | 9,179                                     |       | —                                  |       |
| Issuance of common stock for cash                        |       | 100              |       | 900                              |       | —                                               |       | —                     |       | —                   |       | 1,000                                     |       | —                                  |       |
| Issuance of common stock as a result of debt  conversion |       | 332              |       | 2,985                            |       |                                                 |       |                       |       |                     |       | 3,317                                     |       |                                    |       |
| Debt modification charge                                 |       | —           |       | 995                              |       | —                                               |       | —                     |       | —                   |       | 995                                       |       | —                                  |       |
| Stock compensation charge                                |       | —           |       | 188                              |       | —                                               |       | —                     |       | —                   |       | 188                                       |       | —                                  |       |
| Amortization of unearned compensation                    |       | —           |       | —                           |       | —                                               |       | 31                         |       | —                   |       | 31                                        |       | —                                  |       |
| Translation adjustments                                  |       | —           |       | —                           |       | (52                                                  | )          | —                     |       | —                   |       | (52                                       | )          | (52                                     | )          |
| Net loss                                                 |       | —           |       | —                           |       | —                                               |       | —                     |       | (1,158                   | )          | (1,158                                    | )          | (1,158                                  | )          |
|                                                     |       |             |       |                             |       |                                                 |       |                       |       |                     |       |                                      |       |                                    |       |
| Balance at October 31, 2004                         |       | $                | 584        |                             | $          | 47,856                                               |       | $                          | (224       | )                        | $          | (5                                        | )          | $                                       | (49,297    | ) | $ | (1,086 | ) | $ | (1,210 | ) |
|                                                     |       |             |       |                             |       |                                                 |       |                       |       |                     |       |                                      |       |                                    |       |
| Minimum pension liability                                |       | —           |       | —                           |       | (1,037                                               | )          | —                     |       | —                   |       | (1,037                                    | )          | (1,037                                  | )          |
| Amortization of unearned compensation                    |       | —           |       | —                           |       | —                                               |       | 5                          |       | —                   |       | 5                                         |       | —                                  |       |
| Translation adjustments                                  |       | —           |       | —                           |       | (58                                                  | )          | —                     |       | —                   |       | (58                                       | )          | (58                                     | )          |
| Net loss                                                 |       | —           |       | —                           |       | —                                               |       | —                     |       | (37                      | )          | (37                                       | )          | (37                                     | )          |
|                                                     |       |             |       |                             |       |                                                 |       |                       |       |                     |       |                                      |       |                                    |       |
| Balance at December 31, 2004                        |       | $                | 584        |                             | $          | 47,856                                               |       | $                          | (1,319     | )                        | $          | —                                    |       | $                                       | (49,334    | ) | $ | (2,213 | ) | $ | (1,132 | ) |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

18

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**Exhibit 13.1.7****                     ConsolidatedStatements of Cash Flows**

 

**MAI SYSTEMSCORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(inthousands)

 
| ** **                                                                                                                                                          | ** ** | **For the years ended  December 31,** | ** ** | **For the Periods**                              | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                                          | ** ** | ** **                                 | ** ** | **Jan. 1, 2004 –  Oct. 31, 2004** | ** ** | **Nov. 1, 2004 –  Dec. 31, 2004** | ** ** |
| **2002**                                                                                                                                                            | ** ** | **2003**                                   |
| Cash flows  from operating activities:                                                                                                                              |       |                                       |       |                                             |       |   |   |   |   |
| Net income  (loss)                                                                                                                                                  |       | $                                          | (1,350     | )                                                | $          | 353 |   | $ | (1,158 | ) | $ | (37 | ) |
| Loss from  discontinued operations                                                                                                                                  |       | 746                                        |       | —                                           |       | — |   | — |   |
| Loss (gain)  on disposal of discontinued operations                                                                                                                 |       | 1,021                                      |       | —                                           |       | — |   | — |   |
|                                                                                                                                                                |       |                                       |       |                                             |       |   |   |   |   |
| Income  (loss) from continuing operations                                                                                                                           |       | 417                                        |       | 353                                              |       | (1,158 | ) | (37 | ) |
|                                                                                                                                                                |       |                                       |       |                                             |       |   |   |   |   |
| Adjustments  to reconcile income from continuing operations to net cash provided by (used  in) operating activities, net of business acquisitions and dispositions: |       |                                       |       |                                             |       |   |   |   |   |
| Gain on IRS  settlement                                                                                                                                             |       | —                                     |       | (262                                             | )          | — |   | — |   |
| Amortization  of intangibles                                                                                                                                        |       | 134                                        |       | 38                                               |       | — |   | 136 |   |
| Depreciation  and amortization                                                                                                                                      |       | 515                                        |       | 474                                              |       | 448 |   | 54 |   |
| Amortization  of debt discount                                                                                                                                      |       | 170                                        |       | 44                                               |       | 39 |   | 8 |   |
| Debt  modification charge                                                                                                                                           |       | —                                     |       | —                                           |       | 995 |   | — |   |
| Stock  compensation charge                                                                                                                                          |       | 62                                         |       | —                                           |       | 188 |   | — |   |
| Provision  for doubtful accounts receivable and inventory                                                                                                           |       | 89                                         |       | 66                                               |       | 170 |   | 76 |   |
| Changes in  assets and liabilities:                                                                                                                                 |       |                                       |       |                                             |       |   |   |   |   |
| (Increase)  decrease in receivables                                                                                                                                 |       | 592                                        |       | 469                                              |       | (208 | ) | (58 | ) |
| (Increase)  decrease in inventories                                                                                                                                 |       | 30                                         |       | —                                           |       | (31 | ) | 4 |   |
| (Increase)  decrease in prepaids and other asset                                                                                                                    |       | 327                                        |       | (185                                             | )          | 138 |   | (114 | ) |
| (Increase)  decrease in other assets                                                                                                                                |       | 68                                         |       | (67                                              | )          | 44 |   | (1 | ) |
| (Decrease)  increase in accounts payable and customer deposits                                                                                                      |       | (445                                       | )          | 366                                              |       | (799 | ) | (116 | ) |
| (Decrease)  increase in accrued liabilities                                                                                                                         |       | (522                                       | )          | 1,052                                            |       | 363 |   | 496 |   |
| (Decrease)  increase in income taxes payable                                                                                                                        |       | (151                                       | )          | (4                                               | )          | 17 |   | 1 |   |
| (Decrease)  increase in unearned revenue                                                                                                                            |       | 1,700                                      |       | (484                                             | )          | 367 |   | (120 | ) |
| (Decrease)  increase in other liabilities                                                                                                                           |       | 42                                         |       | (421                                             | )          | (286 | ) | 61 |   |
|                                                                                                                                                                |       |                                       |       |                                             |       |   |   |   |   |
| Net cash  provided by (used in) continuing operations                                                                                                               |       | 3,028                                      |       | 1,439                                            |       | 287 |   | 390 |   |
| Net cash  provided by (used in) discontinued operations                                                                                                             |       | (2,509                                     | )          | —                                           |       | — |   | — |   |
|                                                                                                                                                                |       |                                       |       |                                             |       |   |   |   |   |
| Net cash  provided by (used in) operating activities                                                                                                                |       | 519                                        |       | 1,439                                            |       | 287 |   | 390 |   |
|                                                                                                                                                                |       |                                       |       |                                             |       |   |   |   |   |
| Cash flows  from investing activities:                                                                                                                              |       |                                       |       |                                             |       |   |   |   |   |
| Capital  expenditures                                                                                                                                               |       | (101                                       | )          | (346                                             | )          | (129 | ) | (66 | ) |
| Payments  received on note receivable                                                                                                                               |       | 500                                        |       | 250                                              |       | — |   | — |   |
| Software  development costs                                                                                                                                         |       | (861                                       | )          | (896                                             | )          | (906 | ) | (159 | ) |
| Acquisition  of unconsolidated subsidiary                                                                                                                           |       | —                                     |       | (79                                              | )          | — |   | — |   |
|                                                                                                                                                                |       |                                       |       |                                             |       |   |   |   |   |
| Net cash  used in investing activities                                                                                                                              |       | (462                                       | )          | (1,071                                           | )          | (1,035 | ) | (225 | ) |
|                                                                                                                                                                |       |                                       |       |                                             |       |   |   |   |   |
| Cash flows  from financing activities:                                                                                                                              |       |                                       |       |                                             |       |   |   |   |   |
| Repayments  of long-term debt                                                                                                                                       |       | (102                                       | )          | (239                                             | )          | (739 | ) | (137 | ) |
| Net decrease  in line of credit                                                                                                                                     |       | (623                                       | )          | —                                           |       | — |   | — |   |
| Issuance of  common stock                                                                                                                                           |       | —                                     |       | —                                           |       | 1,000 |   | — |   |
|                                                                                                                                                                |       |                                       |       |                                             |       |   |   |   |   |
| Net provided  by (cash used) in financing                                                                                                                           |       | (725                                       | )          | (239                                             | )          | 261 |   | (137 | ) |
|                                                                                                                                                                |       |                                       |       |                                             |       |   |   |   |   |
| Effect of  exchange rate changes on cash                                                                                                                            |       | (11                                        | )          | (10                                              | )          | (4 | ) | (6 | ) |
|                                                                                                                                                                |       |                                       |       |                                             |       |   |   |   |   |
| Net increase  (decrease) in cash                                                                                                                                    |       | (679                                       | )          | 119                                              |       | (491 | ) | 22 |   |
|                                                                                                                                                                |       |                                       |       |                                             |       |   |   |   |   |
| Cash at  beginning of period                                                                                                                                        |       | 1,224                                      |       | 545                                              |       | 664 |   | 173 |   |
| Cash at end  of period                                                                                                                                              |       | $                                          | 545        |                                             | $          | 664 |   | $ | 173 |   | $ | 195 |   |
|                                                                                                                                                                |       |                                       |       |                                             |       |   |   |   |   |
| Cash paid  during the period for:                                                                                                                                   |       |                                       |       |                                             |       |   |   |   |   |
| Interest                                                                                                                                                            |       | $                                          | 990        |                                             | $          | 826 |   | $ | 535 |   | $ | 20 |   |
| Income taxes                                                                                                                                                        |       | $                                          | 176        |                                             | $          | 6 |   | $ | 35 |   | $ | — |   |

 

Supplementaldisclosure of noncash investing and financing activities (see note 2)

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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**Exhibit 13.1.8****                     Notes toConsolidated Financial Statements**

 

**MAI SYSTEMS CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 1 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Descriptionof the Business**

 

MAI Systems Corporation(the “Company” or “MAI”) provides total information technology solutions to thehospitality, resort and destination industry. The solutions provided by the Company typically include applicationssoftware, computer hardware, peripherals and wide and local area networkdesign, implementation, installation and support.  The software applications are generally theCompany’s proprietary software, or software which is licensed to the Company onan exclusive basis.  The hardware,peripherals and networking systems are generally third-party products, which wedistribute.  Directly and througharrangements with third parties, we provide on-site and off-site service andsupport to users of network and systems hardware.

 

**Liquidity**

 

Although the Company hasa net stockholders’ deficiency of $2,213,000 and a working capital deficit of $7,536,000at December 31, 2004, the Company believes it will continue to generatesufficient funds from operations or obtain additional financing to meet itsoperating and capital requirements for at least the next 12 months.    The Company expects to generate positivecash flow from its continuing operations during 2005 from shipping out productsand services from its current backlog as of December 31, 2004 as well asnew orders. In the event that the Company cannot generate positive cash flowfrom its continuing operations during 2005, the Company can substantiallyreduce its research and development efforts to mitigate cash outflow to helpsustain its operations.  There can be noassurance that the Company will be able to sustain profitability, generatepositive cash flow from operations or obtain additional financing as necessary.  These financial statements have been preparedassuming the Company will continue to operate as a going concern.  If the Company is unsuccessful in theaforementioned efforts, the Company could be forced to liquidate certain of itsassets, reorganize its capital structure and, if necessary, seek other remediesavailable to the Company.

 

The restructured debt,pursuant to the original inter-creditor agreement between Canyon Capital andCoast, which was sold to Wamco on May 15, 2003, contains variousrestrictions and covenants.  In the eventthat the Company were not in compliance with the various restrictions andcovenants and were unable to receive waivers for non-compliance, the term debtwould be immediately due and payable. The Company was not in compliance with, but have received waivers for,its covenants through December 31, 2004 (see note 8).  There is no guaranty that the Company willmeet its debt covenants in the future.

 

**Principlesof Consolidation**

 

The consolidatedfinancial statements of the Company include the accounts of its domesticoperations and its majority and wholly owned subsidiaries.  All significant intercompany transactions andaccounts have been eliminated in consolidation.

 

**Use ofEstimates**

 

The consolidatedfinancial statements have been prepared in conformity with accountingprinciples generally accepted in the United States of America.  In preparing the consolidated financialstatements, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities as of the dates of the balance sheets andrevenues and expenses for the periods. Actual results could materially differ from those estimates.

 

**RevenueRecognition**

 

The Company earns revenuefrom sales of hardware, software and professional services and fromarrangements involving multiple elements of each of the above. Revenue formultiple element arrangements are recorded by allocating revenue to the variouselements based on their respective fair values as evidenced by vendor specificobjective evidence. The fair value in multi-element arrangements is determinedbased upon the price charged when sold separately. Revenue is not recognizeduntil persuasive evidence of an arrangement exists, delivery has occurred, thefee is fixed or determinable and collectibility

 

20

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is probable. Sales ofnetwork and computer equipment are recorded when title and risk of losstransfers. Software revenues are recorded when application software programsare shipped to end users, resellers and distributors, provided the Company isnot required to provide services essential to the functionality of the softwareor significantly modify, customize or produce the software. Professionalservices fees for software development, training and installation arerecognized as the services are provided. Maintenance revenues are recordedevenly over the related contract period.

 

**CashEquivalents**

 

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

 

**Allowancefor Doubtful Accounts**

 

The Company records anallowance for doubtful accounts based on specifically identified amounts thatit believes are  uncollectible.  The Company also records additional allowancesbased upon certain percentages of our aged receivables, which are determinedbased on historical experience and or assessment of the general financialconditions affecting our customer base. If the Company’s actual collection experience changes, revisions to itsallowance may be required.  Anyunanticipated change in the Company’s customer’s credit worthiness or othermatters affecting the collectibility of amounts due from such customers, couldhave a material affect on its results of operations in the period in which suchchanges or events occur.  After allattempts to collect a receivable have failed, the receivable is written offagainst the allowance.

 

**Inventories**

 

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

 

**Furniture,Fixtures and Equipment**

 

Furniture, fixtures andequipment are recorded at cost and depreciated on a straight-line basis overestimated useful lives ranging from 3 to 5 years.  Leasehold improvements are amortized on astraight-line basis over the shorter of the lease term or their estimateduseful lives.  Expenditures for additionsand major improvements are capitalized. Repairs and maintenance costs are charged to operations as incurred.  Management of the Company assesses therecoverability of property and equipment by determining whether thedepreciation and amortization of such assets over their remaining lives can berecovered through projected, undiscounted cash flows.

 

**Impairmentof Long-Lived Assets and Long-Lived Assets to be Disposed Of**

 

Statement of Financial AccountingStandards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” provides a single accounting model for long-lived assets tobe disposed of.  SFAS No. 144 alsochanges the criteria for classifying an asset as held for sale, and broadensthe scope of businesses to be disposed of that qualify for reporting asdiscontinued operations and changes the timing of recognizing losses on suchoperations.

 

In accordance with SFAS No. 144,long-lived assets, such as furniture, fixtures and equipment are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to estimatedundiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceedsits estimated future cash flows, and an impairment charge is recognized by theamount by which the carrying amount of the asset exceeds the fair value of theasset.  Assets to be disposed of would beseparately presented in the balance sheet and reported at the lower of thecarrying amount or fair value less costs to sell, and are no longerdepreciated.  The assets and liabilitiesof a disposed group classified as held for sale would be presented separatelyin the appropriate asset and liability sections of the balance sheet.

 

**Goodwill**

 

Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFASNo. 142”) provides that goodwill and all intangible assets havingindefinite useful economic lives are not to be amortized until their lives aredetermined to be finite, however, a recognized intangible asset with anindefinite useful life should be tested for impairment annually or on aninterim basis if events or circumstances indicate that the fair value of theasset has decreased below its carrying value. At December 31, 2004, theCompany evaluated its goodwill and determined that fair value had not decreasedbelow carrying value and no adjustment to impair goodwill was necessary inaccordance with SFAS No. 142.

 

21

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**Income Taxes**

 

Income taxes areaccounted for under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss carryforwards.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date. The realizability of the deferred tax asset is assessed throughout theyear and a valuation allowance is established accordingly.

 

**ComprehensiveIncome (Loss)**

 

In accordance with SFAS No. 130,“Reporting Comprehensive Income,” the Company reports accumulated othercomprehensive income (loss) in its Consolidated Balance Sheets.  Comprehensive income (loss) includes netincome (loss), minimum pension liability and other comprehensive income (loss),which includes current period foreign currency translation adjustments and amortizationof unearned compensation.

 

**StockOption Plans**

 

In December 2002,the FASB issued FAS No. 148, “Accounting for Stock-Based Compensation —Transition and Disclosure”, which amended FAS No. 123, “Accounting forStock-Based Compensation.” The new standard provides alternative methods oftransition for a voluntary change to the fair market value based method foraccounting for stock-based employee compensation. Additionally, the statementamends the disclosure requirements of FAS No. 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  In compliancewith FAS No. 148, the Company elected to continue to follow the intrinsicvalue method in accounting for its stock-based employee compensation plan asdefined by APB No. 25.

 

At December 31, 2004,the Company had two stock-based employee compensation plans, which aredescribed more fully in Note 12. Under APB No. 25, compensation expenserelating to employee stock options is determined based on the excess of themarket price of the Company’s stock over the exercise price on the date ofgrant, the intrinsic value method, versus the fair value method as providedunder FAS No. 123.  Had compensationcost for the Company’s stock option plans been determined based on the fairvalue at the grant date for awards for years ended December 31, 2002, 2003and 2004 (which includes the periods for January 1, 2004 through October 31,2004 and November 1, 2004 through December 31, 2004), consistent withthe provisions of FAS No. 123, the Company’s net loss and loss per shareor net income and net income and net income per share would have increased ordecreased respectively.

 

22

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The following tablerepresents the effect on net income and earnings per share if the Company hadapplied the fair value based method and recognition provisions of Statement ofFinancial Accounting Standards (SFAS) No. 123, “Accounting for Stock-BasedCompensation”, to stock-based employee compensation:

 
| *** ***                               | ** ** | **Years  ended December 31,**                                                         | *** *** | **For the  Periods**                              | *** *** |
|--------------------------------------------|------------|--------------------------------------------------------------------------------------------|--------------|---------------------------------------------------|--------------|
| **(in thousands, except per share  data)** | ** ** | ** **                                                                                 | ** **   | **Jan. 1,  2004 –  Oct. 31, 2004** | ** **   | **Nov. 1,  2004 –  Dec. 31, 2004** | ** ** |
| **2002**                                   | ** ** | **2003**                                                                                   |
|                                       |       |                                                                                       |         |                                              |         |   |   |   |   |   |   |
| Net income (loss):                         |       | As reported                                                                                |         | $                                                 | (1,350       | ) | $ | 353 |   | $ | (1,158 | ) | $ | (37 | ) |
|                                       |       | Add:  Stock-based employee compensation expense recorded                                   |         | 62                                                |         | — |   | — |   | — |   |
|                                       |       | Less:  Stock based employee compensation expense determined under fair value  calculations |         | (193                                              | )            | (67 | ) | (32 | ) | (6 | ) |
|                                       |       | Pro forma                                                                                  |         | $                                                 | (1,481       | ) | $ | 286 |   | $ | (1,190 | ) | $ | (43 | ) |
|                                       |       |                                                                                       |         |                                              |         |   |   |   |   |   |   |
| Basic income (loss) per  share:            |       | As reported                                                                                |         | $                                                 | (0.10        | ) | $ | 0.02 |   | $ | (0.08 | ) | $ | — |   |
|                                       |       | Add:  Stock-based employee compensation expense recorded                                   |         | —                                            |         | — |   | — |   | — |   |
|                                       |       | Less:  Stock based employee compensation expense determined under fair value  calculations |         | (0.01                                             | )            | — |   | — |   | — |   |
|                                       |       | Pro forma                                                                                  |         | $                                                 | (0.11        | ) | $ | 0.02 |   | $ | (0.08 | ) | $ | — |   |
|                                       |       |                                                                                       |         |                                              |         |   |   |   |   |   |   |
| Diluted income (loss)  per share:          |       | As reported                                                                                |         | $                                                 | (0.10        | ) | $ | 0.02 |   | $ | (0.08 | ) | $ | — |   |
|                                       |       | Add:  Stock-based employee compensation expense recorded                                   |         | —                                            |         | — |   | — |   | — |   |
|                                       |       | Less:  Stock based employee compensation expense determined under fair value  calculations |         | (0.01                                             | )            | — |   | — |   | — |   |
|                                       |       | Pro forma                                                                                  |         | $                                                 | (0.11        | ) | $ | 0.02 |   | $ | (0.08 | ) | $ | — |   |

 

**Pension Plan**

 

The Company established adefined benefit plan for employees that were employed by the Company’smaintenance service business acquired in 1988. The plan provides benefits based upon a percentage of the participant’scareer income with the Company or years of service while an employee of theCompany.  The funding policy is tocontribute annually an amount to fund pension costs as actuarially determinedby an independent pension consulting firm.

 

**ForeignCurrency Translation**

 

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

 

There were no materialnet foreign currency transaction gains (losses) in 2002, 2003 and 2004.  These amounts are included in selling,general and administrative expenses in the accompanying consolidated statementsof operations.

 

**SoftwareDevelopment Costs**

 

All costs incurred toestablish the technological feasibility of software products to be sold toothers are expensed as research and development. Once technological feasibilityhas been established, all software production costs are capitalized.Amortization is computed on an individual product basis and is recognized overthe greater of the remaining economic lives of each product or the ratio thatcurrent gross revenues for a product bear to the total of current andanticipated revenues for that product, commencing when the products becomeavailable for general release to customers. Software development costs are generally amortized over a three-yearperiod.  The Company continually assessesthe recoverability of software development costs by comparing the carryingvalue of individual products to their net realizable value.

 

The Company capitalized$896,000 and $1,065,000 of software development costs during 2003 and 2004(which includes the periods for January 1, 2004 through October 31,2004 and November 1, 2004 through December 31, 2004),  respectively, relating to our new N-Tier,Internet-native corporate application suite of products written in java.  The modules to this suite of applicationsbecame available for general release in the first quarter of 2005 at which timeamortization of such costs commenced.  Webelieve that these new products will produce new sales adequate to recoveramounts capitalized.

 

23

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**Researchand Development Costs**

 

During 2002, 2003,and 2004, we incurred $3,307,000, $2,828,000 and $3,708,000, respectively (netof capitalized software of $861,000, $896,000 and $1,065,000 for 2002, 2003 and2004 (which includes the periods for January 1, 2004 through October 31,2004 and November 1, 2004 through December 31, 2004), respectively)for research and development activities, which are expensed as incurred.  Our research and development expendituresrelated to the support and extension of existing software products and thedevelopment of new products.

 

**Fair Value of Financial Instruments**

 

As of December 31,2003 and 2004, the carrying value of account receivables, accounts payable,accrued liabilities, income taxes payable and other liabilities approximatefair value due to the short-term nature of such instruments.  The carrying value of long-term debtapproximates fair value as the related interest rates approximate ratescurrently 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 stockoutstanding during the period. Consideration is also given in the dilutive income per share calculationfor the dilutive effect of common stock equivalents which might result from theexercise of stock options and warrants.

 

**RecentAccounting Pronouncements**

 

In December 2004,the FASB issued SFAS No. 123r, “Share-Based Payment” (“SFAS 123r”). SFAS123r provides accounting guidance for stock-based payments to employees. SFAS123r revises SFAS 123 by eliminating the choice of using the recognition andmeasurement provisions of APB No. 25 and requiring all companies to usethe fair value method of measuring stock compensation expense. SFAS 123rclarifies and expands SFAS 123’s guidance in several areas, including measuringfair value, classifying an award as equity or a liability, attributingcompensation cost to reporting periods as well as adding several new disclosurerequirements. SFAS 123r also changes the accounting for the tax effects ofoptions, including the presentation of the tax effects on the consolidatedstatements of cash flows. SFAS 123r is effective for public companies with thefirst interim or annual period that begins after June 15, 2005. Asdiscussed above, the Company is currently accounting for all of its stock-basedcompensation under the intrinsic value method as outlined in APB 25 and willadopt SFAS 123r beginning in the first quarter of 2006. The Company still needsto evaluate the impacts of SFAS 123r.

 

In December 2004,the FASB issued SFAS No. 153 (SFAS 153), *“Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,Accounting for Nonmonetary Transactions.”*SFAS 153 eliminatesthe exception from fair value measurement for nonmonetary exchanges of similarproductive assets in paragraph 21(b) of APB Opinion No. 29, *“Accounting for Nonmonetary Transactions,”*andreplaces it with an exception for exchanges that do not have commercialsubstance. SFAS 153 specifies that a nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. SFAS 153 is effective forperiods beginning after June 15, 2005. We do not expect that adoption ofSFAS 153 will have a material effect on our consolidated financial position,consolidated results of operations, or liquidity.

 

**Reclassifications**

 

Certain prior yearamounts have been reclassified to conform with the 2004 presentation.

 

**NOTE 2 –MANAGEMENT EQUITY/CONVERSION TRANSACTION AND PRIVATIZATION PLANS**

 

**Management Equity/Conversion Transaction**

 

On April 9, 2004, aninvestor group, consisting of Canyon, the Company’s Chairman of the Board,Chief Executive Officer & President and Chief Financial &Operating Officer (“Investor Group”), acquired 2,433,333 shares of the Company’scommon stock held by CSA and $3,133,344 of secured indebtedness owed to CSA for$1 million in cash (see note 8).  On September 22,2004, the Company received approval from its shareholders for the InvestorGroup to convert the Company’s secured indebtedness acquired from CSA plus anyaccrued interest through the date of conversion for shares of the Company’scommon stock based upon a conversion price of $0.10 per share.  Additionally, the shareholders also approvedfor the Investor Group to invest $1,000,000 of new cash proceeds into theCompany, which the Company received on September 24, 2004, in a privateplacement at $0.10 per share (the “Management Equity/Conversion Transaction”).  On November 1, 2004, the Company issued10 million shares of its common stock to the Investor Group in exchange for the$1,000,000 of cash proceeds and the $3,133,344 secured note, together with$183,867 of accrued interest, was converted into 33,172,110 shares of theCompany’s common stock.

 

24

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As the carrying value ofthe acquired indebtedness of $3,317,211 as of November 1, 2004 was lowerthan the fair value (quoted market price) of the 33,172,110 shares issued inconnection with the debt conversion of $4,312,374 (33,172,110 shares $0.13 pershare), the Company recorded a debt extinguishment charge of $995,163, whichhas been measured as of the conversion date (commitment date) of November 1,2004 for accounting purposes.

 

In addition, the marketprice for our common stock was $0.13 per share on November 1, 2004, thedate of issuance of the 10,000,000 shares of our common stock to the InvestorGroup.  Accordingly, we recorded a $187,500charge to stock compensation expense since certain members of our managementare also members of the Investor Group. The amount of the charge is based onthe 6,250,000 shares attributable to members of management based on their ownershipshare in the Investor Group multiplied by the amount that the market price ofour common stock of $0.13 per share exceeded the $0.10 per share on the date ofissuance of such shares.

 

We believe that theaforementioned transaction permits but does not require us to use new basis orpush down accounting since the members of the Investor Group will hold between80% and 94% of the voting shares of the company upon completion of thetransaction. Application of push-downaccounting requires that the acquiring parent or control group obtain at leastan 80% ownership interest, either in a single transaction, or though a seriesof transactions. The Investor Group has acquired 78.84%, and the members of theInvestor Group previously personally held 17.85% ownership, not within theInvestor Group. The 17.85% personal ownership of the members outside of theInvestor Group was reduced to 4.53% after the Investor Group’s acquisition of78.84% of the Company’s common stock.  Thebasis for considering the members as part of a control group is due to the factthat the group’s intent was to mutually promote the acquisition and tocollaborate on the subsequent control of the Company and, as such, should beviewed effectively as one investor/group.  The 78.84% interest held by the Investor Group effectively ties the fourmembers together into a control group, and that the remaining outside holdingsof 4.53% (totaling 83.37%) should also be treated as held by the control groupfor purposes of applying push-down accounting (therefore the Investor Groupcontrols 83.37% of the Company’s common stock). Accordingly, the Company has elected to apply push downaccounting, and in accordance with SFASNo. 141 and using the guidance inTopic D-97.  This has resulted in a newvaluation of the assets and liabilities of the Company based upon fair valuesas of the date of the transaction.

 

As of November 1, 2004,the Company had a stockholders’ deficit of approximately $14,582,000 (excludingthe $1 million of cash infused by the Investor Group) and an accumulateddeficit of approximately $232 million. After application of the push downaccounting, the portion of the historic deficit attributable to the InvestorGroup’s new ownership was eliminated, and stockholders’ deficit has beenpartially reset based on the Investor Group’s new basis in the Company of $2.0million. Post push down stockholders’ deficiency was calculated as follows (inthousands):

 
| Non-Investor  Group:                                                      |   |   |    |   |   |   |   |
|---------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|
| Adjusted  historic stockholders’ deficiency at November 1, 2004 |   | $      | (14,582 | )      |   |   | (a)    |   |
| Non-Investor  Group Ownership (100% - 83.37%)                             |   | 16.63  | %       |   |   |   |   |
| Non-Investor  Group basis to carry over                                   |   |   |    | $      | (2,425 | )      |   |   |
|                                                                      |   |   |    |   |   |   |   |
| Investor Group:                                                           |   |   |    |   |   |   |   |
| New  basis to push down                                                   |   |   |    | $      | 2,000  |   | (b)    |   |
| Adjusted  historic stockholders’ deficiency at November 1, 2004 |   | $      | (14,582 | )      |   |   |   |   |
| Investor  Group pre-existing ownership percentage                         |   | 4.53   | %       |   |   |   |   |
|                                                                      |   |   |    | (661   | )      |   |   |
|                                                                      |   |   |    |   |   |   |   |
| New  stockholders’ deficiency as of November 1, 2004            |   |   |    | $      | (1,086 | )      |   |   |

 

----

(a)          Historic stockholders’deficiency was adjusted to exclude the $1 million of common stock subscribed bythe Investor Group on September 24, 2004 since the amount has been includedin the Investor Group’s new basis calculation (see note (b) below).

 

(b)         The Investor Group’s newbasis is calculated as follows:

 
| Investor  Group’s cash to purchase MAI common stock and indebtedness from CSA |   | $         | 1,000,000 |   |
|------------------------------------------------------------------------------------|--------|-----------|-----------|--------|
| Investor Group’s cash to  purchase 10 million shares of MAI common stock      |   | 1,000,000 |      |
|                                                                               |   |      |      |
| Investor  Group’s new basis                                                   |   | $         | 2,000,000 |   |

 

25

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Based on the balancesheet as of November 1, 2004, and considering the additional equity investmentand debt conversion by the Investor Group, application of  push down accounting resulted in a step-up inbasis of the net assets of the Company of approximately $10,179,000 calculatedas follows (in thousands):

 
| Adjusted  historical stockholders’ deficiency at November 1, 2004 |   | $      | (14,582 | ) |
|-----------------------------------------------------------------------------|--------|--------|---------|---|
| Conversion of Investor  Group debt at book value                            |   | 3,317  |    |
| Step up in value of net  assets                                             |   | 10,179 |    |
| Post push-down  accounting stockholders’ deficiency                    |   | $      | (1,086  | ) |

 

Below is the purchaseprice allocation relating to the net liabilities acquired (representing theexcess of fair value over net historical net assets).  The Company completed a valuation of itsassets and liabilities and determined the fair value to be the book value forall assets and liabilities except for furniture, fixtures and equipment (valuedat estimated replacement costs) and intangible assets (valued based uponestimated future revenue streams). Following is our allocation of the purchase price at estimated fairvalues (in thousands):

 
| ** **                                      | ** ** | **Adjusted  Historical Book  Value-Pre Push  Down  Accounting (1)** | ** ** | **Fair Value** | ** ** | **Excess of Fair  Value Over  Book Value** | ** ** | **Investor  Group’s  65.52% of  Excess(2)** | ** ** | **Purchase  Price  Allocation** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------------|------------|----------------|------------|--------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | ** **                                                          | ** ** | ** **     | ** ** | ** **                                 | ** ** | ** **                                       | ** ** | ** **                      | ** ** |
| Furniture,  fixtures and equipment              |       | $                                                                   | 470        |           | $          | 687                                        |       | $                                                | 217        |                            | $          | 142 |   | $ | 612 |   |
| Capitalized  software development costs         |       | 2,661                                                               |       | 2,503          |       | (158                                       | )          | (158                                             | )          | 2,503                           |       |
| Goodwill                                        |       | 1,121                                                               |       | 7,374          |       | 6,253                                      |       | 5,251                                            |       | 6,372                           |       |
| Trade  names                                    |       | —                                                              |       | 4,059          |       | 4,059                                      |       | 2,659                                            |       | 2,659                           |       |
| Customer  relationships                         |       | —                                                              |       | 3,487          |       | 3,487                                      |       | 2,285                                            |       | 2,285                           |       |
|                                            |       |                                                                |       |           |       |                                       |       |                                             |       |                            |       |
| Other  net liabilities                          |       | (15,517                                                             | )          | (15,517        | )          | —                                     |       | —                                           |       | (15,517                         | )          |
| Net  Book /Fair Value of Assets and Liabilities |       | $                                                                   | (11,265    | )              |       |                                       |       |                                             | $          | 10,179                          |       | $ | (1,086 | ) |
|                                                 |            |                                                                     |            |                |            |                                            |            |                                                  |            |                                 |            |  |  |  |  |  |

 

----

(1)           Other net liabilitiesexclude the $3,317,000 of secured debt that was converted to equity inconjunction with the application of push down accounting.  Historical book value is adjusted to excludethe $1 million of common stock subscribed by the Investor Group on September 24,2004 since the amount has been included in the Investor Group’s new basiscalculation (see note (b) above and note 7).

(2)           Investor Group’s percentage of excess of fair value over book valuerepresents the Investor Group’s acquired ownership percentage of 78.84% lessthe decrease in the Investor Group’s previously personally held ownership of13.32% (17.85% before the transaction reduced to 4.53% after the transaction).

 

In connection with theManagement Equity/Conversion Transaction, the Company assigned a new usefullife for furniture, fixtures and equipment effective as of November 1,2004.  Following is our allocation of thepurchase price at estimated fair values and amortization periods (useful lives)for the groups of assets affected:

 
| ** **                         | ** ** | **Allocation of  Purchase  Price** | ** ** | **Amortization  Period  (Useful Life)** | ** ** |
|------------------------------------|------------|------------------------------------|------------|-----------------------------------------|------------|
| ** **                         | ** ** | ** **                         | ** ** | ** **                              | ** ** |
| Furniture, fixtures and  equipment |       | $                                  | 612,000    |                                    | 3 years    |   |
| Intangible assets:                 |       |                               |       |                                    |       |
| Goodwill                           |       | $                                  | 6,372,000  |                                    |       | * |
| Tradenames                         |       | 2,659,000                          |       | 15 years                                |       |
| Customer  relationships            |       | 2,285,000                          |       | 7 years                                 |       |
| Capitalized  software              |       | 2,503,000                          |       | 7 years                                 |       |
|                               |       | $                                  | 13,819,000 |                                    |       |   |

 

----

*   Reviewed annually for impairment, notamortized, as goodwill has an indefinite life (in accordance with SFAS No. 142).

 

26

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The following reflectsthe unaudited pro forma effect of the Management Equity/Conversion Transactionon continuing operations for the year ended December 31, 2003 and for the periodfrom January 1, 2004 to October 31, 2004 (in thousands):

 
| ** **                   | ** ** | **Year ended  December 31,  2003** | ** ** | **Period from  Jan. 1, 2004 –  Oct. 31, 2004** | ** ** |
|------------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------------|------------|
|                         |       |                                    |       |                                                          |       |
| Revenue                      |       | $                                       | 19,346     |                                                          | $          | 16,317 |   |
| Operating income (loss)      |       | 747                                     |       | (593                                                          | )          |
| Net income (loss)            |       | 92                                      |       | (1,328                                                        | )          |
| Net income (loss) per  share |       | $                                       | 0.01       |                                                          | $          | (0.09 | ) |

 

The unaudited pro forma information provided above has been prepared byadjusting historical amounts for the periods to give effect to the ManagementEquity/Conversion Transaction as if it had occurred on January 1, 2003 and2004, respectively.  The pro formaadjustments to the historical results of operations for the year ended December 31,2003 and the period from January 1, 2004 to October 31, 2004 includethe pro forma impact of the push down accounting resulting in the reduction ofdepreciation expense of $268,000 and $272,000, respectively, and an increase ofamortization of identifiable intangible assets of $861,000 and $718,000,respectively. The pro forma adjustments to the historical results of operationsfor the year ended December 31, 2003 and the period from January 1,2004 to October 31, 2004 include the pro forma impact of the debtconversion resulting in the reduction of interest expense of $332,000 and$276,000, respectively.

 

**Privatization Plans**

 

Our Board of Directorsand the Investor Group are in the process of furnishing an informationstatement to all holders of record of the issued and outstanding shares of ourcommon stock, $0.01 par value, in connection with a proposed Amendment to the Company’s Amended andRestated Certificate of Incorporation (“Amendment”) to effectuate a 1-for-150reverse stock split. If consummated, the reverse stock split would enable theCompany to terminate its periodic reporting obligations under Sections 13 and15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”),the registration of our common stock under Section 12(g) of theExchange Act and the quotation of our common stock on the OTC Bulletin Boardand become a “private” company.

 

**NOTE 3 – INVENTORIES, NET**

 

Inventories aresummarized as follows:

 
| ** **        | *** *** | **December 31,** | *** *** |
|-------------------|--------------|-----------------------|--------------|
| ** **        | *** *** | **(in thousands)**    | *** *** |
| ** **        | ** **   | **2003**              | ** **   | **2004** | ** ** |
|              |         |                  |         |   |   |
| Finished goods    |         | $                     | 39           |   | $ | 65 |   |
| Replacement parts |         | 8                     |         | 6 |   |
|              |         |                  |         |   |   |
|              |         | $                     | 47           |   | $ | 71 |   |

 

The Company has purchasedmany products and components from single sources of supply.  Because the Company’s current products areindustry standard, the Company believes that alternative sources of supply ofsimilar products would be available to the Company in the event of anyinterruption of delivery of a single source supplier.

 

**NOTE 4 –BUSINESSES HELD FOR SALE**

 

In the fourth quarter of2001, the Company’s Board of Directors adopted a plan to sell its Process manufacturingand Legacy divisions.  The Processmanufacturing business division designed, sold, installed and supported totaltechnology solutions featuring complex wide and local area networks to theprocess manufacturing industry.  TheLegacy business provided a wide array of products and services to its customerswho continued to use its proprietary host-based computer

 

27

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systems, including fieldengineering services, new and replacement equipment, operating systems andsoftware application products.  Theseproducts and services upgraded, enhanced and integrated the legacy systems withcurrently available computer technologies.

 

During the fourth quarterof 2002, the Company successfully sold its Process Manufacturing and Legacybusinesses (see note 6).

 

In accordance with SFAS No. 144,the Company has reflected the operating results of these businesses asdiscontinued operations in the consolidated statements of operations for allperiods presented.

 

Summarized below ishistorical financial information about Process Manufacturing and Legacy (inthousands):

 
| ** **                | ** ** | **2002** | ** ** |
|---------------------------|------------|----------|------------|
|                      |       |     |       |
| Revenue                   |       | $        | 2,344      |   |
| Loss, net of tax of  zero |       | $        | (1,767     | ) |

 

**NOTE 5 –FURNITURE, FIXTURES AND EQUIPMENT**

 

The major classes offurniture, fixtures and equipment are as follows:

 
| ** **                                       | ** **   | **2003**           | ** **   | **2004** | ** ** |
|--------------------------------------------------|--------------|--------------------|--------------|----------|------------|
| *** ***                                     | *** *** | **(in thousands)** | *** *** |
|                                             |         |               |         |     |       |
| Furniture, fixtures and  equipment               |         | $                  | 914          |     | $          | 108 |   |
| Office equipment                                 |         | 793                |         | 425      |       |
| Leasehold improvements                           |         | 247                |         | 144      |       |
| Total                                            |         | 1,954              |         | 677      |       |
|                                             |         |               |         |     |       |
| Less: accumulated depreciation  and amortization |         | (1,196             | )            | (48      | )          |
|                                             |         |               |         |     |       |
|                                             |         | $                  | 758          |     | $          | 629 |   |

 

During 2003, the Companymoved its corporate office and wrote off certain fully depreciated assets thatwere disposed of pursuant to the move.

 

**NOTE 6 – ACQUISITIONS, DIVESTITURE, AGREEMENTS ANDFINANCING**

 

**HospitalityServices & Solutions**

 

On June 23, 2002,the Company acquired substantially all of the assets and assumed certainliabilities of Hospitality Services & Solutions (“HSS”) including a35% ownership in AMDB – HIS (“AMDB”) pursuant to a stock purchase agreement for100,000 shares of common stock valued at $32,000 (the quoted market price ofthe common stock at the time the terms were agreed), and $75,000 in cash.  Additionally, the shareholders of HSSreceived a 20% minority interest in the Company’s combined operations in Asia.HSS was acquired for the Company to expand its operations in the Asianmarketplace, strengthen its management team in the territory and create newopportunities for its new enterprise capable suite of products.  The assets acquired from HSS are used in thebusiness of software design, engineering and service relating to hotelinformation systems.  The assets alsoinclude subsidiaries of HSS in Malaysia, Singapore and Thailand. The netliabilities of HSS acquired by the Company totaled $190,000.  The Company recorded $297,000 of goodwill(deductible for tax purposes) in connection with the acquisition of HSS.

 

Included in the acquiredassets of HSS was a 35% interest in AMDB, an online reservation service, originallypurchased by HSS for $66,000.  On February 20,2003, the Company entered into an agreement whereby it acquired the remaining65% for $79,000 payable over 6 month installments.  The net liabilities of $15,000 acquired areused to support an online reservation service related to hotel informationsystems.  The Company recorded $159,000of goodwill in connection with the acquisition of AMDB.

 

28

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**GamingSystems International**

 

On June 19, 1999,the Company sold Gaming Systems International (“GSI”) for an amount in excessof the book value of net assets sold. Assets sold of approximately $3,749,000 consisted of accounts receivableof $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 ofaccounts 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 notestotaling $4,925,000 with face values of $1,100,000, $1,500,000 and $2,325,000,respectively.  Interest was paid monthlyat the rate of 10% per annum on both the $1,100,000 and $1,500,000 notes, withthe principal due and payable on June 19, 2001 and June 19, 2003,respectively.  The $1,100,000 promissorynote was guaranteed by a third party. Principal payments and interest, at prime plus 1%, was to commence forthe $2,325,000 promissory note on October 1, 2002 in 48 monthlyinstallments of approximately $48,000 of principal, plus accrued interest.

 

On April 6, 2001 theCompany entered into an agreement with the maker of the Notes whereby the makerreconveyed 100% of the Common Stock of GSI to the Company for the purpose ofselling GSI to a third party. In connection with the agreement, the Companycanceled the Notes and entered into a new $1.1 million secured promissory notewith the same party. The maker will be paid a commission of 30% of cashreceipts from the third party, which will be first applied to the $1.1 millionnote and paid in cash to the maker thereafter. On July 27, 2001, theCompany entered into an Asset Purchase Agreement (“Agreement”) with the thirdparty for approximately $3.2 million whereby all of the assets of GSI wereacquired and all of the liabilities assumed, except for approximately $300,000of obligations, which will remain with GSI. The payment terms under the Agreement required a $1 million non-refundablecash 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 securedpromissory note in the amount of $750,000, of which $500,000 was received in December 2002and $250,000 in January 2003. The third party was also required to pay anadditional $250,000 subject to a maximum $250,000 reduction pursuant to theresolution of certain uncertainties as of the date of the Agreement, which, aspart of the settlement, in January 2003 the Company received $46,000.

 

**MAICanada **

 

On December 6, 2002,the Company sold all the assets and certain liabilities of its Canadianoperations, including all legacy divisions, to the management of thissubsidiary pursuant to a stock purchase agreement.  In connection with the sale, the Company alsoentered into a software distribution agreement whereby the buyer has anon-exclusive right and license to market and install the Company’s hospitalityproducts in Canada.  The sale resulted ina loss of approximately $630,000, which is included in the loss on disposal ofdiscontinued operations.  Prior to thesale, the Canadian operations incurred a net loss of $305,000 during 2002,which is included in loss from discontinued operations in the accompanyingstatements of operations.

 

**Process Manufacturing**

 

On December 6, 2002,the Company entered into an Asset Purchase Agreement whereby all the assets andcertain liabilities of its process manufacturing software division were sold toa third party for cash of $250,000.  Thesale resulted in a loss of approximately $391,000, which is included in theloss on disposal of discontinued operations. Prior to the sale, Process Manufacturing operations incurred a net lossof $441,000 during 2002, which is included in loss from discontinued operationsin the accompanying statements of operations.

 

**NOTE 7 –INTANGIBLE ASSETS AND GOODWILL**

 

As of December 31,2004, intangible assets consist of developed technology, software trade names,customer lists and goodwill (which represents the excess of the purchase priceover the estimated fair value of the net assets of the acquired businesses) andcapitalized software.  Identifiable intangibleassets other than goodwill are amortized on a straight-line basis over theirestimated useful lives.  Goodwill is notto be amortized until its life is determined to be finite, however, arecognized intangible asset with an indefinite useful life should be tested forimpairment annually or on an interim basis if events or circumstances indicatethat the fair value of the asset has decreased below its carrying value.  At December 31, 2004, the Companyevaluated its goodwill and determined that fair value had not decreased belowcarrying value and no adjustment to impair goodwill was necessary.

 

29

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Intangible assets as of December 31,2003 and 2004 are as follows:

 
| ** **                                   | *** *** | **December 31,** | *** *** |
|----------------------------------------------|--------------|-----------------------|--------------|
| ** **                                   | *** *** | **(in thousands)**    | *** *** |
| ** **                                   | ** **   | **2003**              | ** **   | **2004** | ** ** |
| Gross carrying amount  of intangible assets: |         |                  |         |   |   |
| Capitalized  software                        |         | $                     | 1,755        |   | $ | 2,662 |   |
| Software  trade names                        |         | —                |         | 2,659 |   |
| Customer  relationships                      |         | —                |         | 2,285 |   |
| Total  intangible assets                     |         | 1,755                 |         | 7,606 |   |
|                                         |         |                  |         |   |   |
| Accumulated  amortization:                   |         |                  |         |   |   |
| Capitalized  software                        |         | —                |         | (39 | ) |
| Software  trade names                        |         | —                |         | (41 | ) |
| Customer  relationships                      |         | —                |         | (56 | ) |
| Total  accumulated amortization              |         | —                |         | (136 | ) |
|                                         |         |                  |         |   |   |
| Intangible assets, net                       |         | $                     | 1,755        |   | $ | 7,470 |   |
|                                         |         |                  |         |   |   |
| Goodwill                                     |         | $                     | 1,121        |   | $ | 4,622 |   |

 

As of December 31, 2003, goodwill is comprised of $665,000 on thepurchase of Hotel Information Systems Inc. (HIS) in 1996,  $297,000 on the purchase of HSS in 2002 and$159,000 on the purchase of AMDB in 2003 (see note 6).

 

A roll forward of goodwill for the year ended December 31, 2004 isas follows (in thousands):

 
| Goodwill  at December 31, 2002                     |   | $      | 962    |   |
|---------------------------------------------------------|--------|--------|--------|--------|
| Goodwill from purchase  of AMDB                         |   | 159    |   |
|                                                    |   |   |   |
| Goodwill at December 31,  2003                     |   | 1,121  |   |
| Goodwill from  Management Equity/Conversion Transaction |   | 5,251  |   |
| Private placement by  Investor Group (note 2)           |   | (1,000 | )      |
| Year end adjustment to  minimum pension liability       |   | (750   | )      |
| Impairment identified  in 2004                          |   | — |   |
|                                                    |   |   |   |
| Goodwill at December 31,  2004                     |   | $      | 4,622  |   |

 

The Company’s amortization period for customer relationships is thegreater of seven years on a straight line basis or specificidentification.  Capitalized software andsoftware trade names are being amortized on a straight line basis over sevenand fifteen years, respectively.  Thefollowing table shows the estimated amortization expense for these assets foreach of the succeeding years:

 
| **Year Ending December 31,** | ** ** |
|-----------------------------------|------------|
| **(in thousands)**                | ** ** |
| 2005                              |       | $ | 861 |   |
| 2006                              |       | 861 |   |
| 2007                              |       | 861 |   |
| 2008                              |       | 861 |   |
| 2009                              |       | 861 |   |
| Thereafter                        |       | 3,165 |   |
|                              |       | $ | 7,470 |   |

 

**NOTE 8 – LONG-TERM DEBT**

 

**Wamco 32 Ltd.**

 

On January 13, 2003,the Company re-negotiated the terms of its credit facility with Coast BusinessCredit (“Coast”) whereby the outstanding balance of $1,828,000 was converted toa secured term loan which accrues interest at 9.25% per annum and requiresmonthly payments of $58,000 over a 36 months period commencing March 1,2003.  The loan is secured by all thetangible and intangible assets for the Company, including intellectualproperty.  On February 7, 2003, theFederal Deposit Insurance Corporation (“FDIC”) put Coast and its parentcompany, Southern Pacific Bank, into receivership and held all of Coast’sassets for sale to third parties.  On May 15,2003, the loan was sold to Wamco 32, Ltd. (“Wamco”).  This sale of the loan by the FDIC did notchange any of the terms of the Company’s loan agreement.

 

30

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The loan matures on February 28,2006, at which time all remaining principal and accrued interest is due andpayable.  The Company will also berequired to pay Wamco additional principal payments on a quarterly basis basedupon an EBITDA-based formula commencing March 31, 2003.  For the years ended December 31, 2003and 2004, there were no additional principal payments required under theEBITDA-based formula. As of December 31, 2003 and 2004, the balance of theterm loan was $1,366,000 and $774,000 respectively.

 

The loan, pursuant to theoriginal inter-creditor agreement between Canyon Capital and Coast, which wassold to Wamco on May 15, 2003, contains various restrictions andcovenants, including a minimum quick ratio of .20 to 1.00 and minimum debtservice coverage ratio of .50 to l.00. In the event that the Company were not in compliance with the variousrestrictions and covenants and were unable to receive waivers fornon-compliance, the term loan would be immediately due and payable.  The Company was not in compliance with, but hasreceived waivers for, such covenants through December 31, 2004.  There is no guaranty that the Company willmeet its debt covenants in the future.

 

**CanyonCapital Management LP**

 

On January 13, 2003,the Company modified its 11% secured subordinated notes payable agreement withCanyon Capital Management LP (“Canyon”), whereby the Company is required tomake monthly interest payments of $52,000 until the Wamco term loan is paid offin full at which time the note payable will be converted into a three-yearamortizing loan which will accrue interest at 11% per annum and requires equalmonthly payments of principal and interest such that the subordinated debt willbe paid in full at the end of the amended term. Upon the repayment of the Wamco debt in full, the Company will also berequired to pay Canyon additional principal payments on a quarterly basis basedupon an EBITDA-based formula. Additionally, in connection with the January 13, 2003 modification,the Company issued to Canyon 200,000 shares of its common stock valued at$20,000 (the quoted market price of the common stock at the time the terms wereagreed) and agreed to issue one million warrants at an exercise price of $0.40per share valued at $42,000 (using the Black-Scholes option-pricing model withthe following weighted-average assumptions: risk-free interest rate of 6.5%,volatility of 80% and an expected life of 5 years).  The $62,000 is being amortized to interestexpense over the term of the modified note. The subordinated notes are secured by all the tangible and intangibleassets for the Company, including intellectual property, which lien is juniorto the lien granted to Wamco. The principal balance outstanding on thesubordinate notes payable to Canyon was approximately $5,662,000 and $5,660,000at December 31, 2003 and 2004, respectively.

 

**CSAPrivate Limited**

 

In connection with asettlement agreement in February 2001 with CSA Private Limited (“CSA”),the Company issued $2.8 million of subordinated debt to CSA.  The $2.8 million of debt was secured by allthe tangible and intangible assets for the Company, including intellectualproperty, which was subordinate to Wamco and Canyon, accrued interest at 10%per annum and required 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 2003when all remaining unpaid principal and accrued interest was to be paid infull.

 

The agreement with CSAwas amended whereby the Company was required to make payments under thesubordinated 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 afinal payment in the amount of $400,000 is paid by February 28, 2003.  If the Company did not make all of themodified payments to CSA, the subordinated note would revert back to itsoriginal terms.  The Company did not makethe modified payment and have not made any payments since September 2002.  CSA did not formally notify the Company ofits default.

 

On April 9, 2004,the Company successfully amended its agreement with CSA whereby the principalbalance and accrued interest through March 31, 2004, totaling $3,633,000,were converted to two new secured notes. The first note for $500,000 accrues interest at 10% per annum andprovides for monthly payments of $10,000 until the Wamco and Canyon debt ispaid in full.  Thereafter, the noteprovides for monthly payments in an amount equal to the greater of i) $10,000or ii) the amount required to fully amortize all remaining principal andinterest in 24 equal monthly payments. The second note for $3,133,344 (“Other Note”) also accrues interest at10% per annum and provides for monthly payments of $7,500, or such otherinterest amount, not to exceed $10,000 per month, that Wamco and Canyon willallow.  Under the terms of the amendedsubordination agreement between Wamco, Canyon and CSA, all payments under thenew notes are subordinated to the payment in full of the Wamco and Canyon loanagreements. The Company has not made any payments on the $500,000 note as of December 31,2004 and is currently in default.  Theinterest rate has been increased to 12.5% in line with the terms of that noteuntil the Company becomes current on its contractual payments.  As of December 31, 2004, the Company’saccrued and unpaid interest relating to the $500,000 secured note was $49,000.

 

31

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On April 9, 2004, aninvestor group, consisting of Canyon, the Company’s Chairman of the Board,Chief Executive Officer and Chief Financial and Operating Officer (“InvestorGroup”), acquired 2,433,333 shares of the Company’s common stock held by CSAand the Other Note for $1 million in cash . On November 1, 2004, the $3,133,344 Other Note, together with$183,867 of accrued interest, was converted into 33,172,110 shares of theCompany’s common stock (see note 2).

 

**TaxClaims**

 

On September 30,2003, the Company entered into a settlement agreement with the United StatesInternal Revenue Service (the “Service”) on a tax claim which resulted from theCompany’s 1993 Chapter 11 proceedings whereby it agreed to pay $489,000 inequal monthly installments of $7,438 over a period of six (6) years at aninterest rate of 6%.  The $489,000settlement is reflected as debt in the financial statements and resulted in aone-time gain of $262,000 which is included in income tax benefit. In the eventthat the Company fails to pay the Service any payment, and such payment failurecontinues for sixty days after written notice of such failure, $1,832,100, plusaccrued interest thereon, less any payments made by the Company will beimmediately due and payable to the Service. As of December 31, 2003 and 2004, the debt balance was $428,000 and$363,000, respectively.

 

In connection with thesettlement agreement with the Service, the Company’s 1993 Chapter 11proceedings were officially closed pursuant to Court order effective as of September 30,2003.

 

Long-term debt outstandingis as follows:

 
| ** **                                                                  | *** *** | **December 31,** | *** *** |
|-----------------------------------------------------------------------------|--------------|-----------------------|--------------|
| ** **                                                                  | *** *** | **(in thousands)**    | *** *** |
| ** **                                                                  | ** **   | **2003**              | ** **   | **2004** | ** ** |
|                                                                        |         |                  |         |   |   |
| 11%  subordinated debt, net of discount of $50,000 and 37,000, respectively |         | $                     | 5,612        |   | $ | 5,623 |   |
| 12.5%  subordinated debt                                                    |         | 2,800                 |         | 500 |   |
| 9.25%  debt                                                                 |         | 1,366                 |         | 774 |   |
| Tax  Claims                                                                 |         | 428                   |         | 363 |   |
| Other                                                                       |         | 575                   |         | 392 |   |
|                                                                        |         | 10,781                |         | 7,652 |   |
| Less:  current installments                                                 |         | (3,646                | )            | (1,003 | ) |
|                                                                        |         |                  |         |   |   |
| Non-current  portion                                                        |         | $                     | 7,135        |   | $ | 6,649 |   |

 

Aggregate maturities oflong-term debt are as follows:

 
| **Year Ending December 31,** | ** ** |
|-----------------------------------|------------|
| **(in thousands)**                | ** ** |
| 2005                              |       | $ | 1,003 |   |
| 2006                              |       | 1,557 |   |
| 2007                              |       | 1,939 |   |
| 2008                              |       | 2,145 |   |
| 2009                              |       | 425 |   |
| Thereafter                        |       | 583 |   |
|                              |       | $ | 7,652 |   |

 

**NOTE 9 - ACCRUED LIABILITIES**

 

Accrued liabilitiesconsist of the following:

 
| ** **                                | ** **   | **2003**           | ** **   | **2004** | ** ** |
|-------------------------------------------|--------------|--------------------|--------------|----------|------------|
| *** ***                              | *** *** | **(in thousands)** | *** *** |
|                                      |         |               |         |     |       |
| Salaries, wages and  commissions          |         | $                  | 960          |     | $          | 768 |   |
| Accrued insurance &  sales taxes |         | 85                 |         | 148      |       |
| Accrued vacation                          |         | 409                |         | 469      |       |
| Accrued interest                          |         | 747                |         | 274      |       |
| Other                                     |         | 858                |         | 1,242    |       |
|                                      |         |               |         |     |       |
| Total                                     |         | $                  | 3,059        |     | $          | 2,901 |   |

 

32

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**NOTE 10 - INCOME TAXES**

 

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

 
| ** ** | ** ** | **Years Ended December 31,** | *** *** | **For the Periods**                              | *** *** |
|------------|------------|-----------------------------------|--------------|--------------------------------------------------|--------------|
| ** ** | ** ** | ** **                        | ** **   | **Jan. 1, 2004 –  Oct. 31, 2004** | ** **   | **Nov. 1, 2004 –  Dec. 31, 2004** | ** ** |
| **2002**   | ** ** | **2003**                          |
|       |       |                              |         |                                             |         |   |   |   |   |
| U.S.       |       | $                                 | 702          |                                             | $            | 454 |   | $ | (1,805 | ) | $ | (31 | ) |
| Foreign    |       | (255                              | )            | (412                                             | )            | 662 |   | 10 |   |
|       |       |                              |         |                                             |         |   |   |   |   |
| Total      |       | $                                 | 447          |                                             | $            | 42 |   | $ | (1,143 | ) | $ | (21 | ) |

 

The income tax provision(benefit) is comprised of the following (in thousands):

 
| ** **    | ** ** | **Years Ended December 31,** | *** *** | **For the Periods**                              | *** *** |
|---------------|------------|-----------------------------------|--------------|--------------------------------------------------|--------------|
| ** **    | ** ** | ** **                        | ** **   | **Jan. 1, 2004 –  Oct. 31, 2004** | ** **   | **Nov. 1, 2004 –  Dec. 31, 2004** | ** ** |
| **2002**      | ** ** | **2003**                          |
| Current:      |       |                              |         |                                             |         |   |   |   |   |
| U.S.  Federal |       | $                                 | —       |                                             | $            | (326 | ) | $ | 5 |   | $ | 1 |   |
| State         |       | 3                                 |         | 6                                                |         | — |   | — |   |
| Foreign       |       | 27                                |         | 9                                                |         | 10 |   | 15 |   |
|          |       | 30                                |         | (311                                             | )            | 15 |   | 16 |   |
| Deferred:     |       |                              |         |                                             |         |   |   |   |   |
| U.S.  Federal |       | —                            |         | —                                           |         | — |   | — |   |
| Foreign       |       | —                            |         | —                                           |         | — |   | — |   |
|          |       | —                            |         | —                                           |         | — |   | — |   |
|          |       |                              |         |                                             |         |   |   |   |   |
| Total         |       | $                                 | 30           |                                             | $            | (311 | ) | $ | 15 |   | $ | 16 |   |

 

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

 
| *** ***                          | *** *** | **December 31,** | *** *** |
|---------------------------------------|--------------|-----------------------|--------------|
| *** ***                          | *** *** | **(in thousands)**    | *** *** |
| ** **                            | ** **   | **2003**              | ** **   | **2004** | ** ** |
|                                  |         |                  |         |   |   |
| Deferred tax assets:                  |         |                  |         |   |   |
| Net  operating loss carryforwards     |         | $                     | 21,521       |   | $ | 2,922 |   |
| Furniture,  fixture and equipment     |         | 69                    |         | 25 |   |
| Capitalized  software and intangibles |         | 363                   |         | — |   |
| Inventory  write-downs                |         | 10                    |         | 3 |   |
| Allowance  for doubtful accounts      |         | 58                    |         | 92 |   |
| Accrued  expenses                     |         | 167                   |         | 396 |   |
|                                  |         |                  |         |   |   |
| Total  deferred tax assets            |         | 22,188                |         | 3,438 |   |
|                                  |         |                  |         |   |   |
| Deferred tax liability:               |         |                  |         |   |   |
| Furniture,  fixtures and equipment    |         | —                |         | (57 | ) |
| Identifiable  intangible assets       |         | —                |         | (3,121 | ) |
|                                  |         |                  |         |   |   |
| Total  deferred tax liabilities       |         | —                |         | (3,178 | ) |
|                                  |         |                  |         |   |   |
| Net  deferred tax assets              |         | 22,188                |         | 260 |   |
|                                  |         |                  |         |   |   |
| Less: valuation  allowance            |         | (22,188               | )            | (260 | ) |
|                                  |         |                  |         |   |   |
| Net  deferred tax assets              |         | $                     | —       |   | $ | — |   |

 

The Company has recordeda valuation allowance in the amount set forth above for certain deductibletemporary differences where it is not more likely than not the Company willreceive future tax benefits.  The netchange in the valuation allowance for the years ended 2002, 2003 and 2004 was $(3,806,000),$(179,000) and $(18,750,000), respectively. As a result of the Company applying purchase accounting (see note 2),the Company has adjusted its deferred tax assets to reflect the change in thedifference between the carrying amounts for certain assets and liabilities forincome tax purposes versus the carrying

 

33

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amounts for financialstatement purposes.  These differences resulted, most notably, in therecording of a deferred tax liability related to certain intangibleassets.  The recording of this deferred tax liability resulted in acorresponding reduction in the amount of valuation allowance required.

 

As of December 31,2004, the Company has Federal and state net operating losses (NOL) carryoversof approximately $7,309,000 and $2,800,000, respectively.  These NOL carryovers will expire in the years2005 through 2021.  The Company has netoperating losses that may be subject to limitations under Internal Revenue Code(IRC) section 382; which is triggered in the event of an ownershipchange.  During the current period the Company experienced an ownershipchange, as defined under IRC section 382.  The Company is currentlyevaluating the impact of the IRC section 382 limitation.  The Companybelieves that the amount of net operating losses shown in the financialstatements as deferred tax assets represents the expected minimum amount of netoperating losses available for future use under the IRC section 382 ‘base’limitation; however, the Company will continue to evaluate available IRCguidance that could increase the limitation, and in the event the limitation isincreased, the Company will increase the amount of net operating losses shownas deferred tax assets, which increase will be fully offset with a valuationallowance, resulting in a net zero impact to the financial statements.

 

On September 11,2002, the State of California enacted one of the budget trailer bills thatimplemented the state’s 2002-2003 Budget Bill (A425). The new law suspends theNOL carryover deduction for tax years 2002 and 2003. To compensate for the deductionsuspension, the period of availability for these NOL deductions has beenextended for two years.  In 2004, the NOLsuspension expired and commencing on January 1, 2004, NOL’s generated areapplied at 100% and carried forward up to ten years.

 

The provision (benefit)for income taxes differs from the amount computed by applying the Federalcorporate income tax rate of 34% to income (loss) from continuing operationsbefore income taxes as follows (in thousands):

 
| ** **                                                                                                                         | ** ** | **Years Ended December 31,** | *** *** | **For the Periods**                              | *** *** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|--------------|--------------------------------------------------|--------------|
| ** **                                                                                                                         | ** ** | ** **                        | ** **   | **Jan. 1, 2004 –  Oct. 31, 2004** | ** **   | **Nov. 1, 2004 –  Dec. 31, 2004** | ** ** |
| **2002**                                                                                                                           | ** ** | **2003**                          |
|                                                                                                                               |       |                              |         |                                             |         |   |   |   |   |
| Statutory  tax at 34%                                                                                                              |       | $                                 | 152          |                                             | $            | 14 |   | $ | (389 | ) | $ | (7 | ) |
| Change  in valuation allowance                                                                                                     |       | (3,036                            | )            | (187                                             | )            | (395 | ) | (18,354 | ) |
| Expiration  of state NOLs                                                                                                          |       | 22                                |         | —                                           |         | 48 |   | — |   |
| Effect  of foreign operations                                                                                                      |       | 2,729                             |         | 140                                              |         | (215 | ) | 11 |   |
| Adjustments  of NOL carry forwards and deferred tax assets pursuant to the finalization of  the IRS examination and other analysis |       | —                            |         | (326                                             | )            | 803 |   | 18,466 |   |
| Stock  compensation charge                                                                                                         |       | —                            |         | —                                           |         | 64 |   | — |   |
| Change  in estimates                                                                                                               |       | —                            |         | 48                                               |         | — |   | — |   |
| Other                                                                                                                              |       | 163                               |         | —                                           |         | 99 |   | (100 | ) |
|                                                                                                                               |       |                              |         |                                             |         |   |   |   |   |
| Income  tax expense (benefit)                                                                                                      |       | $                                 | 30           |                                             | $            | (311 | ) | $ | 15 |   | $ | 16 |   |

 

Undistributed earnings of the Company’s foreignsubsidiaries are considered to be indefinitely reinvested and, accordingly, noprovision for U.S. federal and state income taxes has been providedthereon.  Upon distribution of thoseearnings in the form of dividends or otherwise, the Company would be subject toU.S. income taxes and possibly withholding taxes payable to the foreigncountries, but may be able to offset unrecognized foreign tax creditcarryforwards.  Determination of theamount of unrecognized deferred U.S. income tax liability is not practicablebecause of the complexities associate with its hypothetical calculation.

 

34

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**NOTE 11 - SEGMENTS**

 

The Company providestotal information technology solutions to the hospitality, resort anddestination industry.  The solutionsprovided by the Company typically include applications software, computerhardware, peripherals and wide and local area network design, implementation,installation and support.  The Company isorganized and operates in three segments: United States, Asia and UnitedKingdom. For purposes of applying SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” management views the UnitedStates, Asia and United Kingdom segments separately in operating the business,although the products and services are similar for each segment.

 

.Information with respectto the Company’s operations by significant geographic area is set forthbelow.  “Other foreign” includesoperations in Mexico and Canada, both of which have been discontinued.  “Asia” includes operations in Singapore,Malaysia, Hong Kong and China.

 
| ** **                                                           | ** ** | **Years ended December 31,** | ** ** | **For the Periods**                              | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                           | ** ** | ** **                        | ** ** | **Jan. 1, 2004 –  Oct. 31, 2004** | ** ** | **Nov. 1, 2004 –  Dec. 31, 2004** | ** ** |
| **2002**                                                             | ** ** | **2003**                          |
| Revenue  from unaffiliated customers (based on subsidiary location): |       |                              |       |                                             |       |   |   |   |   |
| United  States                                                       |       | $                                 | 17,592     |                                             | $          | 15,439 |   | $ | 12,313 |   | $ | 2,832 |   |
| Asia                                                                 |       | 2,783                             |       | 2,871                                            |       | 2,691 |   | 695 |   |
| United  Kingdom                                                      |       | 1,110                             |       | 1,024                                            |       | 1,314 |   | 227 |   |
| Other  foreign                                                       |       | 452-                              |       | 12                                               |       | — |   | — |   |
|                                                                 |       |                              |       |                                             |       |   |   |   |   |
|                                                                 |       | $                                 | 21,937     |                                             | $          | 19,346 |   | $ | 16,317 |   | $ | 3,754 |   |
|                                                                 |       |                              |       |                                             |       |   |   |   |   |
| United  States revenue from foreign affiliates                       |       | $                                 | 298        |                                             | $          | 313 |   | $ | 495 |   | $ | 132 |   |
|                                                                 |       |                              |       |                                             |       |   |   |   |   |   |   |   |   |
| Operating  income (loss):                                            |       |                              |       |                                             |       |   |   |   |   |
| United  States                                                       |       | $                                 | 2,256      |                                             | $          | 1,748 |   | $ | (303 | ) | $ | 118 |   |
| Asia                                                                 |       | 70                                |       | 185                                              |       | 199 |   | 33 |   |
| United  Kingdom                                                      |       | (176                              | )          | (463                                             | )          | (43 | ) | (23 | ) |
| Other  foreign                                                       |       | (149                              | )          | (130                                             | )          | — |   | — |   |
|                                                                 |       |                              |       |                                             |       |   |   |   |   |
|                                                                 |       | $                                 | 2,001      |                                             | $          | 1,602 |   | $ | (147 | ) | $ | 128 |   |
|                                                                 |       |                              |       |                                             |       |   |   |   |   |
| Identifiable  assets:                                                |       |                              |       |                                             |       |   |   |   |   |
| United  States                                                       |       | $                                 | 4,329      |                                             | $          | 4,985 |   | $ | 14,953 |   | $ | 14,146 |   |
| Asia                                                                 |       | 1,352                             |       | 1,159                                            |       | 1,375 |   | 1,502 |   |
| United  Kingdom                                                      |       | 422                               |       | 314                                              |       | 283 |   | 273 |   |
| Other  foreign                                                       |       | 74                                |       | 72                                               |       | — |   | — |   |
|                                                                 |       |                              |       |                                             |       |   |   |   |   |
|                                                                 |       | $                                 | 6,177      |                                             | $          | 6,530 |   | $ | 16,611 |   | $ | 15,921 |   |
|                                                                 |       |                              |       |                                             |       |   |   |   |   |
| Long-lived  assets:                                                  |       |                              |       |                                             |       |   |   |   |   |
| United  States                                                       |       | $                                 | 2,315      |                                             | $          | 3,109 |   | $ | 12,540 |   | $ | 12,198 |   |
| Asia                                                                 |       | 492                               |       | 541                                              |       | 492 |   | 494 |   |
| United  Kingdom                                                      |       | 46                                |       | 38                                               |       | 45 |   | 44 |   |
| Other  foreign                                                       |       | 7                                 |       | 4                                                |       | — |   | — |   |
|                                                                 |       |                              |       |                                             |       |   |   |   |   |
|                                                                 |       | $                                 | 2,860      |                                             | $          | 3,692 |   | $ | 13,077 |   | $ | 12,736 |   |

 

United States revenuefrom foreign affiliates consists of net intercompany sales and services fromthe United States to the Company’s foreign subsidiaries and is eliminated fromconsolidated net revenue.  Intercompanysales are based on current selling prices or list prices less discounts.  Discounts typically are influenced bycompetitive pricing, market conditions and relative foreign exchange rates.

 

**Customers**

 

During 2002 and 2003, theJoint Armed Services was the only customer accounting for ten percent or moreof our revenues. Total revenue from the Joint Armed Services for 2002 and 2003was $2,880,000 and $3,535,000, respectively. There were no customers thataccounted for ten percent or more of our revenues in 2004.

 

35

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**NOTE 12 - STOCKHOLDERS’DEFICIENCY**

 

**StockOption Plans**

 

The Company adopted theMAI Systems Corporation 1993 Stock Option Plan (the “1993 Plan”) which becameeffective on January 27, 1994. Under the 1993 Plan, 2,500,000 authorized shares of Common Stock arereserved for issuance of options. Options under the 1993 Plan may be granted atexercise prices determined by the Compensation Committee of the Board ofDirectors, provided that the exercise prices shall not be less than the fairmarket value of the Common Stock on the date of grant.  At December 31, 2004, 1,266,500 and 1,121,667options under the 1993 Plan were outstanding and exercisable, respectively, andthe weighted-average exercise price of these options was $0.99.

 

In July 1995, theBoard of Directors adopted the Non-Employee Director’s Stock Option Plan (the “Director’sPlan”).  Under the Director’s Plan,certain directors who are not employees of the Company or any affiliate of theCompany are eligible to receive stock options. The Director’s Plan provides that each non-employee director may also begranted an option to purchase 6,250 shares of Common Stock on the date of eachannual meeting of the Company’s stockholders at which the director is reelectedto the Company’s Board.  These optionsvest 25% on the date of each subsequent annual meeting of the Company’sstockholders which the director is reelected to the Board.  The number of shares of Common Stock reservedfor issuance pursuant to the Director’s Plan is 250,000 shares.  The exercise price shall not be lower thanthe fair market value of the Common Stock on the date of grant.  As of December 31, 2004, 106,250 and 87,500options under the Director’s Plan were outstanding and exercisable,respectively, and the weighted-average exercise price of these options was $1.48.

 

At December 31, 2004,there were 850,397 additional shares available for grant under the stock optionplans.  The per share weighted-averagefair value of stock options granted during 2002 was $0.22, on the date of grantusing the Black-Scholes option-pricing model with the following weighted-averageassumptions:  risk-free interest rate of6.5%, 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 commonstock to employees for services rendered. The exercise price of the options is $0.34 per share. The options vest33.3% per year and have a term of 10 years. The Company recorded no expense related to the granting of options tothese employees.

 

On June 24, 2002,the Company granted 50,000 options to purchase shares of the Company’s common stockto an employee for services rendered. The exercise price of the options is $0.32 per share. The options vest33.3% per year and have a term of 10 years. The Company recorded no expenserelated to the granting of options to this employee.

 

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

 

The Company accounts forstock-based compensation utilizing the intrinsic value method in accordancewith the provisions of Accounting Principles Board Opinion No. 25 (APB 25)“Accounting for Stock Issued to Employees” and related interpretations.  Accordingly, no compensation expense isrecognized for fixed option plans because the exercise prices of employee stockoptions equaled or exceeded the market prices of the underlying stock on thedates of grant.

 

The following is asummary of stock option activity under the Company’s stock option plans:

 
| ** **                                                         | ** ** | **Number of shares** | ** ** | **Weighted-average  Exercise price** | ** ** |
|--------------------------------------------------------------------|------------|----------------------|------------|--------------------------------------|------------|
|                                                               |       |                 |       |                                 |       |
| Options  outstanding at December 31, 2001                     |       | 1,670,667            |       | $                                    | 1.58       |   |
|                                                               |       |                 |       |                                 |       |
| Granted                                                            |       | 499,500              |       | 0.34                                 |       |
| Exercised                                                          |       | (107,167             | )          | —                               |       |
| Forfeited                                                          |       | (41,250              | )          | 0.67                                 |       |
| Options  outstanding at December 31, 2002                     |       | 2,021,750            |       | 0.79                                 |       |
|                                                               |       |                 |       |                                 |       |
| Forfeited                                                          |       | (192,750             | )          | 2.28                                 |       |
| Options  outstanding at December 31, 2003                     |       | 1,829,000            |       | 1.10                                 |       |
|                                                               |       |                 |       |                                 |       |
| Forfeited                                                          |       | (456,250             | )          | 1.58                                 |       |
| Options  outstanding at October 31 and December 31, 2004 |       | 1,372,750            |       | $                                    | 0.94       |   |

 

36

----

 

At December 31, 2004,the exercise prices ranged from $0.28 to $9.75 per share and the weighted-averageremaining contractual life of outstanding options under the Company’s stockoption plans was 6.7 years.

 

The following is asummary of stock options as of December 31, 2004:

 
| ** **           | ** ** | ** **                 | ** ** | ** **           | ** ** | **Weighted Average** | ** ** | ** **                 | ** ** | ** ** | ** ** |
|----------------------|------------|----------------------------|------------|----------------------|------------|----------------------|------------|----------------------------|------------|------------|------------|
| **Range**            | ** ** | **Number Outstanding**     | ** ** | **Remaining**        | ** ** | **Weighted Average** | ** ** | **Number Exercisable**     | ** ** |
| **Exercise  Prices** | ** ** | **December 31, 2004** | ** ** | **Contractual Life** | ** ** | **Exercise Price**   | ** ** | **December 31, 2004** | ** ** |
|                 |       |                       |       |                 |       |                 |       |                       |       |       |       |
| $0.28                | -          | $0.63                      |       | 952,250              |       | 7.50                 |       | $                          | 0.34       |       | 788,667    |   |
| 1.00                 | -          | 1.65                       |       | 131,250              |       | 4.54                 |       | 1.03                       |       | 131,250    |       |
| 2.38                 | -          | 2.81                       |       | 262,500              |       | 4.69                 |       | 2.75                       |       | 262,500    |       |
| 3.25                 | -          | 9.75                       |       | 26,750               |       | 3.74                 |       | 4.14                       |       | 26,750     |       |
|                 |       |                       |       |                 |       |                 |       |                       |       |       |       |
|                 |       |                       |       | 1,372,750            |       |                 |       |                       |       | 1,209,167  |       |
|                      |            |                            |            |                      |            |                      |            |                            |            |            |            |  |

 

**Restricted Stock Plan**

 

In May 2001, theBoard of Directors adopted the 2001 Restricted Stock Plan.  Under the plan, 5,500,000 authorized sharesof the Company’s Common Stock are reserved for issuance to officers anddirectors of the Company.  The shareswill be issued as “Restricted Stock” within the meaning of Rule 144 of theSecurities Act of 1933, as amended.  TheCompensation Committee of the Board of Directors shall have the discretion todetermine what terms and conditions shall apply, including the imposition of avesting schedule.

 

In May 2002, theCompany issued 612,500 shares of restricted common stock to its members of theboard of directors and certain of its corporate officers which vest equallyover a four-year period.  Recipients arenot required to provide consideration to the Company other than rendering theservice and have the right to vote the shares. Under APB 25, compensation cost is recognized for the fair value of therestricted stock awarded, which is its quoted market price at the date ofgrant, which was $0.25 per share.  Thetotal market value of the shares of $153,000 was treated as unearnedcompensation and is being amortized to expense in proportion to the vestingschedule.  The unamortized balance as of December 31,2003 is $53,000 and is included in accumulated other comprehensive loss in theaccompanying consolidated balance sheet. Unearned compensation was fully amortized as of December 31, 2004.

 

**PreferredStock**

 

On May 20, 1997, theCompany authorized the issuance of up to 1,000,000 shares of $0.01 par valuepreferred stock.  The Board of Directorshas the authority to issue the preferred stock, in one or more series, and tofix the rights, preferences, privileges and restrictions thereof without anyfurther vote by the holders of Common Stock.

 

**Stock Warrants**

 

On January 13, 2003,in connection with the modification of the subordinated notes payable withCanyon (see note 8), the Company granted one million warrants to Canyon at anexercise price of $0.40 per share valued at $42,000 which is being amortized tointerest expense over the term of the modified note.  The warrants vest equally over a period offive years and expire on February 1, 2010.

 

On April 26, 2002,the Company granted 25,000 warrants to purchase shares of the Company’s commonstock to a consultant for services rendered. The exercise price of the warrants is $0.34 per share.  The warrants vest equally over a  three-year period and have a term of 10years. The Company recorded no expense related to the granting of warrants tothis consultant.

 

On February 2, 2001,the Company granted 25,000 warrants to purchase shares of the Company’s commonstock to a consultant for services rendered. The exercise price of the warrants is $0.36 per share.  The warrants vest equally over a three-yearperiod and have a term of 10 years. The Company recorded no expense related tothe granting of warrants to this consultant.

 

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

 

37

----

 

**NOTE 13 -EMPLOYEE BENEFITS**

 

**SavingsPlans**

 

On October 1, 1995,the Company established a Savings and Investment Plan covering substantiallyall the Company’s domestic employees (the “Domestic Plan”).  The Domestic Plan qualifies under Sections401(k) and 401(a) of the Internal Revenue Code.  Participating employees are allowed tocontribute from 1% to 15% of their annual compensation.  During 2002, 2003 and 2004 the Company didnot make contributions to the Domestic Plan.

 

**DefinedBenefit Plans**

 

The Company established adefined benefit plan for employees that were employed by the Company’smaintenance service business acquired in 1988.

 

In April 1992, theCompany elected to cease benefit accruals under the defined benefit plan tocurrent participants.  The curtailmenthad no effect on the accrued pension cost of the defined benefit plan and,accordingly, the Company’s accumulated benefit obligation and projected benefitobligation are the same as of the end of each of the years presented below.

 

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

 

The actuarially computedcomponents of net periodic benefit cost included the following components (inthousands):

 
| ** **                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2002**                         | ** ** | **2003** | ** ** | **2004(1)** | ** ** |
|                               |       |                             |       |   |   |   |   |
| Service costs                      |       | $                                | —     |   | $ | — |   | $ | — |   |
| Interest costs                     |       | 142                              |       | 143 |   | 143 |   |
| Amortization of  unrecognized loss |       | 16                               |       | 38 |   | 39 |   |
| Expected return on plan  assets    |       | (107                             | )          | (100 | ) | (144 | ) |
|                               |       |                             |       |   |   |   |   |
| Net periodic pension  expense      |       | $                                | 51         |   | $ | 81 |   | $ | 38 |   |

 

The following table setsforth the funded status and amounts recognized in the Company’s consolidatedstatements of operations (in thousands):

 
| ** **                                       | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                       | ** ** | **2002**                          | ** ** | **2003** | ** ** | **2004(1)** | ** ** |
|                                             |       |                              |       |   |   |   |   |
| Change in Benefit  Obligation:                   |       |                              |       |   |   |   |   |
| Projected  Benefit Obligation, beginning of year |       | $                                 | 1,993      |   | $ | 2,154 |   | $ | 2,331 |   |
| Service  cost                                    |       | —                            |       | — |   | — |   |
| Interest  cost                                   |       | 142                               |       | 143 |   | 143 |   |
| Benefits  paid                                   |       | (79                               | )          | (83 | ) | (86 | ) |
| Actuarial  loss/(gain)                           |       | 98                                |       | 117 |   | 225 |   |
|                                             |       |                              |       |   |   |   |   |
| Projected  Benefit Obligation, end of year       |       | $                                 | 2,154      |   | $ | 2,331 |   | $ | 2,613 |   |
|                                             |       |                              |       |   |   |   |   |
| Change  in Plan Assets:                          |       |                              |       |   |   |   |   |
|                                             |       |                              |       |   |   |   |   |
| Plan  assets, beginning of year                  |       | $                                 | 1,531      |   | $ | 1,236 |   | $ | 1,685 |   |
| Actual  return on plan assets                    |       | (279                              | )          | 182 |   | 86 |   |
| Employer  contribution                           |       | 63                                |       | 350 |   | 276 |   |
| Benefits  paid                                   |       | (79                               | )          | (83 | ) | (86 | ) |
|                                             |       |                              |       |   |   |   |   |
| Plan  assets, end of year                        |       | $                                 | 1,236      |   | $ | 1,685 |   | $ | 1,961 |   |
|                                             |       |                              |       |   |   |   |   |
| Unfunded  status                                 |       | $                                 | (918       | ) | $ | (646 | ) | $ | (652 | ) |
| Unrecognized  (gain)/loss                        |       | 1,008                             |       | 1,005 |   | 1,250 |   |
|                                             |       |                              |       |   |   |   |   |
| Net  amount recognized                           |       | $                                 | 90         |   | $ | 359 |   | $ | 598 |   |

 

----

(1)          Theyear ended December 31, 2004 represents the combined pre- and post-recapitalization periods of January 1, 2004 through October 31, 2004and November 1, 2004 through December 31, 2004, respectively, as aresult of the Management Equity/Conversion Transaction (see note 2).

 

38

----

 

The weighted averagediscount rates used in determining the actuarial present value of the benefitobligations were 6.75%, 6.25% and 5.75% for 2002, 2003 and 2004,respectively.  The long-term rate ofreturn on assets was 7%, 8% and 8% for 2002, 2003 and 2004, respectively.

 

The Company expects tocontribute approximately $197,000 to the defined benefit plan during 2005.  Expected benefit payments are as follows:

 
| **Year Ending December 31,** | ** ** |
|-----------------------------------|------------|
| **(in thousands)**                | ** ** |
| 2005                              |       | $ | 197 |   |
| 2006                              |       | 140 |   |
| 2007                              |       | 155 |   |
| 2008                              |       | 177 |   |
| 2009                              |       | 188 |   |
| Thereafter                        |       | 1,124 |   |
|                                   |            |  |  |  |

 

The following tabledescribes the plan asset descriptions and allocation of investment funds:

 
| ** **           | ** ** | ** **            | ** ** | **Percentage of Plan Assets at  December 31,** | ** ** |
|----------------------|------------|-----------------------|------------|-----------------------------------------------------|------------|
| **Asset  Category**  | ** ** | **Target Allocation** | ** ** | **2003**                                            | ** ** | **2004** | ** ** |
|                 |       |                  |       |                                                |       |   |   |
| a. Equity Securities |       | 55.0                  | %          | 56.0                                                | %          | 57.0 | % |
| b. Bond Fund         |       | 45.0                  | %          | 44.0                                                | %          | 43.0 | % |
|                 |       |                  |       |                                                |       |   |   |
| e. Total             |       | 100.0                 | %          | 100.0                                               | %          | 100.0 | % |

 

The policy, asestablished by the Pension Finance Committee, is to provide for growth ofcapital with a moderate level of volatility by investing assets per the targetallocations stated above.  The assetswill be reallocated quarterly to meet the above target allocations.  The investment policy will be reviewed on aquarterly basis, under the advisement of a certified investment advisor, todetermine if the policy should be changed.

 

The expected long-termrate of return for the plan’s total assets is based on the expected return ofeach of the above categories, weighted based on the median of the targetallocation for each class.  Equitysecurities are expected to return 10% to 11% over the long-term, while bondfunds are expected to return between 4% and 6%. Based on historical experience, the Committee expects that the Plan’sasset managers will provide a modest (.5% to 1.0% per annum) premium to theirrespective market benchmark indices.

 

**NOTE 14 - COMMITMENTS AND CONTINGENCIES**

 

**Leases**

 

The Company leasescertain facilities and equipment, under both month-to-month and fixed-termagreements.  The aggregate minimumrentals under operating leases with non-cancelable terms of one year or moreare as follows:

 
| **Year Ending December 31,** | ** ** |
|-----------------------------------|------------|
| **(in thousands)**                | ** ** |
| 2005                              |       | $ | 594 |   |
| 2006                              |       | 499 |   |
| 2007                              |       | 386 |   |
| 2008                              |       | 397 |   |
| 2009                              |       | 407 |   |
| Thereafter                        |       | 877 |   |
|                              |       | $ | 3,160 |   |

 

39

----

 

Rental expense wasapproximately, $953,000, $755,000and $716,000 for the years ended December 31,2002, 2003, and 2004, respectively.

 

**Legal Proceedings**

 

*Hotel Information Systems, Inc.*

 

On March 25, 2003,the Company entered into a settlement agreement with Hotel Information Systems(“HIS”) and one of its former corporate officers whereby (i) the partiesdismissed all claims, known and unknown, against each other; (ii) theCompany forgave and wrote off a note receivable from the former corporateofficer of HIS in the amount of $66,000 (which was expensed to other expense inthe 2002 consolidated statement of operations); (iii) the Company paid $50,000in cash and issued a non-interest bearing unsecured promissory note whichrequires 35 consecutive monthly payments of $5,000 each commencing April 1,2003; and (iv) the remaining 374,116 shares in the escrow account will bereleased to the Company.  If the Companyis delinquent four times in any twelve-month period during the term of theunsecured promissory note in making its $5,000 monthly payments to HIS, and HISissues respective valid default notices, the Company will be subject to a$225,000 penalty.  As of December 31,2004, the Company was current on its payments to HIS. The 374,116 shares havebeen received by MAI together with the HIS authorization to legally transfersuch shares to MAI.

 

### *Imputing interest at 11%, the present valueof the $175,000 promissory note at the date of the settlement was$149,000.  The Company recorded thepresent value of this debt issuance and the $50,000 cash payment as a reductionto additional paid-in capital.*

###  

*Logix Development Corporation*

 

The Company entered intoa settlement agreement with Logix Development Corporation (“Logix”) in July of2002 whereby we (i) issued Logix 200,000 shares of our Common Stock (ii) requiredthe Company to make various cash installment payments totaling $175,000 to bepaid within 1 year and (iii) executed a contract with Logix for aconsulting project in the amount of $50,000. The Company has made all required payments to Logix under thissettlement agreement.

 

In December 2003,the Company entered into another settlement agreement with Logix whereby it (i) issued200,000 free trading shares in exchange for the 200,000 restricted CommonShares from the original settlement agreement in July 2002 (ii) requiredthe Company to make monthly payments totaling $187,500 over a 25 month periodand (iii) mutually released each other of all past, present and futureclaims associated with the lawsuit.  Asof December 31, 2004, the Company was current on its payments to Logix.

 

*Other Litigation*

 

The Company is alsoinvolved in various other legal proceedings that are incident to its business.Management believes the ultimate outcome of these matters will not have amaterial adverse effect on our consolidated financial position, results ofoperations or liquidity.

 

**RelatedParty Transactions**

 

Under the terms of aconsulting agreement, and subsequent amendments (which expired on August 31,2003 but which is automatically renewed each year unless proper notice is givenbetween either party), between Orchard Capital Corporation (“Orchard”) and theCompany, Orchard provides the services of Richard S. Ressler as the Company’sChairman. Orchard was paid a consulting fee of $24,000 per month through September 30,2004 when the consulting fee was modified to $12,000 per month.  The consulting agreement was automaticallyrenewed through August 31, 2005.

 

40

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**NOTE 15 - INCOME (LOSS) PER SHARE**

 

The following tableillustrates the computation of basic and diluted income (loss) per share underthe provisions of SFAS No. 128.

 
| ** **                                                                                                                  | ** ** | **Year Ending December 31,** | ** ** | **For the Periods**                              | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                                                                                          | ** ** | ** **                        | ** ** | **Jan. 1, 2004 –  Oct. 31, 2004** | ** ** | **Nov. 1, 2004 –  Dec. 31, 2004** | ** ** |
| **2002**                                                                                                                    | ** ** | **2003**                          |
| Numerator:                                                                                                                  |       |                              |       |                                             |       |   |   |   |   |
| Numerator  for basic and diluted income (loss) per share - net income (loss)                                                |       | $                                 | (1,350     | )                                                | $          | 353 |   | $ | (1,158 | ) | $ | (37 | ) |
|                                                                                                                        |       |                              |       |                                             |       |   |   |   |   |
| Denominator:                                                                                                                |       |                              |       |                                             |       |   |   |   |   |
| Denominator  for basic income (loss) per share - weighted average number of common shares  outstanding during the period    |       | 13,945                            |       | 14,538                                           |       | 14,676 |   | 57,848 |   |
|                                                                                                                        |       |                              |       |                                             |       |   |   |   |   |
| Incremental  common shares attributable to restricted stock grants and to the exercise of  outstanding options and warrants |       | —                            |       | 300                                              |       | — |   | — |   |
|                                                                                                                        |       |                              |       |                                             |       |   |   |   |   |
| Denominator  for diluted income (loss) per share                                                                            |       | 13,945                            |       | 14,838                                           |       | 14,676 |   | 57,848 |   |
|                                                                                                                        |       |                              |       |                                             |       |   |   |   |   |
| Basic  income (loss) per share                                                                                              |       | $                                 | (0.10      | )                                                | $          | 0.02 |   | $ | (0.08 | ) | $ | — |   |
|                                                                                                                        |       |                              |       |                                             |       |   |   |   |   |
| Diluted  income (loss) per share                                                                                            |       | $                                 | (0.10      | )                                                | $          | 0.02 |   | $ | (0.08 | ) | $ | — |   |

 

The number ofantidilutive options and warrants that were excluded from the computation ofincremental common shares were, 2,676,355, 3,104,000 and 2,647,750 in 2002, 2003and 2004, respectively.

 

41

----

 

**NOTE 16 – QUARTERLY RESULTS OFOPERATIONS (Unaudited)**

 

***(inmillions, except share data)***

 
| ** **                                                                                   | ** ** | **1stQuarter 2003** | ** ** | **2nd**

**Quarter 2003** | ** ** | **3rdQuarter 2003** | ** ** | **4thQuarter 2003** | ** ** | **1stQuarter 2004** | ** ** | **2ndQuarter 2004** | ** ** | **3rdQuarter 2004** | ** ** | **4thQuarter 2004(1)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|------------------------|------------|
|                                                                                         |       |                |       |                      |       |                |       |                |       |                |       |                |       |                |       |                   |       |
| Revenue                                                                                      |       | $                   | 5.2        |                      | $          | 4.8                 |       | $                   | 4.8        |                | $          | 4.6                 |       | $                   | 5.2        |                   | $          | 4.9 |   | $ | 4.9 |   | $ | 5.1 |   |
| Gross  profit                                                                                |       | 3.7                 |       | 3.5                       |       | 3.5                 |       | 3.1                 |       | 3.7                 |       | 3.7                 |       | 3.5                 |       | 3.6                    |       |
| Income  (loss) before income taxes                                                           |       | 0.2                 |       | (0.1                      | )          | 0.1                 |       | 0.1                 |       | 0.2                 |       | 0.1                 |       | (0.1                | )          | (1.3                   | )          |
| Net  income (loss)                                                                           |       | 0.3                 |       | (0.1                      | )          | 0.1                 |       | 0.1                 |       | 0.2                 |       | 0.1                 |       | (0.1                | )          | (1.3                   | )          |
|                                                                                         |       |                |       |                      |       |                |       |                |       |                |       |                |       |                |       |                   |       |
| Income  (loss) per share:                                                                    |       |                |       |                      |       |                |       |                |       |                |       |                |       |                |       |                   |       |
|                                                                                         |       |                |       |                      |       |                |       |                |       |                |       |                |       |                |       |                   |       |
| Basic                                                                                        |       | $                   | 0.02       |                      | $          | (0.01               | )          | $                   | 0.01       |                | $          | —              |       | $                   | 0.01       |                   | $          | 0.01 |   | $ | — |   | $ | (0.03 | ) |
| Diluted                                                                                      |       | 0.02                |       | (0.01                     | )          | 0.01                |       | —              |       | 0.01                |       | 0.01                |       | —              |       | $                      | (0.03      | ) |
|                                                                                         |       |                |       |                      |       |                |       |                |       |                |       |                |       |                |       |                   |       |
| Weighted  average common shares used in determining income (loss) per share (in  thousands): |       |                |       |                      |       |                |       |                |       |                |       |                |       |                |       |                   |       |
|                                                                                         |       |                |       |                      |       |                |       |                |       |                |       |                |       |                |       |                   |       |
| Basic                                                                                        |       | 14,426              |       | 14,426                    |       | 14,575              |       | 14,575              |       | 14,575              |       | 14,676              |       | 14,676              |       | 43,458                 |       |
|                                                                                         |       |                |       |                      |       |                |       |                |       |                |       |                |       |                |       |                   |       |
| Diluted                                                                                      |       | 14,876              |       | 14,426                    |       | 14,875              |       | 14,875              |       | 14,875              |       | 14,676              |       | 14,676              |       | 43,458                 |       |

 

----

(1)  The fourth quarterended December 31, 2004 represents the combined pre- and post- recapitalizationperiods of January 1, 2004 through October 31, 2004 and November 1, 2004through December 31, 2004, respectively, as a result of the ManagementEquity/Conversion Transaction. Additionally, in connection with the Management Equity/ConversionTransaction, in the fourth quarter of 2004, the company recorded a $995,000debt modification charge and a $187,500 stock compensation charge (seenote 2).

 

42

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**Schedule II**

** **

**Valuationand Qualifying Accounts**

** **

Years Ended December 31,2002 and 2003 and for the periods from January 1, 2004 through October 31,2004 and November 1, 2004 through December 31, 2004

*(dollars in thousands*)

 
| ** **                                             | ** ** | **Balance  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Reductions  Due to Sale  of  Subsidiary** | ** ** | **Write-offs** | ** ** | **Balances  Period of  Year** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|---------------------------------------------|------------|----------------|------------|-------------------------------|------------|
|                                                   |       |                              |       |                                |       |                                        |       |           |       |                          |       |
| Year ended December 31,  2002:                    |       |                              |       |                                |       |                                        |       |           |       |                          |       |
| Allowance for doubtful  accounts                       |       | $                                 | 1,023      |                                | $          | 89                                          |       | $              | (103       | )                             | $          | (673 | ) | $ | 336 |   |
|                                                   |       |                              |       |                                |       |                                        |       |           |       |                          |       |
| Year ended December 31,  2003:                    |       |                              |       |                                |       |                                        |       |           |       |                          |       |
| Allowance for doubtful  accounts                       |       | $                                 | 336        |                                | $          | 52                                          |       | $              | —     |                          | $          | (53 | ) | $ | 335 |   |
|                                                   |       |                              |       |                                |       |                                        |       |           |       |                          |       |
| January 1, 2004  through October 31, 2004:   |       |                              |       |                                |       |                                        |       |           |       |                          |       |
| Allowance for doubtful  accounts                       |       | $                                 | 335        |                                | $          | 205                                         |       | $              | —     |                          | $          | (217 | ) | $ | 323 |   |
|                                                   |       |                              |       |                                |       |                                        |       |           |       |                          |       |
| November 1, 2004  through December 31, 2004: |       |                              |       |                                |       |                                        |       |           |       |                          |       |
| Allowance for doubtful accounts                        |       | $                                 | 323        |                                | $          | 41                                          |       | $              | —     |                          | $          | (43 | ) | $ | 321 |   |

 

43

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