##### Table of Contents



---

---

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q/A




QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002


Commission File No. 1-9158

---

MAI SYSTEMS CORPORATION

(Exact name of Registrant as Specified in its Charter)


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

9601 Jeronimo Road
Irvine, California
92618
(Address of Principal Executive Offices)

Registrants telephone number, including area code: (949) 598-6000

---

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.

Yes  x  No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

Yes  x  No

As of November 19, 2002, 14,568,585 shares of the registrants Common Stock, $0.01 par value, were outstanding.



---

---





---

TABLE OF CONTENTS



|                                                     |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                      
|                                                     | Item 1. Financial Statements                                                                 
|Notes to Condensed Consolidated Financial Statements
|                                                     | Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
|                                                     | Item 3. Quantitative And Qualitative Disclosures About Market Risk                           
|                                                     | Item 4. Evaluation of Disclosure Controls and Procedures                                     
|PART II  OTHER INFORMATION                         
|                                                     | Item 1. Legal Proceedings                                                                    
|                                                     | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                     | Item 3. Defaults Upon Senior Securities                                                      
|                                                     | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                     | Item 5. Other Information                                                                    
|                                                     | Item 6. Exhibits and Reports on Form 8-K                                                     



---



##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Financial Statements

MAI SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                                                                     |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |          |         |  
|------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ----- | --------------------------------- | ------- | ------------------- | ----- | -------- | ------- | -
|                                                                                     |                                                                                                                                                                                          |                                |       | (in thousands, except share data)
|                                                                                     |                                                                                                                                                                                          |                                |       | As of December 31,                |         | As of September 30,
|                                                                                     |                                                                                                                                                                                          |                                |       | 2001                              |         | 2002               
|                                                                                     |                                                                                                                                                                                          |                                |       |                                   |         |                    
|ASSETS                                                                               |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|Current assets:                                                                      |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|Cash                                                                                 |                                                                                                                                                                                          | $                              | 1,224 |                                   |         | $                   | 545   |         
|Receivables, less allowance for doubtful accounts of
$1,023 in 2001 and $546 in 2002 |                                                                                                                                                                                          |                                | 2,396 |                                   |         |                     | 2,244 |         
|Inventories                                                                          |                                                                                                                                                                                          |                                | 90    |                                   |         |                     | 86    |         
|Note receivable                                                                      |                                                                                                                                                                                          |                                | 500   |                                   |         |                     | 750   |         
|Prepaids and other assets                                                            |                                                                                                                                                                                          |                                | 918   |                                   |         |                     | 807   |         
|Current assets held for sale                                                         |                                                                                                                                                                                          |                                | 204   |                                   |         |                     | 579   |         
|                                                                                     |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|                                                                                     |                                                                                                                                                                                          | Total current assets           |       |                                   | 5,332   |                     |       |          | 5,011   |  
|Furniture, fixtures and equipment, net                                               |                                                                                                                                                                                          |                                | 1,221 |                                   |         |                     | 924   |         
|Notes receivable                                                                     |                                                                                                                                                                                          |                                | 250   |                                   |         |                     |      |         
|Intangibles, net                                                                     |                                                                                                                                                                                          |                                | 799   |                                   |         |                     | 1532  |         
|Assets held for sale                                                                 |                                                                                                                                                                                          |                                | 613   |                                   |         |                     | 563   |         
|Other assets                                                                         |                                                                                                                                                                                          |                                | 73    |                                   |         |                     | 261   |         
|                                                                                     |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|                                                                                     |                                                                                                                                                                                          | Total assets                   |       | $                                 | 8,288   |                     |       | $        | 8,291   |  
|                                                                                     |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|LIABILITIES AND STOCKHOLDERS DEFICIENCY                                             |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|Current liabilities:                                                                 |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|                                                                                     | Current portion of long-term debt                                                                                                                                                        |                                | $     | 112                               |         |                     | $     | 5,856    |        
|                                                                                     | Line of credit                                                                                                                                                                           |                                |       |                                  |         |                     |       | 2,144    |        
|                                                                                     | Accounts payable                                                                                                                                                                         |                                |       | 1,903                             |         |                     |       | 1,479    |        
|                                                                                     | Customer deposits                                                                                                                                                                        |                                |       | 1,164                             |         |                     |       | 1,275    |        
|                                                                                     | Accrued liabilities                                                                                                                                                                      |                                |       | 2,402                             |         |                     |       | 2,397    |        
|                                                                                     | Income taxes payable                                                                                                                                                                     |                                |       | 235                               |         |                     |       | 101      |        
|                                                                                     | Unearned revenue                                                                                                                                                                         |                                |       | 1,743                             |         |                     |       | 3,033    |        
|                                                                                     | Current liabilities held for sale                                                                                                                                                        |                                |       | 1,560                             |         |                     |       | 385      |        
|                                                                                     |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|                                                                                     |                                                                                                                                                                                          | Total current liabilities      |       |                                   | 9,119   |                     |       |          | 16,670  |  
|Line of credit                                                                       |                                                                                                                                                                                          |                                | 2,424 |                                   |         |                     |      |         
|Long-term debt                                                                       |                                                                                                                                                                                          |                                | 8,542 |                                   |         |                     | 2,837 |         
|Other liabilities                                                                    |                                                                                                                                                                                          |                                | 1,195 |                                   |         |                     | 1,263 |         
|                                                                                     |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|                                                                                     |                                                                                                                                                                                          | Total liabilities              |       |                                   | 21,280  |                     |       |          | 20,770  |  
|                                                                                     |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|Stockholders deficiency:                                                            |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|                                                                                     | Preferred Stock, par value $0.01 per share;
1,000,000 shares authorized, none issued and outstanding                                                                                     |                                |       |                                  |         |                     |       |         |        
|                                                                                     | Common Stock, par value $0.01 per share; authorized
24,000,000 shares; 13,656,085 and 14,568,585 shares
issued and outstanding at December 31, 2001 and
September 30, 2002, respectively |                                |       | 140                               |         |                     |       | 149      |        
|                                                                                     | Additional paid-in capital                                                                                                                                                               |                                |       | 218,022                           |         |                     |       | 218,244  |        
|                                                                                     | Accumulated other comprehensive loss                                                                                                                                                     |                                |       | (361                              | )       |                     |       | (488     | )      
|                                                                                     | Unearned compensation                                                                                                                                                                    |                                |       |                                  |         |                     |       | (100     | )      
|                                                                                     | Accumulated deficit                                                                                                                                                                      |                                |       | (230,793                          | )       |                     |       | (230,284 | )      
|                                                                                     |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|                                                                                     |                                                                                                                                                                                          | Total stockholders deficiency |       |                                   | (12,992 | )                   |       |          | (12,479 | )
|                                                                                     |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|Commitments and contingencies                                                        |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         
|Total liabilities and stockholders deficiency                                       |                                                                                                                                                                                          | $                              | 8,288 |                                   |         | $                   | 8,291 |         
|                                                                                     |                                                                                                                                                                                          |                                |       |                                   |         |                     |       |         

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

2



---



##### Table of Contents



MAI SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |   |        |      |        | 
|----------------------------------------------------- | ---------------------------- | ------------------------------------------------------------------------------ | ------------------------------- | ------------------ | ----- | ------------------------------------- | ------ | ------------------------------------- | ----- | ----- | ------ | ---- | ------ | ----- | ------ | - | ------ | ---- | ------ | 
|                                                      |                              |                                                                                |                                 |                    |       | (Unaudited)                           |        | (Unaudited)                          
|                                                      |                              |                                                                                |                                 |                    |       | For the Three Months Ended            |        | For the Nine Months Ended            
|                                                      |                              |                                                                                |                                 |                    |       | September 30,                         |        | September 30,                        
|                                                      |                              |                                                                                |                                 |                    |       | (in thousands, except per share data) |        | (in thousands, except per share data)
|                                                      |                              |                                                                                |                                 |                    |       | 2001                                  |        | 2002                                  |       | 2001  |        | 2002
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |     
|Revenue:                                              |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      |                              | Software                                                                       |                                 | $                  | 1,254 |                                       |        | $                                     | 1,396 |       |        | $    | 4,465  |       |        | $ | 3,787  |     
|                                                      |                              | Network and computer equipment                                                 |                                 |                    | 375   |                                       |        |                                       | 328   |       |        |      | 820    |       |        |   | 731    |     
|                                                      |                              | Services                                                                       |                                 |                    | 4,474 |                                       |        |                                       | 3,987 |       |        |      | 13,588 |       |        |   | 12,413 |     
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      |                              |                                                                                |                                 | Total revenue      |       |                                       | 6,103  |                                       |       |       | 5,711  |      |        |       | 18,873 |   |        |      | 16,931 | 
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|Direct costs:                                         |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      |                              | Software                                                                       |                                 |                    | 81    |                                       |        |                                       | 158   |       |        |      | 427    |       |        |   | 507    |     
|                                                      |                              | Network and computer equipment                                                 |                                 |                    | 274   |                                       |        |                                       | 276   |       |        |      | 421    |       |        |   | 569    |     
|                                                      |                              | Services                                                                       |                                 |                    | 1,409 |                                       |        |                                       | 1,366 |       |        |      | 5,000  |       |        |   | 4,485  |     
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      |                              |                                                                                |                                 | Total direct costs |       |                                       | 1,764  |                                       |       |       | 1,800  |      |        |       | 5,848  |   |        |      | 5,561  | 
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      |                              |                                                                                |                                 | Gross profit       |       |                                       | 4,339  |                                       |       |       | 3,911  |      |        |       | 13,025 |   |        |      | 11,370 | 
|Selling, general and administrative expenses          |                              |                                                                                | 1,985                           |                    |       |                                       | 2,418  |                                       |       |       | 5,901  |      |        |       | 6,828  |  
|Research and development costs                        |                              |                                                                                | 1,114                           |                    |       |                                       | 797    |                                       |       |       | 3,289  |      |        |       | 2,461  |  
|Amortization of intangibles                           |                              |                                                                                | 183                             |                    |       |                                       | 25     |                                       |       |       | 550    |      |        |       | 134    |  
|Other operating (income) expense                      |                              |                                                                                | 8                               |                    |       |                                       | 232    |                                       |       |       | (1,340 | )    |        |       | 237    |  
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      |                              |                                                                                |                                 | Operating income   |       |                                       | 1,049  |                                       |       |       | 439    |      |        |       | 4,625  |   |        |      | 1,710  | 
|Interest income                                       |                              |                                                                                | 4                               |                    |       |                                       | 1      |                                       |       |       | 53     |      |        |       | 4      |  
|Interest expense                                      |                              |                                                                                | (410                            | )                  |       |                                       | (372   | )                                     |       |       | (1,273 | )    |        |       | (1,146 | )
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|Income from continuing operations before
income taxes |                              |                                                                                | 643                             |                    |       |                                       | 68     |                                       |       |       | 3,405  |      |        |       | 568    |  
|Income taxes                                          |                              |                                                                                | (1                              | )                  |       |                                       | (8     | )                                     |       |       | (79    | )    |        |       | (16    | )
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|Income from continuing operations                     |                              |                                                                                | 642                             |                    |       |                                       | 60     |                                       |       |       | 3,326  |      |        |       | 552    |  
|Loss from discontinued operations                     |                              |                                                                                | (231                            | )                  |       |                                       | (223   | )                                     |       |       | (1,227 | )    |        |       | (43    | )
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      |                              |                                                                                |                                 | Net income (loss)  |       | $                                     | 411    |                                       |       | $     | (163   | )    |        | $     | 2,099  |   |        | $    | 509    | 
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|Income (loss) per share:                              |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      | Continuing Operations:       |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |   |       
|                                                      |                              |                                                                                | Basic income per share          |                    | $     | 0.05                                  |        |                                       | $     | 0.00  |        |      | $      | 0.26  |        |   | $      | 0.04 |       
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      |                              |                                                                                | Diluted income per share        |                    | $     | 0.05                                  |        |                                       | $     | 0.00  |        |      | $      | 0.26  |        |   | $      | 0.04 |       
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      | Discontinued Operations:     |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |   |       
|                                                      |                              |                                                                                | Basic income (loss) per share   |                    | $     | (0.02                                 | )      |                                       | $     | (0.01 | )      |      | $      | (0.10 | )      |   | $      | 0.00 |       
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      |                              |                                                                                | Diluted income (loss) per share |                    | $     | (0.02                                 | )      |                                       | $     | (0.01 | )      |      | $      | (0.10 | )      |   | $      | 0.00 |       
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      | Net income (loss) per share: |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |   |       
|                                                      |                              |                                                                                | Basic income (loss) per share   |                    | $     | 0.03                                  |        |                                       | $     | (0.01 | )      |      | $      | 0.16  |        |   | $      | 0.04 |       
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      |                              |                                                                                | Diluted income (loss) per share |                    | $     | 0.03                                  |        |                                       | $     | (0.01 | )      |      | $      | 0.16  |        |   | $      | 0.04 |       
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|                                                      |                              | Weighted average common shares used in
determining    income (loss) per share: |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |   |        |     
|Basic                                                 |                              |                                                                                | 13,691                          |                    |       |                                       | 14,569 |                                       |       |       | 12,922 |      |        |       | 14,175 |  
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  
|Diluted                                               |                              |                                                                                | 13,928                          |                    |       |                                       | 14,569 |                                       |       |       | 13,113 |      |        |       | 14,182 |  
|                                                      |                              |                                                                                |                                 |                    |       |                                       |        |                                       |       |       |        |      |        |       |        |  

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

3



---



##### Table of Contents



MAI Systems Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

|                                                     |                                           |   |                           |       |      |   |        |      |  
|---------------------------------------------------- | ----------------------------------------- | - | ------------------------- | ----- | ---- | - | ------ | ---- | -
|                                                     |                                           |   | For the Nine Months Ended
|                                                     |                                           |   | September 30,            
|                                                     |                                           |   | (in thousands)           
|                                                     |                                           |   | 2001                      |       | 2002
|                                                     |                                           |   |                           |       |     
|Net cash provided by (used in) operating activities  |                                           | $ | (655                      | )     |      | $ | 1,933  |     
|                                                     |                                           |   |                           |       |      |   |        |     
|Cash flows used in investing activities -            |                                           |   |                           |       |      |   |        |     
|                                                     | Capital expenditures                      |   |                           | (124  | )    |   |        | (128 | )
|                                                     | Software development costs                |   |                           |      |      |   |        | (615 | )
|                                                     |                                           |   |                           |       |      |   |        |     
|Net cash used in investing activities                |                                           |   | (124                      | )     |      |   | (743   | )   
|                                                     |                                           |   |                           |       |      |   |        |     
|Cash flows from financing activities:                |                                           |   |                           |       |      |   |        |     
|                                                     | Net increase (decrease) in line of credit |   |                           | 18    |      |   |        | (280 | )
|                                                     | Proceeds received from sale of subsidiary |   |                           | 1,000 |      |   |        |     |  
|                                                     | Repayments of long-term debt              |   |                           | (262  | )    |   |        | (89  | )
|                                                     | Repayments of bridge loan                 |   |                           | (220  | )    |   |        |     |  
|                                                     |                                           |   |                           |       |      |   |        |     
|Net cash provided by (used in) financing activities  |                                           |   | 536                       |       |      |   | (369   | )   
|                                                     |                                           |   |                           |       |      |   |        |     
|Net cash provided by (used in) continuing operations |                                           |   | (243                      | )     |      |   | 821    |     
|Net cash used in discontinued operations             |                                           |   | (423                      | )     |      |   | (1,487 | )   
|Effect of exchange rate changes on cash              |                                           |   | 4                         |       |      |   | (13    | )   
|                                                     |                                           |   |                           |       |      |   |        |     
|Net change in cash                                   |                                           |   | (662                      | )     |      |   | (679   | )   
|                                                     |                                           |   |                           |       |      |   |        |     
|Cash at beginning of period                          |                                           |   | 1,019                     |       |      |   | 1,224  |     
|                                                     |                                           |   |                           |       |      |   |        |     
|Cash at end of period                                |                                           | $ | 357                       |       |      | $ | 545    |     
|                                                     |                                           |   |                           |       |      |   |        |     

Supplemental disclosure of non-cash investing and financing activities (see notes 4 and 8)

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

4



---



##### Table of Contents



MAI Systems Corporation




Notes to Condensed Consolidated Financial Statements

Nine Months ended September 30, 2002

(Unaudited)



|1. |  | Basis of Presentation and Liquidity
|-- |  | -----------------------------------

Companies for which this report is filed are MAI Systems Corporation and its
wholly-owned subsidiaries (the Company). The information contained herein
is unaudited, but gives effect to all adjustments (which are normal recurring
accruals) necessary, in the opinion of Company management, to present fairly
the condensed consolidated financial statements for the interim period. All
significant intercompany transactions and accounts have been eliminated in
consolidation.

Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC), and these financial statements should be read in
conjunction with the financial statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2001, which is on file
with the SEC.

The Company currently operates in one reportable business segment, which is
the hospitality market, focusing primarily on the hotel, motel and resort
destinations industry for which we design, sell, install and support
enterprise information systems.

Although the Company has a net stockholders deficiency of $12,479,000 at
September 30, 2002, the Company believes it will continue to generate
sufficient funds from operations and obtain additional financing or
restructure its subordinated notes with Canyon and CSA as well as its
facility with Coast, as needed, to meet its operating and capital
requirements. The Company is currently not able to pay its existing debt
obligations with Canyon and Coast, which mature in March 2003 and April 2003,
respectively and CSA, which matures in October 2003, without significantly
modifying the existing terms of such debt. The Company is currently in
negotiations with all of its secured creditors to restructure the terms of
the existing debt, including extending the maturity dates. The Company
expects to generate positive cash flow from its continuing operations during
2002 and 2003 from shipping out products and services from its $3.2 million
backlog as of September 30, 2002 as well as new orders. Also, in July 2001,
the Company entered into an agreement for the sale of its investment in GSI
and has received $2.5 million in 2001. The Company expects to receive an
additional $500,000 in 2002 and an additional $250,000 to $300,000 in January
2003. There can be no assurance that the Company will be able to sustain
profitability, generate positive cash flow from operations or obtain the
necessary renewal and/or restructure of its debt. These financial statements
have been prepared assuming the Company will continue to operate as a going
concern. If the Company is unsuccessful in the aforementioned efforts, the
Company could be forced to liquidate certain of its assets, reorganize its
capital structure and, if necessary, seek other remedies available to the
Company.



|2. |  | Inventories
|-- |  | -----------

Inventories are summarized as follows:

|                  |  |                        |    |               |  |   |    | 
|----------------- |  | ---------------------- | -- | ------------- |  | - | -- | 
|                  |  | (dollars in thousands)
|                  |  | December 31,           |    | September 30,
|                  |  | 2001                   |    | 2002         
|                  |  |                        |    |              
|Finished goods    |  | $                      | 75 |               |  | $ | 70 | 
|Replacement parts |  |                        | 15 |               |  |   | 16 | 
|                  |  |                        |    |               |  |   |    | 
|                  |  | $                      | 90 |               |  | $ | 86 | 
|                  |  |                        |    |               |  |   |    | 



|3. |  | Plan of Reorganization
|-- |  | ----------------------

In 1993, the Company emerged from a voluntary proceeding under the bankruptcy
protection laws. Notwithstanding the confirmation and effectiveness of its
Plan of Reorganization (the Plan), the Bankruptcy Court continues to have
jurisdiction to resolve disputed pre-petition claims against the Company to
resolve matters related to the assumptions, assignment or rejection of
executory contracts pursuant to the Plan and to resolve other matters that
may arise in connection with the implementation of the Plan.

5



---



##### Table of Contents



Shares of common stock may be distributed by the Company to its former
creditors. As of September 30, 2002, 6,738,251 shares of Common Stock had
been issued pursuant to the Plan and were outstanding.



|4. |  | Business Acquisitions
|-- |  | ---------------------

HOTEL INFORMATION SYSTEMS, INC. (HIS):

Effective August 9, 1996, the Company
acquired substantially all of the assets and assumed certain liabilities of
HIS pursuant to an asset purchase agreement. The Company placed approximately
1,100,000 shares of Common Stock issued in connection with the acquisition of
HIS in an escrow account to be released in whole, or in part, upon final
resolution of post closing adjustments. During the fourth quarter of 1996,
arbitration proceedings were initiated regarding the final purchase price of
HIS.

In November 1997, the purchase price for the acquisition of HIS was reduced
by $931,000 pursuant to arbitration proceedings. As a result, goodwill was
reduced by $931,000 and approximately 100,650 shares will be released from
the escrow account and returned to the Company. In addition, further claims
by the Company against HIS relating to legal costs and certain disbursements
currently estimated at $650,000 are presently pending. Resolution of such
claims may result in release of additional escrow shares to the Company. Upon
settlement, the Company may, as needed, pursuant to the asset purchase
agreement and related documents, issue additional shares of Common Stock in
order that the recipients ultimately receive shares worth a fair value of
$9.25 per share. This adjustment applies to a maximum of 73,466 shares of
Common Stock. As of September 30, 2002, the fair market value of the
Companys common stock was $0.17 per share, which would result in
approximately 5,138,110 additional shares being issued. Also, included in
the escrow account at September 30, 2002 is 200,000 shares of Common Stock
which do not have a guarantee of value. The amount and number of shares will
be determined based on the final resolution of such claims. Accordingly, as
of September 30, 2002, the final purchase price has not been determined.

HOSPITALITY SERVICES & SOLUTIONS (HSS):

On June 23, 2002, the Company
acquired substantially all of the assets and assumed certain liabilities of
Hospitality Services & Solutions pursuant to a stock purchase agreement for
100,000 shares of common stock valued at $32,000, and $75,000 in cash.
Additionally, the shareholders of HSS received a 20% minority interest in the
Companys combined operations in Asia. The net assets acquired from HSS are
used in the business of software design, engineering and service relating to
hotel information systems. The net assets also include subsidiaries of HSS
in Malaysia, Singapore and Thailand.



|5. |  | Business Divestitures
|-- |  | ---------------------

On June 19, 1999, the Company sold its gaming subsidiary (GSI). The Company
received three promissory notes totaling $4,925,000 with face values of
$1,100,000, $1,500,000 and $2,325,000, respectively (Notes).

On April 6, 2001 the Company entered into an agreement with the maker of the
Notes whereby the maker reconveyed 100% of the Common Stock of GSI to the
Company for the purpose of selling GSI to a third party. In connection with
the agreement, the Company canceled the Notes and entered into a new $1.1
million secured promissory note with the same party. The maker will be paid a
commission of 30% of cash receipts from the third party, which will be first
applied to the $1.1 million note and paid in cash to the maker thereafter. On
July 27, 2001, the Company entered into an Asset Purchase Agreement
(Agreement) with the third party for approximately $3.2 million whereby all
of the assets of GSI were acquired and all of the liabilities assumed, except
for approximately $300,000 of obligations, which will remain with GSI. The
payment terms under the Agreement required a $1 million non-refundable cash
payment to the Company, which was received on July 27, 2001 and a $1.5
million payment, which was received in December 2001. The Company also
received a secured promissory note in the amount of $750,000. Under the
terms of the secured promissory note, the third party was required to pay
$500,000 in April 2002 (See Note 12) and the remaining $250,000 in January
2003. The third party is also required to pay an additional $250,000 in
January 2003 subject to a maximum $250,000 reduction pursuant to the
resolution of certain uncertainties as of the date of the Agreement.

Due to the uncertainty of collecting the unsecured amount of $250,000, gain
recognition on that part of the proceeds has been deferred until collection
can be assured. The Company recorded a gain on the sale of GSI of $245,000
in the fourth quarter of 2001.

On October 9, 2001, the Company sold certain rights under customer contracts
together with the related assets and liabilities of its domestic Legacy
hardware maintenance division to the third party which currently provides the
on-site repair and warranty service to the Companys Legacy hardware
maintenance customers. Pursuant to the agreement, the Company retained the
software maintenance component of the customer contracts and will continue to
provide the software support services directly to the domestic Legacy
customer base. Additionally, the third party will be required to pay the

6



---



##### Table of Contents



Company approximately 15% of the third partys hardware maintenance revenue
stream relating to the hardware maintenance customer contracts subsequent to
October 31, 2003. In connection with the sale, the Company received $328,000
in cash and sold approximately $157,000 of assets consisting of inventory,
spare parts, fixed assets and certain accounts receivable. The third party
also assumed approximately $1,091,000 of liabilities consisting of accrued
liabilities of approximately $366,000 and deferred revenue of approximately
$725,000. The sale resulted in a gain of approximately $1,262,000 in October
2001, which is included in other operating income.



|6. |  | Businesses Held For Sale
|-- |  | ------------------------

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

The Company is actively seeking buyers for its Process Manufacturing and
Legacy divisions and expects to consummate the sale of these divisions during
2002. These divisions are available for immediate sale subject only to
customary terms for such sales.

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

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

|                                |  |                            |       |                           |  |      |      |      |  |   |        |   |  |   |       |  
|------------------------------- |  | -------------------------- | ----- | ------------------------- |  | ---- | ---- | ---- |  | - | ------ | - |  | - | ----- | -
|                                |  | For The Three Months Ended |       | For The Nine Months Ended
|                                |  | September 30,              |       | September 30,            
|                                |  | 2001                       |       | 2002                      |  | 2001 |      | 2002
|                                |  |                            |       |                           |  |      |      |     
|Revenue                         |  | $                          | 1,342 |                           |  | $    | 585  |      |  | $ | 4,450  |   |  | $ | 2,072 |  
|Income (loss)
before income tax |  |                            | (231  | )                         |  |      | (223 | )    |  |   | (1,227 | ) |  |   | (43   | )



|7. |  | Line of Credit and Bridge Loan and Long Term Debt
|-- |  | -------------------------------------------------

Line of Credit & Bridge Loan

On July 28, 1999, the Company obtained a Bridge Loan from Coast Business
Credit (Coast) in the amount of $2,000,000. The Bridge Loan originally
bore interest at prime plus 5% (prime plus 8% when default interest rates
apply). Loan origination fees of $75,000 paid to Coast in connection with the
Bridge Loan were amortized to interest expense over the term of the loan.
During the first quarter of 2001, the remaining balance of the Bridge Loan
was repaid in full. In April 1998, the Company negotiated a $5,000,000
secured revolving credit facility with Coast. The availability of this
facility is based on a calculation using a rolling average of certain cash
collections. The facility is secured by all assets, including intellectual
property of the Company, and bore interest at prime plus 4.5% and expires on
April 30, 2003. The credit facility was amended to allow for aggregate
borrowings on an interest only basis under the credit facility not to exceed
$3,360,000. In connection with the amendment, the Company agreed to pay Coast
a fee of $300,000 (Loan Fee) in weekly installments of $35,000 commencing
after the Bridge Loan is paid in full. The Loan Fee was fully paid by April
23, 2001. The facility contains various restrictions and covenants,
including a minimum consolidated net worth, debt coverage ratio and minimum
quarterly profitability. The Company was in compliance with all covenants as
of September 30, 2002 except for its minimum quarterly profitability covenant
of $250,000. Coast has informed the Company that it is in default and that
Coast reserves all rights and remedies as provided in the loan agreement.
Additionally, the Company capitalized $256,000 of software development costs
during the quarter ended September 30, 2002.

At December 31, 2001, approximately $2,579,000 $2,424,400, respectively, was
available and drawn down under the credit facility. At September 30, 2002,
approximately $2,162,000 and $2,144,000 was available and drawn down under
the credit facility.

The Loan Fee of $300,000 is classified in prepaids and other current assets
and is being amortized to interest expense over the term of the facility.

The Company is currently in negotiations with Coast to restructure the terms
of the facility including extending its maturity

7



---



##### Table of Contents



date. There can be no assurance that Coast and MAI will come to terms on a
restructuring or that management will be successful in finding a replacement
lender with acceptable terms.

Long-Term Debt

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

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

On April 13, 2000, the Company entered into an agreement with Canyon, which
waived all existing events of default, accelerated the maturity date to March
3, 2003 and provided for continued weekly interest payments of $12,500. On
January 31, 2001, the Company entered into an agreement with Canyon whereby
the specified accrued interest of $431,000 was added to the principal balance
of the subordinated notes payable. As part of this agreement, the Company
also agreed to pay Canyon an additional $79,000 loan fee, of which $29,000
was added to principal. The principal balance outstanding on the subordinate
notes payable to Canyon was approximately $5,690,000 and $5,670,000 at
December 31, 2001 and September 30, 2002, respectively.

The Company is currently in negotiations with Canyon to restructure the terms
of the subordinated notes including extending its maturity date. There can be
no assurance that Canyon and MAI will come to terms on a restructuring or
that management will be successful in finding a replacement lender with
acceptable terms.

In connection with a settlement agreement with CSA (see Note 12), the Company
issued $2.8 million of subordinated debt to CSA. The $2.8 million of debt is
secured by all of the Companys assets which is subordinate to Coast and
Canyon, accrues interest at 10% per annum and requires payments of $37,500
from March 1, 2002 through September 1, 2002 and monthly payments of $107,500
commencing on October 1, 2002 until October 2003 when all remaining unpaid
principal and accrued interest is to be paid in full. The balance outstanding
on the subordinate debt to CSA was $2,800,000 at December 31, 2001 and
September 30, 2002.

The agreement with CSA was revised whereby the Company shall be required to
pay the required payments under the subordinated note unless and until it
pays $1 million by December 31, 2002. Upon payment of the $1 million,
contractual payments under the subordinated note will cease until a final
payment in the amount of $400,000 is paid by February 28, 2003. If the
Company does not make all of the modified payments to CSA, the subordinated
note will revert back to its original terms. As of November 14, 2002, the
Company had not made the modified payment nor its October 1, 2002 and
November 1, 2002 required payment under the subordinated notes to CSA. CSA
has not formally notified the Company of its default. The Company is
currently in negotiations with CSA to restructure the terms of the
subordinated notes including extending its maturity date. There can be no
assurance that CSA and MAI will come to terms on a restructuring or that
management will be successful in finding a replacement lender with acceptable
terms.



|8. |  | Common Stock
|-- |  | ------------

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

In May 2002, the Company issued 612,500 shares of restricted common stock to
its members of the board of directors and certain of its corporate officers.
Recipients are not required to provide consideration to the Company other
than rendering the service and have the right to vote the shares.

Under SFAS No. 123, compensation cost is recognized for the fair value of the
restricted stock awarded, which is its fair market value without restrictions
at the date of grant, which was $0.25 per share. The total market value of
the shares of $153,125 was treated as unearned compensation and is being
amortized to expense in proportion to the vesting schedule through March
2005. The unamortized balance as of September 30, 2002 is $100,000.

8



---



##### Table of Contents





|9. |  | Accounting Changes
|-- |  | ------------------

Effective January 1, 2002, the Company adopted SFAS 141 and SFAS 142. SFAS
141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting. It also specifies the
types of acquired intangible assets that are required to be recognized and
reported separate from goodwill. SFAS 142 requires that goodwill and certain
intangibles no longer be amortized, but instead tested for impairment at
least annually. There was no impairment of goodwill upon adoption of SFAS
142.

Net income and earnings per share for the third quarter of fiscal 2001
adjusted to exclude amortization expense (net of taxes) is as follows:

|                            |                                     |                                     |   |                      |      |                     |   |       |       | 
|--------------------------- | ----------------------------------- | ----------------------------------- | - | -------------------- | ---- | ------------------- | - | ----- | ----- | 
|                            |                                     |                                     |   | For the Three Months |      | For the Nine Months
|                            |                                     |                                     |   | Ended                |      | Ended              
|                            |                                     |                                     |   | September 30, 2001   |      | September 30, 2001 
|Net income:                 |                                     |                                     |   |                      |      |                     |   |      
|                            | Reported net income                 |                                     | $ | 411                  |      |                     | $ | 2,099 |      
|                            | Goodwill amortization               |                                     |   | 105                  |      |                     |   | 315   |      
|                            |                                     |                                     |   |                      |      |                     |   |      
|                            |                                     | Adjusted net income                 |   | $                    | 516  |                     |   | $     | 2,414 | 
|                            |                                     |                                     |   |                      |      |                     |   |      
|Basic earnings per share:   |                                     |                                     |   |                      |      |                     |   |      
|                            | Reported basic earnings per share   |                                     | $ | 0.03                 |      |                     | $ | 0.16  |      
|                            | Goodwill amortization               |                                     |   | 0.01                 |      |                     |   | 0.02  |      
|                            |                                     |                                     |   |                      |      |                     |   |      
|                            |                                     | Adjusted basic earnings per share   |   | $                    | 0.04 |                     |   | $     | 0.18  | 
|                            |                                     |                                     |   |                      |      |                     |   |      
|Diluted earnings per share: |                                     |                                     |   |                      |      |                     |   |      
|                            | Reported diluted earnings per share |                                     | $ | 0.03                 |      |                     | $ | 0.16  |      
|                            | Goodwill amortization               |                                     |   | 0.01                 |      |                     |   | 0.02  |      
|                            |                                     |                                     |   |                      |      |                     |   |      
|                            |                                     | Adjusted diluted earnings per share |   | $                    | 0.04 |                     |   | $     | 0.18  | 
|                            |                                     |                                     |   |                      |      |                     |   |      

As of September 30, 2002, net intangible assets consisted of $917,000 of
goodwill and $615,000 of capitalized software. Capitalized software
amortization was $64,000 $45,000 and $25,000 during the first, second, and
third quarters of 2002, respectively.



|10. |  | Income Per Share of Common Stock
|--- |  | --------------------------------

Basic and diluted income per share is computed using the weighted average shares of common stock outstanding during the period. Consideration is also
given in the diluted income per share calculation for the dilutive effect of
stock options and warrants.

The following table illustrates the computation of basic and diluted earnings
per share under the provisions of SFAS 128:

|                                                                                                                 |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ------------------------------------ |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                                                                                                 |  | For the Three Months Ended           |        | For the Nine Months Ended           
|                                                                                                                 |  | September 30,                        |        | September 30,                       
|                                                                                                                 |  | 2001                                 |        | 2002                                 |  | 2001 |        | 2002
|                                                                                                                 |  |                                      |        |                                      |  |      |        |     
|                                                                                                                 |  | (in thousands except per share data) |        | (in thousands except per share data)
|Numerator:                                                                                                       |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 
|Numerator for basic and diluted earnings
per share  net income                                                  |  | $                                    | 411    |                                      |  | $    | (163   | )    |  | $ | 2,099  |  |  | $ | 509    | 
|                                                                                                                 |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 
|Denominator:                                                                                                     |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 
|Denominator for basic earnings per share-
weighted average number of Common
shares outstanding during the period |  |                                      | 13,691 |                                      |  |      | 14,569 |      |  |   | 12,922 |  |  |   | 14,175 | 
|Incremental common shares attributable to
exercise of outstanding shares                                         |  |                                      | 237    |                                      |  |      |       |      |  |   | 191    |  |  |   | 7      | 
|                                                                                                                 |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 
|Denominator for diluted earnings per share                                                                       |  |                                      | 13,928 |                                      |  |      | 14,569 |      |  |   | 13,113 |  |  |   | 14,182 | 
|                                                                                                                 |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 
|Basic earnings per share                                                                                         |  | $                                    | 0.03   |                                      |  | $    | (0.01  | )    |  | $ | 0.16   |  |  | $ | 0.04   | 
|                                                                                                                 |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 
|Diluted earnings per share                                                                                       |  | $                                    | 0.03   |                                      |  | $    | (0.01  | )    |  | $ | 0.16   |  |  | $ | 0.04   | 
|                                                                                                                 |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 

9



---



##### Table of Contents



The computation does not consider the additional shares of common stock which
may be issued in connection with past acquisitions. The number of
antidilutive options and warrants that were excluded from the computation of
incremental common shares were 2,126,894 and 2,667,272 for the nine-month
periods ended September 30, 2001 and 2002, respectively.



|11. |  | Accounting Pronouncements
|--- |  | -------------------------

On October 3, 2001, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 144, Accounting for the Impairment or Disposal of Long
Lived Assets, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While Statement No. 144
supersedes FASB Statement No. 121, Accounting for the Impairment of Long
Lived Assets and for Long-Lived Assets for Be Disposed Of, it retains many
of the fundamental provisions of that Statement.

Statement No. 144 also supersedes the accounting and reporting provisions of
APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions,for the disposal of a segment
of a business. However, it retains the requirement in Opinion 30 to report
separately discontinued operations and extends that reporting to a component
of an entitythat either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale.

Statement No. 144 is effective for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The Company elected to
adopt Statement No. 144 as of December 31, 2001. There was no impact on the
statement of operations as a result of the adoption of Statement No. 144.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 (SFAS 145), Rescission of FASB Statements No. 4 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections, to update, clarify and
simplify existing accounting pronouncements. FASB Statement No. 4, which
required all gains and losses from debt extinguishments to be aggregated and,
if material, classified as an extraordinary item, net of related tax effect,
was rescinded. Consequently, FASB Statement No. 64, which amended FASB
Statement No. 4, was rescinded because it was no longer necessary. The
adoption of SFAS 145 did not have a material impact on the Companys
financial position or results of operations.

In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS
146 addresses accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit An Activity (Including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at
fair value when the liability is incurred. SFAS No. 146 is effective for exit
or disposal activities that are initiated after December 31, 2002, with early
application encouraged. We do not expect the adoption of this statement to
have a material effect on our financial statements.



|12. |  | Legal Proceedings
|--- |  | -----------------

Chapter 11 Bankruptcy Proceedings

At September 30, 2002, there was only one material claim to be settled
regarding the Companys Chapter 11 proceedings, a tax claim with the United
States Internal Revenue Service (the Service). The amount of this claim is
in dispute. The Company has reserved $712,000 for settlement of this claim,
which it is anticipated would be payable to the Service in equal monthly
installments over a period of six (6) years from the settlement date at an
interest rate of 6%.

CSA Private Limited

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

10



---



##### Table of Contents



secured leaders and required cash installment payments to commence in March
2002 (see note 7).

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

Cher-Ae Heights Indian Community

A lawsuit has been filed by Cher-Ae Heights Indian Community (Cher-Ae
Heights) against Logix Development Corporation (Logix), now known as MAI
Development Corporation, as a co-defendant for a breach of contract by the
Companys formerly owned gaming subsidiary along with the new owners, Monaco
Informatiques Systemes (MIS), who acquired the assets and certain
liabilities of the gaming subsidiary on July 27, 2001. Based upon this suit,
MIS has informed the Company that it did not intend to pay the next $500,000
due to the Company under a promissory note and security agreement (see note
5). The Company is currently in settlement negotiations with Cher-Ae Heights
and MIS to resolve any and all outstanding legal issues associated with
Cher-Ae Heights and the July 27, 2001 Agreement and believes that the
promissory note will be recoverable through payments from MIS.

Logix Development Corporation

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

Other Litigation

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



|13. |  | Comprehensive Income
|--- |  | --------------------

The following table summarizes components of comprehensive income:

|                                             |  |                            |     |                           |  |      |      |      |  |   |       |  |  |   |      |  
|-------------------------------------------- |  | -------------------------- | --- | ------------------------- |  | ---- | ---- | ---- |  | - | ----- |  |  | - | ---- | -
|                                             |  | For The Three Months Ended |     | For The Nine Months Ended
|                                             |  | September 30,              |     | September 30,            
|                                             |  | 2001                       |     | 2002                      |  | 2001 |      | 2002
|                                             |  |                            |     |                           |  |      |      |     
|Net income                                   |  | $                          | 411 |                           |  | $    | (163 | )    |  | $ | 2,099 |  |  | $ | 509  |  
|Change in cumulative
translation Adjustments |  |                            | 46  |                           |  |      | (37  | )    |  |   | 56    |  |  |   | (128 | )
|                                             |  |                            |     |                           |  |      |      |      |  |   |       |  |  |   |      |  
|Comprehensive income                         |  | $                          | 457 |                           |  | $    | (200 | )    |  | $ | 2,155 |  |  | $ | 381  |  
|                                             |  |                            |     |                           |  |      |      |      |  |   |       |  |  |   |      |  

Accumulated other comprehensive income in the accompanying consolidated
balance sheets consists of cumulative translation adjustments.



|14. |  | Subsequent Events
|--- |  | -----------------

On December 6, 2002, the Company sold all the assets and certain liabilities
of its Canadian operations to the management of this subsidiary pursuant to a
stock purchase agreement. In connection with the sale, the Company also
entered into a software distribution agreement whereby the buyer has a
non-exclusive right and license to market and install the Companys
hospitality products in Canada. The sale resulted in a loss of approximately
$630,000, which will be included in the loss from the sale of discontinued
operations in the fourth quarter of 2002.

11



---



##### Table of Contents



On December 6, 2002, the Company entered into an Asset Purchase Agreement
whereby all the assets and certain liabilities of its process manufacturing
software division were sold to a third party for cash of $250,000. The sale
resulted in a loss of approximately $391,000, which will be included in the
loss from the sale of discontinued operations in the fourth quarter of 2002.

12



---



##### Table of Contents






Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

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

Accounts Receivable

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

Intangible Assets

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

The Company capitalized $256,000 and $615,000 of software development costs
during the three and nine month periods ended September 30, 2002,
respectively, relating to its new N-Tier, Internet-native corporate
application suite of products written. Although the Company has not yet sold
any of the modules to this suite of applications, the Company believes that

13



---



##### Table of Contents



its new product will produce new sales adequate to recover amounts
capitalized.

Liquidity and Capital Resources

At September 30, 2002, working capital decreased from a working capital
deficiency of $3,787,000 at December 31, 2001 to a working capital deficiency
of $11,659,000 as an additional $7.9 million of Company debt was classified
as current as of September 30, 2002. Excluding unearned revenue of
$3,033,000, the Companys working capital deficiency at September 30, 2002
would be $8,626,000 or a ratio of current assets to current liabilities of
0.37 to 1.0. Excluding unearned revenue, working capital deficiency at
December 31, 2001 was $2,044,000 with a current ratio of 0.72 to 1.0.
Excluding unearned revenue, the increase in the working capital deficiency of
$6,582,000 was primarily attributable to an increase in current portion of
long-term debt and line of credit of $7,888,000 and customer deposits of
$111,000 offset by increases in note receivable of $250,000, current assets
held for sale of $375,000 and decreases in accounts payable of $424,000,
income taxes payable of $134,000 and current liabilities held for sale of
$1,175,000.

Cash was $545,000 at September 30, 2002, as compared to $1,224,000 at
December 31, 2001. Availability under the Companys secured revolving credit
facility is based on a calculation using a rolling average of certain cash
collections. At September 30, 2002, approximately $2,162,000 was available
and $2,144,000 was drawn down under this facility. The facility expires on
April 30, 2003.

Net cash used in investing activities for the nine months ended September 30,
2002, totaled $743,000 which represented capital expenditures of $128,000 and
capitalized software of $615,000.

Net cash used in financing activities for the nine months ended September 30,
2002 totaled $369,000, which is comprised of a $280,000 decrease in the
secured revolving credit facility and $89,000 in repayments of long-term
debt. The revolving credit facility requires monthly interest only payments
on the average outstanding balance for the period. The Company is required to
make weekly payments of $12,500 on the subordinated debt. The facility, and
subordinated debt pursuant to an intercreditor agreement between Canyon
Capital and Coast Business Credit, contains various restrictions and
covenants, including an adjusted minimum consolidated net worth of
($4,758,102) as of September 30, 2002, minimum quarterly debt coverage ratio
of 1.1:1 and minimum quarterly profitability of $250,000. In the event that
we are not in compliance with the various restrictions and covenants and were
unable to receive waivers for non-compliance, the facility and subordinated
debt would become immediately due and payable. We were in compliance with
all covenants as of September 30, 2002, except for our minimum quarterly
profitability covenant of $250,000. Coast has informed the Company that it
is in default and that Coast reserves all rights and remedies as provided in
the loan agreement. Additionally, the Company capitalized $256,000 of
software development costs during the quarter ended September 30, 2002. The
restrictions and covenants are assessed quarterly.

Stockholders deficiency decreased from $12,992,000 at December 31, 2001 to
$12,479,000 at September 30, 2002, mainly as a result of net income of
$509,000 and the issuance of common stock of $231,000 offset by an increase
in the accumulated other comprehensive loss of $127,000 and unearned
compensation of $100,000.

Net cash provided by operating activities for the nine months ended September
30, 2002 totaled $1,933,000 and mainly related to an increase in unearned
revenue of $1,040,000, customer deposits of $111,000, net income for the
period of $509,000, non-cash charges for depreciation and amortization of
tangible and intangible assets of $775,000 and a decrease in accounts
receivable of $260,000 and $191,000 of prepaids and other assets, offset by a
decrease in accounts payable of $570,000, accrued liabilities of $132,000,
and income taxes payable of $139,000. Net cash used for discontinued
operations was $1,487,000. The Company expects that it will generate cash
from its operating activities during the next twelve months.

Although the Company has a net stockholders deficiency of $12,479,000 at
September 30, 2002, the Company believes it will continue to generate
sufficient funds from operations and obtain additional financing or
restructure its subordinated notes with Canyon and CSA as well as its
facility with Coast, as needed, to meet its operating and capital
requirements. The Company is currently not able to pay its existing debt
obligations with Canyon and Coast, which mature in March 2003 and April 2003,
respectively and CSA, which matures in October 2003, without significantly
modifying the existing terms of such debt. The Company is currently in
negotiations with all of its secured creditors to restructure the terms of
the existing debt, including extending the maturity dates. The Company
expects to generate positive cashflow from its continuing operations during
2002 and 2003 from shipping out products and services from its $3.2 million
backlog as of September 30, 2002 as well as new orders. Also, in July 2001,
the Company entered into an agreement for the sale of its investment in GSI
and has received $2.5 million in 2001. The Company expects to receive an
additional $500,000 in 2002 and an additional $250,000 to $300,000 in January
2003. There can be no assurance that the Company will be able to sustain
profitability, generate positive cash flow from operations or obtain the
necessary renewal and/or restructure of its debt. These financial statements
have been prepared assuming the Company will continue to operate as a going
concern. If the

14



---



##### Table of Contents



Company is unsuccessful in the aforementioned efforts, the Company could be
forced to liquidate certain of its assets, reorganize its capital structure
and, if necessary, seek other remedies available to the Company.

Contractual Obligations and Commercial Commitments

The following table summarizes the Companys obligations and commitments as
of September 30, 2002:

|                             |  |       |        |        |  |                                       |       |           |  |               |       |  |  |   |    |  |  |   |     | 
|---------------------------- |  | ----- | ------ | ------ |  | ------------------------------------- | ----- | --------- |  | ------------- | ----- |  |  | - | -- |  |  | - | --- | 
|                             |  |       |        |        |  | Payments Due by Period (in thousands) |       |           |  |              
|                             |  |       |        |        |  |                                       |       |           |  |              
|                             |  |       |        |        |  | Less Than                             |       |           |  |               |       |  |  |   |    |  |  |  
|Contractual Cash Obligations |  | Total |        | 1 Year |  | 1-3 Years                             |       | 4-5 Years |  | After 5 Years
|                             |  |       |        |        |  |                                       |       |           |  |              
|Long-Term Debt               |  | $     | 8,787  |        |  | $                                     | 5,928 |           |  | $             | 2,607 |  |  | $ |   |  |  | $ | 252 | 
|Line of Credit               |  |       | 2,144  |        |  |                                       | 2,144 |           |  |               |      |  |  |   |   |  |  |   |    | 
|Operating Leases             |  |       | 1,372  |        |  |                                       | 765   |           |  |               | 540   |  |  |   | 67 |  |  |   |    | 
|                             |  |       |        |        |  |                                       |       |           |  |               |       |  |  |   |    |  |  |   |     | 
|                             |  | $     | 12,303 |        |  | $                                     | 8,837 |           |  | $             | 3,147 |  |  | $ | 67 |  |  | $ | 252 | 
|                             |  |       |        |        |  |                                       |       |           |  |               |       |  |  |   |    |  |  |   |     | 

15



---



##### Table of Contents



Results of Operations
Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2002

|                                             |  |                |       |               |  |              |       |                |  |   |       |   |  |  |       |   
|-------------------------------------------- |  | -------------- | ----- | ------------- |  | ------------ | ----- | -------------- |  | - | ----- | - |  |  | ----- | --
|                                             |  | September 30,  |       | Percentage of |  | September30, |       | Percentage of 
|                                             |  | 2001           |       | Revenue       |  | 2002         |       | Revenue       
|                                             |  |                |       |               |  |              |       |               
|                                             |  | (in thousands) |       |               |  |              |       | (in thousands) |  |   |       |  
|Revenue                                      |  | $              | 6,103 |               |  |              | 100.0 | %              |  | $ | 5,711 |   |  |  | 100.0 | % 
|Gross profit                                 |  |                | 4,339 |               |  |              | 71.1  | %              |  |   | 3,911 |   |  |  | 68.5  | % 
|Selling, general and administrative expenses |  |                | 1,985 |               |  |              | 32.5  | %              |  |   | 2,418 |   |  |  | 42.3  | % 
|Research and development costs               |  |                | 1,114 |               |  |              | 18.3  | %              |  |   | 797   |   |  |  | 14.0  | % 
|Amortization of intangibles                  |  |                | 183   |               |  |              | 3.0   | %              |  |   | 25    |   |  |  | 0.4   | % 
|Other operating income                       |  |                | 8     |               |  |              | 0.1   | %              |  |   | 232   |   |  |  | 4.1   | % 
|Interest expense, net                        |  |                | 406   |               |  |              | 6.7   | %              |  |   | 371   |   |  |  | 6.5   | % 
|Income taxes                                 |  |                | 1     |               |  |              | 0.0   | %              |  |   | 8     |   |  |  | 0.1   | % 
|Loss from discontinued operations            |  |                | (231  | )             |  |              | (3.8  | )%             |  |   | (223  | ) |  |  | (3.9  | )%
|Net income                                   |  | $              | 411   |               |  |              | 6.7   | %              |  | $ | (163  | ) |  |  | (2.9  | )%

Revenue for 2002 was $5,711,000 compared to $6,103,000 in 2001 or a 6.4%
decrease. Revenue decreased $392,000 in 2002, as a result of decreased
professional services and maintenance services mainly due to decreased
capital spending on information technology in 2002 due to the effects of the
September 11, 2001 terrorist attacks on the hospitality industry.

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

Gross profit for 2002 decreased to $3,911,000 (68.5%) from $4,339,000 (71.1%)
in 2001. The decrease in gross profit is mainly due to the decrease in
professional services and maintenance services revenues during the period in
excess of the Companys cost reductions. Selling, general and administrative
expenses (SG&A) increased from $1,985,000 in 2001 to $2,418,000 in 2002.
The increase is mainly due to an increase in selling & marketing, expenses
for trade shows, advertisements and additional head count and other employee
related expenses as the Company actively markets components of its newly
developed enterprise suite of applications. Additionally, approximately
$225,000 was expensed to S,G&A during the period in connection with the
Companys legal settlement with Logix.

The decrease in research and development costs in 2002 was due to the
capitalization of approximately $257,000 of software development costs
associated with the Companys new product development for hospitality. There
were no such costs capitalized in 2001.

The decrease in amortization of intangibles in 2002 versus the comparable
period of 2001 is due to the fact that goodwill is no longer amortized to
expense commencing January 1, 2002. Goodwill amortization was $105,000 for
the three months ended September 30, 2001.

Net interest expense was $406,000 in 2001 compared to $371,000 in 2002. The
decrease is mainly due to the Company not incurring interest expense for the
Bridge Loan in 2002. The Bridge loan was paid in full in 2001.

The income tax provision reflects a tax provision for our foreign operations
only and alternative minimum taxes for domestic operations due to the
utilization for net operating loss carry forward in 2001 and 2002.

Results from discontinued operations improved from a loss of $231,000 in 2001
to loss of $223,000 in 2002 as a result of decreased Process Manufacturing
operating expenses from $866,000 in 2001 to $401,000 in 2002. Revenue from
discontinued operations decreased from $1,342,000 in 2001 to $585,000 in
2002. Revenue from Process Manufacturing decreased from $482,000 in 2001 to
$339,000 in 2002 as the process business unit continued its transition from a
direct selling model to a reseller model and completed development of new
products. During 2000, we focused on developing enhancements to our CIMPRO V
and CIMPRO classic process manufacturing products which were released in late
2001 and early 2002. Additionally, consistent with our strategy to focus on
providing software and services to our vertical markets, our legacy revenue
(traditional hardware contract service revenues and proprietary add-on sales)
declined $614,000 (71.3%) from $860,000 in 2001 to $246,000 in 2002, largely
due to the sale of its domestic legacy hardware

16



---



##### Table of Contents



business in October 2001 and expected decreased volume and customers
replacing their legacy systems. The Company is actively engaged in selling
its businesss units classified as discontinued operations.

Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2002

|                                             |  |                |        |               |  |                |       |               |  |   |        |   |  |  |       |   
|-------------------------------------------- |  | -------------- | ------ | ------------- |  | -------------- | ----- | ------------- |  | - | ------ | - |  |  | ----- | --
|                                             |  | September 30,  |        | Percentage of |  | September 30,  |       | Percentage of
|                                             |  | 2001           |        | Revenue       |  | 2002           |       | Revenue      
|                                             |  |                |        |               |  |                |       |              
|                                             |  | (in thousands) |        |               |  | (in thousands) |       |              
|Revenue                                      |  | $              | 18,873 |               |  |                | 100.0 | %             |  | $ | 16,931 |   |  |  | 100.0 | % 
|Gross profit                                 |  |                | 13,025 |               |  |                | 69.0  | %             |  |   | 11,370 |   |  |  | 67.2  | % 
|Selling, general and administrative expenses |  |                | 5,901  |               |  |                | 31.3  | %             |  |   | 6,828  |   |  |  | 40.4  | % 
|Research and development costs               |  |                | 3,289  |               |  |                | 17.4  | %             |  |   | 2,461  |   |  |  | 14.6  | % 
|Amortization of intangibles                  |  |                | 550    |               |  |                | 2.9   | %             |  |   | 134    |   |  |  | 0.8   | % 
|Other operating (income) expense             |  |                | (1,340 | )             |  |                | (7.1  | )%            |  |   | 237    |   |  |  | 1.4   | % 
|Interest expense, net                        |  |                | 1,220  |               |  |                | 6.5   | %             |  |   | 1,142  |   |  |  | 6.8   | % 
|Income taxes                                 |  |                | 79     |               |  |                | 0.4   | %             |  |   | 16     |   |  |  | 0.1   | % 
|Loss from discontinued operations            |  |                | (1,227 | )             |  |                | (6.5  | )%            |  |   | (43    | ) |  |  | (0.3  | )%
|                                             |  |                |        |               |  |                |       |               |  |   |        |   |  |  |       |   
|Net income                                   |  | $              | 2,099  |               |  |                | 11.1  | %             |  | $ | 509    |   |  |  | 3.0   | % 

Revenue for 2002 was $16,931,000 compared to $18,873,000 in 2001 or a 10.5%
decrease. Revenue decreased $688,000 in 2002, as a result of decreased
professional services and maintenance services mainly due to decreased
capital spending on information technology in 2002 due to the effects of the
September 11, 2001 terrorist attacks on the hospitality industry.

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

Gross profit for 2002 decreased to 11,370,000 (67.2%) from $13,025,000
(69.0%) in 2001. The decrease in gross profit is mainly due to the decrease
in professional services and maintenance services revenues during the period
in excess of the Companys cost reductions. Selling, general and
administrative expenses (SG&A) increased from $5,901,000 in 2001 to
$6,828,000 in 2002. The increase is mainly due to an increase in selling &
marketing, expenses for trade shows, advertisements and additional head count
and other employee related expenses as the Company actively markets
components of its newly developed enterprise suite of applications.
Additionally, approximately $225,000 was expensed to S,G&A during the period
in connection with the Companys legal settlement with Logix.

The decrease in research and development costs in 2002 was due to the
capitalization of approximately $615,000 of software development costs
associated with the Companys new product development for hospitality. There
were no such costs capitalized in 2001.

The decrease in amortization of intangibles in 2002 versus the comparable
period of 2001 is due to the fact that goodwill is no longer amortized to
expense commencing January 1, 2002. Goodwill amortization was $315,000 for
the nine months ended September 30, 2001.

Other operating (income) expense was ($1,340,000) in 2001 and $237,000 in
2002. The decrease in other operating income in 2002 is mainly due to the
Company issuing Common Stock to certain creditors to satisfy its obligations,
which resulted in a gain of $1,377,000 in the first quarter of 2001. There
were no such transactions in 2002.

Net interest expense was $1,220,000 in 2001 compared to $1,142,000 in 2002.
The decrease is mainly due to the Company not incurring interest expense for
the Bridge Loan in 2002. The Bridge loan was paid in full in 2001.

The income tax provision only reflects a tax provision for our foreign
operations and alternative minimum taxes for domestic operations due to the
utilization for net operating loss carry forward in 2001 and 2002.

Results from discontinued operations improved from a loss of $1,227,000 in
2001 to loss of $43,000 in 2002 as a result of decreased Process
Manufacturing operating expenses from $2,819,000 in 2001 to $1,039,000 in
2002. Revenue from discontinued operations decreased from $4,450,000 in 2001
to $2,073,000 in 2002. Revenue from Process Manufacturing decreased from
$1,565,000 in 2001 to $1,172,000 in 2002 as the process business unit
continued its transition from a direct selling model to a reseller model and
completed development of new products. During 2000, we focused on developing

17



---



##### Table of Contents



enhancements to our CIMPRO V and CIMPRO classic process manufacturing
products which were released in late 2001 and early 2002. Additionally,
consistent with our strategy to focus on providing software and services to
our vertical markets, our legacy revenue (traditional hardware contract
service revenues and proprietary add-on sales) declined $1,984,000 (68.8%)
from $2,885,000 to $901,000, largely due to the sale of its domestic legacy
hardware business in October 2001 and expected decreased volume and customers
replacing their legacy systems.




Item 3. Quantitative And Qualitative Disclosures About Market Risk

Market Risk Disclosures

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

Interest Rate Sensitivity

Of the Companys approximate $10.8 million principal amount of indebtedness
at September 30, 2002, approximately $2.1 million bears interest at a rate
that fluctuates based on changes in prime rate. A one percentage point
change in the underlying prime rate would result in an approximately $21,000
change in the annual amount of interest payable on such debt. Of the
remaining amount of approximately $8.7 million, $5.6 million bears interest
at a fixed rate of 11%, $2.8 million bears interest at a fixed rate of 10%
and $300,000 bears fixed interest rates ranging from 6% to 17.5%.

Foreign Currency Risk

The Company believes that its exposure to currency exchange fluctuation risk
is insignificant because the Companys transactions with international
vendors are generally denominated in US dollars. The currency exchange
impact on intercompany transactions was immaterial for the quarter ended
September 30, 2002.




Item 4. Evaluation of Disclosure Controls and Procedures



| | (a) |  | Evaluation of disclosure controls and procedures
| | --- |  | ------------------------------------------------

Our chief executive officer and our chief financial officer, after evaluating
the effectiveness of the Companys disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
15-d-14(c)) as of a date (Evaluation Date) within 90 days before the filing
date of this quarterly report, have concluded that as of the Evaluation Date,
our disclosure controls and procedures were adequate and designed to ensure
that material information relating to us and our consolidated subsidiaries
would be made known to them by others within those entities.



| | (b) |  | Changes in internal controls
| | --- |  | ----------------------------

There were no significant changes in our internal controls or to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date.

18



---



##### Table of Contents






PART II  OTHER INFORMATION




Item 1. Legal Proceedings

Chapter 11 Bankruptcy Proceedings

At September 30, 2002, there was only one material claim to be settled
regarding the Companys Chapter 11 proceedings, a tax claim with the United
States Internal Revenue Service (the Service). The amount of this claim is
in dispute. The Company has reserved $712,000 for settlement of this claim,
which it is anticipated would be payable to the Service in equal monthly
installments over a period of six (6) years from the settlement date at an
interest rate of 6%.

CSA Private Limited

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

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

Cher-Ae Heights Indian Community

A lawsuit has been filed by Cher-Ae Heights Indian Community (Cher-Ae
Heights) against Logix Development Corporation (Logix), now known as MAI
Development Corporation, as a co-defendant for a breach of contract by the
Companys formerly owned gaming subsidiary along with the new owners, Monaco
Informatiques Systemes (MIS), who acquired the assets and certain
liabilities of the gaming subsidiary on July 27, 2001. Based upon this suit,
MIS has informed the Company that it did not intend to pay the next $500,000
due to the Company under a promissory note and security agreement (see note 5
to the financial statements). The Company is currently in settlement
negotiations with Cher-Ae Heights and MIS to resolve any and all outstanding
legal issues associated with Cher-Ae Heights and the July 27, 2001 Agreement
and believes that the promissory note will be recoverable through payments
from MIS.

Logix Development Corporation

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

Other Litigation

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




Item 2. Changes in Securities and Use of Proceeds



| | (a) |  | None.
| | --- |  | -----
|
| | (b) |  | None.
|
| | (c) |  | None 
|
| | (d) |  | None.

19



---



##### Table of Contents






Item 3. Defaults Upon Senior Securities



| | (a) |  | None
| | --- |  | ----




Item 4. Submission of Matters to a Vote of Security Holders



| | (a) |  | None
| | --- |  | ----




Item 5. Other Information



| |  |  | None
| |  |  | ----




Item 6. Exhibits and Reports on Form 8-K






| | (a)  |  | Exhibits                                                                                                                       
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------
|
| | 99.1 |  | Certification of Chief Executive Officer, W. Brian Kretzmer, as
required by Sections 3.02 and 9.06 of Sarbane-Oxley Act of 2002
|
| | 99.2 |  | Certification of Chief Financial Officer, James W. Dolan, as
required by Sections 3.02 and 9.06 of Sarbane-Oxley Act of 2002   
|
| | (b)  |  | Reports on Form 8-K: None.                                                                                                     

* Previously filed




20



---



##### Table of Contents



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                        |  |                                         
|----------------------- |  | ----------------------------------------
|                        |  | MAI SYSTEMS CORPORATION
(Registrant)    
|                        |  |                                         
|Date: November 19, 2002 |  | /s/James W. Dolan                       
|                        |  |                                         
|                        |  | James W. Dolan                          
|                        |  | Chief Financial and Operating Officer   
|                        |  | (Chief Financial and Accounting Officer)

21



---



##### Table of Contents



CERTIFICATIONS

I, William B. Kretzmer, certify that:

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

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

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

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



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

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



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

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

|                        |  |     |  |                         |  | 
|----------------------- |  | --- |  | ----------------------- |  | 
|Date: November 19, 2002 |  | By: |  | /s/ William B. Kretzmer |  | 
|                        |  |     |  |                         |  | 
|                        |  |     |  | William B. Kretzmer     |  | 
|                        |  |     |  | Chief Executive Officer |  | 

22



---



##### Table of Contents



I, James W. Dolan, certify that:

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

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

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

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



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

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



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

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

|                        |  |     |  |                                      
|----------------------- |  | --- |  | -------------------------------------
|Date: November 19, 2002 |  | By: |  | /s/ James W. Dolan                   
|                        |  |     |  |                                      
|                        |  |     |  | James W. Dolan                       
|                        |  |     |  | Chief Financial and Operating Officer

23