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

 

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**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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**PART I**

** **

# **ITEM 1.                  BUSINESS**

 

**THECOMPANY**

** **

We provide totalinformation technology solutions to the hospitality, resort and destinationindustry.  The solutions provided by ustypically include applications software, computer hardware, peripherals andwide and local area network design, implementation, installation andsupport.  The software applications aregenerally our proprietary software, or software which is licensed to us on anexclusive 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 our solutions. We were incorporated under the laws of theState of Delaware on September 6, 1984. Our name was changed from MAI Basic Four, Inc. to MAI SystemsCorporation on November 6, 1990.  Wecommenced operations on January 29, 1985.

 

On April 9, 2004, aninvestor group, consisting of Canyon Capital Advisors (“Canyon”), our Chairmanof the Board, Chief Executive Officer & President and Chief Financial &Operating Officer (“Investor Group”), acquired 2,433,333 shares of our commonstock held by CSA Private Limited (“CSA”) and $3,133,344 of securedindebtedness owed to CSA for $1 million in cash.  On September 22, 2004, we receivedapproval from our shareholders for the Investor Group to convert the securedindebtedness acquired from CSA plus any accrued interest through the date ofconversion for shares of the our common stock based upon a conversion price of$0.10 per share.  Additionally, theshareholders also approved for the Investor Group to invest $1,000,000 of newcash proceeds into the company, which we received on September 24, 2004,in a private placement at $0.10 per share (the “Management Equity/ConversionTransaction”).    On November 1,2004, we issued 10 million shares of its common stock to the Investor Group inexchange 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 33,172,110shares of our common stock.  See Notes 2and 8 of the Notes to the Consolidated Financial Statements, Item 15 of Part IVof this report, incorporated herein by reference.

 

**DESCRIPTIONOF THE BUSINESS**

** **

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

 

We market our products andservices primarily through a team selling approach, which utilizes ournationwide network of sales offices. This approach involves a coordinated effort between our field salespersonnel, and our corporate office software development, marketing, contractadministration and financial staff.  Allof our products and services are also available through a limited number ofdistributors, independent value-added resellers (“VARs”), authorized servicerepresentatives and independent software vendors (“ISVs”).

 

Our activities areconducted principally in the United States, the United Kingdom, Malaysia, HongKong and Singapore.  We also operateoffices in the People’s Republic of China in Beijing and Shanghai.

 

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

 

# **Products and Services**

# ** **

We provide completeenterprise products and services to serve the needs of local and multinationalchains, franchisees and independent operators of hotels, resorts anddestination properties. Our products have been installed in over 4,100properties, throughout 84 countries, and in properties with up to 5,000 roomsfrom limited service and business hotels to convention centers and five starluxury resorts or urban luxury hotels.

 

Our HIS epitomeÔsolutions, including our established products (epitome for windows, formerlyLodgingTouch, epitome for Unix, formerly CLS and epitome for i-series, formerlyParagon as well as our new internet native suite of products written in java(epitomeÔ Enterprise) which became available for generalrelease in the first quarter of 2005), which represented all of our revenueduring the three-year period ended December 31, 2004, enables hospitalityenterprises to increase revenue, improve guest loyalty and reduce costs bycentralizing and streamlining their operations while maximizing existingtechnology investments. A majority of our historical revenue relates to ourproperty management systems

 

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applications associatedwith our established products.  Our newinternet native corporate application suite is a component-basedarchitecture.  The epitomeÔEnterprise suite includes software, services and integration for BusinessIntelligence, Corporate Information, Channel Reservation, Channel Managementand Property Management systems. The products are deployable on multipleplatforms using intelligent transport and messaging technology.

 

Our epitomeÔEnterprise services include systems integration, consulting, projectmanagement, implementation, training, documentation, online help, long-termsupport, maintenance and specialized engineering, with particular expertise inthe implementation of local and wide-area networks for the hospitality industry.

 

Summarized below are thefeatures of epitomeÔ Enterprise whichhas been general released in Q1 of 2005.

 

### *The epitomeStrategic Analysis Tools*

###  

Our epitomemultidimensional Business Intelligence (“BI”) provides a suite of sophisticatedMultidimensional Online Analytical Processing (“MOLAP”) tools for strategicanalysis and planning for the entire enterprise. Not only can hoteliers analyzeand report on data consolidated from multiple sources, they can perform complexmodeling against industry standard Key Performance Indicators (“KPIs”),including Revenue Per Available Room (“RevPAR”) and Revenue Per AvailableCustomer (“RevPAC”). These tools include a relational data warehouse,subject-specific data marts, MOLAP tools and a library of standard analyses andreports. This combination results in a system that provides executives with “just-in-time”strategic intelligence to analyze operations and grow market share, revenue andoccupancy.

 

### *The epitomeCorporate Management Tools*

###  

Our epitome CentralInformation Systems (“CIS”) provides essential information and management toolsto centralize operations at a corporate headquarters. With the increasingnumber of mergers, acquisitions and individual properties desiring to associatewith an established chain or flag, centralizing the data for consolidatedmarketing, accounting and reporting tasks have become popular cost-savingstools. Additionally, hotel guests now expect their preferences and history tobe available at local properties, corporate locations and online. To accomplishthis, corporate systems must capture and share all guest information to providequality service during the reservation process as well as comprehensivemarketing and financial information to facilitate corporate marketing andfinance strategies. Our HIS corporate tools consolidate information about eachguest such as identity, spending patterns, preferred accommodations, amenityrequests, billing details, commission accumulations and more.

 

Specialized functionalityof the CIS includes centralized travel agency production statistics andtransaction payments, more accurate and effective corporate Accounts Receivableinvoicing and collections, and consistent guest spending patterns to betterfacilitate corporate affinity programs and more.

 

### *The epitomeReservation and Channel Management Tools*

###  

Our epitome CentralReservation Systems (“CRS”) provides chains and management companies with thefunctionality required to process reservations and availability from acentralized location. Over time, CRS products have evolved to provide the samefeatures and functions as reservation modules in Property Management Systems.However, a CRS must be more efficient at guest preference requirements,multiple property itineraries, history retrievals, travel agent processing andgeneral corporate billing and transaction processing. These products areperfectly suited for small and medium reservation call centers.

 

Hoteliers are reducingthe cost of guest acquisition and improving guest loyalty through brandedInternet booking engines. However, we understand that the explosion of Internetchannels and travel procurement software has been difficult for hoteliers tomanage effectively. Our epitome Channel Reservation and Channel ManagementTools deliver more benefits than a simple branded booking engine or any onewholesale reservation portal. It allows hoteliers the tools to manage theirrates, availability and guests through all their channels of distribution. Thegoal and foundation of the design are to provide a more cost-effective andefficient tool for the properties using the epitome enterprise suite ofapplications.

 

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

 

### *The epitomeProperty Management Tools*

###  

Our epitome PropertyManagement Systems (“PMS”) provide a complete solution for the management ofrates, availability and affinity programs for single and multi-propertyenterprises. These tools are specifically designed and optimized forcomprehensive guest management, including modules for web and centralreservations, room and revenue management and group and wholesaler management.

 

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Specialized functionalityoffers flexible guest-focused features including guest service notification,availability and occupancy controls for long-term stay and gender-specificenvironments, sophisticated revenue and taxation capabilities, casinoaccounting and condominium management. Multi-property integration of availability,itinerary reservations and guest accounting is also available. Additional toolsinclude modules for report writing, emulation, data extraction and transfer andmore.

 

### *The epitomeIntegration and Data Exchange Tools*

###  

The HIS epitomeInterfaces and Integrations provide multiple levels of data exchange andapplication integration, from simple send and receive interfaces to intelligentbusiness application integration. The high-level of integration availablebetween the HIS PMS, CRS, CIS and BI enables chains and management companies todeploy an enterprise solution with ‘customizable’ functionality at eachlocation, while consolidating critical controls, statistics and revenueanalysis. Our HIS epitome Enterprise Solutions includes a library of over 400device-type interfaces. Some examples include Call Accounting, EnergyManagement, In-room Facsimile, In-room Internet, Mini Bar, Point Of Sale,Telephone Management, Video Services and Voice Mail.

 

We also specialize inapplication-type integrations, which are typically more complex thandevice-type interfaces, requiring additional management and auditing of thedata exchange. It often includes the exchange of guest and group information,availability, contractual room rates and more. Each product also adds complexity,as the platform, data and method of communication vary from product to product.It is very rare that any of these elements are similar to the platform,database and method of communication in the core business applications.

 

Our integration solutionsoffer integration of the core business applications (PMS, CRS and CIS) withother disparate business applications (Sales, Catering, Revenue Management andmore). It allows for standardized communication processes, configurationcontrols and audit trails. The data mapping is accomplished through a series ofapplication-specific and common industry Application Programming Interfaces (“APIs”).All communication and data exchange are actually handled through a centralintegration product, providing our core business applications and the thirdparty products with a common ground for data exchange and consolidation.

 

From propertytransactions to corporate intelligence our HIS epitome Enterprise Solutionsprovides complete products and services for every level of the enterprise. Withdifferent platforms, applications, deployment methods and database managementtechnologies, hoteliers can implement the ‘epitome of technology’ for theirenterprise.

 

# **Marketing and Sales**

# ** **

We market our productsand services primarily through a team-selling approach, which utilizes ourworldwide network of sales offices and our Irvine, California-based accountrepresentatives.  We also market certainproducts and services through limited numbers of distributors, authorizedservice representatives and ISVs.

 

In the United States, oursystems are marketed by a direct sales and marketing organization whichincluded, 13 sales and marketing personnel located in the corporateheadquarters and satellite offices.  Inaddition, we market our systems internationally through our subsidiaries whichoperate in the United Kingdom, Hong Kong, Malaysia and Singapore, and throughvarious distributors that are exclusive in their jurisdictions.  Our international subsidiaries employed 19sales and marketing personnel who are engaged in the marketing of MAI productsfrom sales offices in the United Kingdom, Hong Kong, Singapore, Malaysia andthe People’s Republic of China.

 

During 2004, ouraggregate revenue was derived from geographic areas as follows:

 
| ** **     | ** ** | **Percentage of  Total Revenue** | ** ** |
|----------------|------------|----------------------------------|------------|
|           |       |                             |       |
| United States  |       | 75.4                             | %          |
| Asia           |       | 16.9                             | %          |
| United Kingdom |       | 7.7                              | %          |
|           |       |                             |       |
| Total          |       | 100.0                            | %          |

 

Our financial performanceis affected by the fluctuation in value of the US dollar in relation to thelocal currencies of the countries in which we do business.  In addition, our foreign operations aresubject to the usual risks that may affect such operations, including possibleexpropriation or other governmental actions, taxes and political changes.  However, as only 24.6% of our 2004 revenuewas generated outside the United States, the risk associated with these foreignoperations in relation to our overall financial performance is limited.

 

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# **Support and Maintenance**

# ** **

The provision of around-the-clockcustomer service is a cornerstone of our business. As of December 31,2004, we had support and maintenance agreements with approximately 1,738customers.  We employ approximately 56technicians to provide support for our applications software products.

 

Telephonic support, whichis primarily to assist licensees of our applications products, is provided fromour response centers located in Lake Forest, California, Concord, California,Singapore, Hong Kong, Malaysia and the United Kingdom.  We utilize current developments in telephonyand call center technology to enable our support technicians to quicklyidentify and resolve customers’ software related computing problems.

 

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

 

# **Production and Procurement**

# ** **

In response to marketdemand for standardized hardware and software products, all of our currentsystems offerings utilize open systems architecture, which means that they willoperate on a wide variety of third-party hardware equipment.  At present, we have relationships with anumber of suppliers including Microsoft, Cognos, BEA, Compaq Computer, DataGeneral, Hewlett Packard, Seagull Software, Visual Legacy, IBM, SouthernDatacom and distributors such as MicroAge and Ingram Micro.  Management believes that these relationshipshave enabled us to reduce product costs, permit earlier availability of newtechnology and offer customer’s products with superior performance atcompetitive prices.  We no longermanufacture proprietary hardware products.

 

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

 

# **Order, Shipment and Backlog**

# ** **

We record and enter intobacklog a purchase order for equipment and software when we receive a customer’swritten order requesting delivery within twelve months, and systemsconfiguration and contract provisions are verified.  Orders that are canceled by the customer andorders that are not shipped within one year are removed from backlog.  Orders that are removed from backlog fornon-shipment are restored if they are reinstated by the customer.  We include in backlog signed government contractswhich have not yet been fully funded that are expected to commence deliverywithin the next twelve months.  As of December 31,2004, we have approximately $9.7 million included in backlog relating to theUnited States Air Force, of which $1.2 million is expected to be shipped withinfiscal 2005 and the balance of the contract shipped by December 31, 2008.

 

Set forth below iscertain information concerning orders, shipments and backlog for 2003 and 2004:

 
| ** **                             | ** ** | **(dollars in millions)** | ** ** |
|----------------------------------------|------------|---------------------------|------------|
| ** **                             | ** ** | **2003**                  | ** ** | **2004** | ** ** |
|                                   |       |                      |       |   |   |
| Orders received (net of cancellations) |       | $                         | 2.9        |   | $ | 17.9 |   |
| Shipments                              |       | 4.3                       |       | 7.5 |   |
| Backlog (at year end)                  |       | 1.8                       |       | 12.2 |   |
|                                        |            |                           |            |  |  |  |  |

 

Our backlog is notnecessarily indicative of future revenues.

 

# **Research and Development**

# ** **

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

 

As of December 31,2004, we employed 62 engineers, programmers and other technical personnel inresearch and development activities. During 2002, 2003, and 2004, we incurred $3,307,000 (net of capitalizedsoftware of $861,000), $2,828,000 (net of capitalized software of $896,000) and$3,708,000 (net of capitalized software of $1,065,000) respectively, forresearch and development activities.  Ourresearch and development expenditures related to the support and extension ofexisting software products and the development of new products.

 

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# **Customers**

# ** **

Our customers inhospitality are both chain and independent hotels and resorts.  During 2002 and 2003, Joint Armed Services(JAS) was the only customer accounting for ten percent or more of ourrevenues.  Total revenue from JAS for2002 and 2003 was $2,880,000 and $3,535,000 respectively.  There were no customers accounting for tenpercent or more of our revenues for 2004.

 

# **Competition**

# ** **

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

 

Within our targetedapplication markets, we have positioned ourselves to sell complete enterprisesolutions to our customers.  Within thismarketplace, competition comes primarily from vendors of competing informationtechnology in the markets in which we compete. There are several providers of information technology to the hotel,resort and destination industry against which we regularly compete.  We have several primary competitors, whichare substantially larger than us, and provide application software that issimilar to ours in quality but have the ability to aggressively compete onprice.

 

# **Trademarks, Copyrights and Licenses**

# ** **

We are the owner orlicensee of certain trademarks, copyrights and other property rights associatedwith our businesses, including rights associated with our proprietaryapplication software.  We own or havelicensing rights, generally with terms of three years, to the principalapplication software products marketed by us. Such licensing rights are generally renewable.  Although there is some risk that independentvendors who own such products may elect not to renew their licensing agreementswith us and enter into exclusive arrangements with, or elect to install theirsoftware on systems sold by competitors of ours, such vendors generally tend tocontinue to support our marketing efforts so long as our systems provide a goodopportunity for them to market their products.  These independent vendors do not represent a significant part of ourrevenues.

 

We are party to licenseagreements with Microsoft, Cognos, BEA, Compaq Computer, Data General, HewlettPackard, Seagull Software, Visual Legacy, IBM and Southern Datacom, Novell andwith a number of other suppliers of software products.  These licenses are terminable at our optionand certain of the licenses require us to make royalty payments.

 

# **Employees**

# ** **

As of December 31,2004, we had 226 employees, of which 129 were employed in the United States, 12in the United Kingdom and 85 in Asia (Hong Kong, Singapore, Malaysia and thePeople’s Republic of China).  We have notexperienced any work stoppages and consider our relationship with ouremployees to be good.

 

**RISKFACTORS**

 

*Thefollowing discussion should be read in conjunction with the auditedconsolidated financial statements contained herein.  In addition to the factors set forth herein,there may be other factors, or factors that arise in the future which mayaffect our future performance.*

* *

# **Effects of Terrorism, War in Iraq and Other Events**

# ** **

Our operating results forthe twelve months ended December 31, 2004 were negatively affected bycontinuing threat of worldwide terrorism, war in Iraq and other worldevents.  Weakness in the hospitality andtourism industries as a result of terrorist attacks and armed conflicts arisingthere from have caused the Company to experience cancellations, delays andreductions in certain purchases by its hospitality customers. There can be noguarantee that this slow-down will be only short-term. Many of our hospitalitycustomers experienced severe declines in occupancy and room rates at most oftheir hotels in the weeks following the attacks.  We are operating our business under theassumption that the weakness in the hospitality industry will beshort-term.  It is not possible, however,to predict the magnitude or duration of the declines or the potential impact onour results of operations, financial condition or cash flow, if the existingpolitical and economic risks continue unabated, or if there is future majorterrorist activity.

 

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# **We Have Issued ASubstantial Number of Shares to a Shareholder Who Can Exercise SignificantInfluence**

# ** **

On April 9, 2004, aninvestor group, consisting of our Chairman of the Board, Chief ExecutiveOfficer & President, Chief Financial & Operating Officer andour principal lender, Canyon Capital Advisors (“Investor Group”), acquired2,433,333 shares of the Company’s common stock held by CSA and approximately$3.2 million of our secured indebtedness to CSA for $1 million in cash.

 

On September 22,2004, the Company received approval from its shareholders for the InvestorGroup to convert the indebtedness the Investor Group acquired from CSA plus anyaccrued interest through the date of conversion for shares of the our commonstock 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 we received on September 24, 2004, in a private placementat $0.10 per share (the “Management Equity/Conversion Transaction”).  On November 1, 2004, the Companyconverted $3,317,211 of its indebtedness to the Investor Group on such date, at$0.10 per share, and issued 33,172,110 shares of its common stock together with10,000,000 shares of its common stock relating to the $1,000,000 privateplacement to the Investor Group.**** Such stock is subject to certain terms andconditions, including the fact that it will initially be ‘restricted’ stock,not available for sale. If this Investor Group decides not sell its shares ofCommon Stock or sells the shares in a block to a third party, either thisshareholder or the party or parties it sells to in any “block” sale may be ableto exert significant influence over our affairs because they have approximately85% of the voting control on any matter that may be submitted for a shareholdervote.

 

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 our Amended and RestatedCertificate of Incorporation (“Amendment”) to effectuate a 1-for-150 reversestock split. If consummated, the reverse stock split would enable us toterminate our periodic reporting obligations under Sections 13 and 15(d) ofthe Securities Exchange Act of 1934, as amended (“Exchange Act”), theregistration of our common stock under Section 12(g) of the ExchangeAct and the quotation of our common stock on the OTC Bulletin Board and we willbecome a “private” company.

 

This concentration ofownership could have the effect of delaying or preventing a change in ourcontrol or otherwise discouraging a potential acquirer from attempting toobtain control of us.  Additionally, theconsummation of the going private transaction could have a material and adverseeffect on the market price of our common stock.

 

# **The Price of Our Common Stock May Decline Due toSales by Certain Shareholders**

# ** **

Approximately 85% of ourissued and outstanding Common Stock is held by the Investor Group and thepersonal holdings of the members of the Investor Group.  Sales by these shareholders of a part orsubstantially all of their shares of our Common Stock in the market or theperception that sales may occur could cause the market price of our Common Stockto drop.

 

As defined under Rule 144under the Securities Act of 1933, the shares held by the Investor Group are “restrictedsecurities”.  These shares may be soldpursuant to registration under the Securities Act, or to the extent permittedby Rule 144 or another exemption under the Securities Act.

 

# **Our Agreements with ourPrimary Lender and Two Other Substantial Creditors Require Substantial On-GoingPayments**

# ** **

We have agreements withWamco 32, Ltd. (“Wamco”), previously Coast Business Credit (“Coast”) whose loanwas sold to Wamco on May 15, 2003, and two other creditors that requiresubstantial on-going payments and affect the availability of our cash flow tobe used for other material company operations. On January 13, 2003 and again on March 31, 2004, werestructured our debt with Wamco and Canyon. We also restructured our subordinated debt with CSA on March 31,2004.  Currently, these obligations arefollows:

 

•                  A balance due toWamco of approximately $774,000 under a term loan with a current monthly principaland interest payment obligation of approximately $58,000, maturing in February 28,2006;

 

•                  A balance dueunder our 11% subordinated notes payable to an investment fund managed byCanyon Capital Management LP (“Canyon”) of approximately $5,660,000, with acurrent monthly interest payment obligation of $52,000;

 

•                  A balance dueunder a 12.5% secured promissory note due to CSA in the amount of $500,000,with monthly principal and interest payments of $10,000.

 

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As of December 31,2004 we were current on our payment obligations to Wamco and Canyon.  In connection with the restructuring of theWamco and Canyon debt, the covenants were revised and were effective commencingwith the quarter ended March 31, 2003, to include a minimum quick ratio of0.20 to 1.00 and minimum debt service coverage ratio of 0.50 to l.00.  We are currently not in compliance with butreceived waivers for these covenants through December 31, 2004.  We are currently in default with our paymentobligations to CSA and have not made any payments on the $500,000 securedpromissory note. In the event that we are unable to meet the required paymentsto our primary secured lenders, they are entitled to exercise certain rightsunder the respective agreements we have with them, including but not limitedto, foreclosing on all of our tangible and intangible assets.  Such action would have a substantial adverseeffect on our ability to continue as a going concern.

 

# **Our Period of Losses May Continue**

# ** **

We incurred a net lossfor the years ended December 31, 2002 and 2004.  We cannot assure you that we will attainprofitability on a consistent basis or avoid losses on a quarterly or annualbasis in the future.

 

# **Our Operating Results InOne or More Future Periods Are Likely to Fluctuate Significantly and May NegativelyImpact Our Stock Price**

# ** **

Our annual and quarterlyoperating results may fluctuate significantly in the future as a result ofnumerous factors, including:

 

•      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;

•      Ability of the Company tosuccessfully implement its restructuring of debt, to achieve and maintain anappropriate cost structure and to minimize unforeseen and extraordinaryexpenses.

 

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

 

# **We May Need and BeUnable to Obtain Additional Funding on Satisfactory Terms, Which Could DiluteOur Stockholders or Impose Burdensome Financial Restrictions on Our Business**

# ** **

As stated above, theCompany has successfully restructured the terms of certain secured debt,including extending the maturity dates. The restructured debt, pursuant to the original inter-creditor agreementbetween Canyon Capital and Coast, which was sold to Wamco on May 15, 2003,contains various restrictions and covenants, including a minimum quick ratio of..20 to 1.00 and a minimum debt service coverage ratio of .50 to l.00.  In the event that the Company were not incompliance with the various restrictions and covenants and were unable toreceive waivers for non-compliance, the term

 

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debt would be immediatelydue and payable.  The Company was not incompliance with but received waivers for its covenants through December 31,2004.  There is no guaranty that theCompany will meet its debt covenants in the future.  Any additional debt financing or otherfinancing of securities senior to Common Stock will likely include financialand other covenants that will restrict our flexibility.  At a minimum, we expect these covenants toinclude restrictions on our ability to pay dividends on our Common Stock. Anyfailure to comply with these covenants or to repay such indebtedness when duewould have a material adverse effect on our business, prospects, financialcondition and results of operation.

 

# **The Market In Which WeOperate is Highly Competitive, and We May Face Increased Competition FromNew Entrants and Established Industry Competitors With Significantly GreaterFinancial Resources**

# ** **

# **We face significant competition in all sectors of themarket for computer-based solutions and support and maintenance services thatwe offer.  We have numerous competitors,which vary widely in their size, capabilities, market segments and geographicalareas, many of which are larger and have financial resources far greater thanwhat we have.  Within our market,competition comes primarily from competing software applications vendors andfrom local value-added resellers and independent software vendors, who usuallyresell hardware or networking products of larger original equipmentmanufacturers.  Many of our services areprovided by our customers’ in-house information services departments. There canbe no assurance that we can effectively compete with any or all of ourcompetitors in our business line.  Ourcompetitors may be able to adapt more swiftly to new or emerging technologiesand changes in customer requirements, take advantage of acquisition and otheropportunities more readily and devote greater resources to the marketing andsale of their products and services than we can.  There can be no assurance that additionalcompetitors will not enter markets that we plan to serve or that we will beable to compete effectively.**

# ** **

# **The Software Industry forHospitality Management is Undergoing Rapid Technological Changes and NewSoftware Introduced by Third Parties May Be Superior to the Software ThatWe Own or License**

# ** **

The software industry forhospitality management is subject to rapid and significant technologicalchange.  We cannot predict the effect oftechnological changes on our business. We expect that new products and services will emerge in the markets inwhich we compete.  These new products andservices may be superior to the products and services that we use or theseproducts and services may render our products and services obsolete.  Our failure to anticipate or respondadequately to the changes in technology and customer preferences, or to developand introduce new products in a timely fashion, could materially adverselyaffect our business and operating results.

 

# **Trading in Our Common Stock is Limited**

# ** **

The recent trading volumefor our Common Stock has been small, and the market for our common stock hasbeen less liquid than that of many other publicly traded companies.  During the twelve months ended December 31,2004, the average daily trading volume has been approximately 15,000 shares,whereas the average daily trading volume for an American Stock Exchange listedstock is substantially higher.  There canbe no assurance that a stockholder who desires to sell shares of Common Stockcan sell all of the shares that the stockholder desires to sell, either at allor at the desired times or prices.

 

# **Our International Operations Are Subject to AdditionalRisks**

# ** **

Approximately 25% of ourrevenues in the year ended December 31, 2004 were derived from foreignoperations and approximately 43% of our work force is based outside the UnitedStates.  Our financial performance isaffected to some extent by the fluctuation in value of the US dollar inrelation to the local currencies of the countries in which we do business. In addition,our foreign operations are subject to the usual risks that may affect suchoperations, including import and export restrictions, possible expropriation orother governmental actions, taxes and political changes. International salesare subject to inherent risks, including:

 

•      recessions in economiesoutside the United States,

•      limited protection ofintellectual property rights in some countries,

•      political instability,

•      terrorism,

•      unexpected changes inregulatory requirements and tariffs,

•      difficulties in staffing andmanaging foreign operations,

•      the possibility ofsubsidization of our competitors and the nationalization of business,

•      longer payment cycles,

•      greater difficulty inaccounts receivable collection, and

•      potentially adverse taxconsequences.

 

9

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# **We May Be Unable to Enforce or Defend OurOwnership and Use of Proprietary Technology**

# ** **

Our success depends to asignificant degree upon our proprietary technology upon and our licensing rightsto the principal application software products that we market.  We rely on a combination of trademark, tradesecret and copyright law and contractual restrictions to protect ourproprietary technology.  However, thesemeasures provide only limited protection, and we may not be able to detectunauthorized use or take appropriate steps to enforce our intellectual propertyrights, particularly in foreign countries where the laws may not protect ourproprietary rights as fully as in the United States.  Any litigation to enforce our intellectualproperty rights would be expensive and time-consuming, would divert managementresources and may not be adequate to protect our business.

 

We could be subject toclaims that we have infringed the intellectual property rights of others.  In addition, we may be required to indemnifyour resellers and users for similar claims made against them.  Any claims against us could require us tospend significant time and money in litigation, pay damages, develop newintellectual property or acquire licenses to intellectual property that is thesubject of the infringement claims. These licenses, if required, may not be available at all or onacceptable terms.  As a result,intellectual property claims against us could have a material adverse effect onour business, prospects, financial condition and results of operations.

 

# **American Stock Exchange Market De-listing**

# ** **

In June 2003, wewere de-listed from the American Stock Exchange (“AMEX”) and our stock begantrading on the Over-the-counter Bulletin Board. Thus, investors may find it more difficult to trade in our Common Stockor obtain accurate, current information concerning market prices. This may havehad a negative impact on the trading prices and the liquidity of the market forour Common Stock.  In addition, there maybe a more negative perception of our company by investors, customers and thirdparties doing business or considering doing business with us.  Also, our company may be treated lessfavorably with respect to regulatory requirements that are dependent uponlisting on a national stock exchange.

 

# **Forward-Looking Statements are Inherently Uncertain**

# ** **

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

 

**Access toCompany Information**

 

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

 

We make available, freeof charge, through our website at www.hotelinfosys.com, and by responding torequests addressed to our investor relations department the annual report on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-K. Thesereports are available as soon as reasonably practicable after such material iselectronically filed with or furnished to the SEC. Our website address iswww.hotelinfosys.com and these reports are available for review at ordownloading from that site. The information contained on our website is notpart of this document.

 

**Use of NOLs**

 

The Company has Federaland state net operating losses (NOL) carryovers that will expire in the years2005 through 2021.  The Company’sutilization of a portion of its NOL carryovers is subject to variousuncertainties including an annual limitation under Section 382 of theInternal Revenue Code of approximately $80,000 for NOL’s as of December 31,2004.

 

10

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**ITEM 2.****                                                     PROPERTIES**

 

As of July 12, 2005,the principal properties utilized by the Company were as follows:

 
| **Type of Facility**                                                                                             | ** ** | **Approximate Total  Square Footage** | ** ** | **Location**            | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------|------------|
|                                                                                                             |       |                                  |       |                    |       |
| Corporate  and Hospitality Headquarters, warehousing, administration, marketing, sales,  development and support |       | 26,955                                |       | Lake Forest, California |       |
| Sales and  support                                                                                               |       | 600                                   |       | Boston, Massachusetts   |       |
| Sales and  support                                                                                               |       | 500                                   |       | Allen, Texas            |       |
| Hotel  Information Systems (Ltd) Hong Kong headquarters, marketing, sales, and  support                          |       | 2,902                                 |       | Hong Kong               |       |
| Hotel  Information Systems (Ltd) Singapore sales and support                                                     |       | 4,529                                 |       | Singapore               |       |
| Hospitality  Services & Solutions (Ltd) Malaysia support and development.                               |       | 6,300                                 |       | Malaysia                |       |
| Hotel  Information Solutions Limited, European Headquarters, marketing, sales and  support                       |       | 2,225                                 |       | London                  |       |

 

All of the propertiesnoted above were occupied by the Company pursuant to leases with variousexpiration dates.  In addition to thepremises identified above, the Company leases 2 other locations around theworld.  Generally such leases are forterms of five years or less.  We believethat our current facilities are suitable for our needs.

 

# **ITEM 3.**                                                     LEGALPROCEEDINGS

# ** **

None.

 

# **ITEM 4.**                                                     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

# ** **

**None.**

** **

**PART II**

** **

# **ITEM 5.**                                                     MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

# ** **

In June 2003, theCompany was de-listed from the American Stock Exchange (“AMEX”) and begantrading on the Over-the-counter Bulletin Board under the symbol “MAIY.OB” andis currently being traded on under the symbol “MAIY.PK”.  Prior to listing on the AMEX, which occurred August 29,1995, our shares were traded on the Over-the-Counter Bulletin Board by variousmarket makers under the ticker symbol “MAIS”. The following table sets forththe high and low closing sales prices for our Common Stock for the indicatedperiods during 2003, 2004 and 2005, as reported by the AMEX andOver-the-counter Bulletin Board. On September 16, 2005, the closing priceof our Common Stock as reported by the Over-the-counter Bulletin Board was $0.055and there were 485 stockholders of record (See “Risk Factors” – American StockExchange Market Listing”).

 

11

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We have never paid anydividends and do not anticipate declaring or paying cash dividends in theforeseeable future.  We intend to retainfuture earnings, if any, to reinvest in our business.  The covenants in our current or futurefinancing agreements may prohibit or limit our ability to declare or pay cashdividends.

 
| **Period**      | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
|            |       |     |       |    |       |
| Fiscal 2003     |       |     |       |    |       |
| First  Quarter  |       | $        | 0.55       |    | $          | 0.06 |   |
| Second  Quarter |       | $        | 0.28       |    | $          | 0.05 |   |
| Third  Quarter  |       | $        | 0.25       |    | $          | 0.06 |   |
| Fourth  Quarter |       | $        | 0.15       |    | $          | 0.08 |   |
|            |       |     |       |    |       |
| Fiscal 2004:    |       |     |       |    |       |
| First  Quarter  |       | $        | 0.26       |    | $          | 0.14 |   |
| Second  Quarter |       | $        | 0.34       |    | $          | 0.16 |   |
| Third  Quarter  |       | $        | 0.24       |    | $          | 0.15 |   |
| Fourth  Quarter |       | $        | 0.21       |    | $          | 0.10 |   |
|            |       |     |       |    |       |
| Fiscal 2005:    |       |     |       |    |       |
| First  Quarter  |       | $        | 0.16       |    | $          | 0.09 |   |
| Second  Quarter |       | $        | 0.08       |    | $          | 0.04 |   |

 

# **ITEM 6.**                                                     SELECTEDFINANCIAL INFORMATION

# ** **

The information requiredby this item is incorporated by reference to our Annual Report under theheading, “Selected Financial Information”.

 

# **ITEM 7.**                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

# ** **

The information requiredby this item is incorporated by reference to our Annual Report under theheading, “Management’s Discussion and Analysis of Financial Condition andResults of Operations”.

 

# **ITEM 7A.**                                            QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

# ** **

# **Market Risk Disclosures**

# ** **

The following discussion aboutour market risk disclosures contains forward-looking statements.  Forward-looking statements are subject torisks and uncertainties.  Actual resultscould differ materially from those discussed in the forward-lookingstatements.  We are exposed to marketrisk related to changes in interest rates and foreign currency exchangerates.  We do not have derivativefinancial instruments for hedging, speculative, or trading purposes.

 

***Interest Rate Sensitivity***

*** ***

Of our $7.7 millionprincipal amount of indebtedness at December 31, 2004, none bears interestat a variable rate.  However, $5.7million bears interest at a fixed rate of 11%, $0.5 million bears interest at afixed rate of 12.5%, $0.8 million bears interest at 9.25% and $0.7 millionbears fixed interest rates ranging from zero to 6%. Since these debtinstruments bear interest at fixed rates, we have exposure to decreases ininterest rates because we still are required to pay the fixed rate even ifcurrent interest rates are lower.

 

***Foreign Currency Risk***

*** ***

We believe that ourexposure to currency exchange fluctuation risk is reduced because ourtransactions with international vendors and customers are generally transactedin US dollars.  The currency exchangeimpact on intercompany transactions was immaterial in 2002, 2003, and 2004.

 

12

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# **ITEM 8.**                                                     CONSOLIDATEDFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

# ** **

The information requiredby this item is incorporated by reference to our Annual Report under theheadings, “Consolidated Balance Sheets”, “Consolidated Statements of Operations”,“Consolidated Statements of Stockholders’ Deficiency and Comprehensive Income(Loss)”, “Consolidated Statements of Cash Flows”, “Notes to ConsolidatedFinancial Statements” and “Report of Independent Registered Accounting Firm”.

 

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

 

All other schedules andfinancial statements are omitted because they are not applicable or therequired information is shown in the consolidated financial statements or notesthereto.

 

# **ITEM 9.**                 CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

# ** **

None.

 

# **ITEM 9A.**                                            CONTROLSAND PROCEDURES

# ** **

The Company maintainscontrols and procedures designed to ensure that it is able to collect theinformation it is required to disclose in the reports it files with the SEC,and to process, summarize and disclose this information within the time periodsspecified in the rules of the SEC. The Company’s Chief Executive and Chief Financial Officers areresponsible for establishing and maintaining these procedures, and, as requiredby the rules of the SEC, evaluate their effectiveness.  Based on their evaluation of the Company’sdisclosure controls and procedures which took place as of a date within 90 daysof the filing date of this report, the Chief Executive and Chief FinancialOfficers believe that these procedures are effective to ensure that the Companyis able to collect, process and disclose the information it is required todisclose in the reports it files with the SEC within the required time periods.

 

Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesif any, within a company have been detected.

 

On November 17,2004, the Company’s independent auditors orally notified the Company’s AuditCommittee that they had identified significant deficiencies regarding theCompany’s internal controls. The deficiencies noted were mainly (a) thelack of segregation of duties and (b) the lack of adequate account analysisand reconciliations, and (c) insufficient supervision of the Company’saccounting personnel.  The Company believes such deficiencies wereprimarily attributable to changes in personnel within the accounting departmentcombined with the lack of adequate resources given the size of theCompany.  However, the Company has takensteps to improve these internal control weaknesses such as hiring of additionalaccounting personnel and the reallocation of duties to better facilitatesegregation of duties and supervision. Additionally, the Company has implemented procedures for timely andcomplete account analysis and reconciliations. We have implemented new accounting software during the first quarter of2005, which we believe mitigates certain weaknesses in our systems to ensureour financial statements are fairly presented in accordance with United StatesGenerally Accepted Accounting Principles.

 

Based on theinvestigation by the Company’s Audit Committee and additional proceduresperformed by management, the principalexecutive officer and principal financial officer have concluded that ourdisclosure controls and procedures are effective and will timely alertthe Company’s management to material information relating to the Company thatis required to be included in our periodic Securities and Exchange Committeefilings, and that the internal controls are sufficient to provide reasonableassurance that the consolidated financial statements are fairly presented inconformity with generally accepted accounting principles.

 

Since the date of themost recent evaluation of the Company’s internal controls by the ChiefExecutive and Chief Financial Officers, there have been no significant changesin such controls or in other factors that could have significantly affectedthose controls, including and corrective actions with regard to significantdeficiencies and material weaknesses.

 

13

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**PART III**

** **

# **ITEM 10.**                                              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

# ** **

*Directors*

 

The name, business address and experience of each of our directors forat least the past five years and certain other information concerning eachdirector has been furnished by the director and is set forth below.

 

***Richard S. Ressler,***46, has been the Chairman of the Board and adirector since 1995. He was our Chief Executive Officer from October 1994until February 1997 and our President from October 1994 until May 1995.He has served in each of these capacitiespursuant to a consulting agreement between our company and Orchard CapitalCorporation. Mr. Ressler is the founder and President of Orchard Capital,a firm that provides investment capital and advice to companies (including MAI)in which Orchard Capital or its affiliates invest. He has been a principal ofOrchard Capital since 1994. His present business address is 6922Hollywood Boulevard, Suite 900, Hollywood, California  90028. Mr. Ressler is Chairman of CIMGroup, Inc., which acts as an integrated real estate investment andmanagement services firm for institutional investors. He has been a principalof CIM Group and its predecessor since 1994. Mr. Ressler has been Chairmanof the Board and a director of j2 Global Communications, Inc., a leadingunified messaging service provider, since 1997, and served as Chief ExecutiveOfficer of j2 Global from March 1997 until January 2000, serving ineach of these capacities pursuant to a consulting agreement between j2 Globaland Orchard Capital.

 

***Zohar Loshitzer***,47, was appointed to our Board of Directors in January 1998. From July 1997through December 31, 2000, he was Chief Information Officer, and in 2001he became Executive Vice President, Corporate Strategy, for j2 GlobalCommunications, Inc., a leading unified messaging services provider. Hispresent business address is 6922 Hollywood Boulevard, Suite 900,Hollywood, California  90028.  From July 1997 through November 29,2000, he also served as a member of the Board of Directors of j2 GlobalCommunications, Inc. From August 2000 through December 31, 2001he acted as a consultant with MAI Systems Corporation. Since 1995, he has alsobeen a Managing Director of Orchard Telecom, a telecommunications-consultingfirm. From 1987 until 1995, he was the general manager and part owner of LifeAlert, a nationwide emergency response service.

 

***Stephen Ross***, 57,was elected to our Board of Directors in May 2001. He is currently aconsultant for Warner Bros. His present business address is 4000 WarnerBoulevard, Building 2, Suite 208, Burbank, California 91522. From 1989 to2001, he was employed by Warner Bros. as Executive Vice President, SpecialProjects. He also served from 1992 through 2001 as a director of the Sea WorldProperty Trust (an Australian theme park company). From 1986 through 1989, hewas employed by Lorimar Telepictures Corp. as Senior Vice President and GeneralCounsel. From 1981 through 1986, he worked with Telepictures Corp. where he wasSenior Vice President, General Counsel and a member of its board of directors.He also serves as a director of Grill Concepts, Inc., a restaurantcompany.

 

***Steven F. Mayer***,45, was elected to our Board of Directors in May 2001. Since December 2002,he has been Managing Director of Cerberus Capital Management, LLC, a privateinvestment firm that manages funds and accounts with approximately $12.5billion in aggregate committed capital. His present business address is 11812San Vicente Boulevard, Suite 300, Los Angeles, California 90049. Cerberusinvests primarily in businesses exhibiting the potential for business improvementand manages holdings in the United States and worldwide. From February 2002until November 2002, Mr. Mayer was Executive Managing Director ofGores Technology Group, LLC, a private investment and management firm. From November 1996until September 2001, he was a Managing Director and co-head of CorporateFinance of U.S. Bancorp Libra, the leveraged finance investment-banking unit ofU.S. Bancorp, and its predecessor company. He was also a Managing Director ofLibra Capital Partners, L.P., an affiliated private equity firm that sponsorsand invests in management-led buyouts, later stage growth financings, leveragedrecapitalizations, corporate divestitures, and acquisitions. From June 1994until November 1996, Mr. Mayer was a managing director of Aries CapitalGroup, LLC, a private investment firm that he co-founded. From April 1992until June 1994, when he left to co-found Aries Capital Group, Mr. Mayerwas a principal with Apollo Advisors, L.P. and Lion Advisors, L.P., affiliatedprivate investment firms. Prior to that time, Mr. Mayer was an attorneywith Sullivan & Cromwell specializing in mergers, acquisitions,divestitures, leveraged buyouts and corporate finance. Mr. Mayer currentlyserves as a director of Acterna Corporation, a leading telecommunications testand measurement company and Airway Industries, Inc., a leading luggage andtravel accessories company.

 

14

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*Executive Officers*

 

Thename, business address and experience for at least the past five years andcertain other information concerning each such executive officer has beenfurnished by the executive officer and is set forth below.

 

***W. Brian Kretzmer****,* 51, has been our Chief Executive Officer since August 1999and was appointed as our President on September 10, 2000. His presentbusiness address is 26110 Enterprise Way, Lake Forest, California 92630. Healso served as our Chief Financial Officer from August 1999 until March 2000.From August 1997 until July 1999, he was Executive Vice President andChief Financial Officer for Segue Corporation, a California-based privatecompany focused on providing support services to computer manufacturersutilizing Internet commerce. From July 1991 until July 1997 he heldvarious positions with us, including Vice President, Corporate Development,Controller, Vice President, Finance, Chief Financial Officer, and ChiefInformation Officer. From July 1995 until July 1996 he also served asthe President and Chief Operating Officer of Gaming Systems International, whichwas at that time a wholly-owned subsidiary of ours.

 

***James W. Dolan***,46, has been our Chief Financial Officer since March 2000 and our ChiefOperating Officer since March 2001. His present business address is 26110Enterprise Way, Lake Forest, California 92630. Previously, he served as our Vice President, Finance from September 1999until March 2000. From 1985 to 1999, Mr. Dolan served in positions ofincreasing responsibility with the accounting firm of KPMG LLP, where hemanaged audit and consulting projects for companies ranging in size fromstart-up operations to large public multinational organizations. Mr. Dolanalso served as KPMG’s senior audit manager to MAI from 1994 through 1997.

 

**Code of Business Conduct and Ethics**

 

We have adopted a “Code of Business Conduct and Ethics,” a code ofethics that applies to all employees, including our executive officers. Inaddition, we have adopted a supplemental code of ethics for our chief executiveofficer and chief financial officer and other senior accounting officers. A copy of both documents setting forth our Code of Business Conduct and Ethicsis posted on our Internet site at www.hotelinfosys.com. In the event we makeany amendments to, or grant any waivers of, a provision of the Code of BusinessConduct and Ethics that applies to the principal executive officer, principalfinancial officer, or principal accounting officer that requires disclosureunder applicable SEC rules, we intend to disclose such amendment or waiver andthe reasons therefore on a Form 8-K or on our next periodic report.

 

# **ITEM 11.**                                              EXECUTIVECOMPENSATION

# ** **

**Summary Compensation Table**

 

The following table shows, as to our Chairman, our Chief ExecutiveOfficer, and one other executive officer who served during the last fiscalyear, information concerning all compensation paid for services in allcapacities during the last three fiscal years.

 

**SUMMARYCOMPENSATION TABLE**

 
| ** **                          | ** ** | **Annual Compensation** | ** ** | **Long Term  Compensation Awards** | ** ** |
|-------------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| **Name and Principal  Position**    | ** ** | **Year**                | ** ** | **Salary($)**                      | ** ** | **Bonus($)** | ** ** | **Other  Annual  Compensation  ($)** | ** ** | **Restricted  Stock  Awards** | ** ** | **Securities  Underlying  Options(#)** | ** ** | **All  Other  Compensation  ($)** | ** ** |
|                                |       |                    |       |                               |       |   |   | ** ** |   |   |   |   |   | ** ** |   |
| Richard S. Ressler(1)               |       | 2004                    |       | $                                  | 144,000    | (2) | $ | 0 |   | $ | 0 |   | 12,500 | (3) | 0 |   | $ | 0 |   |
| Chairman                            |       | 2003                    |       | 252,000                            | (2)        | 0 |   | 0 |   | 12,500 |   | 6,250 |   | 0 |   |
|                                |       | 2002                    |       | 288,000                            | (2)        | 0 |   | 0 |   | 12,500 |   | 6,250 |   | 0 |   |
|                                |       |                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| W. Brian Kretzmer(4)                |       | 2004                    |       | $                                  | 306,000    |   | $ | 0 |   | $ | 0 |   | 62,500 | (5) | 0 |   | $ | 0 |   |
| Chief  Executive Officer & |       | 2003                    |       | 240,000                            |       | 55,000 |   | 0 |   | 62,500 |   | 0 |   | 0 |   |
| President                           |       | 2002                    |       | 240,000                            |       | 0 |   | 0 |   | 62,500 |   | 100,000 |   | 0 |   |

 

15

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### *Footnotes toTable:*

 

----

(1)                                   Mr. Ressleris an employee of Orchard Capital Corporation, which provides his services tous through a consulting agreement.

 

(2)                                   Aportion of Mr. Ressler’s 2002, 2003 and 2004 compensation has been accruedand not yet paid.

 

(3)                                   Mr. Resslerpresently holds 37,500 shares of vested restricted stock as of December 31,2004.

 

(4)                                   Mr. Kretzmerwas appointed to the position of Chief Executive Officer effective August 2,1999 and he assumed the position of Chief Financial Officer effective August 17,1999 (Mr. Kretzmer subsequently resigned as Chief Financial Officer on March 24,2000 when Mr. Dolan was elected to this position). He assumed the positionof President effective September 10, 2000.

 

(5)                                   Mr. Kretzmerpresently holds 187,500 shares of vested restricted stock as of December 31,2004.

 

(6)                                   Mr. Dolanwas appointed to the position of Chief Financial Officer effective March 24,2000 and to the position of Chief Operating Officer effective March 10,2001. Previously, from September 1999 through March 2000 he served asour Vice President, Finance.

 

(7)                                   Mr. Dolanpresently holds 112,500 shares of vested restricted stock as of December 31,2004.

 

### *OptionsGranted in Last Fiscal Year*

###  

The following table sets forth certaininformation regarding grants of stock options made during the fiscal year endedDecember 31, 2004 to the Company’s chairman and executive officers namedin the Summary Compensation Table:

 
| ** **        | ** ** | **Number of  Securities  Underlying  Options** | ** ** | **% of Total  Options Granted** | ** ** | **Exercise Price** | ** ** | **Expiration** | ** ** | **Potential Realizable Value at  Assumed Annual Rates  of Stock Price  Appreciation for  Option Term (1)** | ** ** |
|-------------------|------------|------------------------------------------------|------------|---------------------------------|------------|--------------------|------------|----------------|------------|------------------------------------------------------------------------------------------------------------|------------|
| **Name**          | ** ** | **Granted (2)**                                | ** ** | **In Fiscal Year (3)**          | ** ** | **($/Share) (4)**  | ** ** | **Date**       | ** ** | **5% ($)**                                                                                                 | ** ** | **10% ($)** | ** ** |
| ** **        | ** ** | ** **                                     | ** ** | ** **                      | ** ** | ** **         | ** ** | ** **     | ** ** | ** **                                                                                                 | ** ** | ** ** | ** ** |
| Richard Ressler   |       | N/A                                            |       | N/A                             |       | N/A                |       | N/A            |       | N/A                                                                                                        |       | N/A |   |
| W. Brian Kretzmer |       | N/A                                            |       | N/A                             |       | N/A                |       | N/A            |       | N/A                                                                                                        |       | N/A |   |
| James Dolan       |       | N/A                                            |       | N/A                             |       | N/A                |       | N/A            |       | N/A                                                                                                        |       | N/A |   |

 

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(1)                                  Potentialrealizable value is based on the assumption that the Common Stock appreciatesat the annual rate shown (compounded annually) from the date of grant until theexpiration of the option term. These numbers are calculated based on therequirements promulgated by the Securities and Exchange Commission and do notrepresent an estimate by the Company of future stock price growth.

 

(2)                                  Therewere no stock options granted by us in 2004.

 

(3)                                  Optionsare granted at an exercise price equal to the market value of the Common Stockas listed on the OTC Bulletin Board.

 

(3)                                  Theexercise price and tax withholding obligations may be paid in cash and, subjectto certain conditions or restrictions, by delivery of already-owned shares orpursuant to a cashless exercise procedure under which the optionee providesirrevocable instructions to a brokerage firm to sell the purchased shares andto remit to the Company, out of the sale proceeds, an amount equal to theexercise price plus all applicable withholding taxes.

 

16

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**Aggregated Option Exercises in Last FiscalYear and Fiscal Year End Option Values**

 

Nooptions were exercised by any of the executive officers during the year ended December 31,2004. The value of the options held at the end of the year are set forth in thefollowing table:

 

**VALUE OFUNEXERCISED STOCK OPTIONS AT END OF YEAR**

 
| ** **         | ** ** | **Number of Securities Underlying  Unexercised Options at Fiscal  Year-End (#)** | ** ** | **Value of Unexercised  In-The-Money Options at  Fiscal Year-End ($) (1)** | ** ** |
|--------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **Name**           | ** ** | **Exercisable**                                                                  | ** ** | **Unexercisable**                                                          | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Richard S. Ressler |       | 14,063                                                                           |       | 4,688                                                                      |       | $ | 0.00 |   | $ | 0.00 |   |
| W. Brian Kretzmer  |       | 591,667                                                                          | (2)        | 33,333                                                                     |       | $ | 0.00 |   | $ | 0.00 |   |
| James W. Dolan     |       | 233,333                                                                          |       | 16,667                                                                     |       | $ | 0.00 |   | $ | 0.00 |   |

 

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(1)                                   Marketvalue of underlying securities at fiscal year end ($0.14 per share), minus theexercise price.

 

(2)                                  Includes225,000 warrants issued to Mr. Kretzmer in May 2000 which have a tenyear term with an exercise price of $0.56 per share. The exercise price ofthese warrants will increase with the fair market value of Common Stock whenthe fair market value exceeds $2.81 per share.

 

**REPORT OF THE COMPENSATION COMMITTEE OF THEBOARD OF DIRECTORS ON EXECUTIVE COMPENSATION**

 

**General**

 

The policy of the Company regarding thecompensation of its executive officers is to maintain a total compensationprogram which would retain the services of key executives and (a) assurethe availability of their skills for the benefit of the Company, (b) secureto the Company freedom from competition by such persons within reasonable andlawful limits, and (c) provide appropriate base compensation, benefits,and financial incentives through bonus, severance and other employment-relatedprograms. The Compensation Committee of the Board of Directors recommends,subject to the Board’s approval, executive compensation, including thecompensation of the Chairman and the Chief Executive Officer. The CompensationCommittee or the Board of Directors determines and approves stock option grantsfor all employees, including the Chief Executive Officer. The Committeecurrently comprises two non-employee directors, one of whose services areprovided pursuant to a consulting agreement between MAI and his employer.

 

**Compensation Philosophy**

 

The Company operates in the highlycompetitive and rapidly changing high technology industry. The goals of theCompany’s compensation program are to align compensation with the Company’soverall business objectives and performance, to foster teamwork, and to enablethe Company to attract, retain and reward employees who contribute to itslong-term success. The Committee also seeks to establish compensation policiesthat allow the Company flexibility to respond to changes in its businessenvironment.

 

**Compensation Components**

 

Compensationfor the Company’s executive officers generally consists of salary, annualincentive, and stock option and restricted stock awards. The Committee assessespast performance, anticipated future contributions and various subjectivefactors such as their responsibilities, qualifications, and years of experiencein establishing the total amount and mix of each element of compensation.

 

**Salary**. The salariesof the executive officers are determined annually by the Compensation Committeebased upon various subjective factors such as the executive’s responsibilities,position, qualifications, years of experience, and individual performance. Inno such case does the Committee undertake a formal survey of analysis ofcompensation paid by other companies.

 

**Annual Incentive**. The Committee annuallyreviews and approves an executive compensation plan. A target, expressed as apercentage of salary, is established for each corporate officer, based on thescope of his or her responsibility. Actual payment is computed as a percentageof that target based on the Company’s performance in achieving specifiedobjectives, and the individual performance of executives.

 

17

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**Stock Options, Warrants and Restricted Stock**.Stock option, warrants and restricted stock awards are designed to align theinterests of executives with the long-term interests of the stockholders. TheCommittee approves option, warrant and restricted stock grants subject tovesting periods (usually over a three or four-year period) to retain executivesand encourage sustained contributions. The exercise price of options andwarrants, or the issue price in relation to restricted stock, is the marketprice on the date of grant.

 

TheCompany is subject to Section 162(m) of the Internal Revenue Code, adoptedin 1993, which limits the deductibility of certain compensation payments to itsofficers. The Company does not have a policy requiring the Committee to qualifyall compensation for deductibility under this provision. The Company does notcurrently have any non-deductible compensation plans. The Company believes thatany compensation expense incurred in connection with the exercise of stockoptions granted under its 1993 Employee Stock Option Plan will continue to bedeductible as performance-based compensation.

 

Inawarding stock options to its corporate level executive officers, the Committeeconsiders the executive’s performance as well as options previously grantedwhen determining additional option awards. The Committee does not currentlyhave a targeted percentage of equity ownership for executives.

 

**Compensation of Chairman**

 

Richard Ressler’s services as Chairman (andformerly as Chief Executive Officer) have been provided pursuant to aconsulting agreement dated August 15, 1994 (amended as of August 16,1997, August 24, 1997, August 24, 1998, August 24, 1999, August 24,2000, August 24, 2001, August 24, 2002, August 24, 2003) withOrchard Capital Corporation, Mr. Ressler’s employer. Pursuant to thatagreement, Orchard was paid $24,000 per month up through and including September 30,2003, at which time this amount was voluntarily reduced to $12,000 per month,for the balance of the term through August 31, 2006.

 

In August 1994, Orchard was grantedwarrants to purchase up to 625,000 shares of the Company’s Common Stock at$1.90 per share (which Orchard immediately transferred to Mr. Ressler). Mr. Resslerexercised 157,895 of these warrants in September 1997. The remainder ofthe $1.90 warrants expired on August 14, 2003 (these warrants were originallyscheduled to expire on August 14, 1999, but the Committee approved twoextensions). In March 1997, Orchard was issued warrants to purchase up to50,000 shares of Common Stock at $7.50 per share (which it immediatelytransferred to Mr. Ressler). In order for the Company to raise equitycapital, the exercise price of these warrants was adjusted to $3.04 on September 12,1997 and the warrants were subsequently exercised. In August, 1999, Orchard wasgranted options under the Company’s 1993 Employee Stock Option Plan to purchase225,000 shares of Common Stock at $2.50 per share. One-third of these optionsbecame exercisable on each of the first three anniversaries of the grant, andthe options expire in August, 2009.  Theoptions to purchase 225,000 shares of Common Stock were voluntarily canceledduring 2004.

 

Commencing in 1999, Mr. Ressler becameeligible to receive stock options under the Company’s Non-Employee Director’sOption Plan. He currently holds options to acquire 50,000 shares of CommonStock under the Plan. Additionally, Mr. Ressler participates in theCompany’s 2001 Restrictive Stock Plan and has received a grant of 50,000 sharesof restricted Common Stock, of which 37,500 shares have vested.  During 2004, options to purchase 31,250shares of Common Stock were voluntarily canceled.

 

**Compensation of Chief Executive Officer**

 

The Company considers that the compensationlevel of the Chief Executive Officer should be comparable to those companies inthe computer software and services peer group (including certain peer companiesthat are included in the S&P Application Software composite index). Basedupon these factors, the Committee determined that Brian Kretzmer should receivea base salary of $300,000. For fiscal 2004, Mr. Kretzmer did not participatein an incentive compensation plan. Additionally, Mr. Kretzmer participatesin the Company’s 2001 Restrictive Stock Plan and has received a grant of250,000 shares of restricted Common Stock, of which 250,000 shares have vestedas of December 31, 2004.

 

Respectfully submitted,

 

Zohar Loshitzer, Chairman

Richard S. Ressler

 

Date: September 16, 2005

 

18

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**REPORT OFTHE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS**

 

The role of the Audit Committee is to assistthe Board of Directors in its oversight of the Company’s financial reportingprocess. The Board of Directors, in its business judgment, has determined thatall current members of the Committee are “independent”, as required by thelisting standards of the American Stock Exchange.

 

The Committee operates pursuant to a Charterthat was adopted by the Board on June 12, 2000, and amended and restatedon March 15, 2001 and again on March 25, 2004. As set forth in theCharter, management of the Company is responsible for the preparation,presentation and integrity of the Company’s financial statements, the Company’saccounting and financial reporting principles and internal controls andprocedures designed to assure compliance with accounting standards andapplicable laws and regulations. The independent registered public accountingfirm is responsible for auditing the Company’s financial statements andexpressing an opinion as to their conformity with generally accepted accountingprinciples.

 

In the performance of its oversight function,the Committee has considered and discussed the audited financial statementswith management and the independent registered public accounting firm. TheCommittee has also discussed with the independent registered public accountingfirm the matters required to be discussed by Statement on Auditing Standards No. 61,*Communication with Audit Committees*, ascurrently in effect. Finally, the Committee has received the writtendisclosures and the letter from the independent registered public accountingfirm required by Independence Standards Board Standard No. 1, *Independence Discussions with Audit Committees,* as currentlyin effect.

 

The members of the Audit Committee are notprofessionally engaged in the practice of auditing or accounting and are notexperts in the fields of accounting or auditing, including in respect ofauditor independence. We do not currently have a financial expert serving onthe Audit Committee.  We do not presentlyhave specific plans with respect adding a director who would constitute afinancial expert, as defined by SEC rules. Members of the Committee rely without independent verification on theinformation provided to them and on the representations made by management andthe independent registered public accounting firm. Accordingly, the AuditCommittee’s oversight does not provide an independent basis to determine thatmanagement has maintained appropriate accounting and financial reportingprinciples or appropriate internal control and procedures designed to assurecompliance with accounting standards and applicable laws and regulations.Furthermore, the Audit Committee’s considerations and discussions referred toabove do not assure that the audit of the Company’s financial statements hasbeen carried out in accordance with generally accepted auditing standards, thatthe financial statements are presented in accordance with generally acceptedaccounting principles or that the Company’s auditors are in fact “independent”.

 

Based upon the reports and discussions describedin this report, and subject to the limitations on the role and responsibilitiesof the Committee referred to above and in the Charter, the Committeerecommended to the Board that the audited financial statements be included inthe Company’s Annual Report on Form 10-K for the year ended December 31,2004 to be filed with the Securities and Exchange Commission.

 

Respectfully submitted,

 

Steven F. Mayer

Stephen Ross

 

Date:  September 16, 2005

 

19

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**PERFORMANCEGRAPH**

 

Set forth below is a line graph comparing the annual percentage changein the cumulative return to the stockholders of the Company’s Common Stock withthe cumulative return of the S&P 500 Index and the S&P Computer SystemsIndex for the period commencing January 1, 2000 and ending December 31,2004. The information contained in the performance graph shall not be deemed “solicitingmaterial” or to be “filed” with the Securities and Exchange Commission, norshall such information be incorporated by reference into any future filingunder the Securities Act of 1933 as amended (the “Securities Act”) or ExchangeAct, except to the extent that the Company specifically incorporates it byreference into such filing. The stock price performance on the following graphis not necessarily indicative of future stock price performance.

 

**COMPARISONOF 5 YEAR CUMULATIVE TOTAL RETURN***

AMONG MAI SYSTEMS CORPORATION,THE S & P 500 INDEX

AND THE S & PAPPLICATION SOFTWARE INDEX

 

 

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* $100 invested on 12/31/99 in stock or index-including reinvestment ofdividends.  Fiscal year ending December 31.

 

Copyright © 2002, Standard & Poor’s, a division of TheMcGraw-Hill Companies, Inc. All rights reserved.

www.researchdatagroup.com/S&P.htm

 
|   | Graph  produced by Research Data Group, Inc. | 7/21/2005 |
|--------|---------------------------------------------------|-----------|

 

20

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# **ITEM 12.**                                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

# ** **

The following table sets forth informationregarding the beneficial ownership of the persons listed below as of December 31,2004. Beneficial ownership is determined in accordance with Rule 13d-3promulgated by the Commission under the Exchange Act and generally includesvoting or investment power with respect to securities. Except as indicatedbelow, we believe each holder possesses sole voting and investment power withrespect to all of the shares of common stock owned by that holder, subject tocommunity property laws where applicable. In computing the number of sharesbeneficially owned by a holder and the percentage ownership of that holder,shares of common stock subject to options or warrants held by that holder thatare currently exercisable or are exercisable within 60 days after the date ofthe table are deemed outstanding. Those shares, however, are not deemedoutstanding for the purpose of computing the percentage ownership of any otherperson or group. The inclusion of shares in this table as beneficially owned isnot an admission of beneficial ownership

 

Our controlling stockholder is HIS Holding,LLC, which we also refer to in this Annual Report on Form 10-K as the “InvestorGroup.”  This entity is a Delawarelimited liability company that was formed on March 23, 2004 to act as aholding company for investments in hospitality companies. Voting and dispositivepower over shares of our common stock held by HIS Holding, LLC is held byRichard S. Ressler as the managing member. The other members of HIS Holding, LLC are James W. Dolan, W. BrianKretzmer and Canyon Capital Advisors, LLC.

 
| ** **                      | ** ** | **Number of** | ** ** | **Percentage**        | ** ** |
|---------------------------------|------------|---------------|------------|-----------------------|------------|
| **Name and Address**            | ** ** | **Shares**    | ** ** | **of Class (1)** | ** ** |
|                            |       |          |       |                  |       |
| Canyon Capital Advisors LLC (2) |       | 2,515,600     |       | 4.35                  | %          |
|                            |       |          |       |                  |       |
| Richard S. Ressler (3)          |       | 44,787,897    |       | 77.42                 | %          |
|                            |       |          |       |                  |       |
| W. Brian Kretzmer (4)           |       | 1,086,033     |       | 1.88                  | %          |
|                            |       |          |       |                  |       |
| James W. Dolan (5)              |       | 650,000       |       | 1.12                  | %          |
|                            |       |          |       |                  |       |
| Investor Group (6)              |       | 43,172,110    |       | 74.63                 | %          |

 

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(1) For each individual and group in the table, percentageownership is calculated by dividing the number of shares beneficially owned bysuch person or group, plus shares acquirable within 60 days of the date of thistable by such person or group, by the sum of 57,847,862 shares of common stockoutstanding on the date which is within 60 days of the date of this table plusshares of common stock acquirable within 60 days of the date of this table bysuch person or group.

 

(2) Canyon Capital Advisors LLC, The Value Realization Fund L.P.,The Value Realization Fund B, L.P., C.P.I. Securities, L.P., The Canyon ValueRealization Fund (Cayman), Ltd., GRS Partners II, Mitchell R. Julis, Joshua S.Friedman and R. Christian B. Evensen, as a group, beneficially own 2,515,600shares of common stock. Power to vote or dispose of the shares beneficiallyowned by Canyon Capital Advisors, LLC is held jointly by Messrs. Julis andFriedman, as managing partners.  Theaddress of all of the above-referenced entities is 9665 Wilshire Boulevard, Suite 200,Beverly Hills, California 90212.

 

(3) Mr. Ressler’s address is c/o Orchard Capital Corporation,6922 Hollywood Boulevard, Suite 900, Hollywood, California  90028. Includes 14,063 shares of common stockissuable upon exercise of options held by Mr. Ressler which are currentlyexercisable and exercisable within 60 days of the date of this table. Alsoincludes 43,172,110 shares of common stock issued to the Investor Group overwhich Mr. Ressler has voting and dispositive control.

 

(4)  Includes 650,000 shares of common stock issuable uponexercise of options or warrants held by Mr. Kretzmer that are currentlyexercisable and exercisable within 60 days of the date of this table.

 

(5)  Includes 250,000 shares of common stock issuable uponexercise of options held by Mr. Dolan which are currently exercisable andexercisable within 60 days of the date of this table.

 

(6) The InvestorGroup consists of certain members of senior management and/or our Board ofDirectors (Richard S.  Ressler is theChairman of our Board of Directors, W. Brian Kretzmer is our Chief ExecutiveOfficer and President and James W. Dolan is our Chief Financial and OperatingOfficer) and our principal senior lender, Canyon Capital Advisors, LLC.  Mr. Ressler and Canyon Capital Advisors,LLC own 37.5% each, and Messrs. Kretzmer and Dolan own 12.5% each,

 

21

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of the shares held by HISHolding.  Under certain circumstances,based upon their performance and the our performance, Messrs. Kretzmer’sand Dolan’s percentage ownership interest in HIS Holding may be increased to20% each.  The managing member of HISHolding, LLC is Orchard Capital Corporation, a California corporation, of whichRichard S. Ressler is president and the controlling shareholder.  The address for HIS Holding, LLC is 6922Hollywood Boulevard, Suite 900, Los Angeles, California 90028.

 

# **Security authorized forissuance under equity compensation plans**

# ** **

Thefollowing table provides information as of December 31, 2004 regardingcompensation plans (including individual compensation arrangements) under whichequity securities of the Company are authorized for issuance.

 
| **Plan Category**                                           | ** ** | **Number of securities to be  issued upon exercise of  outstanding options and  warrants** | ** ** | **Weighted-average exercise  price of outstanding  options and warrants** | ** ** | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column a)** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                    | ** ** | **(b)**                                                                   | ** ** | **(c)**                                                                                                                                            | ** ** |
|                                                        |       |                                                                                       |       |                                                                      |       |                                                                                                                                               |       |
| Equity  Compensation Plans Approved By Security Holders     |       | 1,372,750                                                                                  |       | $                                                                         | 0.94       |                                                                                                                                               | 850,397    |   |
| Equity  Compensation Plans not Approved By Security Holders |       | 1,275,000                                                                                  |       | $                                                                         | 0.43       |                                                                                                                                               | —     |   |
|                                                        |       |                                                                                       |       |                                                                      |       |                                                                                                                                               |       |
| Total                                                       |       | 2,647,750                                                                                  |       | $                                                                         | 1.44       |                                                                                                                                               | 850,397    |   |

 

See note 12 to theConsolidated Financial Statements for information regarding the materialfeatures of the above plans.

 

22

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**ITEM 13.****                                              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information with respectto relationships, if any between our directors and officers may be found inItem 10 above  captioned “Directors andExecutive Officers of the Registrant.” Information with respect to related transactions between our directorsand officers, may be found in Part I, Item I of this report.

 

**Compensation Committee Interlocks and InsiderParticipation**

 

The Compensation Committee currently consistsof Messrs. Loshitzer and Ressler. One of our former officers, Richard S.Ressler, but no current officer, serves on the Compensation Committee. Mr. Resslerprovides, and Mr. Loshitzer has provided, consulting services to theCompany pursuant to consulting agreements that are disclosed below.

 

Mr. Ressler’s services as Chairman (andformerly as Chief Executive Officer) have been provided pursuant to aconsulting agreement dated August 15, 1994 (amended as of August 16,1997, August 24, 1997, August 24, 1998, August 24, 1999, August 24,2000, August 24, 2001, August 24, 2002, August 24, 2003) withOrchard Capital Corporation, Mr. Ressler’s employer. Pursuant to thatagreement, for Mr. Ressler’s services Orchard was paid $20,000 per monthup through and including August 15, 1996, and was paid $24,000 per monthup until October 1, 2003, at which time Orchard voluntarily decreased itsfee to $12,000 per month.

 

In August, 1999, Orchard was granted optionsunder the Company’s 1993 Employee Stock Option Plan to purchase 225,000 sharesof Common Stock at $2.50 per share. All of these options were voluntarilycanceled during 2004.

 

Commencing in 1999, Mr. Ressler becameeligible to receive stock options under the Company’s Non-Employee Director’sOption Plan. He currently holds options to acquire 50,000 shares of CommonStock under the Plan. Additionally, Mr. Ressler participates in theCompany’s 2001 Restricted Stock Plan and has received a grant of 50,000 sharesof restricted Common Stock, of which 37,500 shares are vested, and another12,500 shares will become vested on May 21, 2005.  During 2004, options to purchase 31,250shares of Common Stock were voluntarily canceled.

 

The compensationpaid to Orchard pursuant to the consulting agreement and the amendments theretowas determined by the Compensation Committee and the Board of Directors basedupon various subjective factors such as Mr. Ressler’s responsibilities,qualifications, years of experience, individual performance, and perceivedcontributions to the Company.

 

**Employment Contracts and Change of ControlArrangements**

 

We currently haveno employment contracts with any of our executive officers named in the SummaryCompensation Table above (but we do have a consulting agreement with OrchardCapital Corporation which supplies the services of Richard S. Ressler, ourChairman). (See “Compensation Committee Interlocks and Investor Participation.”).  Our 1993 Employee Stock Option Plan andNon-Employee Directors’ Stock Option Plan each provide that upon a change ofcontrol all options granted pursuant to the plans shall become immediatelyexercisable in full. There are similar provisions in effect for warrants andrestricted stock granted to officers and directors.

 

**ITEM 14.****                                              PRINCIPALACCOUNTANT FEES AND SERVICES**

 

The Board of Directors selected BDO Seidman,LLP to audit our financial statements for the fiscal year ending December 31,2004. The decision of the Board of Directors to appoint BDO Seidman, LLP wasbased on the recommendation of the Audit Committee. Before making itsrecommendation to the Board of Directors, the Audit Committee carefullyconsidered that firm’s qualities as independent registered public accountingfirm. This included a review of the qualifications of the engagement team, thequality control procedures the firm has established, and any issues raised bythe most recent quality control review of the firm; as well as its reputationfor integrity and competence in the fields of accounting and auditing. TheAudit Committee’s review also included matters required to be considered underthe SEC’s Rules on Auditor Independence, including the nature and extentof non-audit services, to ensure that they will not impair the independence ofthe accountants. The Audit Committee expressed its satisfaction with BDOSeidman, LLP in all these respects.

 

The Audit Committee has established rules governingour use of BDO Seidman, LLP for non-audit services.  The Audit Committee has determined that theaccounting advice and tax services provided by BDO Seidman, LLP is compatiblewith maintaining BDO Seidman LLP’s independence.

 

23

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**Auditor Fee Disclosure**

 

The following is a summary of fees billed byBDO Seidman, LLP for audit and other professional services during fiscal years2004 and 2003:

 
| ** **                                                                                                                                                                                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                                                                                |       |     |       |     |       |
| **AUDIT  FEES**include the review of interim consolidated financial  statements, annual audit of the consolidated financial statements, required  statutory audits of certain foreign subsidiaries and assistance with SEC  filings |       | $        | 211,000    |     | $          | 166,000 |   |
|                                                                                                                                                                                                                                |       |     |       |     |       |
| **AUDIT RELATED FEES**include  the annual audit of the 401(k) plan                                                                                                                                                                  |       | $        | 12,000     |     | $          | 5,000 |   |
|                                                                                                                                                                                                                                |       |     |       |     |       |
| **TAX FEES**include tax compliance, transactional consulting,  and tax advice for multi-state and global restructuring and assistance with  certain foreign regulatory filings and tax issues                                       |       | $        | 10,000     |     | $          | 11,000 |   |
|                                                                                                                                                                                                                                |       |     |       |     |       |
| **ALL  OTHER FEES**include license fees for online financial  reporting and assurance literature. There were no fees for Financial  Information Design and Implementation in fiscal years 2004 and 2003                             |       | $        | —     |     | $          | 8,000 |   |
|                                                                                                                                                                                                                                |       |     |       |     |       |
| **TOTAL FEES**                                                                                                                                                                                                                      |       | $        | 233,000    |     | $          | 190,000 |   |

 

The Audit Committee is directly responsiblefor determining the compensation of the independent registered publicaccounting firm and has established pre-approval policies and procedures forall BDO Seidman, LLP services. All work was pre-approved by the AuditCommittee. When considering matters that could bear on the independence of BDOSeidman, LLP, the Committee takes into account both the nature of any potentialwork performed and the related fees. The Audit Committee has considered whetherthe provision of the non-audit services described above is compatible withmaintaining BDO Seidman’s independence and has concluded that it is compatible.The Committee aggregates all audit-related and recurring, non-audit costs whenevaluating the potential impact of BDO Seidman fees for discretionary projectson auditor independence.

 

24

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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.                                                                                                                      |

 

25

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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).                                                                                                                                                                                 |

 

26

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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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 14.1        |   | Code  of Ethics (All Employees)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 14.2        |   | Code  of Ethics (Chief Executive and Chief Financial Officers and Other Senior  Accounting Personnel)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 21.1        |   | Subsidiaries  of MAI Systems Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 23.1        |   | Report of  Independent Registered Public Accounting Firm from BDO Seidman LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 23.2        |   | Consent  of BDO Seidman, LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1        |   | Certification  of Chief Executive Officer as required by Section 302 of Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2        |   | Certification of Chief  Financial Officer as required by Section 302 of Sarbanes-Oxley Act of  2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (b)         |   | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|        |   | 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 |

 

27

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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 therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities indicated 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        |       |                                                 |

 

28

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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).

 

29

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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 RegisteredPublic Accounting 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

 

30

----

 

**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 | ) |

 

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

(2)          Unaudited

 

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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, seasonalityand other variations in the buying cycles of certain of our customers, thetiming of 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 to revenuerecognition, accounts receivable and intangible assets. We base our estimateson historical experience and on various other assumptions that are believed tobe reasonable under the circumstances. This forms the basis of judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may materially differ from these estimatesunder 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 the servicesare provided. Maintenance revenues are recorded evenly over the relatedcontract period.

 

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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 balancesoutstanding. If the financial condition of our customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required which would result in an additional general andadministrative expense in the period such determination was made. While suchcredit losses have historically been within our expectations and the provisionsestablished, we cannot guarantee that we will continue to experience the samecredit loss rates that 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 notgoing to be able to fully realize its recorded deferred tax assets, it wouldmake an adjustment 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.

 

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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 ofapproximately $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.

 

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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 enhanced products;

•      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.

 

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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                       | )%         |

 

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(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 during2003.  This charge was offset by lowerbalances of interest bearing debt during 2004 as compared to 2003 mainly due tothe conversion of approximately $3.3 million of indebtedness by the InvestorGroup to 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.

 

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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 $2,591,000in 2003, as a result of decreased professional services and maintenance services mainly due to decreasedcapital spending on information technology in 2003 due to the effects of adownturn 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,advertisement and travel as the Company continues to actively and aggressivelymarket its enterprise suite of applications and services which are scheduledfor general release 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.

 

37

----

 

**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, consolidatedresults of operations, or liquidity.

 

38

----

 

**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

 

39

----

 

**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.

 

40

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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.

 

41

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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.

 

42

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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

 

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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.

 

45

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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.

 

46

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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.

 

47

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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.

 

48

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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 |   |

 

49

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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                           |       | $                                  | 5,251,000  |                                    |       | * |
| Tradenames                         |       | 2,659,000                          |       | 15 years                                |       |
| Customer  relationships            |       | 2,285,000                          |       | 7 years                                 |       |
| Capitalized  software              |       | 2,503,000                          |       | 7 years                                 |       |
|                               |       | $                                  | 12,698,000 |                                    |       |   |

 

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

 

50

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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

 

51

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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.

 

52

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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.

 

53

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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.

 

54

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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.

 

55

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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 |   |

 

56

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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

 

57

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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.

 

58

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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.

 

59

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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       |   |

 

60

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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.

 

61

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**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 |   |

 

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(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).

 

62

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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 |   |

 

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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.

 

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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.

 

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**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                 |       |

 

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(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).

 

66

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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 |   |

 

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