UNITED STATES SECURITIES AND EXCHANGE COMMISSION ~~Washington, DC 20549~~

Washington, DC 20549

FORM 10-Q

ý	~~Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.~~	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the period ended September 30, 2003 or
		For the period ended June 30, 2004 or
o	~~Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.~~	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
~~For the transition period from to .~~		For the transition period from to .
Commission file number: 1-9158

~~MAI~~Commission ~~Systems~~file ~~Corporation (Exact~~number: ~~name of registrant as specified in its charter)~~1-9158

Delaware		22-2554549
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
26110 Enterprise Way, Lake Forest, CA 92630
Address of principal executive offices
Registrant’s telephone number including area code (949) 598-6000

MAI Systems Corporation

(Exact name of registrant as specified in its charter)

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

26110 Enterprise Way, Lake Forest, CA 92630
Address of principal executive offices

Registrant’s telephone number including area code (949) 598-6000

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ~~Yes o No ý~~

The aggregate market value of the common stock held by non-affiliates of the registrant, based upon the last sale price of the Common Stock reported on the National Association of Securities Dealers Automated Quotation National Market System onYes ~~October~~o ~~20, 2003 was $1,487,575.~~ No ý

The ~~number~~ ofaggregate ~~shares~~market value of the common stock ~~issued~~held by non-affiliates of the registrant, ~~outstanding~~based ~~and~~upon ~~subscribed~~the aslast sale price of the Common Stock reported on the National Association of ~~October 20,~~Securities ~~2003~~Dealers Automated Quotation National Market System on August 5, 2004 was 14$2,~~875~~494,~~752~~877.84.

The number of shares of common stock issued, outstanding and subscribed as of August 5, 2004 was 14,675,752.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

MAI SYSTEMS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	(in thousands, except share data)
	As of December 31, 2002			As of September 30,2003 (unaudited)
ASSETS
Current assets:
Cash	$	545		$	161
Receivables, less allowance for doubtful accounts of $336 in 2002 and $338 in 2003	1,834			1,715
Inventories	60			77
Notes receivable	250			—
Prepaids and other assets	628			618
Total current assets	3,317			2,571
Furniture, fixtures and equipment, net	843			821
Intangibles, net	1,823			2,601
Other assets	194			44
Total assets	$	6,177		$	6,037
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities:
Current portion of long-term debt	$	3,289		$	3,506
Accounts payable	1,077			864
Customer deposits	1,811			1,963
Accrued liabilities	2,007			2,466
Income taxes payable	89			87
Unearned revenue	3,693			3,483
Total current liabilities	11,966			12,369
Long-term debt	7,234			7,193
Other liabilities	1,759			1,026
Total liabilities	20,959			20,588
Commitments and contingencies
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; 14,675,752 and 14,875,752 shares issued,outstanding and subscribed at December 31, 2002 and September 30, 2003, respectively.	150			152
Additional paid-in capital	218,251			218,112
Accumulated other comprehensive loss:
Minimum pension liability	(918		)	(918		)
Foreign currency translation	(31		)	(2		)
Unearned Compensation	(91		)	(62		)
Accumulated deficit	(232,143		)	(231,833		)
Total stockholders’ deficiency	(14,782		)	(14,551		)
Total liabilities and stockholders’ deficiency	$	6,177		$	6,037

(Unaudited)

	(in thousands, except share data)
	As of December 31, 2003			As of June30, 2004
ASSETS
Current assets:
Cash	$	664		$	129
Receivables, less allowance for doubtful accounts of $335 in 2003 and $434 in 2004	1,313			2,009
Inventories	47			50
Prepaids and other assets	814			800

Total current assets	2,838			2,988

Furniture, fixtures and equipment, net	758			623
Intangibles, net	2,876			3,480
Other assets	58			140

Total assets	$	6,530		$	7,231

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities:
Current portion of long-term debt	$	3,646		$	914
Accounts payable	904			1,157
Customer deposits	2,334			1,463
Accrued liabilities	3,059			2,422
Income taxes payable	85			99
Unearned revenue	3,209			4,787

Total current liabilities	13,237			10,842

Long-term debt	7,135			10,286
Other liabilities	744			480

Total liabilities	21,116			21,608

Commitments and contingencies

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; 14,875,752 and 14,675,752 shares issued,outstanding and subscribed at December 31, 2003 and June 30, 2004, respectively.	152			152
Additional paid-in capital	218,112			218,112
Accumulated other comprehensive loss
Minimum pension liability	(1,005		)	(1,005		)
Foreign currency translation	(2		)	(60		)
Unearned Compensation	(53		)	(34		)
Accumulated deficit	(231,790		)	(231,542		)

Total stockholders’ deficiency	(14,586		)	(14,377		)

Total liabilities and stockholders’ deficiency	$	6,530		$	7,231

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

MAI SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	(Unaudited)						(Unaudited)
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2003			2004			2003			2004
	(in thousands, except per share data)						(in thousands, except per share data)
	2002			2003			2002			2003
Revenue:
Software	$	1,~~396~~127		$	~~842~~814		$	32,~~787~~257		$	32,~~098~~103
Network and computer equipment	~~328~~86			~~104~~136			~~731~~235			~~339~~211
Services	3,~~987~~539			3,~~868~~951			127,~~413~~446			117,~~315~~760
Total revenue	54,~~711~~752			4,~~814~~901			169,~~931~~938			1410,~~752~~074
Direct costs:
Software	~~158~~52			~~167~~8			~~507~~258			~~425~~329
Network and computer equipment	~~276~~74			73109			~~569~~165			~~238~~169
Services	1,~~366~~100			1,~~109~~113			42,~~485~~274			32,~~384~~182
Total direct costs	1,~~800~~ 226			1,~~349~~230			52,~~561~~697			42,~~047~~680
Gross profit	3,~~911~~526			3,~~465~~671			117,~~370~~241			107,~~705~~394
Selling, general and administrative expenses	2,~~404~~438			2,~~307~~351			64,~~787~~969			74,~~277~~700
Research and development costs	~~797~~658			~~764~~908			21,~~461~~340			21,~~104~~800
Amortization of intangibles	25			—			134			—
Other operating (income) loss	3			15			(46		)	18
Other operating (income) loss	232			(134		)	237			(181		)
Operating income	427			397			978			876
Operating income	453			528			1,751			1,505
Interest income	—			—			1			—
Interest income	1			—			4			1
Interest expense	(292		)	(288		)	(642		)	(579		)
Interest expense	(372		)	(286		)	(1,146		)	(928		)
Other non-operating expense	(212		)	(23		)	(212		)	(39		)
Other non-operating expense	(14		)	(98		)	(41		)	(309		)
Income (loss) before income taxes	(77		)	86			125			258
Income from continuing operations before income taxes	68			144			568			269
Income tax benefit (expense)	(5		)	(4		)	54			(10		)
Income tax benefit (expense)	(8		)	(12		)	(16		)	41
Net income (loss)	$	(82	)	$	82		$	179		$	248
Income from continuing operations	60			132			552			310
Loss from discontinued operations	(223		)	—			(43		)	—
Net income (loss)	$	(163	)	$	132		$	509		$	310
Income (loss) per share:
Continuing Operations:
Basic income per share	$	0.00		$	0.01		$	0.04		$	0.02
Diluted income per share	$	0.00		$	0.01		$	0.04		$	0.02
Discontinued Operations:
Basic income (loss) per share	$	(0.01	)	$	0.00		$	0.00		$	0.00
Diluted income (loss) per share	$	(0.01	)	$	0.00		$	0.00		$	0.00
Net income per share:
Basic income (loss) per share	$	(0.01	)	$	0.01		$	0.0401		$	0.02
Diluted income (loss) per share	$	(0.01	)	$	0.01		$	0.0401		$	0.02
Weighted average common shares used in determining income (loss) per share:
Basic	14,~~119~~426			14,~~575~~676			1314,~~876~~426			14,~~525~~676
Diluted	14,~~569~~426			14,~~875~~676			14,~~326~~726			14,~~825~~676

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

MAI Systems Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months Ended September 30,
	For the Six Months Ended June 30,
	2003			2004
	(in thousands)
	2002			2003
Net cash provided by operating activities:	$	399		$	605
Net cash provided by operating activities:	$	1,933		$	619
Cash flows used in investing activities:
Proceeds from note receivable	—250			~~250~~—
Capital expenditures	(128		)	(240		)
Capital Expenditures	(195		)	(110		)
Acquisition of unconsolidated subsidiary	—			(79		)
Capitalized software development costs	(419		)	(604		)
Capitalized software development costs	(615		)	(619		)
Net cash used in investing activities	(364		)	(714		)
Net cash used in investing activities	(743		)	(688		)
Cash flows used in financing activities:
Cash flows from financing activities:
Repayments on long-term debt	(148		)	(425		)
Net decrease in line of credit	(280		)	—
Net cash used in operations	(113		)	(534		)
Repayments on long-term debt	(89		)	(312		)
Effect of exchange rate changes on cash	(3		)	(1		)
Net cash used in financing activities	(369		)	(312		)
Net change in cash	(116		)	(535		)
Net cash provided by (used in) continuing operations	821			(381		)
Cash at beginning of period	545			664
Net cash used in discontinued operations	(1,487		)	—
Cash at end of period	$	429		$	129
Effect of exchange rate changes on cash	(13		)	(3		)
Net change in cash	(679		)	(384		)
Cash at beginning of period	1,224			545
Cash at end of period	$	545		$	161

See note 5 for disclosure on non -cash transactions.

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

MAI Systems Corporation

Notes to Condensed Consolidated Financial Statements

Three Months ended ~~September~~ June 30, ~~2003~~2004

(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, ~~2002~~2003, which is on file with the SEC.

2. Liquidity

Although the Company has a net stockholders’ deficiency of $14,~~551~~377,000 and a working capital deficit of ~~$9,798,000 (which includes subordinated debt due to CSA of~~ $27,~~800~~854,000, ~~see note 7)~~ at ~~September~~ June 30, ~~2003~~2004, the Company ~~believes~~expects ~~it will continue~~ to generate ~~sufficient~~positive ~~funds~~cash flow from ~~operations and obtain additional financing or restructure~~ its ~~subordinated~~operations ~~note~~during ~~with~~2004 ~~CSA~~from toshipping ~~meet~~out ~~its operating~~products and ~~capital~~services ~~requirements. The~~from ~~Company~~its iscurrent ~~currently~~backlog inas ~~negotiations with CSA to restructure the terms~~ of ~~the existing~~June ~~debt~~30, ~~including~~2004 ~~extending~~as ~~the~~well ~~maturity~~as ~~date. The~~new ~~Company~~orders ~~expects~~and tothrough ~~generate positive cash flow from~~ its ~~continuing~~proposed ~~operations~~private ~~during~~placement ~~2003~~of ~~from~~$1 ~~shipping~~million ~~out products and services~~ from ~~its~~ ~~current~~an ~~backlog~~Investor asGroup ofto ~~September 30,~~meet ~~2003~~its operating asand ~~well~~capital asrequirements ~~new~~(see ~~orders~~Note 5). In the event that the Company cannot generate positive cash flow from its ~~continuing~~ operations during ~~2003~~2004, the Company can substantially reduce its research and development efforts to mitigate cash outflow to help sustain its operations. There can be no assurance that the Company will be able to sustain profitability, generate positive cash flow from operations or restructure its debt as necessary. These financial statements have been prepared assuming the Company will continue to operate as a going concern. If the Company is unsuccessful in the aforementioned efforts, ~~the~~ the Company could be forced to liquidate certain of its assets, reorganize its capital structure and, if necessary, seek other remedies available to the Company, including protection under the bankruptcy laws.The restructured debt, pursuant to the original inter-creditor agreement between Canyon Capital and Coast, which was sold to Wamco on May 15, 2003, contains various restrictions and covenants. In the event that the Company were not in compliance with the various restrictions and covenants and were unable to receive waivers for non-compliance, the term debt would be immediately due and payable. The Company is not in compliance with the amended debt covenants as of and for the period ending June 30, 2004. There is no guaranty that the Company will meet its debt covenants in the future. In the event that the Company were not in compliance with the various restrictions and covenants and were unable to receive waivers for non-compliance, the term loan would be immediately due and payable.

~~The restructured debt, pursuant to the original inter-creditor agreement between Canyon Capital and Coast, which was sold to Wamco on May 15, 2003, contains various restrictions and covenants~~3. In the event that the Company were not in compliance with the various restrictions and covenants and were unable to receive waivers for non-compliance, the term debt would be immediately due and payable. The Company was not in compliance with but received a waiver for one of its covenants as of and for the three month period ended September 30, 2003 (see note 7). There is no guaranty that the Company will meet its debt covenants in the future. The Company is currently negotiating with Wamco to change such covenants, but there is no assurance that the Company will be able to successfully change the covenants. Inventory

3. Inventories

Inventories are summarized as follows:

	(dollars in thousands)
	December 31, 2002		September 30, 2003
	December 31, 2003		June 30, 2004
Finished goods	$	4539	$	6343
Replacement parts	158		147
	$	6047	$	7750

4. Business Acquisitions

4. Plan of Reorganization

In connection with the Company’s Chapter 11 bankruptcy proceedings in 1993, shares of Common Stock are currently being distributed by the Company to its former creditors pursuant to the Plan of Reorganization (the “Plan”) as approved by United States Bankruptcy Court. The Company does not anticipate that additional shares will be issued under the plan. As of September 30, 2003, 6,758,251 shares had been issued pursuant to the Plan.

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

5. Business Acquisitions

Hotel Information Systems, Inc.

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

During 1996, the Company entered into arbitration proceedings regarding the purchase price of HIS. The Company placed approximately 1,100,000 shares of Common Stock issued in connection with the acquisition of HIS in an escrow account to be released in whole, or in part, upon final resolution of post closing adjustments.

In November 1997, the purchase price for the acquisition of HIS was reduced by $931,000 pursuant to arbitration proceedings. As a result, goodwill was reduced by $931,000 and approximately 100,650 shares were required to be released from the escrow account and returned to the Company (this has not occurred as of September 30, 2003). In addition, the Company had further claims against HIS relating to legal costs and certain disbursements inappropriately made by HIS prior to the closing estimated at $650,000. The Company was required, as needed, pursuant to the asset purchase agreement and related documents, to issue additional shares of Common Stock in order that the recipients ultimately receive shares worth a fair value of $9.25 per share. This adjustment applied to a maximum of 73,466 shares of Common Stock. As of September 30, 2003, the fair market value of the Company’s common stock was $0.09 per share, which would have resulted in approximately 5,755,453 additional shares being issued. Also, included in the escrow account at December 31, 2002 are 200,000 shares of the Company’s common stock, which do not have a guarantee of value.

On March 25, 2003, the Company entered into a settlement agreement with HIS and one of its former corporate officers whereby (i) the parties dismissed all claims, known and unknown, against each other; (ii) the Company forgave and wrote off a note receivable from the former corporate officer of HIS in the amount of $66,000 (which was expensed to other expense in the 2002 consolidated statement of operations); (iii) the Company paid $50,000 in cash and issued a non-interest bearing unsecured promissory note which requires 35 consecutive monthly payments of $5,000 each commencing April 1, 2003; and (iv) the remaining 374,116 shares in the escrow account will be released to the Company. If the Company is delinquent four times in any twelve month period during the term of the unsecured promissory note in making its $5,000 monthly payments to HIS, and HIS issues respective valid default notices, the Company will be subject to a $225,000 penalty. The 374,116 shares have been received by MAI together with the HIS authorization to legally transfer such shares to MAI.

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

Hospitality Services & Solutions

On June 23, 2002, the Company acquired substantially all of the assets and assumed certain liabilities of Hospitality Services & Solutions (“HSS”) including a 35% ownership in AMDB – HIS (“AMDB”) pursuant to a stock purchase agreement for 100,000 shares of common stock valued at $32,000 (the quoted market price of the common stock at the time the terms were agreed), and $75,000 in cash. Additionally, the shareholders of HSS received a 20% minority

Services & Solutions (“HSS”) including a 35% ownership in AMDB – HIS (“AMDB”) pursuant to a stock purchase agreement for 100,000 shares of common stock valued at $32,000 (the quoted market price of the common stock at the time the terms were agreed), and $75,000 in cash. Additionally, the shareholders of HSS received a 20% minority interest in the Company’s combined operations in Asia. HSS was acquired for the Company to expand its operations in the Asian marketplace, strengthen its management team in the territory and create new opportunities for its new enterprise capable suite of products. The net assets acquired from HSS are used in the business of software design, engineering and service relating to hotel information systems. The net assets also include subsidiaries of HSS in Malaysia, Singapore and Thailand. The Company recorded $297,000 of goodwill (deductible for tax purposes) in connection with the acquisition of HSS. Pro forma results of operations as if this acquisition had occurred at the beginning of 2001 and 2002 are not shown because its impact would have been immaterial.

Included in the acquired assets of HSS was a 35% interest in AMDB, an online reservation service, originally purchased by HSS for $66,000. On February 20, 2003, the Company entered into an agreement whereby it acquired the remaining 65% for $79,000 payable over 6 month installments. The net liabilities of $15,000 acquired are used to support an online reservation service related to hotel information systems. The Company recorded $159,000 of goodwill in connection with the acquisition of AMDB. Pro forma results of operations as if this acquisition had occurred at the beginning of 2002 and 2003 are not shown because its impact would have been immaterial.

5. Long-Term Debt

Wamco 32 Ltd.

On January 13, 2003, the Company re-negotiated the terms of its credit facility with Coast Business Credit (“Coast”) whereby the outstanding balance of $1,828,000 was converted to a term loan which accrues interest at 9.25% per annum and requires monthly payments of $58,000 over a 36 months period commencing March 1, 2003. On February 7, 2003, the Federal Deposit Insurance Corporation (“FDIC”) put Coast and its parent company, Southern Pacific Bank, into receivership and held all of Coast’s assets for sale to third parties. On May 15, 2003, the loan was sold to Wamco 32, Ltd. (“Wamco”). This sale of the loan by the FDIC did not change any of the terms of the Company’s loan agreement. The Company is required to pay Wamco additional principal payments on a quarterly basis based upon an EBITDA-based formula commencing March 31, 2003. For the period ended June 30, 2004, there are no additional principal payments required under the EBITDA-based formula.

On April 9, 2004, the Company successfully re-negotiated the terms of its loan whereby the maturity date was extended to February 28, 2006. In addition, various restrictions and covenants, pursuant to the inter-creditor agreement between Canyon and Wamco, were amended to modify the financial covenants to a minimum quick ratio of 0.20 to 1.00 and a minimum debt coverage ratio of 0.50 to 1.00 effective for the three month period ended March 31, 2004 and for each and every fiscal quarter ending thereafter. The Company was not in compliance with the amended debt covenants as of and for the period ending June 30, 2004, but obtained a waiver for non-compliance. There is no guaranty that the Company will meet its debt covenants in the future. In the event that the Company were not in compliance with the various restrictions and covenants and were unable to receive waivers for non-compliance, the term loan would be immediately due and payable. As of December 31, 2003 and June 30, 2004, the balance of the term loan was $1,366,000 and $1,027,000 respectively.

Canyon Capital Management LP

On January 13, 2003, the Company modified its 11% subordinated notes payable agreement with Canyon Capital Management LP (“Canyon”), whereby the Company is required to make monthly interest payments of $52,000 until the Wamco term loan is paid off in full at which time the note payable will be converted into a three-year amortizing loan which will accrue interest at 11% per annum and requires equal monthly payments of principal and interest such that the subordinated debt will be paid in full at the end of the amended term. Upon the repayment of the Wamco debt in full, the Company will also be required to pay Canyon additional principal payments on a quarterly basis based upon an EBITDA-based formula. Additionally, the Company issued to Canyon 200,000 shares of its common stock valued at $20,000 (the quoted market price of the common stock at the time the terms were agreed) and agreed to issue one million warrants at an exercise price of $0.40 per share valued at $42,000 (using the Black-Scholes option-pricing model with the following weighted-average assumptions: risk-free interest rate of 6.5%, volatility of 80% and an expected life of 5 years). The $62,000 is being amortized to interest expense over the term of the modified note. The principal balance outstanding on the subordinate notes payable to Canyon was approximately $5,662,000 at December 31, 2003 and June 30, 2004.

~~interest in~~CSA ~~the~~Private Company’s combined operations in Asia. HSS was acquired for the Company to expand its operations in the Asian marketplace, strengthen its management team in the territory and create new opportunities for its new enterprise capable suite of products. The net assets acquired from HSS are used in the business of software design, engineering and service relating to hotel information systems. The net assets also include subsidiaries of HSS in Malaysia, Singapore and Thailand. The Company recorded $297,000 of goodwill (deductible for tax purposes) in connection with the acquisition of HSS. Pro forma results of operations as if this acquisition had occurred at the beginning of 2001 and 2002 are not shown because its impact would have been immaterial.Limited

~~Included~~In ~~in the~~connection ~~acquired~~with ~~assets of HSS was~~ a ~~35%~~settlement ~~interest~~agreement in ~~AMDB, an online reservation~~February ~~service,~~2001 ~~originally~~with ~~purchased~~CSA byPrivate ~~HSS~~Limited ~~for $66~~(“CSA”),~~000. On~~ ~~February 20, 2003,~~ the Company ~~entered~~issued ~~into~~$2.8 anmillion ~~agreement~~of ~~whereby~~subordinated itdebt ~~acquired~~to ~~the~~CSA. The ~~remaining~~$2.8 million ~~65%~~of ~~for~~debt ~~$79,000~~was ~~payable~~secured ~~over~~by 6all ~~month installments. The~~of ~~net~~the ~~liabilites~~Company’s ~~of $15~~assets,~~000~~ ~~acquired~~which ~~are~~was subordinate ~~used~~ to ~~support~~Wamco anand ~~online~~Canyon, ~~reservation~~accrued ~~service~~interest ~~related~~at ~~to hotel~~10% ~~information~~per ~~systems. The~~annum ~~Company~~and required ~~recorded~~payments of $~~160~~37,~~000~~500 offrom ~~goodwill~~March in1, ~~connection~~2002 ~~with~~through ~~the~~September ~~acquisition~~1, of2002 ~~AMDB. Pro~~and ~~forma~~monthly payments ~~results~~ of ~~operations~~$107,500 ascommencing ifon ~~this acquisition~~October ~~had~~1, ~~occurred~~2002 atuntil ~~the~~October ~~beginning~~2003 ofwhen ~~2002~~all remaining ~~and~~unpaid ~~2003~~principal ~~are~~and ~~not~~accrued ~~shown because~~interest ~~its~~was ~~impact~~to ~~would~~be ~~have~~paid ~~been~~in ~~immaterial~~full.

6The agreement with CSA was amended whereby the Company was required to make payments under the subordinated note unless and until it paid $1 million by December 31, 2002. ~~Business~~ ~~Divestitures~~Upon payment of the $1 million, contractual payments under the subordinated note would have ceased until a final payment in the amount of $400,000 is paid by February 28, 2003. If the Company did not make all of the modified payments to CSA, the subordinated note would revert back to its original terms. The Company did not make the modified payment and have not made any payments since September 2002. CSA did not formally notify the Company of its default.

~~Gaming~~On ~~Systems~~April 9, 2004, the Company successfully amended its ~~International~~agreement with CSA whereby the principal balance and accrued interest through March 31, 2004, totaling $3,633,000, were converted to two new notes. The first note for $500,000 accrues interest at 10% per annum and provides for monthly payments of $10,000 until the Wamco and Canyon debt is paid in full. Thereafter, the note provides for monthly payments in an amount equal to the greater of i) $10,000 or ii) the amount required to fully amortize all remaining principal and interest in 24 equal monthly payments. The second note for $3,133,000 (“Other note”) also accrues interest at 10% per annum and provides for monthly payments of $7,500, or such other interest amount, not to exceed $10,000 per month, that Wamco and Canyon will allow. Under the terms of the amended subordination agreement between Wamco, Canyon and CSA, all payments under the new notes are subordinated to the payment in full of the Wamco and Canyon loan agreements. The company has not made any payments on the two new notes as of June 30, 2004. The Company is currently in default of the first note. The interest rate has been increased to 12.5% in line with the terms of that note until the Company becomes current on its contractual payments.

On ~~June 19,~~ ~~1999,~~April ~~the Company sold Gaming Systems International (“GSI”) for an amount in excess of the book value of net assets sold. Assets sold of approximately $3~~9,~~749,000 consisted~~ ~~of accounts receivable of $1~~2004,~~514,000,~~ ~~inventories~~an ofinvestor ~~$364~~group,~~000, furniture,~~ ~~fixtures~~consisting ~~and equipment~~ of ~~$218,000, intangible assets of $1,573,000~~ ~~and prepaid expenses of $80~~Canyon,~~000. Liabilities~~ ~~assumed by~~ the ~~buyer~~Company’s ~~consisted~~Chairman of ~~accounts~~the ~~payable and accrued liabilities of $197~~Board,~~000,~~ ~~deposits~~Chief ofExecutive ~~$100,000,~~Officer ~~unearned~~and ~~revenue of~~Chief ~~$351,000~~Financial and ~~long-term~~Operating ~~debt~~Officer of(“Investor ~~$446~~Group”),~~000. The~~ ~~Company~~acquired ~~received three promissory notes totaling $4~~2,~~925~~433,~~000~~333 ~~with~~shares ~~face values~~ of ~~$1,100,000, $1,500,000 and $2,325,000, respectively. Interest was paid monthly at~~ the ~~rate~~Company’s ofcommon ~~10% per~~stock ~~annum~~held onby ~~both~~CSA ~~the $1,100,000~~ and ~~$1,500,000 notes, with~~ the ~~principal~~Other ~~due and~~Note ~~payable on June 19, 2001 and June 19, 2003, respectively. A third party guaranteed the $1,100,000 promissory note. Principal payments and interest, at prime plus 1%, was to commence~~ for ~~the~~ $~~2,325,000 promissory note on October~~ 1, ~~2002~~million in ~~48 monthly installments of approximately $48,000 of~~ ~~principal, plus accrued interest~~cash.

~~Imputing interest~~Subject atto ashareholder ~~rate of 10%~~approval, the ~~present~~Investor ~~value~~Group has ofagreed to convert the ~~$2,325,000~~Company ~~promissory~~indebtedness ~~note~~acquired from CSA plus any ataccrued interest through the date of ~~sale~~shareholder ~~was~~approval $1for approximately 32,~~682,~~000,000 ~~which~~shares ~~resulted~~of inthe Company’s common stock based upon a ~~combined~~conversion ~~carrying~~price ~~value~~ of $0.10 per share, and will invest $41,~~282~~000,000 ~~for~~of ~~all~~new ~~three~~cash ~~promissory~~proceeds ~~notes.~~into ~~The~~the Company ~~gain~~in ona ~~sale~~private ofplacement at $10.10 per share and receive 10,~~227~~000,000 shares ~~had~~of ~~been~~the ~~deferred~~Company’s ~~until~~common ~~collection~~stock. This Investor ofGroup ~~the~~transaction ~~proceeds~~is ~~representing~~subject to certain terms and conditions, including the ~~gain~~fact ~~can~~that it will initially be ‘restricted’ stock, not available ~~assured~~for sale. The AsCompany ofhas ~~December 31,~~also ~~2000,~~received a fairness opinion from Marshall Stevens which concluded that the ~~Notes~~transaction was ~~were~~fair ~~held~~to ~~for~~the ~~sale~~shareholders. The Company’s ~~and~~annual ~~were~~shareholders meeting is expected to occur in September 2004. ~~written~~The ~~down~~Investor Group has consented to andefer ~~amount,~~any ~~which~~payments ~~approximated~~on ~~their~~the ~~estimated~~other ~~net~~note ~~realizable~~until ~~value~~the ofannual $2shareholder meeting at which time,~~700,000~~ if approved all principals and accrued interest will be converted to common stock.

OnTax April 6, 2001 the Company entered into an agreement with the maker of the Notes whereby the maker reconvened 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, of which $500,000 was received in December 2002 and $250,000 in January 2003. The third party was also required to pay an additional $250,000 subject to a maximum $250,000 reduction pursuant to the resolution of certain uncertainties as of the date of the Agreement, which, as part of the settlement, in January 2003 the Company received $46,000. Due to the uncertainty of collecting the unsecured amount of $250,000, gain recognition on that part of the proceeds was deferred until collection was assured. The Company recorded a gain on the sale of GSI of $245,000 in the fourth quarter of 2001.Claims

~~Legacy~~On September 30, 2003, the Company entered into a settlement agreement with the United States Internal Revenue Service (the “Service”) on a tax claim which resulted from the Company’s 1993 Chapter 11 proceedings whereby it agreed to pay $489,000 in equal monthly installments of $7,438 over a period of six (6) years at an interest rate of 6%. The $489,000 settlement is reflected as debt in the financial statements and resulted in a one-time gain of $262,000 which was included in income tax benefit in the fourth quarter of 2003. In the event that the Company fails to pay the Service any payment, and such payment failure continues for sixty days after written notice of such failure, $1,832,100, plus accrued interest thereon, less any payments made by the Company will be immediately due and payable to the Service. As of December 31, 2003 and June 30, 2004, the debt balance was $428,000 and $396,000, respectively.

~~On October 9,~~In ~~2001,~~connection ~~the Company sold certain rights under customer contracts together~~ with the ~~related~~settlement ~~assets~~agreement ~~and~~with ~~liabilities of its domestic Legacy hardware maintenance division to~~ the ~~third party currently providing the~~ ~~on-site~~Service, ~~repair and warranty service to~~ the Company’s ~~Legacy~~1993 ~~hardware maintenance~~Chapter ~~customers. Pursuant~~11 toproceedings ~~the agreement,~~were ~~the~~officially ~~Company~~closed pursuant ~~retained~~to ~~the~~Court ~~software~~order ~~maintenance~~effective ~~component~~as of ~~the customer~~September ~~contracts~~30, ~~and will continue to provide the~~2003.

6. Restricted Stock Plan

In May 2001, the Board of Directors adopted the 2001 Restricted Stock Plan. Under the plan, 1,250,000 authorized shares of the Company’s Common Stock are reserved for issuance to officers and directors of the Company. The shares will be issued as “Restricted Stock” within the meaning of Rule 144 of the Securities Act of 1933, as amended. The

~~software support~~Compensation ~~services~~Committee ~~directly~~of to the ~~domestic~~Board ~~Legacy customer base. Additionally, the third party will be required to pay the Company approximately 15%~~ of ~~the~~Directors ~~third party’s hardware~~shall ~~maintenance~~have ~~revenue stream relating to~~ the ~~hardware~~discretion ~~maintenance customer contracts subsequent~~ to ~~October 31,~~determine ~~2003. In~~what ~~connection~~terms ~~with the sale, the Company received $328,000 in cash~~ and ~~sold~~ ~~approximately~~conditions ~~$157,000~~shall ~~of assets consisting of inventory~~apply, ~~spare parts,~~ ~~fixed~~including ~~assets~~the ~~and~~imposition ~~certain accounts receivable. The third party also assumed approximately $1,091,000~~ of ~~liabilities consisting of accrued liabilities of approximately $366,000 and deferred revenue of approximately $725,000. The sale resulted in~~ a ~~gain~~vesting ~~of approximately $1,262,000 in October 2001~~schedule.

~~MAI~~In ~~Canada~~May 2002, the Company issued 612,500 shares of restricted common stock to its members of the board of directors and certain of its corporate officers which vest equally over a four-year period. Recipients are not required to provide consideration to the Company other than rendering the service and have the right to vote the shares. Under APB 25, compensation cost is recognized for the fair value of the restricted stock awarded, which is its quoted market price at the date of grant, which was $0.25 per share. The total market value of the shares of $153,000 was treated as unearned compensation and is being amortized to expense in proportion to the vesting schedule. The unamortized balance as of June 30, 2004 is $34,000 and is included in accumulated other comprehensive loss in the accompanying consolidated balance sheet.

On December 6, 2002, the Company sold all the assets and certain liabilities of its Canadian operations, including all legacy divisions, to the management of this subsidiary pursuant to a stock purchase agreement7. In Preferred connection with the sale, the Company also entered into a software distribution agreement whereby the buyer has a non-exclusive right and license to market and installs the Company’s hospitality products in Canada. The sale resulted in a loss of approximately $630,000, which is included in the loss on disposal of discontinued operations. Prior to the sale, the Canadian operations incurred a net income of $5,000 and $178,000 for the three-month and nine-month periods ended September 30, 2002, respectively. Stock

Process Manufacturing

On December 6, 2002, the Company entered into an Asset Purchase Agreement whereby all the assets and certain liabilities of its process manufacturing software division were sold to a third party for cash of $250,000. The sale resulted in a loss of approximately $391,000, which is included in the loss on disposal of discontinued operations. Prior to the sale, Process Manufacturing operations incurred a net loss of $203,000 and $215,000 for the three-month and nine-month periods ended September 30, 2002.

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

Line of Credit & Bridge Loan

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

On January 13, 2003, the Company re-negotiated the terms of the credit facility whereby the outstanding balance of $1,828,000. As of that date was converted to a term loan which accrues interest at 9.25% per annum and requires monthly payments of $58,000 over a 36 months period commencing March 1, 2003. The new term loan matures on February 28, 2005, at which time all remaining principal and accrued interest is due and payable. The Company will also be required to pay Coast additional principal payments on a quarterly basis based upon an EBITDA-based formula commencing March 31, 2003. For the three-months ended September 30, 2003, there are no additional principal payments required under the EBITDA-based formula. The consolidated balance sheet as of December 31, 2002 and September 30, 2003 reflects the re-class of the secured revolving credit facility to a term loan.

On February 7, 2003, the Federal Deposit Insurance Corporation (“FDIC”) put Coast and its parent company, Southern Pacific Bank, into receivership and held all of Coast’s assets for sale to third parties. On May 15, 2003, the loan was sold to Wamco 31, Ltd. (Wamco). This sale of the loan by the FDIC did not change any of the terms of the Company’s loan agreement.

The restructured debt, pursuant to the original inter-creditor agreement between Canyon Capital and Coast, which was sold to Wamco on May 15, 2003, contains various restrictions and covenants, including a minimum quick ratio of 0.31

to l.00 and minimum debt service coverage ratio of 1.25 to l.00 for the three-month period ended September 30, 2003. The minimum quick ratio increases to .34 to 1.00 as of December 31, 2003 and for each and every fiscal quarter ending thereafter. In the event that the Company were not in compliance with the various restrictions and covenants and were unable to receive waivers for non-compliance, the term debt would be immediately due and payable. The Company was not in compliance with its minimum quick ratio but received a waiver for such covenant as of and for the three month period ended September 30, 2003. There is no guaranty that the Company will meet its debt covenants in the future. The Company is currently negotiating with Wamco to change such covenants, but there is no assurance that the Company will be able to successfully change the covenants.

Long-Term Debt

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

The Company and Canyon subsequently entered into a forbearance agreement providing that the Company pays 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 Wamco.

On April 13, 2000, the Company entered into an agreement with Canyon, waiving all existing events of default, accelerated the maturity date to March 3, 2003 and provided for continued weekly interest payments of $12,500. On January 31, 2001, the Company entered into an agreement with Canyon whereby the specified accrued interest of $431,000 was added to the principal balance of the subordinated notes payable. As part of this agreement, the Company also agreed to pay Canyon an additional $79,000 loan fee, of which $29,000 was added to principal. The principal balance outstanding on the subordinate notes payable to Canyon was approximately $5,662,000 at December 31, 2002 and September 30, 2003.

On January 13, 2003, the Company modified the terms of its agreement with Canyon, whereby the Company is required to make monthly payments of $52,000 until the Wamco term loan is paid off in full at which time the note payable will be converted into a three-year amortizing loan which will accrue interest at 11% per annum and requires equal monthly payments of principal and interest such that the subordinated debt will be paid in full at the end of the amended term. Upon the repayment of the Wamco debt in full, the Company will also be required to pay Canyon additional principal payments on a quarterly basis based upon an EBITDA-based formula. Additionally, the Company issued to Canyon 200,000 shares of its common stock valued at $20,000 (the quoted market price of the common stock at the time the terms were agreed) and agreed to issue one million warrants at an exercise price of $0.40 per share valued at $ 42,000 (using the Black-Scholes option-pricing model with the following weighted-average assumptions: risk-free interest rate of 6.5%, volatility of 80% and an expected life of 5 years). The $62,000 is being amortized to interest expense over the term of the modified note.

In connection with a settlement agreement with CSA, 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 Wamco and Canyon, accrues interest at 10% per annum and requires payments of $37,500 from March 1, 2002 through September 1, 2002 and monthly payments of $107,500 commencing on October 1, 2002 until October 2003 when all remaining unpaid principal and accrued interest is to be paid in full. The balance outstanding on the subordinate debt to CSA was $2,800,000 at December 31, 2002 and September 30, 2003.

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

CSA has not formally notified the Company of its default. As of December 31, 2002 and September 30, 2003, accrued interest relating to the CSA subordinated debt was $408,000 and $657,000 respectively, and is included in accrued liabilities in the accompanying consolidated balance sheets.

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 must also pay the $470,000 to the creditors as prescribed in the respective agreements. All payments required under the agreements were made in 2001 and the first quarter of 2002.

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

Under SFAS No. 123, compensation cost is recognized for the fair value of the restricted stock awarded, which is its fair market value without restrictions at the date of grant, which was $0.25 per share. The total market value of the shares of $153,125 was treated as unearned compensation and is being amortized to expense in proportion to the vesting schedule through March 2005. The unamortized balance as of September 30, 2003 is $62,000.

9. Preferred Stock

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

108. Intangible Assets

Intangible assets consist primarily of goodwill and capitalized software. Intangible assets other than goodwill are amortized on a straight-line basis over their estimated useful lives. Prior to 2002, goodwill, representing the excess of the purchase price over the estimated fair value of the net assets of the acquired business, was amortized over the period of expected benefit of five to seven years. However, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets, (“SFAS No. 142”) ~~which~~ which requires that the Company cease amortization of all goodwill and ~~intangible~~ intangible assets having indefinite useful economic lives. The Company determined that there was no impairment upon adoption. Such assets are not to be amortized until their lives are determined to be finite. However, a recognized intangible asset with an indefinite useful life should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. At June 30, 2004, ~~The~~the Company ~~will~~evaluated ~~evaluate~~ its goodwill ~~as of December 31, 2003~~ and determined that fair value had not decreased below carrying value and no adjustment to impair goodwill was necessary in accordance with SFAS No. 142.

Goodwill and capitalized software as of December 31, 2003 ~~2002~~ and ~~September~~ June 30, ~~2003~~ 2004 are as follows:

	(dollars in thousands)
	December 31, 2002		September 30, 2003
	December 31, 2003		June 30, 2004
Goodwill	$	~~962~~1,121	$	1,121
Accumulated amortization	—		—
Goodwill, net	~~962~~1,121		1,121
Capitalized software	~~861~~1,755		12,~~480~~359
Accumulated amortization	—		—
Capitalized software, net	~~861~~1,755		12,~~480~~359
Total	$	12,~~823~~876	$	23,~~601~~480

~~The~~Net ~~Company’s weighted~~goodwill ~~average~~is ~~amortization~~comprised ~~period~~of ~~for~~$665,000 ~~capitalized~~on ~~software~~the ispurchase of ~~expected~~Hotel toInformation ~~be three~~Systems ~~years~~Inc. ~~The~~ ~~following~~(HIS) ~~table~~in ~~shows~~ 1996, $297,000 on the ~~estimated~~purchase ~~amortization~~of ~~expense~~HSS ~~for~~in ~~these~~2002 ~~assets~~and ~~for~~$159,000 ~~each~~on the purchase of ~~the~~AMDB ~~five succeeding~~in ~~years:~~2003 (see Note 4).

9The Company’s weighted average amortization period for capitalized software is expected to be three years. The Company expects that certain of our new products will be available for general release during the third quarter of 2004 at which time amortization of such costs shall commence. The following table shows the estimated amortization expense for these assets for each of the five succeeding years:

~~Year Ending December 31,~~7

(in thousands)

Year Ending December 31,
*(in thousands)*
2004	$	393
2005	786
2006	786
2007	394
2008	––
	$	2,359

2003	$	—
2004	493
2005	493
2006	494
2007	—
2008	—
	$	1,480

9. Income (Loss) Per Share

11. Income (Loss) Per Share of Common Stock

Basic and diluted income or loss 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 September 30,					For the Nine Months Ended September 30,
	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2002			2003		2002		2003
	2003			2004		2003		2004
	(in thousands except per share data)					(in thousands except per share data)
Numerator:
Numerator for basic and diluted earnings (loss) per share – net income (loss)	$	(~~163~~82	)	$	~~132~~82	$	~~509~~179	$	~~310~~248
Denominator:
Denominator for basic earnings (loss) per share weighted average number of Common shares outstanding during the period	14,119			14,575		13,876		14,525
Denominator for basic income (loss) per share – weighted average number of Common shares outstanding during the period	14,426			14,676		14,426		14,676
Incremental common shares attributable to exercise of outstanding shares	~~450~~—			~~300~~—		~~450~~300		~~300~~—
Denominator for diluted earnings (loss) per share	14,569			14,875		14,326		14,825
Denominator for diluted income (loss) per per share	14, 426			14,676		14,726		14,676
Basic earnings (loss) per share	$	(0.01	)	$	0.01	$	0.0401	$	0.02
Diluted earnings (loss) per share	$	(0.01	)	$	0.01	$	0.0401	$	0.02

The number of anti-dilutive options and warrants that were excluded from the computation of incremental common shares were 23,~~667~~508,~~272~~ 605 and 3,~~041~~104,~~500~~000 for the ~~nine~~six month period ended ~~September~~ June 30, ~~2002~~2003 and ~~2003~~2004, respectively.

1210. Stock Option Plans

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

stock options is determined based on the excess of the market price of the Company’s stock over the exercise price on the date of grant, the intrinsic value method, versus the fair value method as provided under FAS No. 123.

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

At ~~September~~ June 30, ~~2003~~2004, the Company had two stock-based employee compensation plans. The Company accounts for that plan under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no stock-based employee compensation cost is reflected in net income (loss), as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant date for awards for the three-month periods ended June 30, 2003 and 2004, consistent with the provisions of FAS No. 123, the Company’s net income (loss) and net income (loss) per share would have decreased. The following table represents the effect on net income and net income per share if the Company had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.

	For the three-months ended June 30,						For the six-months ended June 30,
	2003			2004			2003			2004
	(in thousands, except per share data)						(in thousands, except per share data)
Net income (loss):
As reported	$	(82	)	$	82		$	179		$	248
Add: Stock-based employee compensation expense recorded	10			10			20			20
Less: Stock based employee compensation expense determined under fair value calculations	(33		)	(10		)	(66		)	(20		)
Pro forma	$	(105	)	$	82		$	133		$	248

Basic income (loss) per share:
As reported	$	(0.01	)	$	0.01		$	0.01		$	0.02
Add: Stock-based employee compensation expense recorded	—			—			—			—
Less: Stock based employee compensation expense determined under fair value calculations	—			—			—			—
Pro forma	$	(0.01	)	$	0.01		$	0.01		$	0.02

Diluted income (loss) per share:
As reported	$	(0.01	)	$	0.01		$	0.01		$	0.02
Add: Stock-based employee compensation expense recorded	—			—			—			—
Less: Stock based employee compensation expense determined under fair value calculations	—			—			—			—
Pro forma	$	(0.01	)	$	0.01		$	0.01		$	0.02

~~based on the fair value at the grant date for awards for the three-month periods ended September 30, 2002 and 2003, consistent with the provisions of FAS No~~11. ~~123,~~ Legal the Company’s net income (loss) and net income (loss) per share would have decreased. The following table represents the effect on net income and net income per share if the Company had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.Proceedings

	For the three-months ended September 30,						For the nine-months ended September 30,
	(in thousands, except per share data)						(in thousands, except per share data)
	2002			2003			2002			2003
Net income (loss):
As reported	$	(163	)	$	132		$	509		$	310
Add: Stock-based employee compensation expense recorded	—			—			—			—
Less: Stock based employee compensation expense determined under fair value calculations	(33		)	(17		)	(99		)	(51		)
Pro forma	$	(196	)	$	115		$	410		$	259
Basic income (loss) per share:
As reported	$	(0.01	)	$	0.01		$	0.04		$	0.02
Add: Stock-based employee compensation expense recorded	—			—			—			—
Less: Stock based employee compensation expense determined under fair value calculations	—			—			(0.01		)	—
Pro forma	$	(0.01	)	$	0.01		$	0.03		$	0.02
Diluted income (loss) per share:
As reported	$	(0.01	)	$	0.01		$	0.04		$	0.02
Add: Stock-based employee compensation expense recorded	—			—			—			—
Less: Stock based employee compensation expense determined under fair value calculations	—			—			(0.01		)	—
Pro forma	$	(0.01	)	$	0.01		$	0.03		$	0.02

Hotel Information Systems, Inc.

~~13. Legal~~On March 25, 2003, the Company entered into a ~~Proceedings~~settlement agreement with Hotel Information Systems (“HIS”) and one of its former corporate officers whereby (i) the parties dismissed all claims, known and unknown, against each other; (ii) the Company forgave and wrote off a note receivable from the former corporate officer of HIS in the amount of $66,000 (which was expensed to other expense in the 2002 consolidated statement of operations); (iii) the Company paid $50,000

~~Internal Revenue Service~~9

~~On September 30,~~in ~~2003,~~cash ~~the~~and ~~Company~~issued ~~entered into~~ a ~~settlement~~non-interest ~~agreement~~bearing ~~with~~unsecured ~~the~~promissory ~~United~~note ~~States Internal Revenue Service (the “Service”) on a tax claim~~ which ~~resulted~~ ~~from~~requires ~~the~~35 ~~Company’s~~consecutive ~~Chapter~~monthly 11payments ~~proceedings~~of ~~whereby~~$5,000 ~~it agreed to pay an~~each ~~aggregate~~commencing ofApril ~~$489~~1,~~000~~ in2003; ~~equal~~and ~~monthly~~(iv) ~~installments~~the ofremaining $7374,~~438~~116 ~~over~~shares ain ~~period~~the ofescrow ~~six~~account ~~(6)~~will ~~years~~be atreleased anto ~~interest~~the ~~rate of 6%~~Company. ~~The~~If ~~$489,000~~the ~~settlement~~Company is ~~reflected~~delinquent asfour ~~debt~~times in ~~the~~any ~~financial statements. The~~twelve-month ~~settlement resulted in~~period aduring ~~one-time~~the ~~gain~~term of ~~$262,000~~the ~~which~~unsecured ispromissory ~~reflected~~note in ~~other~~making ~~operating~~its ~~income.~~$5,000 Inmonthly ~~the~~payments ~~event that the Company fails~~ to ~~pay the Service any payment~~HIS, and ~~such payment~~HIS ~~failure~~issues ~~continues~~respective ~~for~~valid ~~sixty~~default ~~days~~notices, ~~after~~the ~~written~~Company will ~~notice~~be ofsubject ~~such~~to ~~failure,~~ a $1225,~~832,100,~~000 ~~plus~~penalty. The ~~accrued interest thereon~~374,116 ~~less~~shares ~~any~~have ~~payments~~been ~~made~~received by MAI together with the HIS ~~Company~~authorization ~~will~~to belegally ~~immediately~~transfer ~~due~~such ~~and~~shares ~~payable~~ to ~~the Service~~MAI.

CSAImputing Privateinterest Limitedat 11%, the present value of the $175,000 promissory note at the date of the settlement was $149,000. The Company recorded the present value of this debt issuance and the $50,000 cash payment as a reduction to additional paid-in capital.

~~CSA~~Logix isDevelopment ~~a MAI shareholder. On August 9, 1996, MAI acquired from Hotel Information Systems, Inc. (“HIS”)~~Corporation

11The Company entered into a settlement agreement with Logix Development Corporation (“Logix”) in July of 2002 whereby we (i) issued Logix 200,000 shares of our Common Stock (ii) required the Company to make various cash installment payments totaling $175,000 to be paid within 1 year and (iii) executed a contract with Logix for a consulting project in the amount of $50,000. The Company has made all required payments to Logix under this settlement agreement.

~~substantially all~~In 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~~2003, ~~pursuant to~~ the ~~agreement. The Company~~ Company entered into aanother settlement agreement with ~~CSA~~Logix ~~in February, 2001~~ whereby it (i) issued ~~CSA 1~~200,~~916,014~~000 ~~additional~~free trading shares ofin ~~our~~exchange for the 200,000 restricted Common ~~Stock~~Shares tofrom ~~bring~~the ~~CSA’s~~original ~~total share~~settlement ~~ownership~~agreement toin ~~2,433,333~~July ~~shares;~~2002 (ii) ~~filed a registration statement for~~required ~~all~~the ofCompany ~~CSA’s~~to ~~shares~~make ofmonthly ~~our~~payments ~~Common~~totaling ~~Stock~~$187,500 ~~which~~over ~~has~~a ~~been~~25 ~~declared~~month ~~effective by~~period ~~the SEC so that such shares are now freely tradable;~~ and (iii) ~~executed~~mutually areleased ~~secured debt~~each ~~instrument~~other ~~in favor~~ of ~~CSA~~all ~~in the principal sum of $2~~past,~~800,000~~ ~~which is subordinate only to the Company’s~~ present ~~group~~and offuture ~~two (2) senior secured~~claims ~~leaders~~associated ~~and~~with ~~required~~the ~~cash installment payments to commence in March 2002~~lawsuit.

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

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

~~A lawsuit was filed by Cher-Ae Heights Indian Community (“Cher-Ae Heights”) against Logix Development Corporation (Logix)~~12. Comprehensive Now known as MAI Development Corporation, as a co-defendant for a breach of contract by the Company’s formerly owned gaming subsidiary along with the new owners, Monaco Informatiques Systemes (“MIS”), who acquired the assets and certain liabilities of the gaming subsidiary on July 27, 2001. Based upon this suit, MIS informed the Company that it did not intend to pay the next $500,000 due to the Company under a promissory note and security agreement. On October 24, 2002, the Company entered into a global settlement agreement between the parties whereby all claims, known and unknown, between the parties were dismissed and the Company received $796,000.Income

~~Logix~~The ~~Development~~following ~~Corporation~~table summarizes components of comprehensive income:

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

	For The Three Months Ended June 30,						For The Six Months Ended June 30,
	2003			2004			2003		2004

Net income (loss)	$	(82	)	$	82		$	179	$	248

Change in cumulative translation adjustments	40			(37		)	40		(57		)

Comprehensive income (loss)	$	(42	)	$	45		$	219	$	191

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

The Company is also involved in various other legal proceedings and claims that are incident to its business. Management believes that 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.

14. Comprehensive Income

The following table summarizes components of comprehensive income:

	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
	2002			2003			2002			2003
Net income (loss)	$	(163	)	$	132		$	509		$	310
Change in cumulative translation adjustments	(37		)	(11		)	(128		)	28
Comprehensive income (loss)	$	(200	)	$	121		$	381		$	338

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

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.

1210

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

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

~~Allowance for Doubtful~~ Accounts Receivable

~~The~~We ~~Company~~maintain ~~records~~allowances ~~an allowance~~ for doubtful accounts ~~based~~for onestimated ~~specifically~~losses ~~identified amounts~~resulting ~~that~~from ~~it believes is uncollectible.~~ the ~~The~~inability ~~Company~~of ~~also~~our ~~records~~customers ~~additional~~to ~~allowances~~make ~~based~~required ~~upon~~payments. ~~certain percentages~~The amount of our reserves ~~aged~~is ~~receivables, which are determined~~ based on historical experience and orour ~~assessment~~analysis of the ~~general~~accounts receivable balances outstanding. If the financial ~~conditions~~condition ~~affecting~~of our customers ~~customer~~were ~~base. If~~to ~~the~~deteriorate, ~~Company’s~~resulting ~~actual collection~~in ~~experience~~an ~~changes,~~impairment ~~revisions~~of their ability to ~~its~~make payments, ~~allowance~~additional allowances may be required~~. Any~~ ~~unanticipated~~which ~~change~~would result in ~~the Company’s~~an ~~customer’s~~additional ~~credit~~general ~~worthiness~~and oradministrative ~~other~~expense ~~matters~~in ~~affecting~~ the ~~collectibility~~period ofsuch determination ~~amounts~~was ~~due~~made. ~~from~~While such ~~customers,~~credit ~~could~~losses have ahistorically ~~material~~been ~~affect~~within ~~on its results of~~our ~~operations~~expectations inand the ~~period~~provisions inestablished, ~~which~~we ~~such~~cannot ~~changes~~guarantee orthat ~~events~~we ~~occur. After~~will continue ~~all attempts~~ to ~~collect~~experience athe ~~receivable have~~same ~~failed,~~credit ~~the~~loss ~~receivable~~rates isthat ~~written~~we ~~off~~have ~~against~~in the ~~allowance~~past.

~~Impairment~~Intangible ofand Long-Lived Assets ~~and Long-Lived Assets to be Disposed Of~~

~~Statement~~At ~~of Financial Accounting Standards (“SFAS”) No. 144~~December 31, ~~“Accounting~~2003 ~~for the Impairment~~and orJune ~~Disposal~~30, of2004, ~~Long-Lived~~goodwill ~~Assets”~~and ~~provides~~other ~~a single accounting model for~~ long-lived assets torepresented be44% ~~disposed~~and ~~of.~~ 45%, ~~SFAS No. 144 also changes the criteria for classifying an asset as held for sale~~respectively, ~~and broadens the scope~~ of ~~businesses to be disposed of that qualify for reporting as discontinued operations and changes~~ the ~~timing~~Company’s oftotal ~~recognizing losses on such operations~~assets.

~~The~~Goodwill ~~Company adopted~~must ~~SFAS~~be ~~No.~~tested ~~144 on January 1, 2001.~~ at ~~The~~least ~~adoption~~annually offor ~~SFAS~~impairment ~~No.144~~at ~~did~~a ~~not~~level ~~affect~~of ~~the~~reporting ~~Company’s~~referred ~~financial statements. In~~to ~~accordance~~as ~~with SFAS No.~~the ~~144,~~reporting ~~long-lived~~unit ~~assets, such as furniture, fixtures~~ and ~~equipment~~more ~~are~~frequently ~~reviewed for~~if ~~impairment~~adverse ~~whenever~~ events or changes in circumstances indicate that the ~~carrying~~ ~~amount of an~~ asset may ~~not~~ be ~~recoverable~~impaired. ~~Recoverability~~ The ofCompany ~~assets~~did tonot berecord ~~held and used is measured by a comparison of the carrying amount of~~ an ~~asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, and~~ impairment charge isupon ~~recognized~~completion ~~by the amount by which the carrying amount~~ of the ~~asset~~initial ~~exceeds~~impairment ~~the~~reviews ~~fair~~on ~~value~~January of1, ~~the~~2002 ~~asset. Assets to be disposed of would be separately~~or ~~presented~~upon inits ~~the~~annual ~~balance~~impairment ~~sheet~~review ~~and reported~~ at ~~the~~December ~~lower of the carrying amount or fair value less costs to sell~~31, ~~and are no longer depreciated~~2003. ~~The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.~~

~~Prior~~Long-lived toassets ~~the adoption~~consist of ~~SFAS~~property Noand equipment and other identifiable intangible assets. These ~~144~~assets are depreciated or amortized over their estimated useful life, ~~the~~and are subject to impairment reviews. The Company ~~accounted~~periodically ~~for~~reviews long-lived assets towhenever beadverse ~~disposed~~events ofor changes in ~~accordance~~circumstances ~~with~~indicate ~~SFAS~~the Nocarrying value of such assets may not be recoverable. In ~~121~~assessing recoverability, ~~“Accounting~~the ~~for~~Company ~~Impairment~~must ofmake assumptions regarding estimated future ~~Long-Lived~~cash ~~Assets~~flows and ~~for~~other ~~Long-Lived~~factors ~~Assets~~to determine if an impairment loss may exist, and, if so, estimate fair value. The Company also must estimate and make assumptions regarding the useful lives assigned to its long-lived assets. If these estimates, or their related assumptions, change in the future, the Company may be ~~Disposed~~required ~~Of”~~to record impairment losses or change the useful life including accelerating depreciation or amortization for these assets.

~~Goodwill~~Accrued Expenses

~~Prior~~The toCompany reviews ~~2002~~its contingent liabilities, which arise primarily from litigation and ~~goodwill~~litigation defense costs, ~~representing~~in ~~the~~accordance ~~excess~~with Statement of ~~the~~Financial ~~purchase~~Accounting Standards ~~price~~No. 5 ~~over~~(SFAS 5), ~~the~~“Accounting ~~estimated~~for ~~fair value~~Contingencies”. Contingent ofliabilities ~~the~~are ~~net~~recorded ~~assets~~as liabilities ofwhen ~~the~~it ~~acquired~~is ~~business,~~probable ~~was~~that ~~amortized~~a ~~over~~liability ~~the~~has ~~period of~~been ~~expected~~incurred ~~benefit~~and the amount of ~~five~~the toloss ~~seven~~is ~~years~~reasonably estimable. ~~Long-lived~~Contingent ~~assets~~liabilities ~~and~~are ~~certain~~often ~~identifiable~~resolved ~~intangibles~~over tolong beperiods. Estimating ~~held~~probable ~~and~~losses requires ~~used~~judgments byabout both the ~~Company~~amount ~~were~~of ~~reviewed~~liability, ~~for~~which ~~impairment~~may ~~whenever~~or ~~events~~may ornot ~~changes~~be inreadily ~~circumstances~~determinable, ~~indicated~~and ~~that~~ the ~~carrying~~likelihood ~~amount~~of liability, which involves ranges of probability ~~the~~that ~~asset~~can ~~may~~at ~~not~~times be ~~recoverable.~~ ~~Recoverability~~broad and depend on the potential actions of third parties.

1311

~~assets~~Provision tofor ~~be held~~Income and used was assessed by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets were considered to be impaired, the impairment recognized was measured by the amount by which the carrying amount of the assets exceeded the fair value of the assets. Assets that were to be disposed of were reported at the lower of the carrying amount or fair value less cost to sell.Taxes

~~However, effective~~Provision ~~January 1,~~for ~~2002,~~income taxes is based upon the Company’s ~~adopted~~estimate ~~Statement~~ of ~~Financial Accounting~~taxable ~~Standards~~income ~~No.~~or ~~142,~~loss ~~“Goodwill~~for ~~and~~each ~~Other~~respective accounting ~~Intangible~~period. An ~~Assets,”~~asset ~~(“SFAS~~or ~~No.~~liability ~~142”)~~is ~~which~~recognized ~~requires~~for ~~that~~ the ~~Company~~deferred ~~cease~~tax ~~amortization~~consequences of ~~goodwill~~temporary ~~and~~differences ~~all~~between ~~intangible~~the tax bases of assets ~~having~~and ~~indefinite~~liabilities ~~useful~~and ~~economic~~their ~~lives~~reported amounts in the financial statements. These temporary ~~Such~~differences will result in taxable or deductible amounts in future periods when the reported amounts of assets are recovered or liabilities are ~~not~~settled. The Company regularly reviews its deferred tax assets to bedetermine ~~amortized~~the amount ~~until~~that ~~their~~is ~~lives~~more ~~are~~likely ~~determined~~than not to be ~~finite~~realized. ~~However~~When this amount is less than the deferred tax asset recorded, the Company records a valuation allowance ~~recognized~~to ~~intangible~~reduce the asset ~~with~~to anits ~~indefinite~~estimated ~~useful~~realizable ~~life~~value. If ~~should~~the beCompany ~~tested~~determined ~~for~~that it was not ~~impairment~~going ~~annually~~to orbe onable anto ~~interim~~fully ~~basis~~realize ifits ~~events~~recorded ordeferred ~~circumstances~~tax ~~indicate~~assets, it would make an adjustment to the valuation allowance. This would reduce net income in the period that the ~~fair~~Company ~~value~~made ofits determination. Similarly, if the Company realized that it was going to be able to fully realize a deferred tax asset ~~has~~in ~~decreased~~excess ~~below~~of its ~~carrying~~net recorded value., ~~The Company~~net ~~evaluates~~income ~~its~~would ~~goodwill~~be ~~annually~~increased in ~~December~~the period that the Company made its determination.

The Company also reviews its deferred tax liabilities on a regular basis to determine that the amount recorded is adequate to cover the expected reversal of temporary income tax liabilities. In the event that the amount recorded was less than adequate, the deferred tax liability would be increased to its estimated realizable value and net income would be decreased accordingly. In the event that the deferred tax liability was determined to be overstated, it would be reduced to its estimated realizable value and net income would increase accordingly.

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

Software Development Costs

~~The~~All ~~Company capitalizes~~ costs ~~related~~incurred to establish the ~~development~~technological feasibility of ~~certain~~ software products~~. Capitalization~~ ofto ~~costs~~be ~~begins~~sold ~~when~~to others are expensed as research and development. Once technological feasibility ishas been established, all software production costs are capitalized. Amortization is computed on an individual product basis and ~~ends~~is recognized ~~when~~over the greater of the remaining economic lives of each product isor the ~~available~~ratio that current gross revenues for a product bear to the total of current and anticipated revenues for that product, commencing when the products become available for general release to customers. Software ~~Technological~~development ~~feasibility~~costs isare ~~reached~~generally ~~upon~~amortized ~~the~~over a ~~earlier~~three-year ofperiod. The ~~completion~~Company continually assesses the recoverability of asoftware ~~detailed~~development ~~program~~costs ~~design~~by comparing orthe ~~working~~carrying ~~model~~value of individual products to their net realizable value.

~~Amortization is~~The ~~computed~~Company oncapitalized an$419,000 ~~individual~~and ~~product~~$604,000 ~~basis~~of software ~~and~~development iscosts ~~recognized~~for ~~over~~ the ~~greater of~~period ~~the~~ending ~~remaining~~June ~~economic~~30, ~~lives~~2003 ofand ~~each~~2004 respectively, ~~product~~relating orto ~~the~~our ~~ratio~~new ~~that~~N-Tier, ~~current~~Internet-native ~~gross~~corporate application ~~revenues~~suite ~~for~~of aproducts ~~product~~written ~~bear~~in tojava. Although ~~the~~we ~~total~~have not yet sold any of ~~current~~the ~~and~~modules ~~anticipated~~to ~~revenues for~~this ~~that~~suite ~~product~~of applications, ~~commencing~~we ~~when~~believe ~~the~~that these new products ~~become~~will ~~available~~produce ~~for~~new ~~general~~sales ~~release~~adequate to ~~customers~~recover amounts capitalized. ~~Software~~ ~~development~~We ~~costs~~expect ~~are~~that ~~generally~~certain ~~being~~of ~~amortized~~our ~~over~~new aproducts ~~three-year~~will ~~period. The~~be ~~Company~~available ~~continually~~for ~~assesses the~~general ~~recoverability~~release ofduring ~~software~~the ~~development~~third ~~costs~~quarter byof ~~comparing~~2004 ~~the~~at ~~carrying~~which ~~value~~time amortization of such ~~individual~~costs ~~products~~shall ~~to their net realizable value~~commence.

The Company capitalized $615,000 and $619,000 for the nine-month period ended September 30, 2002 and 2003, respectively for software development costs relating to its new N-Tier, Internet-native corporate application suite of products written in java. Although the Company has not yet sold any of the modules to this suite of applications, the Company believes that its new product will produce new sales adequate to recover amounts capitalized.

Reclassifications

Certain prior year amounts have been reclassed to conform with the 2003 presentation.

Liquidity and Capital Resources

At ~~September~~ June 30, ~~2003~~2004, our working capital deficiency decreased from a working capital deficiency of $810,~~649~~399,000 at December 31, ~~2002~~2003 to a working capital deficiency of $97,~~798~~854,000. Excluding unearned revenue of $34,~~483~~787,000, ~~the Company’s~~ working capital deficiency at ~~September~~ June 30, ~~2003~~2004 ~~would~~was be $63,~~315~~067,000. Excluding unearned revenue of $3,~~693~~209,000, the Company’s working capital deficiency at December 31, ~~2002~~2003 ~~would be~~ was $47,~~956~~190,000. Excluding unearned revenue, the decrease in the working capital deficiency of $14,~~359~~123,000 was primarily ~~attributable~~ ~~decrease~~attributable into ~~accounts~~increases ~~payable~~in receivables of $~~213~~696,000, ~~offset~~and by decreases in ~~cash~~current portion of ~~$384,000,~~ ~~net~~long ~~accounts~~term ~~receivable~~debt of $~~119~~2,732,000, ~~note~~customer ~~receivable~~deposits of $~~250~~871,000, ~~and~~accrued ~~increases~~liabilities ~~in current portion~~ of ~~long~~$637,000 ~~term~~offset ~~debt~~by ofdecrease ~~$217,000,~~in ~~customer~~cash ~~deposits~~ of $~~152~~535,000 and ~~accrued~~increase ~~liabilities~~in accounts payable of $~~459~~253,000.

Net cash used in in investing activities for the period ended ~~September~~ June 30, ~~2003~~2004 totaled $~~688~~714,000, which is comprised of capital expenditures of $~~240~~110,000, ~~capitalized software of $619,000~~ and ~~acquisition~~capitalized ofsoftware ~~unconsolidated subsidiary~~ of ~~$79,000~~ ~~offset by proceeds from note receivable of~~ $~~250~~604,000.

Net cash used in in financing activities for the period ended ~~September~~ June 30, ~~2003~~2004 totaled $~~312~~425,000, which represents repayments on long-term debt. On ~~January 13~~March 31, ~~2003~~2004, the Company ~~converted~~ ~~its~~successfully ~~credit~~re-negotiated ~~facility~~the toterms aof its ~~term~~Wamco loan ~~which~~whereby ~~requires~~the ~~monthly~~maturity ~~principal and~~date ~~interest~~was ~~payments~~extended ofto ~~$58,000 and matures on~~ February 28, ~~2005~~ 2006. In addition, ~~the~~various ~~Company amended its~~restrictions ~~subordinated~~and ~~note to require monthly interest only payments of $52~~covenants,~~000~~ ~~through February 28, 2005, at which time it will convert to a term loan to be amortized over a three years period. The restructured debt,~~ pursuant to the ~~original~~inter-creditor ~~intercreditor~~ agreement between Canyon and ~~Coast~~ Wamco, ~~which~~were ~~was~~amended ~~sold~~ to ~~Wamco~~include ~~on May 15, 2003, contains various restrictions and covenants, including~~ a minimum quick ratio of ~~0.31~~ ~~to l.00 and minimum debt service coverage ratio of 1.25 to l.00 for the three-month period ended September 30, 2003. The minimum quick ratio increases to~~ 0.3420 to 1.00 as of December 31, 2003 and for each and every fiscal quarter ending thereafter. In the event that we were not in compliance with the various restrictions and covenants and were unable to receive waivers for non-compliance,

and a minimum debt coverage ratio of 0.50 to 1.00 which commence as of and for the three month period ended March 31, 2004 and for each and every fiscal quarter ending thereafter. The Company was not in compliance with the amended debt covenants as of and for the period ending June 30, 2004, but obtained a waiver for non-compliance. There is no guaranty that the Company will meet its debt covenants in the future. In the event that the Company were not in compliance with the various restrictions and covenants and were unable to receive waivers for non-compliance, the term loan would be immediately due and payable.

Stockholders’ deficiency decreased from $14,586,000 at December 31, 2003 to $14,377,000 at June 30, 2004, mainly as a result of net income during the period of $248,000.

Although the Company has a net stockholders’ deficiency of $14,377,000 and a working capital deficit of $7,854,000 at June 30, 2004, the Company believes it will generate sufficient funds from operations and through its proposed private placement of $1 million from an Investor Group to meet its operating and capital requirements. In the event that the Company cannot generate positive cash flow from its operations during 2004, the Company can substantially reduce its research and development efforts to mitigate cash outflow to help sustain its operations. There can be no assurance that the Company will be able to sustain profitability or generate positive cash flow from operations; however, the Company expects to generate positive cash flow from its operations during 2004 from shipping out products and services from its current backlog as of June 30, 2004 as well as new orders and a private placement of $1 million from an Investor Group. These financial statements have been prepared assuming the Company will continue to operate as a going concern. If the Company is unsuccessful in the aforementioned efforts, the Company could be forced to liquidate certain of its assets, reorganize its capital structure and, if necessary, seek other remedies available to the Company, including protection under the bankruptcy laws.

Contractual Obligations and Commercial Commitments

The following table summarizes the Company’s obligations and commitments as of June 30, 2004, excluding interest:

	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	$	11,200	$	914	$	8,123	$	1,774	$	389
Operating Leases	1,621		514		927		127		53
Consulting Agreements	60		60		—		—		—
	$	12,881	$	1,488	$	9,050	$	1,901	$	442

Results of Operations

Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2004

	June 30, 2003			Percentage of Revenue		June 30, 2004		Percentage of Revenue
	(in thousands)					(in thousands)
Revenue:	$	4,752		100.0	%	$	4,901	100.0	%
Gross profit	3,526			74.2	%	3,671		74.9	%
Selling, general and administrative expenses	2,438			51.3	%	2,351		48.0	%
Research and development costs	658			13.9	%	908		18.5	%
Other operating expense	3			0.1	%	15		0.3	%
Interest expense, net	292			6.2	%	288		5.9	%
Other non-operating expense	212			4.5	%	23		0.5	%
Income tax expense	5			0.1	%	4		0.1	%
Net income (loss)	$	(82	)	(1.7	)%	$	82	1.7	%

Revenue for 2004 was $4,901,000 compared to $4,752,000 in 2003 or a 3.1% increase. Revenue increased $149,000 in 2004, as a result of increased software maintenance service.

Gross profit for 2004 increased to $3,671,000 from $3,526,000 in 2003. The increase in gross profit is mainly due to the increase in professional and maintenance services revenues from 2003 to 2004.

Selling, general and administrative expenses (“SG&A”) decreased from $2,438,000 in 2003 to $2,351,000 in 2004. The decrease is mainly due to the management cost control program by reducing vendor costs and consulting services.

Research and development costs increased from $658,000 in 2003 to $908,000 in 2004. The increase is mainly due to new hires, it’s related cost and consulting services. The Company capitalized $190,000 and $282,000 of software development costs in 2003 and 2004, respectively, associated with the Company’s product development of its new internet native suite of applications as well as our core product offerings.

Net interest expense was $292,000 in 2003 compared to $288,000 in 2004. The decrease is due to lower balances of interest bearing debt during 2004 as compared to 2003.

Other non-operating expense increased from $212,000 in 2003 to $23,000 in 2004. In 2003 non-operating expense relates to pension expense under a defined benefit plan for former employees from our discontinued operations. Other non-operating expense of $23,000 in 2004 relates to minority interest expenses associated with our Asian Operations. There were no such expense recorded in 2003.

The income tax benefit in 2003 is due to the Company recording a domestic income tax receivable during the period to recover taxes previously paid. There were no such receivables recorded in 2004.

~~the~~Six ~~term~~Months ~~debt would~~Ended beJune ~~immediately due and payable. The Company was not in compliance with and received a waiver for its minimum quick ratio covenant as of and for the three-month period ended September~~ 30, 2003. ~~There~~Compared ~~is no guaranty that the Company will meet its debt covenants in the future. The Company is currently negotiating with Wamco~~ to ~~change~~Six ~~such covenants,~~Months ~~but~~Ended ~~there~~June ~~is no assurance that the Company will be able to~~30, ~~successfully change the covenants.~~2004

Stockholders’ deficiency decreased from $14,782,000 at December 31, 2002 to $14,551,000 at September 30, 2003, mainly as a result of net income during the period of $310,000, the issuance of common stock and warrants to Canyon Capital valued at $62,000, and amortization of unearned compensation of $29,000 offset by a reduction in additional paid-in capital of $199,000 relating to the issuance of $149,000 of debt and $50,000 of cash to satisfy a legal settlement (see note 5).

	June 30, 2003			Percentage of Revenue		June 30, 2004		Percentage of Revenue
	(in thousands)					(in thousands)
Revenue	$	9,938		100.0	%	$	10,074	100.0	%
Gross profit	7,241			72.9	%	7,394		73.4	%
Selling, general and administrative expenses	4,969			50.0	%	4,700		46.7	%
Research and development costs	1,340			13.5	%	1,800		17.9	%
Other operating expense (income)	(46		)	(0.5	)%	18		0.2	%
Interest expense, net	641			6.4	%	579		5.8	%
Other non-operating expense	212			2.1	%	39		0.4	%
Income tax expense (benefit)	(54		)	(0.5	)%	10		0.1	%

Net income	$	179		1.8	%	$	248	2.5	%

~~Although~~Revenue ~~the Company~~for ~~has~~2004 awas ~~net stockholders’ deficiency of~~ $1410,~~551~~074,000 ~~and~~compared ~~a working capital deficit of~~ to $9,~~798~~938,000. ~~(which~~in ~~includes subordinated debt due to CSA of $2,800,000) at September 30,~~ 2003, ~~the Company believes it will generate sufficient funds from operations and obtain additional financing~~ or ~~restructure~~a ~~its subordinated note with CSA to meet its operating and capital requirements~~1. ~~The Company~~4% ~~is currently in negotiations with CSA to restructure the terms of the existing debt, including extending the maturity date~~increase. ~~The~~ ~~Company~~Revenue ~~expects~~increased ~~to generate positive cash flow from its continuing operations during 2003 from shipping out products and services from its current backlog as of September 30~~$136,000 ~~2003~~in ~~as well as new orders. In the event that the Company cannot generate positive cash flow from its continuing operations during 2003~~2004, the Company can substantially reduce its research and development efforts to mitigate cash outflow to help sustain its operations. There can be no assurance that the Company will be able to sustain profitability, generate positive cash flow from operations or restructure its debt as ~~necessary. These financial statements have been prepared assuming the Company will continue to operate as~~ a ~~going concern. If the Company is~~ ~~unsuccessful~~result ~~in the aforementioned efforts, the Company could be forced to liquidate certain~~ of ~~its~~increased ~~assets,~~professional ~~reorganize~~services ~~its~~revenue ~~capital~~as ~~structure~~well ~~and,~~as ifmaintenance ~~necessary,~~service ~~seek~~price ~~other remedies available to the Company, including protection under the bankruptcy laws~~increases.

~~Contractual~~Gross ~~Obligations~~profit for 2004 increased to $7,394,000 from $7,241,000 in 2003. The increase in gross profit is mainly due to the increase in professional and ~~Commercial~~maintenance services ~~Commitments~~revenues.

Selling, general and administrative expenses (“SG&A”) increased from $4,969,000 in 2003 to $4,700,000 in 2004. The ~~following~~decrease is mainly due to a decrease in ~~table~~headcount ~~summarizes~~associated with the Company’s ~~obligations~~focus ~~and~~on ~~commitments~~reducing ascosts, ofsuch as ~~September 30,~~building ~~2003:~~rent and consulting services.

	Payments Due by Period (in thousands)
Contractual Cash Obligations	Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years
Long-Term Debt	$	10,699	$	3,507	$	3,948	$	2,992	$	252
Operating Leases	1,978		596		1,064		239		79
Consulting Agreements	360		360		—		—		—
	$	13,037	$	4,463	$	5,012	$	3,231	$	331

Research and development costs increased from $1,340,000 in 2003 to $1,800,000 in 2004. The company capitalized $419,000 and $604,000 of software development costs in 2003 and 2004, respectively. The increase is mainly due to the Company continued efforts to invest in product development of its new internet native suite of applications as well as our core product offerings.

15Other operating expense (income) was ($46,000) in 2003 and $18,000 in 2004. Other operating income in 2003 is due to receipt of approximately $46,000 of cash resulting from a legal settlement.

~~Results~~Net interest expense was $641,000 in 2003 compared to $579,000 in 2004. The decrease is due to lower balances of ~~Operations~~interest bearing debt during 2004 as compared to 2003.

~~Three~~Other ~~Months~~non-operating ~~Ended~~expense ~~September 30~~increased from $212,000 ~~2002~~in 2003 ~~Compared~~to $39,000 in 2004. In 2003 non-operating expense relates to ~~Three~~pension ~~Months~~expense under a defined benefit plan ~~Ended~~for ~~September 30~~former employees from our discontinued operations. Of other non-operating expense of $39,000 in 2004, $22,000 relates to minority interest expense associated with our Asia Operations. There were no such expense recorded in 2003.

	September 30, 2002			Percentage of Revenue		September 30, 2003			Percentage of Revenue
	(in thousands)					(in thousands)
Revenue:	$	5,711		100.0	%	$	4,814		100.0	%
Gross profit	3,911			68.5	%	3,465			71.9	%
Selling, general and administrative expenses	2,404			42.0	%	2,307			47.9	%
Research and development costs	797			14.0	%	764			15.9	%
Amortization of intangibles	25			0.4	%	—			—
Other operating expense (income)	232			4.1	%	(134		)	(2.8	)%
Interest expense, net	372			6.5	%	286			5.9	%
Other non-operating expense	14			0.2	%	98			2.0	%
Income tax expense	8			0.1	%	12			0.2	%
Loss from discontinued operations	(223		)	(3.9	)%	—			—
Net income (loss)	$	(163	)	(2.9	)%	$	132		2.7	%

The income tax benefit in 2003 is due to the Company recording a domestic income tax receivable during the period to recover taxes previously paid. There were no such receivables recorded in 2004.

Revenue for 2003 was $4,814,000 compared to $5,711,000 in 2002 or a 18.6% decrease. Revenue decreased $897,000 in 2003, as a result of decreased professional services and maintenance services due to decreased capital spending on information technology in 2003 mainly due to the effects of the September 11, 2001 terrorist attacks on the hospitality industry.

The decrease in revenue in 2003 was mainly attributable to a decrease in service volume and rates as many hotels have reduced their operating costs by canceling or reducing contracted services, including support, in a post September 11, 2001 economy. Many hotels have requested that their suppliers reduce the cost of service or delay any price increases while they are experiencing reduced guest occupancy and lower average daily rates on their inventory of rooms. Certain hotels have also established their own help desks to further reduce costs. As a result, the Company postponed increasing its support prices until the first quarter of 2003 and agreed, with certain of its clients, to provide a second line of support versus a first line of support that was previously provided to such clients. Our continuing hospitality business is expected to generate sufficient cash from operations to adequately fund its ongoing operating activities.

Gross profit for 2003 decreased to $3,465,000 from $3,911,000 in 2002. The decrease in gross profit is mainly due to the decrease in software and maintenance services revenues which was offset by the Company’s cost reductions during the period.

Selling, general and administrative expenses (“SG&A”) decreased slightly from $2,404,000 in 2002 to $2,307,000 in 2003 as a result of continued efforts to reduce costs.

Research and development costs decreased from $797,000 in 2002 to $764,000 in 2003. The Company capitalized $257,000 and $200,000 of software development costs in 2002 and 2003, respectively, associated with the Company’s product development of its new internet native suite of applications.

The decrease in amortization of intangibles in 2003 versus the comparable period of 2002 is due to the fact that the Company amortized $25,000 of software development costs in 2002 relating to costs capitalized in 1999. These costs were fully amortized during 2002.

Net interest expense was $372,000 in 2002 compared to $286,000 in 2003. The decrease is due to lower balances of interest bearing debt and lower interest rates on variable debt during 2003 as compared to 2002.

Other operating expense (income) in 2002 was $232,000 compared to ($134,000) in 2003. Other operating income in 2003 was mainly due to a settlement agreement related to a disputed tax claim by the United States Internal Revenue Service that resulted in a one-time gain of $262,000 (see note 13).

Other non-operating expense increased from $14,000 in 2002 to $98,000 in 2003. Non-operating expense relates to pension expense under a defined benefit plan for former employees from our discontinued operations.

Results from discontinued operations were $223,000 in 2002. Results from discontinued operations in 2003 were $0 as all entities held for sale were sold in the fourth quarter of 2002.

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2003

	September 30, 2002			Percentage of Revenue		September 30, 2003			Percentage of Revenue
	(in thousands)					(in thousands)
Revenue	$	16,931		100.0	%	$	14,752		100.0	%
Gross profit	11,370			67.2	%	10,705			72.6	%
Selling, general and administrative expenses	6,787			40.0	%	7,277			49.3	%
Research and development costs	2,461			14.6	%	2,104			14.3	%
Amortization of intangibles	134			0.8	%	—			—
Other operating expense (income)	237			1.4	%	(181		)	(1.2	)%
Interest expense, net	1,142			6.8	%	927			6.3	%
Other non-operating expense	41			0.2	%	309			2.1	%
Income tax expense (benefit)	16			0.1	%	(41		)	(0.3	)%
Loss from discontinued operations	(43		)	(0.3	)%	—			—
Net income	$	509		3.0	%	$	310		2.1	%

Revenue for 2003 was $14,752,000 compared to $16,931,000 in 2002 or a 12.9% decrease. Revenue decreased $2,179,000 in 2003, as a result of decreased professional services and maintenance services due to decreased capital spending on information technology in 2003 mainly due to the effects of the September 11, 2001 terrorist attacks on the hospitality industry.

Revenue in our Asian operations increased from $1,797,000 in 2002 to $2,111,000 in 2003 as a result of its acquisition of HSS in June 2002 (see note 5) which allowed the Company to expand its operations in the Asian marketplace, strengthen its management team in the territory and create new opportunities for its new enterprise capable suite of products.

Gross profit for 2003 decreased to $10,705,000 (72.6%) from $11,370,000 (67.2%) in 2002. The decrease in gross profit is mainly due to the decrease in software and maintenance services revenues which was offset by the Company’s cost reductions during the period.

Selling, general and administrative expenses (“SG&A”) increased from $6,787,000 in 2002 to $7,277,000 in 2003. The increase is mainly due to an increase in selling and marketing expenses for trade shows, advertisement and travel as the Company continues to actively and aggressively market its newly developed enterprise suite of applications and services.

Research and development costs decreased from $2,461,000 in 2002 to $2,104,000 in 2003. The decrease is due to the capitalization of $615,000 and $619,000 of software development costs in 2002 and 2003, respectively, associated with the Company’s product development of its new internet native suite of applications. The decrease is also due to a decrease in headcount associated with the Company’s focus on reducing costs.

Other operating expense (income) was $237,000 in 2002 and ($181,000) in 2003. Other operating income in 2003 is due to receipt of approximately $46,000 of cash resulting from a legal settlement and a settlement agreement on a tax claim with the United States Internal Revenue Service that resulted in a one-time gain of $262,000 (see note 13).

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

Net interest expense was $1,142,000 in 2002 compared to $927,000 in 2003. The decrease is due to lower balances of interest bearing debt and lower interest rates on variable rate debt during 2003 as compared to 2002

Other non-operating expense increased from $41,000 in 2002 to $309,000 in 2003. Non-operating expense relates to pension expense under a defined benefit plan for former employees from our discontinued operations.

The income tax provision (benefit) 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. The income tax benefit in 2003

is due to the Company recording a domestic income tax receivable during the period to recover taxes previously paid.

Results from discontinued operations was $43,000 in 2002. Results from discontinued operations in 2003 was $0 as all entities held for sale were sold in the fourth quarter of 2002.

Item 3. Quantitative And Qualitative Disclosures About Market Risk

Market Risk Disclosures

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

Interest Rate Sensitivity

Of our $1011.7 2 million principal amount of indebtedness at ~~September~~ June 30, ~~2003~~2004, none bears interest at a variable rate. However, $5.7 million bears interest at a fixed rate of 11%, $23.86 million bears interest at a fixed rate of 10%, $1.6 0 million bears interest at 9.25% and $0.69 million bears fixed interest rates ranging from 6% to 17.5%. Since these debt instruments bear interest at fixed rates, we have no exposure to decreases in interest rates because we still are required to pay the fixed rate even if current interest rates are lower.

Foreign Currency Risk

We believe that our exposure to currency exchange fluctuation risk is reduced because our transactions with international vendors and customers are generally transacted in US dollars. The currency exchange impact on intercompany transactions was immaterial for the quarter ended ~~September~~ June 30, ~~2003~~2004.

Item 4. Evaluation of Disclosure Controls and Procedures

(a) Evaluation of disclosure controls and procedures

~~Our~~We ~~chief~~evaluated the design and ~~executive~~operation ~~officer~~of our disclosure controls and procedures to determine whether they are effective in ensuring that we disclose the required information in a timely manner and in accordance with the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and forms of the Securities and Exchange Commission. Management, including our ~~chief~~principal executive officer and principal financial officer, ~~after~~supervised ~~evaluating~~and participated in the evaluation. The ~~effectiveness~~evaluation was completed as of ~~the~~June ~~Company’s~~30, “2004. The principal executive officer and principal financial officer concluded, based on their review, that our disclosure controls and procedures”, (as defined in ~~the~~by ~~Securities~~ Exchange Act ~~of 1934~~ Rules 13a-14(c) and 1515d-d-14(c)), asare ofeffective aand ensure that we disclose the required ~~date~~information ~~(“Evaluation~~in ~~Date”)~~reports ~~within~~that 90we ~~days~~file ~~before~~under the ~~filing~~Exchange ~~date~~Act ofand ~~this~~that ~~quarterly~~the filings ~~report~~are recorded, ~~have~~processed, ~~concluded~~summarized ~~that~~and asreported ofwithin the ~~Evaluation~~time ~~Date,~~periods specified ~~our~~in ~~disclosure~~Securities ~~controls~~ and ~~procedures~~Exchange ~~were~~Commission ~~adequate~~rules and ~~designed~~forms. toNo ~~ensure~~significant changes ~~that~~were ~~material~~made ~~information relating~~ to usour ~~and~~internal ~~our~~controls ~~consolidated~~or ~~subsidiaries~~other ~~would~~factors bethat ~~made~~could significantly ~~known~~affect these controls subsequent to ~~them~~the ~~by others~~date ~~within~~of ~~those~~their ~~entities~~evaluation.

~~(b) Changes~~A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in ~~internal~~all control systems no evaluation of controls can provide absolute assurance that all control issues if any, within a company have been detected.

~~There~~On ~~were~~August no20, 2004, the Company’s independent auditors orally notified the Company’s Audit Committee that they had identified significant ~~changes~~deficiencies inregarding ~~our~~the Company’s internal controls. orThe todeficiencies ~~our~~noted ~~knowledge,~~were in(a) ~~other~~the lack of segregation of ~~factors~~duties, ~~that~~(b) ~~could~~the ~~significantly~~lack ~~affect~~of ~~our~~adequate ~~disclosure~~account ~~controls~~analysis and ~~procedures~~reconciliations, and (c) ~~subsequent~~insufficient supervision of the Company’s accounting personnel. The Company believes such deficiencies were primarily attributable to changes in personnel within the ~~Evaluation~~accounting ~~Date~~department combined with a lack of adequate resources.

~~PART~~Based IIon -the ~~OTHER~~investigation ~~INFORMATION~~by the Company’s Audit Committee and additional procedures performed by management, the Company has concluded that, except as noted above, and subject to the inherent limitations in all control systems, the Company’s current disclosure controls and procedures are sufficient to timely alert the Company’s management to material information relating to the Company that is required to be included in our periodic Securities and Exchange Committee filings, and that the internal controls are sufficient to provide reasonable assurance that the consolidated financial statements are fairly presented in conformity with generally accepted accounting principles.

(b) Changes in internal controls

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

~~Internal~~Hotel ~~Revenue~~Information ~~Service~~Systems, Inc.

On ~~September 30~~ March 25, 2003, the Company entered into a settlement agreement with ~~the~~ ~~United~~Hotel ~~States~~Information ~~Internal~~Systems ~~Revenue Service~~ (~~the~~ “~~Service~~HIS”) onand aone ~~tax~~of ~~claim which~~its ~~resulted~~former ~~from~~corporate ~~the~~officers ~~Company’s~~whereby ~~Chapter~~(i) 11the ~~proceedings~~parties ~~whereby~~dismissed itall ~~agreed~~claims, ~~to pay~~known ~~$489,000~~and ~~in equal monthly installments of $7~~unknown,~~438~~ ~~over~~against aeach ~~period~~other; ~~of six~~ (6ii) ~~years at~~the anCompany ~~interest~~forgave ~~rate~~and ofwrote ~~6%. The~~off ~~$489,000~~a note ~~settlement~~receivable isfrom ~~reflected as debt in~~ the ~~financial~~former ~~statements~~corporate ~~and~~officer ~~resulted~~of HIS in athe ~~one-time gain~~amount of $~~262~~66,000 (which iswas ~~included~~expensed into other ~~operating~~expense ~~income.~~in In the ~~event~~2002 ~~that the~~consolidated ~~Company~~statement ~~fails~~of operations); to(iii) ~~pay~~ the ~~Service~~Company ~~any~~paid ~~payment~~$50,000 in cash and ~~such~~issued ~~payment~~a ~~failure~~non-interest ~~continues~~bearing ~~for~~unsecured ~~sixty~~promissory ~~days~~note ~~after~~which ~~written~~requires ~~notice~~35 ofconsecutive ~~such failure, $1,832,100, plus~~monthly ~~accrued~~payments ~~interest thereon,~~of

1816

~~less~~$5,000 each commencing April 1, 2003; and (iv) the remaining 374,116 shares in the escrow account will be released to the Company. If the Company is delinquent four times in any twelve-month period during the term of the unsecured promissory note in making its $5,000 monthly payments ~~made~~to byHIS, and HIS issues respective valid default notices, the Company will be ~~immediately~~subject ~~due~~to ~~and~~a ~~payable~~$225,000 penalty. The to374,116 shares have been received by MAI together with the HIS authorization to legally transfer such ~~Service~~shares to MAI.

~~CSA~~Imputing ~~Private~~interest ~~Limited~~at 11%, the present value of the $175,000 promissory note at the date of the settlement was $149,000. The Company recorded the present value of this debt issuance and the $50,000 cash payment as a reduction to additional paid-in capital.

CSA is a MAI shareholder. On August 9, 1996, MAI acquired from Hotel Information Systems, Inc. (“HIS”) substantially all their assets and certain of their liabilities (the “HIS Acquisition”). At the time of MAI’s acquisition of HIS in 1996, CSA was a shareholder of HIS and, in connection with the purchase, MAI agreed to issue to CSA shares of its Common Stock worth approximately $4.8 million in August 1996, which amount had increased to approximately $6.8 million as of December 31, 2000, pursuant to the agreement. The Company entered into a settlement agreement with CSA in February, 2001 whereby it (i) issued CSA 1,916,014 additional shares of our Common Stock to bring CSA’s total share ownership to 2,433,333 shares; (ii) filed a registration statement for all of CSA’s shares of our Common Stock which has been declared effective by the SEC so that such shares are now freely tradable; and (iii) executed a secured debt instrument in favor of CSA in the principal sum of $2,800,000 which is subordinate only to the Company’s present group of two (2) senior secured leaders and required cash installment payments to commence in March 2002 (see note 6).

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

Cher-Ae Heights Indian Community

A lawsuit was fied by Cher-Ae Heights Indian Community (“Cher-Ae Heights”) against Logix Development Corporation (Logix), now known as MAI Development Corporation, as a co-defendant for a breach of contract by the Company’s formerly owned gaming subsidiary along with the new owners, Monaco Informatiques Systemes (“MIS”), who acquired the assets and certain liabilities of the gaming subsidiary on July 27, 2001. Based upon this suit, MIS informed the Company that it did not intend to pay the next $500,000 due to the Company under a promissory note and security agreement. On October 24, 2002, the Company entered into a global settlement agreement between the parties whereby all claims, known and unknown, between the parties were dismissed and the Company received $796,000 (see note 5)

Logix Development Corporation

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

~~Other~~In ~~Litigation~~December 2003, the Company entered into another settlement agreement with Logix whereby it (i) issued 200,000 free trading shares in exchange for the 200,000 restricted Common Shares from the original settlement agreement in July 2002 (ii) required the Company to make monthly payments totaling $187,500 over a 25 month period and (iii) mutually released each other of all past, present and future claims associated with the lawsuit.

TheOther Company is also involved in various other legal proceedings and claims that are incident to its business. Management believes that 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.Litigation

The Company is also involved in various other legal proceedings and claims that are incidental 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.

(d) None.

Item 3. Defaults Upon Senior Securities

(a) None

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

(a) None

(b) None

(d) None

Item 5. Other Information

(a) None.

Item 6. Exhibits and Reports on Form 8-K

(a)		Exhibits
31.1		Certification of Chief Executive Officer, W. Brian Kretzmer, as required by Section 3.02 of Sarbane-Oxley Act of 2002
31.2		Certification of Chief Financial Officer, James W. Dolan, as required by Section 3.02 of Sarbane-Oxley Act of 2002
32.1		Certification of Chief Executive Officer, W. Brian Kretzmer, as required by Section 9.06 of Sarbane-Oxley Act of 2002
32.2		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
		Filed May 2, 2003
		Filed April 1, 2004
		Filed April 30, 2003
		Filed April 12, 2004
		Filed April 24, 2003
		Filed November 5, 2003

2018

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	~~MAI SYSTEMS CORPORATION~~
		(Registrant)	~~(Registrant)~~
Date: November 6, 2003	By:		/s/ James W. Dolan
Date: August 23, 2004	By:	/s/James W. Dolan
		James W. Dolan	~~James W. Dolan~~
			Chief Financial and Operating Officer (Chief Financial and Accounting Officer)
		Chief Financial and Operating Officer
		(Chief Financial and Accounting Officer)

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