##### Table of Contents



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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q

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

For the quarterly period ended June 30, 2002


Commission File No. 1-9158



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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  (XBOX)    No  (BOX)
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  (XBOX)    No  (BOX)
As of August 14, 2002, 14,568,585 shares of the registrants Common Stock, $0.01 par value, were outstanding.



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TABLE OF CONTENTS



|                                                     |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                      
|                                                     | Item 1. Financial Statements                                                                 
|CONDENSED CONSOLIDATED BALANCE SHEETS               
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|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                           
|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                                                     
|SIGNATURES                                          
|Exhibit Index                                       
|EXHIBIT 10.1                                        
|EXHIBIT 10.2                                        
|EXHIBIT 10.3                                        
|EXHIBIT 10.4                                        
|EXHIBIT 10.5                                        
|EXHIBIT 10.6                                        
|EXHIBIT 10.7                                        
|EXHIBIT 10.8                                        
|EXHIBIT 99.1                                        
|EXHIBIT 99.2                                        



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##### 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                    |         | As of June
|                                                                                     |                                                                                                                                                                                     |                                |       | 31, 2001                          |         | 30, 2002  
|                                                                                     |                                                                                                                                                                                     |                                |       |                                   |         |           
|ASSETS                                                                               |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Current assets:                                                                      |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cash                                                                                 |                                                                                                                                                                                     | $                              | 1,224 |                                   |         | $          | 1,238 |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Receivables, less allowance for doubtful accounts of
$1,023 in 2001 and $553 in 2002 |                                                                                                                                                                                     |                                | 2,396 |                                   |         |            | 2,410 |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Inventories                                                                          |                                                                                                                                                                                     |                                | 90    |                                   |         |            | 99    |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Note receivable                                                                      |                                                                                                                                                                                     |                                | 500   |                                   |         |            | 750   |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Prepaids and other assets                                                            |                                                                                                                                                                                     |                                | 918   |                                   |         |            | 978   |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Current assets held for sale                                                         |                                                                                                                                                                                     |                                | 204   |                                   |         |            | 435   |         
|                                                                                     |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|                                                                                     |                                                                                                                                                                                     | Total current assets           |       |                                   | 5,332   |            |       |          | 5,910   |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Furniture, fixtures and equipment, net                                               |                                                                                                                                                                                     |                                | 1,221 |                                   |         |            | 1,043 |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Notes receivable                                                                     |                                                                                                                                                                                     |                                | 250   |                                   |         |            |      |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Intangibles, net                                                                     |                                                                                                                                                                                     |                                | 799   |                                   |         |            | 1,300 |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Assets held for sale                                                                 |                                                                                                                                                                                     |                                | 613   |                                   |         |            | 581   |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Other assets                                                                         |                                                                                                                                                                                     |                                | 73    |                                   |         |            | 207   |         
|                                                                                     |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|                                                                                     |                                                                                                                                                                                     | Total assets                   |       | $                                 | 8,288   |            |       | $        | 9,041   |  
|                                                                                     |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|LIABILITIES AND STOCKHOLDERS DEFICIENCY                                             |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Current liabilities:                                                                 |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Current portion of long-term debt                                                                                                                                                   |                                | $     | 112                               |         |            | $     | 5,774    |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Line of credit                                                                                                                                                                      |                                |       |                                  |         |            |       | 2,039    |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Accounts payable                                                                                                                                                                    |                                |       | 1,903                             |         |            |       | 1,507    |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Customer deposits                                                                                                                                                                   |                                |       | 1,164                             |         |            |       | 964      |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Accrued liabilities                                                                                                                                                                 |                                |       | 2,402                             |         |            |       | 2,340    |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Income taxes payable                                                                                                                                                                |                                |       | 235                               |         |            |       | 140      |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Unearned revenue                                                                                                                                                                    |                                |       | 1,743                             |         |            |       | 3,027    |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Current liabilities held for sale                                                                                                                                                   |                                |       | 1,560                             |         |            |       | 1,421    |        
|                                                                                     |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|                                                                                     |                                                                                                                                                                                     | Total current liabilities      |       |                                   | 9,119   |            |       |          | 17,212  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Line of credit                                                                       |                                                                                                                                                                                     |                                | 2,424 |                                   |         |            |      |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Long-term debt                                                                       |                                                                                                                                                                                     |                                | 8,542 |                                   |         |            | 2,904 |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Other liabilities                                                                    |                                                                                                                                                                                     |                                | 1,195 |                                   |         |            | 1,258 |         
|                                                                                     |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|                                                                                     |                                                                                                                                                                                     | Total liabilities              |       |                                   | 21,280  |            |       |          | 21,374  |  
|                                                                                     |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|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 14,368,585 shares
issued and outstanding at December 31, 2001 and
June 30, 2002, respectively |                                |       | 140                               |         |            |       | 147      |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Additional paid-in capital                                                                                                                                                          |                                |       | 218,022                           |         |            |       | 218,200  |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Accumulated other comprehensive loss                                                                                                                                                |                                |       | (361                              | )       |            |       | (451     | )      
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Unearned compensation                                                                                                                                                               |                                |       |                                  |         |            |       | (109     | )      
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Accumulated deficit                                                                                                                                                                 |                                |       | (230,793                          | )       |            |       | (230,120 | )      
|                                                                                     |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|                                                                                     |                                                                                                                                                                                     | Total stockholders deficiency |       |                                   | (12,992 | )          |       |          | (12,333 | )
|                                                                                     |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|Commitments and contingencies                                                        |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Total liabilities and stockholders deficiency                                       |                                                                                                                                                                                     | $                              | 8,288 |                                   |         | $          | 9,041 |         
|                                                                                     |                                                                                                                                                                                     |                                |       |                                   |         |            |       |         

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

-2-



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##### Table of Contents



MAI SYSTEMS CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |   |       |      |        | 
|----------------------------------------------------- | ------------------------ | --------------------------------------------------------------------------- | ------------------------------- | ------------------ | ----- | ------------------------------------- | ------ | ------------------------------------- | ----- | ---- | ------ | ---- | ----- | ----- | ------ | - | ----- | ---- | ------ | 
|                                                      |                          |                                                                             |                                 |                    |       | (Unaudited)                           |        | (Unaudited)                          
|                                                      |                          |                                                                             |                                 |                    |       | For the Three Months Ended June 30,   |        | For the Six Months Ended June 30,    
|                                                      |                          |                                                                             |                                 |                    |       | (in thousands, except per share data) |        | (in thousands, except per share data)
|                                                      |                          |                                                                             |                                 |                    |       | 2001                                  |        | 2002                                  |       | 2001 |        | 2002
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |     
|Revenue:                                              |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                          | Software                                                                    |                                 | $                  | 1,519 |                                       |        | $                                     | 1,124 |      |        | $    | 3,211 |       |        | $ | 2,391 |     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                          | Network and computer equipment                                              |                                 |                    | 221   |                                       |        |                                       | 134   |      |        |      | 444   |       |        |   | 404   |     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                          | Services                                                                    |                                 |                    | 4,532 |                                       |        |                                       | 4,230 |      |        |      | 9,115 |       |        |   | 8,425 |     
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                      |                          |                                                                             |                                 | Total revenue      |       |                                       | 6,272  |                                       |       |      | 5,488  |      |       |       | 12,770 |   |       |      | 11,220 | 
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|Direct costs:                                         |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                          | Software                                                                    |                                 |                    | 142   |                                       |        |                                       | 192   |      |        |      | 205   |       |        |   | 349   |     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                          | Network and computer equipment                                              |                                 |                    | 84    |                                       |        |                                       | 90    |      |        |      | 288   |       |        |   | 292   |     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                          | Services                                                                    |                                 |                    | 1,690 |                                       |        |                                       | 1,499 |      |        |      | 3,591 |       |        |   | 3,119 |     
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                      |                          |                                                                             |                                 | Total direct costs |       |                                       | 1,916  |                                       |       |      | 1,781  |      |       |       | 4,084  |   |       |      | 3,760  | 
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                      |                          |                                                                             |                                 | Gross profit       |       |                                       | 4,356  |                                       |       |      | 3,707  |      |       |       | 8,686  |   |       |      | 7,460  | 
|                                                     
|                                                     
|                                                     
|                                                     
|Selling, general and administrative expenses          |                          |                                                                             | 1,834                           |                    |       |                                       | 2,336  |                                       |       |      | 3,916  |      |       |       | 4,409  |  
|                                                     
|                                                     
|                                                     
|                                                     
|Research and development costs                        |                          |                                                                             | 1,100                           |                    |       |                                       | 656    |                                       |       |      | 2,175  |      |       |       | 1,664  |  
|                                                     
|                                                     
|                                                     
|                                                     
|Amortization of intangibles                           |                          |                                                                             | 183                             |                    |       |                                       | 45     |                                       |       |      | 367    |      |       |       | 109    |  
|                                                     
|                                                     
|                                                     
|                                                     
|Other operating (income) loss                         |                          |                                                                             | 8                               |                    |       |                                       | 6      |                                       |       |      | (1,349 | )    |       |       | 5      |  
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                      |                          |                                                                             |                                 | Operating income   |       |                                       | 1,231  |                                       |       |      | 664    |      |       |       | 3,577  |   |       |      | 1,273  | 
|                                                     
|                                                     
|                                                     
|                                                     
|Interest income                                       |                          |                                                                             | 2                               |                    |       |                                       | 1      |                                       |       |      | 49     |      |       |       | 3      |  
|                                                     
|                                                     
|                                                     
|                                                     
|Interest expense                                      |                          |                                                                             | (408                            | )                  |       |                                       | (388   | )                                     |       |      | (863   | )    |       |       | (775   | )
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|Income from continuing operations before
income taxes |                          |                                                                             | 825                             |                    |       |                                       | 277    |                                       |       |      | 2,763  |      |       |       | 501    |  
|                                                     
|                                                     
|                                                     
|                                                     
|Income taxes                                          |                          |                                                                             | (2                              | )                  |       |                                       | (5     | )                                     |       |      | (79    | )    |       |       | (8     | )
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|Income from continuing operations                     |                          |                                                                             | 823                             |                    |       |                                       | 272    |                                       |       |      | 2,684  |      |       |       | 493    |  
|                                                     
|                                                     
|                                                     
|                                                     
|Income (loss) from discontinued operations            |                          |                                                                             | (530                            | )                  |       |                                       | 74     |                                       |       |      | (996   | )    |       |       | 180    |  
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                      |                          |                                                                             |                                 | Net income         |       | $                                     | 293    |                                       |       | $    | 346    |      |       | $     | 1,688  |   |       | $    | 673    | 
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|Income (loss) per share:                              |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Continuing Operations:   |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |   |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                          |                                                                             | Basic income per share          |                    | $     | 0.06                                  |        |                                       | $     | 0.02 |        |      | $     | 0.21  |        |   | $     | 0.04 |       
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                      |                          |                                                                             | Diluted income per share        |                    | $     | 0.06                                  |        |                                       | $     | 0.02 |        |      | $     | 0.21  |        |   | $     | 0.04 |       
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                      | Discontinued Operations: |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |   |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                          |                                                                             | Basic income (loss) per share   |                    | $     | (0.04                                 | )      |                                       | $     | 0.00 |        |      | $     | (0.08 | )      |   | $     | 0.01 |       
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                      |                          |                                                                             | Diluted income (loss) per share |                    | $     | (0.04                                 | )      |                                       | $     | 0.00 |        |      | $     | (0.08 | )      |   | $     | 0.01 |       
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                      | Net income per share:    |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |   |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                          |                                                                             | Basic income per share          |                    | $     | 0.02                                  |        |                                       | $     | 0.02 |        |      | $     | 0.13  |        |   | $     | 0.05 |       
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                      |                          |                                                                             | Diluted income per share        |                    | $     | 0.02                                  |        |                                       | $     | 0.02 |        |      | $     | 0.13  |        |   | $     | 0.05 |       
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|                                                      |                          | Weighted average common shares used in
determining income (loss) per share: |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |   |       |     
|                                                     
|                                                     
|                                                     
|                                                     
|Basic                                                 |                          |                                                                             | 13,679                          |                    |       |                                       | 14,302 |                                       |       |      | 12,537 |      |       |       | 13,979 |  
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  
|Diluted                                               |                          |                                                                             | 13,847                          |                    |       |                                       | 14,361 |                                       |       |      | 12,705 |      |       |       | 13,999 |  
|                                                      |                          |                                                                             |                                 |                    |       |                                       |        |                                       |       |      |        |      |       |       |        |  

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

-3-



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##### Table of Contents



MAI Systems Corporation




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

|                                           |                                           |   |                          |      |      |   |       |      |  
|------------------------------------------ | ----------------------------------------- | - | ------------------------ | ---- | ---- | - | ----- | ---- | -
|                                           |                                           |   | For the Six Months Ended
|                                           |                                           |   | June 30,                
|                                           |                                           |   | (in thousands)          
|                                           |                                           |   | 2001                     |      | 2002
|                                           |                                           |   |                          |      |     
|Net cash provided by operating activities  |                                           | $ | 487                      |      |      | $ | 1,229 |     
|                                           |                                           |   |                          |      |      |   |       |     
|Cash flows used in investing activities -  |                                           |   |                          |      |      |   |       |     
|                                          
|                                          
|                                          
|                                          
|                                           | Capital expenditures                      |   |                          | (40  | )    |   |       | (117 | )
|                                          
|                                          
|                                          
|                                          
|                                           | Software development costs                |   |                          |     |      |   |       | (359 | )
|                                           |                                           |   |                          |      |      |   |       |     
|Net cash used in investing activities      |                                           |   | (40                      | )    |      |   | (476  | )   
|                                           |                                           |   |                          |      |      |   |       |     
|Cash flows from financing activities:      |                                           |   |                          |      |      |   |       |     
|                                          
|                                          
|                                          
|                                          
|                                           | Net increase (decrease) in line of credit |   |                          | 19   |      |   |       | (385 | )
|                                          
|                                          
|                                          
|                                          
|                                           | Repayments of long-term debt              |   |                          | (159 | )    |   |       | (75  | )
|                                          
|                                          
|                                          
|                                          
|                                           | Repayments of bridge loan                 |   |                          | (220 | )    |   |       |     |  
|                                           |                                           |   |                          |      |      |   |       |     
|Net cash used in financing activities      |                                           |   | (360                     | )    |      |   | (460  | )   
|                                           |                                           |   |                          |      |      |   |       |     
|Net cash provided by continuing operations |                                           |   | 87                       |      |      |   | 293   |     
|                                          
|                                          
|                                          
|                                          
|Net cash used in discontinued operations   |                                           |   | (432                     | )    |      |   | (264  | )   
|                                          
|                                          
|                                          
|                                          
|Effect of exchange rate changes on cash    |                                           |   | 12                       |      |      |   | (15   | )   
|                                           |                                           |   |                          |      |      |   |       |     
|Net change in cash                         |                                           |   | (333                     | )    |      |   | 14    |     
|                                           |                                           |   |                          |      |      |   |       |     
|Cash at beginning of period                |                                           |   | 1,019                    |      |      |   | 1,224 |     
|                                           |                                           |   |                          |      |      |   |       |     
|Cash at end of period                      |                                           | $ | 686                      |      |      | $ | 1,238 |     
|                                           |                                           |   |                          |      |      |   |       |     

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.

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##### Table of Contents



MAI Systems Corporation




Notes to Condensed Consolidated Financial Statements

Six Months ended June, 2002

(Unaudited)



|1. |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | 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.
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Inventories are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                  |  |                        |    |          |  |   |    | 
|----------------- |  | ---------------------- | -- | -------- |  | - | -- | 
|                  |  | (dollars in thousands)
|                  |  | December 31,           |    | June 30,
|                  |  | 2001                   |    | 2002    
|                  |  |                        |    |         
|Finished goods    |  | $                      | 75 |          |  | $ | 83 | 
|                 
|                 
|                 
|                 
|Replacement parts |  |                        | 15 |          |  |   | 16 | 
|                  |  |                        |    |          |  |   |    | 
|                  |  | $                      | 90 |          |  | $ | 99 | 
|                  |  |                        |    |          |  |   |    | 



|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.                                                                                                                                                                                                
|  
|   |  | Shares of common stock may be distributed by the Company to its former
creditors. As of June 30, 2002, 6,758,251 shares of Common Stock had been
issued pursuant to the Plan and were outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|4. |  | Business Acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | HOTEL INFORMATION SYSTEMS,
INC. (HIS):During 1996, the Company entered into
arbitration proceedings regarding the purchase price of HIS. 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.                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | 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

-5-



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|   |  | 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 June
30, 2002, the fair market value of the Companys common stock was $0.33 per
share, which would result in approximately 2,495,451 additional shares being
issued. Also, included in the escrow account at June 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 June 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 GSI for an amount in excess of the book
value of net assets sold. Assets sold of approximately $3,749,000 consisted
of accounts receivable of $1,514,000, inventories of $364,000, furniture,
fixtures and equipment of $218,000, intangible assets of $1,573,000 and
prepaid expenses of $80,000. Liabilities assumed by the buyer consisted of
accounts payable and accrued liabilities of $197,000, deposits of $100,000,
unearned revenue of $351,000 and long-term debt of $446,000. The Company
received three promissory notes totaling $4,925,000 with face values of
$1,100,000, $1,500,000 and $2,325,000, respectively. Interest was paid
monthly at the rate of 10% per annum on both the $1,100,000 and $1,500,000
notes, with the principal due and payable on June 19, 2001 and June 19, 2003,
respectively. The $1,100,000 promissory note was guaranteed by a third
party. Principal payments and interest, at prime plus 1%, was to commence
for the $2,325,000 promissory note on October 1, 2002 in 48 monthly
installments of approximately $48,000 of principal, plus accrued interest.                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | Imputing interest at a rate of 10%, the present value of the $2,325,000
promissory note at the date of sale was $1,682,000 which resulted in a
combined carrying value of $4,282,000 for all three promissory notes. The
gain on sale of $1,227,000 had been deferred until collection of the proceeds
representing the gain can be assured. As of December 31, 2000, the Notes were
held for sale and were written down to an amount which approximated
their estimated net realizable value of $2,700,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | On April 6, 2001 the Company entered into an agreement with the maker of the
Notes whereby the maker reconveyed 100% of the Common Stock of GSI to the
Company for the purpose of selling GSI to a third party. In connection with
the agreement, the Company canceled the Notes and entered into a new $1.1
million secured promissory note with the same party. The maker will be paid a
commission of 30% of cash receipts from the third party, which will be first
applied to the $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 May 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
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

-6-



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|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|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
technology solutions featuring complex wide and local area networks to the
process manufacturing industry. The Legacy business provides a wide array of
products and services to its customers who continue to use its proprietary
host-based computer systems, including field engineering services, new and
replacement equipment, operating systems and software application products.
These products and services upgrade, enhance and integrate the legacy systems
with currently available computer technologies.
|  
|   |  | The Company is actively seeking buyers for its Process Manufacturing and
Legacy divisions and expects to consummate the sale of these divisions during
2002. The 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 Six Months Ended
|                                |  | June 30,                   |       | June 30,                
|                                |  |                            |       |                         
|                                |  | 2001                       |       | 2002                     |  | 2001 |     | 2002
|                                |  |                            |       |                          |  |      |     |     
|Revenue                         |  | $                          | 1,475 |                          |  | $    | 773 |      |  | $ | 3,108 |   |  | $ | 1,487 | 
|                               
|                               
|                               
|                               
|Income (loss)
before income tax |  |                            | (530  | )                        |  |      | 74  |      |  |   | (996  | ) |  |   | 180   | 



|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) and was payable interest only on a monthly basis with all accrued and
unpaid principal and interest due on the earlier of June 30, 2000 or the date
the Company receives a debt or equity infusion of at least $10,000,000. 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. Due to a
temporary event of default on the Bridge Loan and the secured revolving
credit facility and pursuant to a forbearance agreement with Coast, the
Company began making weekly principal payments of $25,000 on the Bridge Loan
commencing in September 1999. During the default period, the Company also
paid and expensed $40,000 in default fees to Coast in 1999 and $30,000 in
2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | 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 was amended on July 28, 1999 to allow for aggregate borrowings on an
interest only basis under the credit facility and Bridge Loan not to exceed
$6,000,000. The facility is secured by all assets, including intellectual
property of the Company, and bore interest at prime plus 2.25% (prime plus
5.25% when default interest rates apply) and expires on April 30, 2003. The
facility was again amended on April 13, 2000 and September 12, 2000. In
accordance with the amendments, the Bridge Loan and the credit facility bear
interest at prime plus 4.5% and required $35,000 weekly principal payments on
the Bridge Loan, except for the period from September 12, 2000 through
December 8, 2000, which required monthly payments of $35,000, until it was
paid in full. During the first quarter of 2001, the remaining balance of the
Bridge Loan was repaid in full. Additionally, 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 on
April 13, 2000, Coast waived all existing defaults. Additionally, 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

-7-



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|   |  | contains various restrictions and covenants, including a minimum
consolidated net worth, debt coverage ratio and minimum quarterly
profitability. The Company was in compliance with covenants as of June 30,
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | At December 31, 2001 and June 30, 2002, approximately $2,424,400 and
$2,039,000, respectively, was available and drawn down under the credit
facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Loan restructuring fees of $300,000 were incurred in connection with the line
of credit and Bridge Loan and are classified in prepaids and other current
assets and are 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 date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | 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 call for semi-annual interest
payments. On September 3, 1999, the Company failed to make the semi-annual
interest payment due on that date in the amount of $289,000.                                                                                                                                                                                                           
|  
|   |  | 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 balance outstanding on the subordinate notes
payable to Canyon was $5,490,000 and $5,563,000 at December 31, 2001 and June
30, 2002, respectively.
|  
|   |  | The Company is currently in negotiations with Canyon to restructure the terms
of the subordinated notes including extending its maturity date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | 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 and accrued interest to CSA was $3,103,000 and
$3,115,000 at December 31, 2001 and June 30, 2002, respectively.                                    
|  
|   |  | 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.                                                                                                                                                                                                                            
|  
|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 provided 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

-8-



---



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|   |  | $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 June 30, 2002
is $109,000.                                                                                                                                                                                                                                                                                                                                            
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|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 first and second quarter of fiscal
2001 adjusted to exclude amortization expense (net of taxes) is as follows:                                                                                                                                                                                                                                                                                                                                                                                      

|                            |                                     |                                     |   |                            |      |                          |   |       |       | 
|--------------------------- | ----------------------------------- | ----------------------------------- | - | -------------------------- | ---- | ------------------------ | - | ----- | ----- | 
|                            |                                     |                                     |   | For the Three Months Ended |      | For the Six Months Ended
|                            |                                     |                                     |   | June 30, 2001              |      | June 30, 2001           
|                            |                                     |                                     |   |                            |      |                         
|Net income:                 |                                     |                                     |   |                            |      |                          |   |      
|                           
|                           
|                           
|                           
|                            | Reported net income                 |                                     | $ | 293                        |      |                          | $ | 1,688 |      
|                           
|                           
|                           
|                           
|                            | Goodwill amortization               |                                     |   | 105                        |      |                          |   | 210   |      
|                            |                                     |                                     |   |                            |      |                          |   |      
|                            |                                     | Adjusted net income                 |   | $                          | 398  |                          |   | $     | 1,898 | 
|                            |                                     |                                     |   |                            |      |                          |   |      
|Basic earnings per share:   |                                     |                                     |   |                            |      |                          |   |      
|                           
|                           
|                           
|                           
|                            | Reported basic earnings per share   |                                     | $ | 0.02                       |      |                          | $ | 0.13  |      
|                           
|                           
|                           
|                           
|                            | Goodwill amortization               |                                     |   | 0.01                       |      |                          |   | 0.02  |      
|                            |                                     |                                     |   |                            |      |                          |   |      
|                            |                                     | Adjusted basic earnings per share   |   | $                          | 0.03 |                          |   | $     | 0.15  | 
|                            |                                     |                                     |   |                            |      |                          |   |      
|Diluted earnings per share: |                                     |                                     |   |                            |      |                          |   |      
|                           
|                           
|                           
|                           
|                            | Reported diluted earnings per share |                                     | $ | 0.02                       |      |                          | $ | 0.13  |      
|                           
|                           
|                           
|                           
|                            | Goodwill amortization               |                                     |   | 0.01                       |      |                          |   | 0.02  |      
|                            |                                     |                                     |   |                            |      |                          |   |      
|                            |                                     | Adjusted diluted earnings per share |   | $                          | 0.03 |                          |   | $     | 0.15  | 
|                            |                                     |                                     |   |                            |      |                          |   |      



|    |  | As of June 30, 2002, intangible assets consisted of $1,190,000 of goodwill
and $383,000 of capitalized software. Capitalized software amortization was
$64,000 and $45,000 during the first and second 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 June 30,  |        | For the Six Months Ended June 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                                                  |  | $                                    | 293    |                                      |  | $    | 346    |      |  | $ | 1,688  |  |  | $ | 673    | 
|                                                                                                                 |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 
|Denominator:                                                                                                     |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Denominator for basic earnings per share-
weighted average number of Common
shares outstanding during the period |  |                                      | 13,679 |                                      |  |      | 14,302 |      |  |   | 12,537 |  |  |   | 13,979 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Incremental common shares attributable to
exercise of outstanding shares                                         |  |                                      | 168    |                                      |  |      | 59     |      |  |   | 168    |  |  |   | 20     | 
|                                                                                                                 |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 
|Denominator for diluted earnings per share                                                                       |  |                                      | 13,847 |                                      |  |      | 14,361 |      |  |   | 12,705 |  |  |   | 13,999 | 
|                                                                                                                 |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 
|Basic earnings per share                                                                                         |  | $                                    | 0.02   |                                      |  | $    | 0.02   |      |  | $ | 0.13   |  |  | $ | 0.05   | 
|                                                                                                                 |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 
|Diluted earnings per share                                                                                       |  | $                                    | 0.02   |                                      |  | $    | 0.02   |      |  | $ | 0.13   |  |  | $ | 0.05   | 
|                                                                                                                 |  |                                      |        |                                      |  |      |        |      |  |   |        |  |  |   |        | 



| |  | 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 1,702,939 and 1,975,772 in 2001 and 2002,
respectively
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents





|11. |  | Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On October 3, 2001, the Financial Accounting Standards Board 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|12. |  | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | Chapter 11 Bankruptcy Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | At June 30, 2002, there was only one material claim to be settled before the
Companys Chapter 11 proceeding could be formally closed, 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. MAI also granted CSA demand registration rights with respect to
such stock. CSA requested registration of their shares, but MAI delayed
registration based upon its good faith exercise of its rights under its
agreement with CSA. On October 5, 1998, CSA filed a lawsuit against MAI in
the U.S. District Court for the Central District of California. Pursuant to
a settlement agreement entered into as of May 13, 1999 MAI agreed by November
1, 1999 to file, or at a minimum to commence the process to file, a
registration statement with the Securities and Exchange Commission (SEC)
for the purpose of registering CSAs shares. CSA initiated another lawsuit
in December 1999 in the above-referenced court (a) seeking damages in excess
of $5 million; (b) enforcement of the settlement agreement; and (c) and
injunctive relief through court order to cause MAI to file with the SEC. On
March 6, 2000, the Company answered the complaint. Because the Company did
not conclude the S-1 registration statement filing by November 1, 1999, CSA
initiated another lawsuit in January 2000 to enforce the settlement agreement
and secure injunctive relief through court order to cause us to file a
registration statement.
|   
|    |  | The Company entered into a second 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | In connection with the second 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. The $2.8 million of debt accrues interest at 10%
per annum and requires payments of $37,500                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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##### Table of Contents





|    |  | 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 (see note 7).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Cher-Ae Heights Indian Community                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | A lawsuit has been filed by Cher-Ae Heights Indian Community (Cher-Ae
Heights) against Logix Development Corporation, 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. However, the Company
has not yet been formerly served with the lawsuit. Based upon this suit, MIS
has informed the Company that it does not intend to pay the next $500,000 due
to the Company under a promissory note and security agreement (see Note 5).
The Company believes that the promissory note will be recoverable through
payment from MIS or through the sale of the underlying collateral, if
ultimately foreclosed upon.
|   
|    |  | 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 Six Months Ended
|                                             |  | June 30,                   |     | June 30,                
|                                             |  | 2001                       |     | 2002                     |  | 2001 |     | 2002
|                                             |  |                            |     |                          |  |      |     |     
|Net income                                   |  | $                          | 293 |                          |  | $    | 346 |      |  | $ | 1,688 |  |  | $ | 673 |  
|                                            
|                                            
|                                            
|                                            
|Change in cumulative
translation Adjustments |  |                            | 7   |                          |  |      | (92 | )    |  |   | 10    |  |  |   | (90 | )
|                                             |  |                            |     |                          |  |      |     |      |  |   |       |  |  |   |     |  
|Comprehensive income                         |  | $                          | 300 |                          |  | $    | 254 |      |  | $ | 1,698 |  |  | $ | 583 |  
|                                             |  |                            |     |                          |  |      |     |      |  |   |       |  |  |   |     |  



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

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##### 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.
|
| |  | We currently do not expect to record an impairment charge upon completion of
the initial impairment review. However, there can be no assurance that at the
time the review is completed a material impairment charge will not be
recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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##### Table of Contents



Liquidity and Capital Resources



| |  | At June 30, 2002, working capital decreased from a working capital deficiency
of $3,787,000 at December 31, 2001 to a working capital deficiency of
$11,302,000. Excluding unearned revenue of $3,027,000, the Companys working
capital deficiency at June 30, 2002 would be $8,275,000 or a ratio of current
assets to current liabilities of 0.42 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 $6,231,000 was primarily attributable to an increase in
current portion of long-term debt and line of credit of $7,701,000 offset by
increases in note receivable of $250,000, prepaids and other assets of
$60,000, current assets held for sale of $231,000 and decreases in accounts
payable of $396,000, customer deposits of $200,000, accrued liabilities of
$62,000, income taxes payable of $95,000 and current liabilities held for
sale of $139,000.                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cash was $1,238,000 at June 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 June 30, 2002, approximately $2,039,000 was available and
drawn down under this facility. The facility expires on April 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Net cash used in investing activities for the six months ended June 30, 2002,
totaled $476,000 which represented capital expenditures of $117,000 and
capitalized software of $359,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Net cash used in financing activities for the six months ended June 30, 2002
totaled $460,000, which is comprised of a $385,000 decrease in the secured
revolving credit facility and $75,000 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
($4,628,000) as of June 30, 2002, minimum quarterly debt coverage ratio of
1.1:1 and minimum quarterly profitability of $250,000. We were in compliance
with these covenants as of June 30, 2002. 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. The restrictions and covenants are
assessed quarterly.
|
| |  | Stockholders deficiency decreased from $12,992,000 at December 31, 2001 to
$12,333,000 at June 30, 2002, mainly as a result of net income of $673,000
and the issuance of common stock of $185,000 offset by an increase in the
accumulated other comprehensive loss of $90,000 and unearned compensation of
$109,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Net cash provided by operating activities for the six months ended June 30,
2002 totaled $1,229,000 and mainly related to an increase in unearned revenue
of $1,034,000, net income for the period of $673,000, non-cash charges for
depreciation and amortization of tangible and intangible assets of $582,000
and a decrease in accounts receivable of $94,000 offset by a decrease in
accounts payable of $542,000, customer deposits of $200,000, accrued
liabilities of $189,000, income taxes payable of $100,000 and discontinued
operations of $74,000. 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 $12,333,000 at
June 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 its facility with Coast, as needed, in
2002 to meet its operating and capital requirements. The Company expects to
generate positive cashflow during 2002 from shipping out products and
services from its $3.3 million backlog as of June 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 $500,000 in January 2003.                                                                                                                                                                                                                                                                                                                                                         

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##### Table of Contents



Contractual Obligations and Commercial Commitments



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

|                             |  |                                       |        |                  |  |           |       |           |  |               |       |  |  |   |     |  |  |   |     | 
|---------------------------- |  | ------------------------------------- | ------ | ---------------- |  | --------- | ----- | --------- |  | ------------- | ----- |  |  | - | --- |  |  | - | --- | 
|                             |  | Payments Due by Period (in thousands)
|                             |  |                                      
|Contractual Cash Obligations |  | Total                                 |        | Less Than 1 Year |  | 1-3 Years |       | 4-5 Years |  | After 5 Years
|                             |  |                                       |        |                  |  |           |       |           |  |              
|Long-Term Debt               |  | $                                     | 8,792  |                  |  | $         | 5,889 |           |  | $             | 2,651 |  |  | $ |    |  |  | $ | 252 | 
|                            
|                            
|                            
|                            
|Line of Credit               |  |                                       | 2,039  |                  |  |           | 2,039 |           |  |               |      |  |  |   |    |  |  |   |    | 
|                            
|                            
|                            
|                            
|Operating Leases             |  |                                       | 1,686  |                  |  |           | 918   |           |  |               | 613   |  |  |   | 155 |  |  |   |    | 
|                             |  |                                       |        |                  |  |           |       |           |  |               |       |  |  |   |     |  |  |   |     | 
|                             |  | $                                     | 12,517 |                  |  | $         | 8,846 |           |  | $             | 3,264 |  |  | $ | 155 |  |  | $ | 252 | 
|                             |  |                                       |        |                  |  |           |       |           |  |               |       |  |  |   |     |  |  |   |     | 

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##### Table of Contents



Results of Operations

Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2002

|                                             |  |                |       |         |  |               |       |                |  |   |       |               |  |  |       |  
|-------------------------------------------- |  | -------------- | ----- | ------- |  | ------------- | ----- | -------------- |  | - | ----- | ------------- |  |  | ----- | -
|                                             |  |                |       |         |  | Percentage of |       |                |  |   |       | Percentage of
|                                             |  | June 30, 2001  |       | Revenue |  | June 30, 2002 |       | Revenue       
|                                             |  |                |       |         |  |               |       |               
|                                             |  | (in thousands) |       |         |  |               |       | (in thousands) |  |   |       |              
|Revenue                                      |  | $              | 6,272 |         |  |               | 100.0 | %              |  | $ | 5,488 |               |  |  | 100.0 | %
|                                            
|                                            
|                                            
|                                            
|Gross profit                                 |  |                | 4,356 |         |  |               | 69.5  | %              |  |   | 3,707 |               |  |  | 67.5  | %
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative expenses |  |                | 1,834 |         |  |               | 29.3  | %              |  |   | 2,336 |               |  |  | 42.6  | %
|                                            
|                                            
|                                            
|                                            
|Research and development costs               |  |                | 1,100 |         |  |               | 17.5  | %              |  |   | 656   |               |  |  | 12.0  | %
|                                            
|                                            
|                                            
|                                            
|Amortization of intangibles                  |  |                | 183   |         |  |               | 2.9   | %              |  |   | 45    |               |  |  | 0.8   | %
|                                            
|                                            
|                                            
|                                            
|Other operating income                       |  |                | 8     |         |  |               | 0.1   | %              |  |   | 6     |               |  |  | 0.1   | %
|                                            
|                                            
|                                            
|                                            
|Interest expense, net                        |  |                | 406   |         |  |               | 6.5   | %              |  |   | 387   |               |  |  | 7.1   | %
|                                            
|                                            
|                                            
|                                            
|Income taxes                                 |  |                | 2     |         |  |               | 0.0   | %              |  |   | 5     |               |  |  | 0.1   | %
|                                            
|                                            
|                                            
|                                            
|Income (loss) from discontinued operations   |  |                | (530  | )       |  |               | (8.5  | )%             |  |   | 74    |               |  |  | 1.3   | %
|                                            
|                                            
|                                            
|                                            
|Net income                                   |  | $              | 293   |         |  |               | 4.7   | %              |  | $ | 346   |               |  |  | 6.3   | %



| |  | Revenue for 2002 was $5,488,000 compared to $6,272,000 in 2001 or a 12.5%
decrease. Revenue decreased $784,000 in 2002, as a result of decreased
software sales and professional services mainly due to decreased market
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 the
volume of sales. Our respective business units continue to generate
sufficient cash from operations to adequately fund the respective ongoing
operating activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Revenue in our Asian operations increased from $497,000 in 2001 to $541,000
in 2002. The increase in revenue from 2001 to 2002 is due to an increase in
professional services, mainly maintenance services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Gross profit for 2002 decreased to $3,707,000 (67.5%) from $4,356,000 (69.5%)
in 2001. The decrease in gross profit is due to the decrease in software
sales, which generate higher gross margins. Revenue on lower gross margin
functions such as professional services also declined.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Selling, general and administrative expenses (SG&A) increased from
$1,835,000 in 2001 to $2,336,000 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | The decrease in research and development costs in 2002 was due to the
capitalization of approximately $359,000 of software development costs mainly
associated with the Companys new product development for hospitality. There
were no such costs capitalized in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | 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 June 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Net interest expense was $406,000 in 2001 compared to $387,000 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 $530,000 in 2001
to income of $74,000 in 2002 as a result of decreased Process Manufacturing
operating expenses from $989,000 in 2001 to $340,000 in 2002. Revenue from
discontinued operations decreased from $1,475,000 in 2001 to $773,000 in
2002. Revenue from Process Manufacturing decreased from $478,000 in 2001 to
$413,000 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 $637,000 (63.9%) year over year, largely due to the sale of its
domestic legacy hardware business in October 2001 and expected decreased
volume and customers replacing their legacy systems.

-15-



---



##### Table of Contents



Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2002

|                                             |  |                |        |         |  |               |       |                |  |   |        |               |  |  |       |  
|-------------------------------------------- |  | -------------- | ------ | ------- |  | ------------- | ----- | -------------- |  | - | ------ | ------------- |  |  | ----- | -
|                                             |  |                |        |         |  | Percentage of |       |                |  |   |        | Percentage of
|                                             |  | June 30, 2001  |        | Revenue |  | June 30, 2002 |       | Revenue       
|                                             |  |                |        |         |  |               |       |               
|                                             |  | (in thousands) |        |         |  |               |       | (in thousands) |  |   |        |              
|Revenue                                      |  | $              | 12,770 |         |  |               | 100.0 | %              |  | $ | 11,220 |               |  |  | 100.0 | %
|                                            
|                                            
|                                            
|                                            
|Gross profit                                 |  |                | 8,686  |         |  |               | 68.0  | %              |  |   | 7,460  |               |  |  | 66.5  | %
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative expenses |  |                | 3,916  |         |  |               | 30.7  | %              |  |   | 4,409  |               |  |  | 39.3  | %
|                                            
|                                            
|                                            
|                                            
|Research and development costs               |  |                | 2,175  |         |  |               | 17.0  | %              |  |   | 1,664  |               |  |  | 14.8  | %
|                                            
|                                            
|                                            
|                                            
|Amortization of intangibles                  |  |                | 367    |         |  |               | 2.8   | %              |  |   | 109    |               |  |  | 1.0   | %
|                                            
|                                            
|                                            
|                                            
|Other operating income                       |  |                | (1,349 | )       |  |               | (10.6 | )%             |  |   | 5      |               |  |  | 0.1   | %
|                                            
|                                            
|                                            
|                                            
|Interest expense, net                        |  |                | 814    |         |  |               | 6.4   | %              |  |   | 772    |               |  |  | 6.9   | %
|                                            
|                                            
|                                            
|                                            
|Income taxes                                 |  |                | 79     |         |  |               | 0.6   | %              |  |   | 8      |               |  |  | 0.1   | %
|                                            
|                                            
|                                            
|                                            
|Income (loss) from discontinued operations   |  |                | (996   | )       |  |               | (7.8  | )%             |  |   | 180    |               |  |  | 1.6   | %
|                                            
|                                            
|                                            
|                                            
|Net income                                   |  | $              | 1,688  |         |  |               | 13.2  | %              |  | $ | 673    |               |  |  | 6.0   | %



| |  | Revenue for 2002 was $11,220,000 compared to $12,770,000 in 2001 or a 12.1%
decrease. Revenue decreased $1,550,000 in 2002, as a result of decreased
software sales and professional services mainly due to decreased market
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 the
volume of sales. Our respective business units continue to generate
sufficient cash from operations to adequately fund the respective ongoing
operating activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Revenue in our Asian operations decreased from $1,071,000 in 2001 to
$1,031,000 in 2002. The deterioration of revenue from 2001 to 2002 is mainly
due to the continued generally depressed condition of the Asian economies
through the first quarter of 2002 resulting in a decrease in sales in the
region, for the six months ended June 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Gross profit for 2002 decreased to $7,460,000 (66.5%) from $8,686,000 (68.0%)
in 2001. The decrease in gross profit is due to the decrease in software
sales which generate higher gross margins. Revenue on lower gross margin
functions such as professional services also declined.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Selling, general and administrative expenses (SG&A) increased from
$3,916,000 in 2001 to $4,409,000 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The decrease in research and development costs in 2002 was due to the
capitalization of approximately $359,000 of software development costs mainly
associated with the Companys new product development for hospitality. There
were no such costs capitalized in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | 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 $210,000 for
the six months ended June 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Other operating (income) expense was ($1,349,000) in 2001 and $5,000 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 $814,000 in 2001 compared to $772,000 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 $996,000 in 2001
to income of $180,000 in 2002 as a result of decreased Process Manufacturing
operating expenses from $1,953,000 in 2001 to $637,000 in 2002. Revenue from
discontinued operations decreased from $3,108,000 in 2001 to $1,487,000 in
2002. Revenue from Process Manufacturing decreased from $1,084,000 in 2001 to
$833,000 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 $1,370,000 (67.7%) year over year, largely due to the sale of its
domestic legacy hardware business in October 2001 and expected decreased
volume and customers replacing their legacy systems.

-16-



---



##### Table of Contents






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 $11 million principal amount of indebtedness at
June 30, 2002, approximately $2.0 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 $20,000 change in
the annual amount of interest payable on such debt. Of the remaining amount
of approximately $9 million, $5.7 million bears interest at a fixed rate of
11%, $2.8 million bears interest at a fixed rate of 10% and $0.3 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 June
30, 2002.                                                                                                                                                                                                                                                                         




PART II  OTHER INFORMATION




Item 1. Legal Proceedings



| |  | Chapter 11 Bankruptcy Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At June 30, 2002, there was only one material claim to be settled before the
Companys Chapter 11 proceeding could be formally closed, 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. MAI also granted CSA demand registration rights with respect to
such stock. CSA requested registration of their shares, but MAI delayed
registration based upon its good faith exercise of its rights under its
agreement with CSA. On October 5, 1998, CSA filed a lawsuit against MAI in
the U.S. District Court for the Central District of California. Pursuant to
a settlement agreement entered into as of May 13, 1999 MAI agreed by November
1, 1999 to file, or at a minimum to commence the process to file, a
registration statement with the Securities and Exchange Commission (SEC)
for the purpose of registering CSAs shares. CSA initiated another lawsuit
in December 1999 in the above-referenced court (a) seeking damages in excess
of $5 million; (b) enforcement of the settlement agreement; and (c) and
injunctive relief through court order to cause MAI to file with the SEC. On
March 6, 2000, the Company answered the complaint. Because the Company did
not conclude the S-1 registration statement filing by November 1, 1999, CSA
initiated another lawsuit in January 2000 to enforce the settlement agreement
and secure injunctive relief through court order to cause us to file a
registration statement.
|
| |  | The Company entered into a second 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

-17-



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##### Table of Contents





| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In connection with the second 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. The $2.8 million of debt accrues
interest at 10% per annum and requires payments of $37,500 commencing on
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 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 $1,000,000 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 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.                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Cher-Ae Heights Indian Community                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | A lawsuit has been filed by Cher-Ae Heights Indian Community (Cher-Ae
Heights) against Logix Development Corporation, 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 gaming subsidiary on July
27, 2001. However, the Company has not yet been formerly served with the
lawsuit. Based upon this suit, MIS has informed the Company that it does not
intend to pay the next $500,000 due to the Company under a promissory note
and security agreement (see Note 5 to the condensed consolidated financial
statements). The Company believes that the promissory note will be
recoverable through payment from MIS or through the sale of the underlying
collateral, if ultimately foreclosed upon.
|
| |  | 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.




Item 3. Defaults Upon Senior Securities



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




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



| | (a) |  | Annual Meeting of Stockholders.                                                                                                                       
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company held its Annual Meeting of Stockholders on June 3, 2002
at the Hollywood Roosevelt Hotel,
7000 Hollywood Boulevard, Hollywood, California.

-18-



---



##### Table of Contents





| | (b) |  | Elected Directors of Registrant.                                        
| | --- |  | ------------------------------------------------------------------------
|
| |     |  | The following persons were elected to serve as directors of the
Company.



| |  |  | Richard S. Ressler
Zohar Loshitzer
Stephen Ross
Steven F. Mayer
| |  |  | ---------------------------------------------------------------



| | (c) |  | Items Voted Upon by Stockholders of the Registrant.                                                                                                                                                           
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The following matters were voted upon by the stockholders of the
Company. The number of votes cast for
and against are set forth below (as well as the applicable number of
abstentions and broker non-votes):

|                                                                                                |  |           |            |          |  |             |        |                  |                  |  |        |  |  |  |   |  |  |  | 
|----------------------------------------------------------------------------------------------- |  | --------- | ---------- | -------- |  | ----------- | ------ | ---------------- | ---------------- |  | ------ |  |  |  | - |  |  |  | 
|                                                                                                |  |           |            |          |  |             |        |                  | Votes Against Or |  |        |  |  |  |   |  | 
|Subject                                                                                         |  | Votes For |            | Withheld |  | Abstentions |        | Broker Non-Votes
|                                                                                                |  |           |            |          |  |             |        |                 
|Election of
Directors:                                                                          |  |           |            |          |  |             |        |                  |                  |  |        |  |  |  |   | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Richard S. Ressler                                                                              |  |           | 10,758,067 |          |  |             | 71,472 |                  |                  |  | 0      |  |  |  | 0 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Zohar Loshitzer                                                                                 |  |           | 10,734,047 |          |  |             | 95,492 |                  |                  |  | 0      |  |  |  | 0 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Stephen Ross                                                                                    |  |           | 10,743,477 |          |  |             | 86,062 |                  |                  |  | 0      |  |  |  | 0 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Steven F. Mayer                                                                                 |  |           | 10,743,477 |          |  |             | 86,062 |                  |                  |  | 0      |  |  |  | 0 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Ratification of the
Companys Selection
of KPMG LLP act as
Independent
Auditors for the
Company |  |           | 10,747,865 |          |  |             | 55,442 |                  |                  |  | 26,232 |  |  |  | 0 | 



| | (d) |  | None.
| | --- |  | -----




Item 5. Other Information



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




Item 6. Exhibits and Reports on Form 8-K



| | (a)  |  | Exhibits                                                                                                                                                             
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 10.1 |  | Stock Purchase Agreement dated June 23, 2002 between MAI
Systems Corporation and Hospitality Services and Solutions, Pte.
Ltd., a Singapore limited liability company
|
| | 10.2 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and Richard S. Ressler                                                               
|
| | 10.3 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and Richard S. Zohar Loshitzer                                                       
|
| | 10.4 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and Morton O. Schapiro                                                               

-19-



---



##### Table of Contents





| | 10.5 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and Stephen Ross                     
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------
|
| | 10.6 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and Steven F. Mayer                  
|
| | 10.7 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and W. Brian Kretzmer                
|
| | 10.8 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and James W. Dolan                   
|
| | 99.1 |  | Certification of Chief Executive Officer, W. Brian Kretzmer, as
required by Section 9.06 of Sarbane-Oxley Act of 2002
|
| | 99.2 |  | Certification of Chief Financial Officer, James W. Dolan, as
required by Section 9.06 of Sarbane-Oxley Act of 2002   
|
| | (b)  |  | Reports on Form 8-K: None.                                                                                           

-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: August 14, 2002 |  | /s/ James W. DolanJames W. Dolan
Chief Financial and Operating Officer
(Chief Financial and Accounting Officer)

-21-



---



##### Table of Contents






Exhibit Index



| | 10.1 |  | Stock Purchase Agreement dated June 23, 2002 between MAI
Systems Corporation and Hospitality Services and Solutions, Pte.
Ltd., a Singapore limited liability company
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 10.2 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and Richard S. Ressler                                                               
|
| | 10.3 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and Richard S. Zohar Loshitzer                                                       
|
| | 10.4 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and Morton O. Schapiro                                                               
|
| | 10.5 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and Stephen Ross                                                                     
|
| | 10.6 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and Steven F. Mayer                                                                  
|
| | 10.7 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and W. Brian Kretzmer                                                                
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| | 10.8 |  | Restricted Stock Agreement Dated April 16, 2002 between MAI
Systems Corporation and James W. Dolan                                                                   
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| | 99.1 |  | Certification of Chief Executive Officer, W. Brian Kretzmer, as
required by Section 9.06 of Sarbane-Oxley Act of 2002                                                
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| | 99.2 |  | Certification of Chief Financial Officer, James W. Dolan, as
required by Section 9.06 of Sarbane-Oxley Act of 2002