##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-Q



---



(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the quarterly period ended: March 31, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------



Commission file number: 0-21395



---



ALLIN CORPORATION

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                       
|-------------------------------------------------------------- |  | --------------------------------------
|Delaware                                                       |  | 25-1795265                            
|(State or other jurisdiction of incorporation or organization) |  | (I. R. S. Employer Identification No.)



381 Mansfield
Avenue, Suite 400

Pittsburgh, Pennsylvania 15220-2751

(Address of principal executive offices, including zip code)



(412) 928-8800

(Registrants
telephone number, including area code)



N/A

(Former Name, Former Address and Former Fiscal Year, if changed since last report)



---



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.    x  Yes ̈No



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



Shares Outstanding of the Registrants Common Stock



As of May 2, 2005



Common Stock, 6,967,339 Shares



---



---

##### Table of Contents

Allin Corporation



Form 10-Q



Index



|                                                                                              |  |        
|--------------------------------------------------------------------------------------------- |  | -------
|Forward-Looking Information                                                                   |  | Page 3 
|                                                                                              | 
|Part I - Financial Information                                                                |  |        
|                                                                                              | 
|Item 1. Financial Statements                                                                  |  | Page 4 
|                                                                                              | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | Page 23
|                                                                                              | 
|Item 3. Quantitative and Qualitative Disclosure about Market Risk                             |  | Page 45
|                                                                                              | 
|Item 4. Controls and Procedures                                                               |  | Page 45
|                                                                                              | 
|Part II - Other Information                                                                   |  |        
|                                                                                              | 
|Item 3. Defaults Upon Senior Securities                                                       |  | Page 45
|                                                                                              | 
|Item 6. Exhibits                                                                              |  | Page 46
|                                                                                              | 
|Signatures                                                                                    |  | Page 49



2



---

##### Table of Contents

Forward-Looking Information



Certain matters in this Form 10-Q, including, without limitation, certain matters discussed under PartI, Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are typically identified by the words
believes, expects, intends, will, seek, continue, pursue and similar expressions. In addition, any statements that refer to expectations or other characterizations
of future events or circumstances are forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of performance and that matters referred to in such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Allin Corporation to be materially different from any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, risks and uncertainties discussed throughout Part I,Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations and
under the caption Risk Factors included therein. Allin Corporation undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.



3



---

##### Table of Contents

Part I - Financial Information



Item 1. - Financial Statements



ALLIN
CORPORATION & SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



(Dollars in thousands)



|                                                                            |  |                  |        |   |                |   |        |  
|--------------------------------------------------------------------------- |  | ---------------- | ------ | - | -------------- | - | ------ | -
|                                                                            |  | December 31,2004 |        |   | March 31, 2005 |  
|                                                                            |  | (See Note 1)     |        |   | (Unaudited)    |  
|ASSETS                                                                      |  |                  |        |   |                |   |        |  
|                                                                            |  |                 
|Current assets:                                                             |  |                  |        |   |                |   |        |  
|Cash and cash equivalents                                                   |  | $                | 3,091  |   |                | $ | 2,356  |  
|Accounts receivable, net of allowance for doubtful accounts of $80 and $65  |  |                  | 2,953  |   |                |   | 2,893  |  
|Unbilled receivables                                                        |  |                  | 20     |   |                |   | 61     |  
|Current portion of note receivable from employee                            |  |                  | 3      |   |                |   | 3      |  
|Inventory                                                                   |  |                  | 62     |   |                |   | 104    |  
|Prepaid expenses                                                            |  |                  | 184    |   |                |   | 125    |  
|Costs and estimated gross margins in excess of billings                     |  |                  | 12     |   |                |   | 97     |  
|Deferred income tax asset                                                   |  |                  | 138    |   |                |   | 138    |  
|                                                                            |  |                  |        |   |                |   |        |  
|Total current assets                                                        |  |                  | 6,463  |   |                |   | 5,777  |  
|                                                                            |  |                 
|Property and equipment, at cost:                                            |  |                  |        |   |                |   |        |  
|Leasehold improvements                                                      |  |                  | 460    |   |                |   | 460    |  
|Furniture and equipment                                                     |  |                  | 1,128  |   |                |   | 1,167  |  
|                                                                            |  |                  |        |   |                |   |        |  
|                                                                            |  |                  | 1,588  |   |                |   | 1,627  |  
|Lessaccumulated depreciation                                               |  |                  | (1,447 | ) |                |   | (1,470 | )
|                                                                            |  |                  |        |   |                |   |        |  
|                                                                            |  |                  | 141    |   |                |   | 157    |  
|                                                                            |  |                 
|Other assets:                                                               |  |                  |        |   |                |   |        |  
|Non-current portion of note receivable from employee                        |  |                  | 9      |   |                |   | 8      |  
|Goodwill, net of accumulated amortization of $3,742                         |  |                  | 996    |   |                |   | 996    |  
|Other intangible assets, net of accumulated amortization of $966 and $1,008 |  |                  | 1,142  |   |                |   | 1,105  |  
|                                                                            |  |                  |        |   |                |   |        |  
|Total assets                                                                |  | $                | 8,751  |   |                | $ | 8,043  |  
|                                                                            |  |                  |        |   |                |   |        |  



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



4



---

##### Table of Contents

ALLIN CORPORATION & SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



(Dollars in thousands)



|                                                                                                   |  |                  |         |   |                |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | -------------- | - | ------- | -
|                                                                                                   |  | December 31,2004 |         |   | March 31, 2005 |  
|                                                                                                   |  | (See Note 1)     |         |   | (Unaudited)    |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                               |  |                  |         |   |                |   |         |  
|                                                                                                   |  |                 
|Current liabilities:                                                                               |  |                  |         |   |                |   |         |  
|Accounts payable                                                                                   |  | $                | 750     |   |                | $ | 814     |  
|Note payable                                                                                       |  |                  | 1,000   |   |                |   | 1,000   |  
|Accrued liabilities:                                                                               |  |                  |         |   |                |   |         |  
|Compensation and payroll taxes                                                                     |  |                  | 168     |   |                |   | 204     |  
|Current portion of dividends on preferred stock                                                    |  |                  | 76      |   |                |   | 74      |  
|Other                                                                                              |  |                  | 299     |   |                |   | 148     |  
|Customer deposits                                                                                  |  |                  | 152     |   |                |   | 145     |  
|Billings in excess of costs and estimated gross margins                                            |  |                  | 369     |   |                |   | 11      |  
|Deferred revenue                                                                                   |  |                  | 148     |   |                |   | 118     |  
|                                                                                                   |  |                  |         |   |                |   |         |  
|Total current liabilities                                                                          |  |                  | 2,962   |   |                |   | 2,514   |  
|                                                                                                   |  |                 
|Non-current portion of dividends on preferred stock                                                |  |                  | 2,397   |   |                |   | 2,493   |  
|                                                                                                   |  |                  |         |   |                |   |         |  
|Total liabilities                                                                                  |  |                  | 5,359   |   |                |   | 5,007   |  
|                                                                                                   |  |                 
|Commitments and contingencies                                                                      |  |                  |         |   |                |   |         |  
|                                                                                                   |  |                 
|Shareholders equity:                                                                              |  |                  |         |   |                |   |         |  
|Preferred stock, par value $.01 per share, authorized 100,000 shares:                              |  |                  |         |   |                |   |         |  
|Series C redeemable preferred stock, designated, issued and outstanding 25,000 shares              |  |                  | 2,500   |   |                |   | 2,500   |  
|Series D convertible redeemable preferred stock, designated, issued and outstanding 2,750 shares   |  |                  | 2,152   |   |                |   | 2,152   |  
|Series F convertible redeemable preferred stock, designated, issued and outstanding 1,000 shares   |  |                  | 1,000   |   |                |   | 1,000   |  
|Series G convertible redeemable preferred stock, designated, issued and outstanding 150 shares     |  |                  | 1,067   |   |                |   | 1,071   |  
|Common stock, par value $.01 per share, authorized 20,000,000 shares, outstanding 6,967,339 shares |  |                  | 70      |   |                |   | 70      |  
|Additional paid-in-capital                                                                         |  |                  | 39,466  |   |                |   | 39,280  |  
|Warrants                                                                                           |  |                  | 419     |   |                |   | 419     |  
|Treasury stock at cost, 8,167 common shares                                                        |  |                  | (27     | ) |                |   | (27     | )
|Accumulated deficit                                                                                |  |                  | (43,255 | ) |                |   | (43,429 | )
|                                                                                                   |  |                  |         |   |                |   |         |  
|Total shareholders equity                                                                         |  |                  | 3,392   |   |                |   | 3,036   |  
|                                                                                                   |  |                  |         |   |                |   |         |  
|Total liabilities and shareholders equity                                                         |  | $                | 8,751   |   |                | $ | 8,043   |  
|                                                                                                   |  |                  |         |   |                |   |         |  



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



5



---

##### Table of Contents

ALLIN CORPORATION & SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



(Dollars in thousands, except per share data)

(Unaudited)



|                                                      |  |                                 |           |   |                                 |   |           |  
|----------------------------------------------------- |  | ------------------------------- | --------- | - | ------------------------------- | - | --------- | -
|                                                      |  | Three MonthsEnded March 31,2004 |           |   | Three MonthsEnded March 31,2005 |  
|Revenue:                                              |  |                                 |           |   |                                 |   |           |  
|Consulting services                                   |  | $                               | 2,173     |   |                                 | $ | 2,448     |  
|Integration services                                  |  |                                 | 903       |   |                                 |   | 152       |  
|Outsourced services                                   |  |                                 | 162       |   |                                 |   | 160       |  
|Information system product sales                      |  |                                 | 98        |   |                                 |   | 248       |  
|Other services                                        |  |                                 | 20        |   |                                 |   | 67        |  
|                                                      |  |                                 |           |   |                                 |   |           |  
|Total revenue                                         |  |                                 | 3,356     |   |                                 |   | 3,075     |  
|                                                      |  |                                
|Cost of sales:                                        |  |                                 |           |   |                                 |   |           |  
|Consulting services                                   |  |                                 | 932       |   |                                 |   | 919       |  
|Integration services                                  |  |                                 | 423       |   |                                 |   | 72        |  
|Outsourced services                                   |  |                                 | 129       |   |                                 |   | 124       |  
|Information system product sales                      |  |                                 | 61        |   |                                 |   | 177       |  
|Other services                                        |  |                                 | 12        |   |                                 |   | 21        |  
|                                                      |  |                                 |           |   |                                 |   |           |  
|Total cost of sales                                   |  |                                 | 1,557     |   |                                 |   | 1,313     |  
|                                                      |  |                                
|Gross profit:                                         |  |                                 |           |   |                                 |   |           |  
|Consulting services                                   |  |                                 | 1,241     |   |                                 |   | 1,529     |  
|Integration services                                  |  |                                 | 480       |   |                                 |   | 80        |  
|Outsourced services                                   |  |                                 | 33        |   |                                 |   | 36        |  
|Information system product sales                      |  |                                 | 37        |   |                                 |   | 71        |  
|Other services                                        |  |                                 | 8         |   |                                 |   | 46        |  
|                                                      |  |                                 |           |   |                                 |   |           |  
|Total gross profit                                    |  |                                 | 1,799     |   |                                 |   | 1,762     |  
|                                                      |  |                                
|Selling, general & administrative expenses:           |  |                                 |           |   |                                 |   |           |  
|Depreciation and amortization                         |  |                                 | 46        |   |                                 |   | 65        |  
|Gain on disposal of assets                            |  |                                 | (9        | ) |                                 |   |          |  
|Other selling, general & administrative expenses      |  |                                 | 1,568     |   |                                 |   | 1,863     |  
|                                                      |  |                                 |           |   |                                 |   |           |  
|Total selling, general & administrative expenses      |  |                                 | 1,605     |   |                                 |   | 1,928     |  
|                                                      |  |                                 |           |   |                                 |   |           |  
|Income (loss) from operations                         |  |                                 | 194       |   |                                 |   | (166      | )
|                                                      |  |                                
|Interest income                                       |  |                                 | (9        | ) |                                 |   | (11       | )
|Interest expense                                      |  |                                 | 18        |   |                                 |   | 19        |  
|                                                      |  |                                 |           |   |                                 |   |           |  
|Income before provision for income taxes              |  |                                 | 185       |   |                                 |   | (174      | )
|                                                      |  |                                
|Provision for income taxes                            |  |                                 | 3         |   |                                 |   |          |  
|                                                      |  |                                 |           |   |                                 |   |           |  
|Net income (loss)                                     |  |                                 | 182       |   |                                 |   | (174      | )
|                                                      |  |                                
|Dividends and accretion on preferred stock            |  |                                 | 181       |   |                                 |   | 187       |  
|                                                      |  |                                 |           |   |                                 |   |           |  
|Net income (loss) attributable to common shareholders |  | $                               | 1         |   |                                 | $ | (361      | )
|                                                      |  |                                 |           |   |                                 |   |           |  
|Earnings (loss) per common share - basic and diluted  |  | $                               | 0.00      |   |                                 | $ | (0.05     | )
|                                                      |  |                                 |           |   |                                 |   |           |  
|Weighted average shares outstanding - basic           |  |                                 | 6,967,339 |   |                                 |   | 6,967,339 |  
|                                                      |  |                                 |           |   |                                 |   |           |  
|Weighted average shares outstanding - diluted         |  |                                 | 6,991,014 |   |                                 |   | 6,967,339 |  
|                                                      |  |                                 |           |   |                                 |   |           |  



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



6



---

##### Table of Contents

ALLIN CORPORATION & SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



(Dollars in thousands)

(Unaudited)



|                                                                                        |  |                                 |   |  |                                   |  
|--------------------------------------------------------------------------------------- |  | ------------------------------- | - |  | --------------------------------- | -
|                                                                                        |  | Three MonthsEnded March 31,2004 |   |  | Three Months Ended March 31, 2005 |  
|Cash flows from operating activities:                                                   |  |                                 |   |  |                                   |  
|Net income (loss)                                                                       |  | 182                             |   |  | (174                              | )
|Adjustments to reconcile net income (loss) to net cash flows from operating activities: |  |                                 |   |  |                                   |  
|Depreciation and amortization                                                           |  | 46                              |   |  | 65                                |  
|Gain from disposal of assets                                                            |  | (9                              | ) |  |                                  |  
|Changes in certain assets and liabilities:                                              |  |                                 |   |  |                                   |  
|Accounts receivable                                                                     |  | 106                             |   |  | 60                                |  
|Unbilled receivables                                                                    |  | (165                            | ) |  | (41                               | )
|Inventory                                                                               |  | (24                             | ) |  | (42                               | )
|Prepaid expenses                                                                        |  | 32                              |   |  | 59                                |  
|Costs and estimated gross margins in excess of billings                                 |  | 1                               |   |  | (85                               | )
|Accounts payable                                                                        |  | (198                            | ) |  | 58                                |  
|Accrued compensation and payroll taxes                                                  |  | (137                            | ) |  | 36                                |  
|Other accrued liabilities                                                               |  | 72                              |   |  | (145                              | )
|Customer deposits                                                                       |  | (22                             | ) |  | (7                                | )
|Billings in excess of costs and estimated gross margins                                 |  | (22                             | ) |  | (358                              | )
|Deferred revenue                                                                        |  | (1                              | ) |  | (42                               | )
|                                                                                        |  |                                 |   |  |                                   |  
|Net cash flows used for operating activities                                            |  | (139                            | ) |  | (616                              | )
|                                                                                        |  |                                 |   |  |                                   |  
|Cash flows from investing activities:                                                   |  |                                 |   |  |                                   |  
|Proceeds from sale of assets                                                            |  | 17                              |   |  |                                  |  
|Capital expenditures                                                                    |  | (43                             | ) |  | (39                               | )
|Acquisition of a business                                                               |  |                                |   |  | 8                                 |  
|                                                                                        |  |                                 |   |  |                                   |  
|Net cash flows used for investing activities                                            |  | (26                             | ) |  | (31                               | )
|                                                                                        |  |                                 |   |  |                                   |  
|Cash flows from financing activities:                                                   |  |                                 |   |  |                                   |  
|Repayment of loan to employee                                                           |  | 1                               |   |  | 1                                 |  
|Payment of dividends on preferred stock                                                 |  | (89                             | ) |  | (89                               | )
|                                                                                        |  |                                 |   |  |                                   |  
|Net cash flows used for financing activities                                            |  | (88                             | ) |  | (88                               | )
|                                                                                        |  |                                 |   |  |                                   |  
|Net change in cash and cash equivalents                                                 |  | (253                            | ) |  | (735                              | )
|Cash and cash equivalents, beginning of period                                          |  | 4,580                           |   |  | 3,091                             |  
|                                                                                        |  |                                 |   |  |                                   |  
|Cash and cash equivalents, end of period                                                |  | 4,327                           |   |  | 2,356                             |  
|                                                                                        |  |                                 |   |  |                                   |  



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



7



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



1. Summary of Significant Accounting Policies



The information contained in these financial statements and notes for the three-month periods ended March 31, 2004 and 2005 should be read in conjunction with the audited financial statements and notes for the years
ended December 31, 2003 and 2004, contained in the Annual Report on Form 10-K of Allin Corporation (the Company) for the year ended December 31, 2004. The accompanying unaudited Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission. These interim statements do not include all of the information and footnotes required for complete
financial statements. It is managements opinion that all adjustments (including all normal recurring accruals) considered necessary for a fair presentation have been made. However, results for these interim periods are not necessarily
indicative of results to be expected for the full year. See Notes 5  Goodwill and Intangible Assets, 6Income Taxesand7  Industry Segment Informationfor information concerning the Companys basis of
presentation and accounting policies regarding these matters. The Consolidated Balance Sheet as of December 31, 2004 has been derived from the audited financial statements as of that date, but does not include all of the information and footnotes
required by United States generally accepted accounting principles for complete financial statements.



Principles of Consolidation



The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. It is the Companys policy to consolidate all majority-owned subsidiaries and variable interest entities where the Company has
control. The Company does not currently utilize or have interests in any variable interest entities. All significant intercompany accounts and transactions have been eliminated.



Reclassifications



The Consolidated Statement of Operations for the three months ended March 31, 2004 reflects a reclassification to the statement as previously reported to
conform the prior period information to the current presentation of the statement. The reclassification did not impact the Companys results of operations or earnings per share during this period. On the Consolidated Statement of Operations,
amounts billed to customers for recovery of out-of-pocket costs associated with performance of the Companys services are reflected as other services revenue while the associated costs are reflected as other services cost of sales. Previously,
amounts billed had been netted against the costs. As a result of the reclassification, aggregate revenue and cost of sales have been increased by $12,000 for the three months ended March 31, 2004. There is no change to aggregate gross profit for
this period.



The Consolidated Statement of Cash Flows for the
three months ended March 31, 2004 reflects a reclassification to the statement as previously reported to conform the prior period information to the current presentation of the statement. Separate changes are reflected for accrued compensation and
payroll taxes, other accrued liabilities and customer deposits. Previously, the changes had been combined and reflected as accrued liabilities. There is no change to the aggregate net cash flows provided by operating activities for the three months
ended March 31, 2004. The reclassification did not impact the Companys results of operations or earnings per share during this period.



Use of Estimates in the Preparation of Financial Statements



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ materially from those estimates.



8



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



Revenue Recognition



The Company recognizes revenue in accordance with the Securities and Exchange Commissions Staff Accounting Bulletins 101, Revenue Recognition in
Financial Statements, and 104, Revenue Recognition, American Institute of Certified Public Accountants Statements of Position 97-2, Software Revenue Recognition (SOP 97-2), and 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (SOP 81-1), Accounting Research Bulletin No. 45, Long-Term Construction-Type Contracts (ARB No. 45), Emerging Issues Task Force Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables(EITF No. 00-21), and other authoritative accounting literature. The Companys revenue recognition policies are described below for each of the various revenue captions on the Companys
Consolidated Statements of Operations.



Consulting Services



Consulting services are provided by the Companys Technology
Infrastructure, Collaborative Solutions, Business Process and Interactive Media Practice Areas. The Companys policy is to recognize revenue when persuasive evidence of an arrangement exists, price is fixed or determinable, services have been
rendered and collectibility is reasonably assured. Fees are time-based for the majority of consulting engagements, with revenue recognized as the services are performed. Certain consulting engagements for these practice areas are performed on a
fixed-price basis. The Company follows the contract accounting guidance of ARB No. 45 and SOP 81-1 for these engagements. Revenue is recognized on a proportional performance basis, utilizing the proportion of labor expended through the end of the
period to expected total project labor. The Business Process Practice Area also performs engagements under which a fixed price is charged for support services for a specified time period, typically an annual period. Services are provided as
requested by the customers. Revenue is recognized for these engagements on a pro-rata basis over the applicable time period.



Interactive Media consulting projects are frequently part of related arrangements, including computer hardware and equipment for interactive television
systems, software, services, and post-contract support (PCS). SOP 97-2 specifies that if an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production,
modification, or customization of software, the entire arrangement should be accounted for in conformity with the contract accounting guidance of ARB No. 45 and SOP 81-1. Interactive Medias arrangements involve significant software
modification, including the installation of customized software applications previously developed for the customer. Revenue for fixed-price service-based arrangements associated with these projects is recognized on the percentage of completion
method of contract accounting, based on the proportion of labor expended through the end of the period to expected total project labor. Interactive Media arrangements frequently include PCS for a ninety-day period following system installation. A
portion of the contract value is allocated to the PCS based on the proportion of expected PCS-related labor to expected total project labor and, in accordance with SOP 97-2, revenue is recognized for PCS over the period when services are performed.



The Companys practice areas perform consulting projects
where the Company recommends that the customer implement technology products to facilitate technology-based solutions. Under some of these arrangements, the Company also sells the recommended technology products to the customer. When consulting
services are part of multiple-deliverable arrangements, revenue from services and product sales are recognized separately based on SOP 97-2 and EITF No. 00-21.



Integration Services



Integration services include projects conducted by the Interactive Media Practice Area that are part of related arrangements, including computer hardware
and equipment for interactive television systems, software and services. The Company follows the contract accounting guidance of ARB No. 45 and SOP 81-1, as specified by SOP 97-2, in accounting for revenue derived under these arrangements that
involve significant software modification. The Companys recognition method for revenue for systems integration projects is based on the size and expected duration of the project. For projects in excess of $250,000 of revenue and expected to be
of greater



9



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



than 90 days duration, revenue is recognized based on percentage of completion. The proportion of labor incurred to expected total project labor is utilized as a
quantitative factor in determining the percentage of completion recognized for projects when the proportion of total project costs incurred to expected total project costs is not representative of actual project completion status. For projects with
expected revenue of $250,000 or less, or expected duration of 90 days or less, revenue is recognized upon completion of the project. Interactive Media arrangements do not include rights for software, hardware or equipment upgrades.



Outsourced Services



The Company recognizes revenue for its outsourced services operations in a similar manner as discussed above for time-based
practice area consulting services.



Information System Product Sales



Information system product sales arise from both stand-alone
product sales and as part of multiple-deliverable arrangements. Revenue for stand-alone product sales is recognized when the price has been determined, delivery has occurred and collectibility is reasonably assured. Some sales are associated with
consulting projects where the Company recommends that the customer implement certain technology products in order to facilitate technology-based solutions. Where information system product sales are part of these multiple-deliverable arrangements,
revenue from product sales and consulting services are recognized separately based on SOP 97-2 and EITF No. 00-21.



Revenue and cost of sales for the Companys information system product sales are reported on a gross basis, in accordance with the guidelines of
Emerging Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, based primarily on the Companys assumption of primary responsibility for fulfillment of the sales, sole latitude in establishing
prices, collection risk on amounts billed to customers and inventory risk. Amounts billed to customers for shipping charges are recorded as revenue and associated shipping costs are recorded as cost of sales.



Other Services



Other services include activities peripheral to the Companys operations such as website hosting and archival fees,
contractual commissions and placement fees. Amounts billed to customers for recovery of out-of-pocket costs associated with performance of consulting and integration engagements are also reflected as other services revenue. The Company recognizes
revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, services have been rendered and collectibility is reasonably assured.



Earnings Per Share



Earnings per share (EPS) of common stock have been computed in accordance with Financial Accounting Standards Board Statement No. 128,
Earnings Per Share (SFAS No. 128). The shares used in calculating basic and diluted EPS include the weighted average of the outstanding common shares of the Company. The Companys outstanding stock options and warrants and
the Companys Series G convertible redeemable preferred stock are considered potentially dilutive securities under SFAS No. 128 and are included in the calculation of diluted EPS if the effect is dilutive. The Companys Series F
convertible redeemable preferred stock was also a potentially dilutive security prior to the expiration of its convertibility feature in May 2004.



The Companys convertible preferred stock and outstanding stock options and warrants were not included in the calculation of diluted EPS for the
three-month period ended March 31, 2005. Since the Company recognized a net loss attributable to common shareholders in this period, the effect of inclusion would have been anti-dilutive. An additional 4,285,714 shares would have been included in
the diluted EPS calculation for this period related to the convertible preferred stock, if the effect was not anti-dilutive. The average market prices of the Companys common stock exceeded the exercise prices of 75,000 outstanding options
during the three-month period ended



10



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



March 31, 2005. This would have resulted in the inclusion of 15,273 in the calculation of diluted EPS for the three-month period ended March 31, 2005 if the effect had
not been anti-dilutive. The exercise prices of all other outstanding stock options and all outstanding warrants exceeded the average market prices of the Companys common stock for this period.



The Companys convertible preferred stock was not included in the
calculation of diluted EPS for the three-month period ended March 31, 2004, as the effect was anti-dilutive despite there being net income attributable to common shareholders. An additional 4,794,361 shares would have been included in the diluted
EPS calculation for this period related to the convertible preferred stock, if the effect was not anti-dilutive. The average market price of the Companys common stock during the three-month period ended March 31, 2004 exceeded the exercise
price of 60,000 outstanding options. This resulted in the inclusion of 23,675 additional shares in the calculation of diluted EPS for the three-month period ended March 31, 2004. The exercise prices of all other outstanding stock options and all
outstanding warrants exceeded the average market prices of the Companys common stock for this period.



Accounts Receivable and Unbilled Receivables



The Companys subsidiaries record accounts receivable based upon billing for services and products. Unbilled receivables are recorded when labor-based services have been provided prior to the end of the period
and invoicing has not occurred. The Company evaluates the extension of credit to potential customers based on financial or other information and any special circumstances regarding the potential engagement. Payment for services or products is
normally due within thirty days of billing, although alternate terms may be included in contracts or letters of engagement as agreed upon by the Company and the customer. Accounts receivable are not normally collateralized. The Company does not
routinely charge interest on past due accounts receivable. However, the Company will occasionally reach agreement with a customer on a payment plan for accounts receivable that includes interest charges if the Company believes this will facilitate
collection. In these instances, interest income is recognized as payments are received. As of March 31, 2005 and December 31, 2004, the Companys risk of loss for accounts receivable and unbilled receivables was limited to the amounts recorded
on the Consolidated Balance Sheets as of those dates.



Allowances on accounts receivable are recorded when circumstances indicate collection is doubtful for particular accounts receivable or as a general reserve for all accounts receivable. Accounts receivable are written off if reasonable
collection efforts prove unsuccessful. Bad debt expense is reflected in other selling, general and administrative expenses on the Consolidated Statements of Operations when allowances on accounts receivable are increased or when accounts written off
exceed available allowances.



As of March 31, 2005, two
significant customers comprised 22% and 16%, respectively, of the Companys accounts receivable. As of December 31, 2004, three significant customers comprised 23%, 14% and 12%, respectively, of the Companys accounts receivable and two of
the customers were affiliates of each other.



Costs and Estimated Gross
Margins in Excess of Billings and Billings in Excess of Costs and Estimated Gross Margins



Costs and estimated gross margins in excess of billings and billings in excess of costs and estimated gross margins relate to Interactive Media Practice Area projects for which revenue and cost of sales are being
recognized on a percentage of completion basis. For an individual project, costs and estimated gross margins in excess of billings consists of costs not yet recognized as cost of sales and estimated gross margins, net of amounts billed but not yet
recognized as revenue. For an individual project, billings in excess of costs and estimated gross margins consists of amounts billed but not yet recognized as revenue, net of costs which have not yet been recognized as cost of sales and estimated
gross margins associated with the project. Projects with costs and estimated gross margins in excess of billings are aggregated separately from projects with billings in excess of costs and estimated gross margins for presentation on the
Consolidated Balance Sheets.



11



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



Financial Instruments



As of March 31, 2005, the Companys Consolidated Balance Sheet includes a note payable with a principal balance of $1,000,000 related to the
acquisition of Allin Corporation of California (Allin Consulting-California). The principal balance of the note payable was recorded at the face value of the instrument. The principal balance and accrued interest were repaid to the
note-holders on April 15, 2005, the maturity date of the note.



Market Risk
Sensitive Instruments



The Company currently has not
invested in derivative financial instruments or other market rate sensitive instruments.



Stock-Based Compensation



The Company elected to account for stock-based compensation plans under the intrinsic value method established by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB No. 25), as
permitted by Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). Had compensation costs for the Companys Plans been determined consistent with SFAS No. 123, pro
forma compensation cost, net income and earnings (loss) per share would have been as follows:



|                                                                          |  |      |       |   |      |   |       |  
|------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|Three Months ended March 31 (Dollars in thousands, except per share data) |  | 2004 |       |   | 2005 |  
|As reported:                                                              |  |      |       |   |      |   |       |  
|Stock-based employee compensation cost, net of tax                        |  | $    |      |   |      | $ |      |  
|Net income (loss)                                                         |  |      | 182   |   |      |   | (174  | )
|Net income (loss) attributable to common shareholders                     |  |      | 1     |   |      |   | (361  | )
|Earnings (loss) per share  basic and diluted                             |  | $    | 0.00  |   |      | $ | (0.05 | )
|                                                                          |  |     
|Pro forma                                                                 |  |      |       |   |      |   |       |  
|Stock-based employee compensation cost, net of tax                        |  | $    | 15    |   |      | $ | 8     |  
|Net income (loss)                                                         |  |      | 167   |   |      |   | (182  | )
|Net loss attributable to common shareholders                              |  |      | (14   | ) |      |   | (369  | )
|Loss per share  basic and diluted                                        |  | $    | (0.00 | ) |      | $ | (0.05 | )



Recently Issued Accounting
Standards



In December 2004, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), which replaces SFAS No. 123 and supercedes APB No. 25. SFAS No. 123R requires all
share-based payments, including grants of stock options, to be recognized in the financial statements based on their fair values. In April 2005 the deadline for adoption of SFAS No. 123R was revised such that the requirement will become effective
for the first annual period beginning after December 15, 2005. The pro forma disclosures previously permitted under SFAS No. 123 (See Stock-Based Compensation above) will no longer be an alternative to financial statement recognition after
adoption of SFAS No. 123R. The Company will be required to adopt SFAS No. 123R beginning January 1, 2006. SFAS No. 123R requires determination of the appropriate fair value model to be used for valuing share-based payments, the amortization method
for compensation cost and the transition method to be used at the date of adoption. The transition methods include prospective and retroactive alternatives. Under the retroactive method, prior periods may be restated either as of the beginning of
the year of adoption or for all periods presented, with compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The prospective method requires that compensation expense be recorded for all
unvested stock options and restricted stock at the beginning of the period of adoption of SFAS No. 123R. The Company is evaluating the requirements of SFAS No. 123R and has not yet determined the method of adoption or the effect that adoption of the
new standard will have on the Companys results of operations or financial condition.



12



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



Supplemental Disclosure of Cash Flow Information



Cash payments for income taxes were approximately $6,000 during the three-month period ended March 31, 2004. There were no cash payments for income taxes
during the three-month period ended March 31, 2005. Cash payments for interest were approximately $19,000 and $20,000 during the three-month periods ended March 31, 2004 and 2005, respectively. Cash payments of dividends were approximately $89,000
during each of the three-month periods ended March 31, 2004 and 2005. Dividends of approximately $164,000 and $169,000 were accrued but unpaid during the three-month periods ended March 31, 2004 and 2005, respectively, on outstanding shares of the
Companys preferred stock.



2. Preferred Stock



The Company has the authority to issue 100,000 shares of preferred stock
with a par value of $.01 per share. Of the authorized shares, 40,000 have been designated as Series A Convertible Redeemable Preferred Stock, 5,000 as Series B Redeemable Preferred Stock, 25,000 as Series C Redeemable Preferred Stock, 2,750 as
Series D Convertible Redeemable Preferred Stock, 2,000 as Series E Convertible Redeemable Preferred Stock, 1,000 as Series F Convertible Redeemable Preferred Stock and 150 as Series G Convertible Redeemable Preferred Stock. As of March 31, 2005, the
Company has outstanding 25,000, 2,750, 1,000 and 150 shares of Series C, D, F and G preferred stock, respectively. The Company will not issue any additional shares of any of its existing series of preferred stock. The order of liquidation preference
of the series of the Companys outstanding preferred stock, from senior to junior, is Series F, Series G, Series D and Series C.



3. Equity Transactions and Changes in Shareholders Equity



Options to purchase a total of 984,128 shares of the Companys common stock granted under the Companys 1996, 1997, 1998 and 2000 Stock Plans
(collectively the Stock Plans) were outstanding as of March 31, 2005. During the three months ended March 31, 2005, the Company awarded options to purchase 5,000 shares of the Companys common stock under the Stock Plans. The grant
price was $0.245 per share, which was the closing market price of the Companys common stock on the grant date. These options to purchase common shares will fully vest on the first anniversary of the grant date. There was no compensation
expense recognized in conjunction with the award of the options. During the three months ended March 31, 2005, vested and non-vested options to purchase 1,560 and 640 shares, respectively, were forfeited under the terms of the Stock Plans. Also,
during this period, options to purchase 5,600 shares expired.



Information concerning changes to Series G preferred stock and additional paid-in-capital during the three months ended March 31, 2005 is as follows:



|                                                     |  |                         |       |                           |   |        |  
|---------------------------------------------------- |  | ----------------------- | ----- | ------------------------- | - | ------ | -
|(Dollars in thousands)                               |  | Series GPreferred Stock |       | AdditionalPaid-in-Capital |  
|Balance, December 31, 2004                           |  | $                       | 1,067 |                           | $ | 39,466 |  
|Accretion of Series G preferred stock offering costs |  |                         | 4     |                           |   | (4     | )
|Dividends accrued on preferred stock                 |  |                         |      |                           |   | (183   | )
|                                                     |  |                         |       |                           |   |        |  
|Balance, March 31, 2005                              |  | $                       | 1,071 |                           | $ | 39,279 |  
|                                                     |  |                         |       |                           |   |        |  



There were no
changes to the other components of shareholders equity during this period other than the increase in accumulated deficit resulting from the net loss realized for the three months ended March 31, 2005.



13



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



4. Line of Credit



On October 1, 1998, the Company and S&T Bank, a Pennsylvania banking association, entered into a Loan and Security Agreement, under which S&T Bank
agreed to extend the Company a revolving credit loan. The original term of the revolving credit loan was one year and it has subsequently been renewed for six annual periods. The current expiration date of the revolving credit loan is September 30,
2005. Borrowings may be made under the S&T Loan Agreement for general working capital purposes. The maximum borrowing availability under the revolving credit loan is the lesser of $5,000,000 or 80% of the aggregate gross amount of eligible trade
accounts receivable aged sixty days or less from the date of invoice. Accounts receivable qualifying for inclusion in the borrowing base are net of any prepayments, progress payments, deposits or retention and must not be subject to any prior
assignment, claim, lien, or security interest.



As of March 31,
2005, maximum borrowing availability under the revolving credit loan was approximately $1,834,000. There was no outstanding balance as of this date. Loans made under the revolving credit loan bear interest at the banks prime interest rate plus
one percent. During the three months ended March 31, 2005, the rate of interest on any outstanding borrowings under the revolving credit loan would have ranged from 6.25% to 6.75%. As of March 31, 2005, the interest rate in effect was 6.75%.



The revolving credit loan includes provisions granting S&T
Bank a security interest in certain assets of the Company including its accounts receivable, equipment, lease rights for real property, and inventory. The revolving credit loan also includes reporting requirements regarding annual audit reports,
monthly financial reports, monthly accounts receivable and payable reports and weekly borrowing base certificates. The revolving credit loan also includes various covenants relating to matters affecting the Company including insurance coverage,
financial accounting practices, audit rights, prohibited transactions, dividends and stock purchases. The covenants also include a cash flow to interest ratio of not less than 1.0 to 1.0. Cash flow is defined as operating income before depreciation,
amortization and interest. The cash flow coverage ratio is measured for each of the Companys fiscal quarters. The Company was not in compliance with the cash flow covenant for the fiscal quarter ended March 31, 2005. S&T Bank granted a
waiver of the compliance requirement for this period. The Company is in compliance with all other covenants as of March 31, 2005.



5. Goodwill and Intangible Assets



The Company follows Statements of Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141), No. 142,Goodwill
and Other Intangible Assets (SFAS No. 142), and No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS Nos. 141 and 142 set forth guidance for recording business combinations
and required annual testing for potential impairment of goodwill. SFAS No. 144 sets forth standards for testing for the potential impairment of long-lived assets, including amortized intangible assets. Under SFAS No. 142, goodwill is not amortized,
but separable intangible assets that are deemed to have definite lives are amortized over their useful lives. Goodwill and intangible assets associated with acquisitions prior to 2002 were valued in accordance with Accounting Principals Board
Opinion No. 16, Accounting for Business Combinations.



As of March 31, 2005, the Companys Consolidated Balance Sheet includes goodwill associated with the 1996 acquisition of Allin Corporation of California (Allin Consulting-California), the 1998 acquisitions of Allin
Consulting of Pennsylvania, Inc. (Allin Consulting-Pennsylvania) and MEGAbase, Inc. and the 2004 acquisition of Accounting Technology Professionals, L.L.C. d/b/a Jimary Business Systems (Jimary Business Systems). Accumulated
amortization for goodwill represents amortization expense related to the 1996 and 1998 acquisitions from their respective acquisition dates through December 31, 2001, after which amortization of goodwill was discontinued upon the adoption of SFAS
No. 142. Amortized intangible assets include customer lists associated with the acquisitions of Allin Consulting-Pennsylvania, Jimary Business Systems and the 2004 acquisition of McCrory & McDowell LLCs Computer Resources division
(Computer Resources) and a non-competition agreement associated with the Jimary Business Systems acquisition. Information concerning these assets is as follows:



|                                            |  |                      |       |                         |   |                    |  |   |      
|------------------------------------------- |  | -------------------- | ----- | ----------------------- | - | ------------------ |  | - | -----
|As of March 31, 2005 (Dollars in thousands) |  | Gross CarryingAmount |       | AccumulatedAmortization |   | Net CarryingAmount
|Amortized intangible assets                 |  |                      |       |                         |   |                    |  |   |      
|Customer lists                              |  | $                    | 2,080 |                         | $ | 1,004              |  | $ | 1,076
|Non-competition agreement                   |  |                      | 33    |                         |   | 4                  |  |   | 29   
|                                            |  |                      |       |                         |   |                    |  |   |      
|Total amortized intangible assets           |  | $                    | 2,113 |                         | $ | 1,008              |  | $ | 1,105
|                                            |  |                      |      
|Unamortized intangible assets               |  |                      |       |                         |   |                    |  |   |      
|Goodwill                                    |  |                      | 4,738 |                         |   | 3,742              |  |   | 996  
|                                            |  |                      |       |                         |   |                    |  |   |      
|Total intangible assets                     |  | $                    | 6,851 |                         | $ | 4,750              |  | $ | 2,101
|                                            |  |                      |       |                         |   |                    |  |   |      



14



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



The customer list associated with the acquisition of Allin Consulting-Pennsylvania was amortized during the three-month periods ended March 31, 2004 and
2005 utilizing an estimated useful life extending through 2013. The customer lists associated with the Computer Resources and Jimary Business Systems acquisitions are being amortized over estimated useful lives extending through 2009. The
non-competition agreement is being amortized over the term of three years.



The Company performs annual tests for potential impairment of goodwill and intangible assets as of December 31 of each fiscal year. Key risk factors are monitored throughout the fiscal year and testing for potential
impairment of goodwill or other intangible assets will be performed on an interim basis if indicators of potential impairment arise.



Testing for potential impairment of goodwill involves an attribution of the recognized assets of the acquired businesses, including cash, accounts
receivable, prepaid expenses, deferred tax assets, property and equipment, customer list and goodwill, net of accounts payable, accrued liabilities and deferred revenue, to reporting units. The reporting units utilized are the Companys
reported segments applicable to the acquired businesses, Technology Infrastructure, Collaborative Solutions, Business Process, Outsourced Services and Information System Product Sales, further broken down geographically between Northern
California-based and Pittsburgh-based operations. Recognized assets are attributed to reporting units in a manner consistent with that used for segment reporting. Management utilizes industry information for public technology consulting businesses
to develop assumptions for appropriate revenue multiples for estimating the fair values of the reporting units. Estimated fair values are compared to the attributed recognized assets for each reporting unit, and an impairment loss is recognized to
the extent that attributed assets exceed the estimated fair value of any reporting unit. Key risk factors the Company monitors to evaluate the value of goodwill are the valuation multiple and the revenue levels of the reporting units. Significant
declines in these factors could indicate potential impairment of goodwill.



To test for potential impairment of the customer lists, the Company utilizes a cash flow model to estimate fair value. The critical estimates are determination of the proportions of the estimated cash flow of Allin
Consulting-Pennsylvania for the applicable segments attributed to the acquired customer lists in each period and the assumed growth of the overall business operations. Management utilizes historical information related to business derived from the
customers included on the acquired lists, future projections for the operations of Allin Consulting-Pennsylvania and industry information concerning expected growth in the technology consulting industry to develop estimates of future cash flows for
Allin Consulting-Pennsylvania and the portions of the estimated cash flows attributed to the customer lists. If the sum of the undiscounted cash flows attributable to a customer list exceeds the recognized value of the customer list, no impairment
is indicated. If the sum of the undiscounted cash flows is less than the recognized value, an impairment loss is recognized for the difference between the recognized value and the sum of the discounted cash flows attributable to the customer list.
Key risk factors the Company monitors to evaluate the recorded value of the customer lists are forecast growth rates for the technology consulting industry and revenue derived from customers on the acquired lists. Significant declines in these
factors could indicate potential impairment of the customer lists.



15



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



Goodwill  Changes in Recognized Value and Impairment Losses



The table below reflects the changes in recognized value of goodwill from January 1, 2004 through March 31, 2005, by reportable segment.



|                                 |  |                       |     |                 |   |                         |  |   |    
|-------------------------------- |  | --------------------- | --- | --------------- | - | ----------------------- |  | - | ---
|Dollars in thousands             |  | BalanceJanuary 1,2004 |     | 2004Acquisition |   | BalanceDecember 31,2004
|Attributed Segment:              |  |                       |     |                 |   |                         |  |   |    
|Technology Infrastructure        |  | $                     | 215 |                 | $ |                        |  | $ | 215
|Collaborative Solutions          |  |                       | 494 |                 |   |                        |  |   | 494
|Business Process                 |  |                       |    |                 |   | 166                     |  |   | 166
|Outsourced Services              |  |                       | 81  |                 |   |                        |  |   | 81 
|Information System Product Sales |  |                       |    |                 |   | 40                      |  |   | 40 
|                                 |  |                       |     |                 |   |                         |  |   |    
|Total                            |  | $                     | 790 |                 | $ | 206                     |  | $ | 996
|                                 |  |                       |     |                 |   |                         |  |   |    



The estimated fair
values of all reporting units exceeded the recognized assets attributed to the reporting units indicating no impairment of goodwill in annual testing performed as of December 31, 2004.



Customer List  Impairment Loss



Industry information utilized for the annual testing as of December 31, 2004 indicated a lowering of long-term growth rates for the technology consulting
industry. The factors noted as reasons for the reduction include expectations that future growth will closely correlate with expectations of overall economic conditions, that economic return requirements will continue to be a constraint on future
growth prospects and the impact of outsourcing of business to offshore information technology enterprises on domestic information technology service providers. With assumed long-term growth rates lowered, the December 31, 2004 test indicated that
undiscounted projected cash flows attributed to the customer list associated with the acquisition of Allin Consulting-Pennsylvania did not exceed the recorded value of the customer list. The Company recorded a loss of approximately $191,000 in the
year ended December 31, 2004 to reflect the impairment of this customer list and adjust the recognized value of the list to the estimated level of discounted cash flows attributable to the customer list. No impairment was indicated in the tests of
the customer lists associated with the 2004 acquisitions of Computer Resources and Jimary Business Systems.



Amortization Expense



Information regarding aggregate amortization expense recorded during the three-month periods ended March 31, 2004 and 2005, and expected through December 31, 2010, follows.



|                                            |  |   |    
|------------------------------------------- |  | - | ---
|Amortization Expense (Dollars in
thousands) |  |  
|Recorded expense for the:                   |  |   |    
|Three months ended March 31, 2004           |  | $ | 26 
|Three months ended March 31, 2005           |  |   | 42 
|                                            | 
|Estimated expense to be recognized for the: |  |   |    
|Year ended December 31, 2005                |  |   | 169
|Year ended December 31, 2006                |  |   | 169
|Year ended December 31, 2007                |  |   | 168
|Year ended December 31, 2008                |  |   | 158
|Year ended December 31, 2009                |  |   | 158
|Year ended December 31, 2010                |  |   | 81 



16



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



6. Income Taxes



The Company records current and deferred provisions for or benefits from income taxes and deferred tax assets and liabilities in accordance with the
requirements of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases using enacted tax rates expected
to be in effect for the year in which the differences are expected to reverse. Valuation allowances will reduce deferred tax assets if there is material uncertainty as to the ultimate realization of the deferred tax benefits.



The Companys results of operations in future periods are subject to a
number of material risks, including risks arising from concentrations related to the operations of the Interactive Media Practice Area, where in recent periods revenue has resulted from a small number of large projects each year. Furthermore, these
projects have been performed for a small number of customers concentrated in one industry. The Companys Interactive Media revenue declined significantly during the three-month period ended March 31, 2005 as compared to the three-month period
ended March 31, 2004 and may continue to decline in future periods if the Company fails to obtain additional projects from existing or new customers.



Valuation allowances have been recorded based on the Companys realizability estimates such that the Companys Consolidated Balance Sheets
include net deferred tax assets of $138,000 as of December 31, 2004 and March 31, 2005. Valuation allowances offset any additional net deferred tax assets. Management believes it is more likely than not that the recognized deferred tax assets will
be realized in future periods. During 2004, the Company realized benefits from the use of previously recorded deferred tax assets for net operating loss carryforwards to reduce taxable income. Given the risks associated with the Companys
operations, the Company believes that material uncertainty continues to exist as to the long-term realization of deferred tax benefits greater than the recognized balance as of March 31, 2005. Management assesses the realizability of deferred tax
assets quarterly and adjusts the valuation allowance based on its assessment. The valuation allowance was reduced by $48,000 during the first quarter of 2004 and increased by $97,000 during the first quarter of 2005.



The provision for income taxes is comprised of the following for the
three-month periods ended March 31, 2004 and 2005:



|                                                   |  |      |     |   |      |   |     |  
|-------------------------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|Three Months ended March
31 (Dollars in thousands) |  | 2004 |     |   | 2005 |  
|Current                                            |  |      |     |   |      |   |     |  
|Federal                                            |  | $    | 1   |   |      | $ |    |  
|State                                              |  |      | 2   |   |      |   |    |  
|                                                   |  |      |     |   |      |   |     |  
|Total current                                      |  |      | 3   |   |      |   |    |  
|Deferred                                           |  |      | 48  |   |      |   | (97 | )
|Valuation Allowance                                |  |      | (48 | ) |      |   | 97  |  
|                                                   |  |      |     |   |      |   |     |  
|Total income tax provision                         |  | $    | 3   |   |      | $ |    |  
|                                                   |  |      |     |   |      |   |     |  



17



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



A reconciliation of income taxes computed at the statutory federal income tax rate of 34% to the (benefit) provision for income taxes reflected in the
Statements of Operations is as follows for the three-month periods ended March 31, 2004 and 2005:



|                                                               |  |      |     |   |      |   |     |  
|-------------------------------------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|Three Months ended March 31 (Dollars in thousands)             |  | 2004 |     |   | 2005 |  
|Estimated provision for income taxes at federal statutory rate |  | $    | 63  |   |      | $ | (59 | )
|                                                               |  |     
|Non-deductible intangible asset                                |  |      | 9   |   |      |   | 7   |  
|State income tax benefit, net of federal effect                |  |      | (12 | ) |      |   | (38 | )
|Change in valuation allowance                                  |  |      | (48 | ) |      |   | 97  |  
|Change in estimates and other                                  |  |      | (9  | ) |      |   | (7  | )
|                                                               |  |      |     |   |      |   |     |  
|Provision for income taxes                                     |  | $    | 3   |   |      | $ |    |  
|                                                               |  |      |     |   |      |   |     |  



The components of the
deferred tax assets, as of December 31, 2004 and March 31, 2005, are as follows:



|                                           |  |                  |        |   |               |   |        |  
|------------------------------------------ |  | ---------------- | ------ | - | ------------- | - | ------ | -
|Deferred Tax Assets (Dollars in
thousands) |  | December 31,2004 |        |   | March 31,2005 |  
|Deferred tax assets:                       |  |                  |        |   |               |   |        |  
|Net operating loss carryforward            |  | $                | 7,732  |   |               | $ | 7,848  |  
|Intangible asset differences               |  |                  | 491    |   |               |   | 477    |  
|Miscellaneous                              |  |                  | 47     |   |               |   | 42     |  
|                                           |  |                  |        |   |               |   |        |  
|                                           |  |                  | 8,270  |   |               |   | 8,367  |  
|Valuation allowance                        |  |                  | (8,132 | ) |               |   | (8,229 | )
|                                           |  |                  |        |   |               |   |        |  
|Net deferred tax assets                    |  | $                | 138    |   |               | $ | 138    |  
|                                           |  |                  |        |   |               |   |        |  



As of March 31, 2005,
the Company estimates its potentially realizable net operating loss carryforwards are approximately $20,225,000 and $19,191,000 for federal and state income tax purposes, respectively. The realization of the potential federal and state tax benefits
related to net operating loss carryforwards, estimated to be approximately $6,877,000 and $971,000, respectively, as of March 31, 2005, depends on the Companys ability to generate future taxable income. The net operating loss carryforwards are
scheduled to expire at various times from 2005 through 2025. The Company files state income tax returns for California on a unitary basis. Tax returns for other states in which the Company or subsidiaries operate are filed on a single corporation
basis, which may limit the Companys ability to realize benefits related to net operating loss carryforwards.



Cash payments for income taxes were $6,000 during the three-month period ended March 31, 2004. There were no cash payments for income taxes during the
three-month period ended March 31, 2005.



7. Industry Segment Information



The Company follows Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131), as the basis for determining its segments. SFAS No. 131 requires use of a model for segment reporting called the
management approach. The management approach is based on the way the chief operating decision maker organizes segments within a company for making decisions and assessing performance.



18



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



Basis for Determining Segments



The Companys operations and managements evaluations are primarily oriented around four practice areas meeting customer needs for
Microsoft-based technology and interactive media services: Technology Infrastructure, Collaborative Solutions, Business Process and Interactive Media. The operations of these practice areas comprise the substantial majority of the Companys
revenue and gross profit and are closely associated with its strategic focus of providing solutions-oriented consulting and systems integration services. The reportable segments related to these practice areas reflect aggregated practice area
activity across the Companys subsidiaries due to the similarity in nature of services, processes, types of customers and distribution methods for the practice areas.



During the second quarter of 2004 certain terminology regarding the Companys operations was changed as a result of
managements ongoing review of the Companys business and direction. The Company now utilizes the term practice area to denote its core operating functions, whereas the term solution area had been previously used. Also, the practice area
formerly known as E-Business was renamed Collaborative Solutions. Management believes Collaborative Solutions better reflects the broad scope of the practice area, including portals and information workflow solutions, business intelligence solutions
and applications development and deployment. Revenue and gross profit for the three-month period ended March 31, 2004 reported for Collaborative Solutions was previously reported as E-Business Consulting in the Companys Report on Form 10-Q for
the period ended March 31, 2004.



The Companys reported
segments are the following: Technology Infrastructure, Collaborative Solutions, Business Process, Interactive Media Consulting, Interactive Media Systems Integration, Outsourced Services, Information System Product Sales and Other Services. Business
Process was initially reported as a separate segment in the Companys Report on Form 10-K for the fiscal year ended December 31, 2004. The level of Business Process consulting services provided by the Company increased significantly following
the November 2004 acquisitions of Computer Resources and Jimary Business Systems. The Companys management expects that the level of Business Process services to be realized during 2005 will increase as compared to revenue realized during 2004
due to inclusion of the acquired operations in the Companys results for the entire year of 2005. Management consequently determined that Business Process should be reported as a separate segment. Revenue and gross profit for the three-month
period ended March 31, 2004 for the Business Profit segment were previously reported as part of the Collaborative Solutions segment. These amounts have been reclassified to conform to the current reporting format.



On the Companys Consolidated Statements of Operations, the first four
of the segments are aggregated and captioned as Consulting services while the segment Interactive Media Systems Integration corresponds with the Integration services caption. The Outsourced Services, Information System Product Sales and Other
Services segments correspond with matching captions on the Consolidated Statements of Operations.



Measurement Method



The
Companys basis for measurement of segment revenue, gross profit and assets is consistent with that utilized for the Companys Consolidated Statements of Operations and Consolidated Balance Sheets. There are no differences in measurement
method.



Segment revenue for the three-month period ended March
31, 2004 reflects a reclassification on the Consolidated Statement of Operations. Amounts billed to customers for recovery of out-of-pocket costs associated with performance of the Companys services during this period is now reflected as Other
Services revenue. Previously, amounts billed were netted against the costs. The reclassification has no impact on previously reported information on gross profit.



19



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



Revenue



Information on revenue derived from external customers is as follows:



|                                             |  |                                |       |      |   |      
|-------------------------------------------- |  | ------------------------------ | ----- | ---- | - | -----
|(Dollars in thousands)                       |  | Revenue from ExternalCustomers
|Three Months ended March 31                  |  | 2004                           |       | 2005
|Technology Infrastructure                    |  | $                              | 874   |      | $ | 643  
|Collaborative Solutions                      |  |                                | 758   |      |   | 1,026
|Business Process                             |  |                                | 52    |      |   | 318  
|Interactive Media Consulting                 |  |                                | 489   |      |   | 461  
|Interactive Media Systems Integration        |  |                                | 903   |      |   | 152  
|Outsourced Services                          |  |                                | 162   |      |   | 160  
|Information System Product Sales             |  |                                | 98    |      |   | 248  
|Other Services                               |  |                                | 20    |      |   | 67   
|                                             |  |                                |       |      |   |      
|Consolidated Revenue from External Customers |  | $                              | 3,356 |      | $ | 3,075
|                                             |  |                                |       |      |   |      



Certain of the
Companys segments performed services for related entities. All revenue recorded for these services is eliminated in consolidation. Information on revenue derived from services for and product sales to related entities is as follows:



|                                    |  |                              |   |      |   |   
|----------------------------------- |  | ---------------------------- | - | ---- | - | --
|(Dollars in thousands)              |  | Revenue from RelatedEntities
|Three Months ended March 31         |  | 2004                         |   | 2005
|Services for Other Segments         |  | $                            | 7 |      | $ | 13
|                                    |  |                              |   |      |   |   
|Total Revenue from Related Entities |  | $                            | 7 |      | $ | 13
|                                    |  |                              |   |      |   |   



Gross Profit



Gross profit is the segment profitability measure that the Companys
management believes is determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in the Companys consolidated financial statements. Revenue and cost of sales for services
performed for related entities is eliminated in calculating gross profit. Information on gross profit is as follows:



|                                      |  |              |       |      |   |      
|------------------------------------- |  | ------------ | ----- | ---- | - | -----
|(Dollars in thousands)                |  | Gross Profit
|Three Months ended March 31           |  | 2004         |       | 2005
|Technology Infrastructure             |  | $            | 492   |      | $ | 354  
|Collaborative Solutions               |  |              | 396   |      |   | 558  
|Business Process                      |  |              | 29    |      |   | 198  
|Interactive Media Consulting          |  |              | 324   |      |   | 419  
|Interactive Media Systems Integration |  |              | 480   |      |   | 80   
|Outsourced Services                   |  |              | 33    |      |   | 36   
|Information System Product Sales      |  |              | 37    |      |   | 71   
|Other Services                        |  |              | 8     |      |   | 46   
|                                      |  |              |       |      |   |      
|Consolidated Gross Profit             |  | $            | 1,799 |      | $ | 1,762
|                                      |  |              |       |      |   |      



20



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



Assets



Information on total assets attributable to segments is as follows:



|                                      |  |                  |       |               |   |      
|------------------------------------- |  | ---------------- | ----- | ------------- | - | -----
|(Dollars in thousands)                |  | Total Assets    
|As of                                 |  | December 31,2004 |       | March 31,2005
|Technology Infrastructure             |  | $                | 1,601 |               | $ | 1,412
|Collaborative Solutions               |  |                  | 1,689 |               |   | 2,068
|Business Process                      |  |                  | 701   |               |   | 841  
|Interactive Media Consulting          |  |                  | 501   |               |   | 345  
|Interactive Media Systems Integration |  |                  | 739   |               |   | 514  
|Outsourced Services                   |  |                  | 417   |               |   | 423  
|Information System Product Sales      |  |                  | 342   |               |   | 321  
|Other Services                        |  |                  | 64    |               |   | 31   
|Corporate & Other                     |  |                  | 2,697 |               |   | 2,088
|                                      |  |                  |       |               |   |      
|Consolidated Total Assets             |  | $                | 8,751 |               | $ | 8,043
|                                      |  |                  |       |               |   |      



Information about Major Customers



A significant portion of the Companys revenue for
the three-month periods ended March 31, 2004 and 2005 was derived from a small number of customers. Furthermore, the major customers listed below utilizing the Interactive Media Practice Area are concentrated in the cruise industry. A loss of any of
these major customers or a significant decline in the level of services provided to any of the customers could significantly negatively impact the Companys future results of operations and financial condition.



|                                  |  |                                  |   |  |                                                                                                                      
|--------------------------------- |  | -------------------------------- | - |  | ---------------------------------------------------------------------------------------------------------------------
|Revenue (Dollars in
thousands)    |  | Percentage ofConsolidatedRevenue |   |  | Segments Included                                                                                                    
|Three Months Ended March 31, 2004 |  |                                  |   |  |                                                                                                                      
|718                               |  | 21                               | % |  | Interactive Media Consulting, Interactive Media Systems Integration, Information System Product Sales, Other Services
|                                  |  |                                 
|661                               |  | 20                               | % |  | Interactive Media Consulting, Interactive Media Systems Integration, Information System Product Sales, Other Services
|                                  |  |                                 
|Three Months Ended March 31, 2005 |  |                                  |   |  |                                                                                                                      
|572                               |  | 18                               | % |  | Interactive Media Consulting, Interactive Media Systems Integration, Information System Product Sales, Other Services
|                                  |  |                                 
|448                               |  | 14                               | % |  | Technology Infrastructure, Collaborative Solutions                                                                   



Information about Major Suppliers



The Company purchases materials, including interactive
television equipment, computer hardware, networking equipment and software, to be utilized in the operations of the Interactive Media Systems Integration and Information System Product Sales segments. Over 2004 and the first quarter of 2005, these
materials purchases were highly concentrated with two major suppliers.



21



---

##### Table of Contents

Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements  (Continued)



The Company operates under a License and Supply Agreement with one of the major suppliers. The current agreement became effective June 30, 2003 and has a
term of five years, expiring on June 30, 2008. Under the terms of the License and Supply Agreement, the supplier granted Allin Interactive exclusivity in purchasing hardware and end-user components for interactive television systems for the cruise
line market. Such exclusivity shall be in effect for the first two years of the term and for each succeeding year of the term if a minimum threshold for equipment purchases over the preceding two years has been attained. Allin Interactive is not
obligated to purchase equipment, but risks the loss of exclusivity if purchases are less than the threshold level. The Companys management does not expect that the exclusivity threshold for the first two years of the term will be reached and
consequently, the Company expects to lose its exclusivity in purchasing hardware and end-user components for interactive television systems for the cruise line market after June 30, 2005. Such loss of exclusivity may negatively impact Interactive
Medias competitive position and consequently, may negatively impact the Companys results of operations or financial condition in future periods. During the three-month periods ended March 31, 2004 and 2005, respectively, 76% and 65% of
materials purchases were from the this major supplier.



The
increase in the level of Business Process services provided by the Company in 2004 and the first quarter of 2005 also resulted in a significant increase in revenue for the Information System Product Sales segment as the sale of financial software
products is actively promoted in conjunction with Business Process operations. Purchases of the financial software products are concentrated with one significant supplier. During the three-month periods ended March 31, 2004 and 2005, respectively,
19% and 9% of materials purchases were from this major supplier.



22



---

##### Table of Contents

Item 2.



Managements
Discussion and Analysis of

Financial Condition and Results of Operations



The following discussion and analysis by management provides
information with respect to the financial condition and results of operations of Allin Corporation (the Company) for the three-month periods ended March 31, 2004 and 2005. This discussion should be read in conjunction with the
information in the consolidated financial statements and the notes pertaining thereto contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2004, the information in the consolidated financial statements and the
notes pertaining thereto contained in Item 1  Financial Statements - in this Report on Form 10-Q and the information discussed herein under Risk Factors. Unless the context otherwise requires, all references herein to the
Company refer to Allin Corporation and its subsidiaries. All references to Microsoft refer to Microsoft Corporation.



Certain terminology regarding the Companys operations was changed during the second quarter of 2004 and consequently differs from that used in the
Companys Report on Form 10-Q for the period ended March 31, 2004. The Company now utilizes the term practice area to denote its core operating functions, whereas the term solution area was previously used. Also, the practice area formerly
known as E-Business was renamed Collaborative Solutions. Management believes Collaborative Solutions better reflects the broad scope of the practice area, including portals and information workflow solutions, business intelligence solutions and
applications development and deployment.



The Company commenced
the operations of its Business Process Practice Area in December 2003. However, the Company did not report revenue and gross profit for Business Process as a separate segment prior to its Report on Form 10-K for the fiscal year ended December 31,
2004. The Companys management believed that as a result of the acquisition of two businesses in late 2004, Business Process operations had increased in significance to the Company and thereafter merited reporting as a separate segment. In the
Companys Report on Form 10-Q for the period ended March 31, 2004, Business Process operations were included as part of the Collaborative Solutions segment. Information regarding this period for the Collaborative Solutions Practice Area has
been reclassified to conform to the current presentation.



In
the following Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report on Form 10-Q, words such as believes, expects, intends,
will, seek, continue, pursue and other similar expressions, are intended to identify forward-looking information that involves risks and uncertainties. In addition, any statements that refer to
expectations or other characterizations of future events or circumstances are forward-looking statements. Actual results and outcomes could differ materially as a result of important factors including, among other things, committed backlog, practice
area and customer concentration, fluctuations in operating results, competitive market conditions in the Companys existing lines of business, supplier agreement exclusivity, geopolitical considerations, liquidity and credit risk, dependence on
key personnel, public market and trading issues and technological obsolescence, as well as other risks and uncertainties. See Risk Factors below.



Overview of Organization, Operations & Markets



Allin Corporation is a leading provider of Microsoft-focused information technology and interactive media-based consulting and systems integration
services. The Company designs, develops and deploys enterprise-quality platforms, systems and applications that provide customers with the agility necessary to compete in todays fast-paced business climate. The Companys operations center
on four practice areas: Technology Infrastructure, Collaborative Solutions, Business Process and Interactive Media. The Company leverages its experience in these areas through a disciplined project framework to deliver technology solutions that
address customer needs on time and on budget. The Company is headquartered in Pittsburgh, Pennsylvania with additional offices located in San Jose and Walnut Creek, California and Ft. Lauderdale, Florida.



23



---

##### Table of Contents

A brief description of the Companys practice areas follows:



| |  | The Technology Infrastructure Practice Area focuses on customers network and application architecture, messaging and collaboration systems, operations management and
security issues. Technology Infrastructure designs and implements enterprise-quality systems based on Microsoft technology that maximize network availability and efficiency and enable customers to reduce costs and protect vital resources. Services
include network architecture and application design, evaluation of customer operating systems and database platforms, design and deployment of messaging and collaboration infrastructure to store and share information, and evaluation and upgrading of
operations management and information system security procedures. Technology Infrastructure consulting services are provided from the Companys Northern California and Pittsburgh offices. Technology Infrastructure revenue represented 29% and
21% of the Companys consolidated revenue during 2004 and the first quarter of 2005, respectively.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Collaborative Solutions Practice Area provides portals and information workflow solutions, business intelligence solutions, customized application development based on
the Microsoft .NET framework and enterprise project management solutions. Collaborative Solutions enables organizations to evaluate and streamline key business activities and optimize the creation, storage, sharing and retrieval of information.
Portal and workflow solutions ensure optimal delivery of information to employees, customers, partners and suppliers. Business intelligence solutions organize data into understandable information for strategic decision making. Collaborative
Solutions customized application development addresses needs for automated processes and streamlined workflows. Enterprise project management solutions enable customers to optimize use of resources, improve communication and collaboration
among team members and improve project performance. Collaborative Solutions services are provided from the Companys Northern California and Pittsburgh offices. Collaborative Solutions revenue represented 21% and 33% of the Companys
consolidated revenue during 2004 and the first quarter of 2005, respectively.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Business Process Practice Area provides services that help small and mid-size organizations across a broad array of industries automate processes, make more profitable
decisions, and accelerate growth. Business Process customizes and implements the full range of Microsoft Business Solutions software including Great Plains, Solomon and MS CRM. Great Plains-based solutions provide outstanding financial tools to
enhance the visibility and control of business information and the back office modules necessary to unify an organizations business processes. The Business Process Practice Area maximizes Solomons project-centric back office capabilities
by using its customization and integration tools to help customers implement project accounting best practices. Business Process designs and deploys MS CRM to assist businesses in the development of profitable customer relationships through lead and
opportunity management, incident management, a searchable knowledgebase and integrated reporting tools. Business Process services are provided from the Companys Pittsburgh office. Business Process revenue represented 3% and 10% of the
Companys consolidated revenue during 2004 and the first quarter of 2005, respectively.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Interactive Media Practice Area focuses on interactive media application development, technical architecture design, configuration and integration services. Interactive
Media provides cost-effective interactive television solutions that enable customers to improve service and increase productivity and revenue. Over forty applications have been developed by Interactive Media enabling customers to generate
incremental revenue, promote operating efficiencies and enhance customer service. Interactive Media solutions are Internet accessible and support highly-functional applications and high-end graphics and digital video content. Interactive Media
customers have historically been concentrated in the cruise industry and include some of the worlds largest cruise lines, Carnival Corporation & Plc. (Carnival), its affiliate, Costa Crociere S.p.A. (Costa), Royal
Caribbean Cruise Lines, Ltd. (Royal Caribbean) and its affiliate, Celebrity Cruises (Celebrity). Thirty-two shipboard interactive television systems installed by the Company since 1995 are currently in operation for Carnival,
Celebrity, Costa and Royal Caribbean. Management believes this represents the largest base of interactive television systems installed on cruise ships by any provider of interactive television services. During 2004 and the first quarter of 2005,
Carnival was a significant customer of the Company, accounting for 20% and 18%, respectively, of consolidated revenue, while its affiliate Costa accounted for an additional 7% and 1% of consolidated revenue during these periods. Interactive Media
activities are provided from the Companys Ft. Lauderdale office, near the most active concentration of cruise line operations in the United States. Interactive Media revenue represented 35% and 20% of the Companys consolidated revenue
during 2004 and the first quarter of 2005, respectively.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



---

##### Table of Contents

The following provides a summary of key financial information from the Companys Statements of
Operations for the three-month periods ended March 31, 2004 and 2005, as well as period-to-period percentage changes.



|                                           |      |                             |       |  |                      |       |   |  |      |   
|------------------------------------------ | ---- | --------------------------- | ----- |  | -------------------- | ----- | - |  | ---- | --
|(Dollars in thousands)                     |      | Three Months EndedMarch 31, |       |  | % Increase(Decrease) |      
|                                           | 2004 |                             | 2005  |  |                      | 2005  |  
|Statement of Operations Data:              |      |                             |       |  |                      |       |   |  |      |   
|Revenue                                    |      | $                           | 3,356 |  | $                    | 3,075 |   |  | (8   | )%
|Gross profit                               |      |                             | 1,799 |  |                      | 1,762 |   |  | (2   | )%
|Selling, general & administrative expenses |      |                             | 1,605 |  |                      | 1,928 |   |  | 20   | % 
|Net income (loss)                          |      |                             | 182   |  |                      | (174  | ) |  | (196 | )%



Comparing the three
months ended March 31, 2005 with the three months ended March 31, 2004, the Company experienced period-to-period declines in revenue of $281,000 and gross profit of $37,000. Significant period-to-period declines in revenue and gross profit resulted
from the operations of the Interactive Media and Technology Infrastructure Practice Areas. Revenue for Interactive Media and Technology Infrastructure declined by $779,000 and $231,000, respectively, comparing the first quarter of 2005 with the
first quarter of 2004. Interactive Media and Technology Infrastructure gross profit declined by $305,000 and $138,000, respectively, when comparing these periods. The declines were substantially offset by period-to-period improvement in the revenue
and gross profit realized by the Collaborative Solutions and Business Process Practice Areas. Revenue for Collaborative Solutions and Business Process increased by $268,000 and $266,000, respectively, comparing the first quarter of 2005 with the
first quarter of 2004, with corresponding respective period-to-period increases in gross profit of $162,000 and $169,000 for these practice areas. Revenue for consulting services provided by the four practice areas increased by $275,000, when
comparing the first quarters of 2004 and 2005, as the majority of the decline in revenue for the Interactive Media Practice Area resulted from systems integration, rather than consulting services.



The majority of the Interactive Media Practice Areas revenue and gross
profit in recent years has been derived from consulting and systems integration services for a small number of customers concentrated in the cruise industry. Interactive Medias operations during this period have typically included large
projects for interactive television system installations on newly-built cruise ships. During the first quarter of 2004, Interactive Media performed the majority of project activity related to two interactive system installation projects. However, as
a result of fewer new-build commitments among the Companys existing customers in 2005 than in 2004 and project scheduling, there were no comparable projects during the first quarter of 2005. Only one significant interactive television system
installation is among the projects included in the backlog as of March 31, 2005, the installation of a system on the Carnival Liberty, under an August 2004 amendment to a prior agreement with Carnival. The majority of activity for the
Carnival Liberty project is expected to occur during the second quarter of 2005. Committed backlog for Interactive Media consulting and systems integration services was $1,485,000 as of March 31, 2005, all of which is expected to be realized
over the remainder of 2005, as compared to $1,951,000 as of December 31, 2004. In addition to newly-built ships, management also focuses its sales efforts on interactive television systems for ships currently in service through ongoing efforts to
lower system costs and create programs that enhance cruise lines incremental revenue and return on investment. The Interactive Media Practice Areas operations in 2005 will be significantly impacted by the Companys ability to market
interactive television systems for ships currently in service, add new cruise industry customers or develop alternate markets for consulting and systems integration services based on interactive media.



Management believes the period from the fourth quarter of 2003 through 2004
reflected unusually high demand for the Technology Infrastructure Practice Area due to the release of pent-up demand for network architecture, server and storage upgrades, and demand driven by security concerns and related disaster recovery planning
following several years during which demand was negatively impacted by a significant curtailment in technology-based spending due to domestic economic conditions. Management attributes the decline in Technology Infrastructure revenue and gross
profit comparing the first quarters of 2004 and 2005 primarily to a return of



25



---

##### Table of Contents

demand to more normal levels in 2005. Comparable period-to-period increases in Collaborative Solutions revenue and gross
profit offset the declines for Technology Infrastructure. Management believes the unusually high demand for Technology Infrastructure services in 2004 caused a substitution effect whereby applications development and business intelligence projects
were deferred by customers while infrastructure-related projects were given a higher priority. Management believes that the deferred projects have resulted in increased demand for Collaborative Solutions services in 2005 that has offset the decline
in demand for Technology Infrastructure services. The significant increases in Business Process revenue and gross profit when comparing the first quarters of 2004 and 2005 resulted primarily from the acquisition of two businesses in November 2004
that specialized in services based on Microsoft Business Solutions technology. There can be no assurance that the Collaborative Solutions or Business Process Practice Areas will realize future revenue equal to or greater than current levels. The
Companys committed backlog for Technology Infrastructure, Collaborative Solutions and Business Process consulting was $2,019,000 as of March 31, 2005, as compared to approximately $1,445,000 as of December 31, 2004. All of the March 31, 2005
backlog is expected to be realized over the remainder of 2005.



The increase in selling, general & administrative expenses for the first quarter of 2005 as compared to the first quarter of 2004 was $323,000. The most significant contributing factor was an increase in the Companys workforce,
primarily for consultants for the Microsoft-focused practice areas. The general expenses of the Company include compensation related to non-billable time for the Companys consultants and, consequently, will often increase in periods when the
Company is adding to its productive workforce. The increase in selling, general & administrative expenses was the most significant factor in the period-to-period decline of $356,000 in the Companys profitability.



The Companys cash balance decreased from $3,091,000 as of December 31,
2004 to $2,356,000 as of March 31, 2005, a decline of $735,000. The most significant factors in the decline were net cash flows used by operating activities of $616,000, primarily as a result of changes in working capital and net cash flows used for
financing activities, primarily for payment of $89,000 in dividends on preferred stock. The Companys cash balance was diminished further during April 2005 due to repayment of a note with a principal balance of $1,000,000 and $79,000 of accrued
interest. The Companys cash balance may continue to decline over the remainder of 2005 due to the use of cash for operations, changes in working capital, capital expenditures, dividends on preferred stock and other factors. On the Consolidated
Balance Sheet as of March 31, 2005, the current portion of accrued dividends on preferred stock of $74,000 represents accrued dividends scheduled for payment within one year of March 31, 2005 while the non-current portion of accrued dividends on
preferred stock of $2,493,000 represents $2,452,000 of accrued dividends on the Companys Series C Redeemable Preferred Stock scheduled for payment within ten days of June 30, 2006 and $41,000 of accrued dividends on Series F Redeemable
Preferred Stock which is not required to be paid prior to redemption, if any. The Companys material obligations may result in significant cash payments in future periods beyond 2005. See Liquidity and Capital Resources following in this
Managements Discussion and Analysis of Financial Condition and Results of Operationsfor additional information concerning these and other future obligations of the Company.



The Company was organized as a Delaware corporation in July 1996 to act as a holding company for operating subsidiaries
which focus on particular aspects of the Companys business. As of March 31, 2005, the organizational legal structure consists of Allin Corporation and five subsidiaries. Allin Interactive Corporation (Allin Interactive), Allin
Corporation of California (Allin Consulting-California), Allin Consulting of Pennsylvania, Inc. (Allin Consulting-Pennsylvania) and Allin Network Products, Inc. (Allin Network) are operating subsidiaries focusing
on different aspects of the consulting and systems integration services provided by the Company. Allin Holdings Corporation (Allin Holdings) is a non-operating subsidiary that provides treasury management services to the Company. Since
1998, the Company has utilized the trade-names Allin Interactive, Allin Consulting and Allin Corporation in its operations. Management believes the trade names are recognized in the markets the Company serves. All trade- and brand-names included in
this Report on Form 10-Q are the property of their respective owners.



The Companys Allin Consulting subsidiaries are designated as Microsoft Gold Certified Partners and have been designated with Microsoft Competencies in recognition of the attainment of rigorous certification criteria and demonstrated
technical competency in providing complex business solutions. Both Allin Consulting-Pennsylvania and Allin Consulting-California are designated with the Advanced Infrastructure Solutions and Information Worker Solutions competencies, while Allin
Consulting-Pennsylvania has also been designated with the Security Solutions,



26



---

##### Table of Contents

Microsoft Business Solutions and Networking Solutions competencies. The Companys technical expertise and quality of
services have been recognized by Microsoft in two 2005 awards. Allin Consulting-California received the Q2 2005 Western Region Partner Competencies and Best Practices Award in recognition of exceptional expertise or competency by a partner. Allin
Consulting-Pennsylvania received the Microsoft Q1 2005 Greater Pennsylvania District Area Award in recognition of its outstanding achievement as a Microsoft Partner. The Company has also been recognized by Microsoft for demonstrated capabilities in
developing and deploying project management solutions, and has assisted Microsoft in building awareness of the capabilities of new products and encouraging associated implementation and applications development. The Company intends to continue its
specialization in Microsoft-based technology. Management believes that the Companys Microsoft gold-certified partner status and technical competency designations and past and current participation on Microsoft advisory councils and product
implementation teams provide it with the ability to quickly develop solutions capabilities for new Microsoft product offerings, which serves as a competitive advantage in the marketplace. Management also believes the Companys established
relationship with Microsoft will position the Company to benefit from any future growth in Microsofts infrastructure-, business intelligence- and business process-based products since Microsoft has historically relied extensively on third
party partners to provide custom development and integration services to businesses implementing their technology.



The Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas target businesses across a broad spectrum of industries,
ranging from relatively small organizations to Fortune 1000 companies seeking to achieve a competitive advantage through technology. The Company believes that businesses with annual revenue of up to $1 billion afford the Company the best
opportunities for offering solutions creating value for the customers and fostering the development of long-term business relationships. Management believes smaller to mid-market companies are more likely to utilize Microsoft-oriented information
technology than larger organizations and typically have less sophisticated internal technical resources. The Company will not, however, limit its marketing and sales efforts solely to customers of this size. Management believes the Technology
Infrastructure, Collaborative Solutions and Business Process Practice Areas can effectively compete on the basis of the quality and broad scope of their technological capabilities and on the basis of performance in meeting customer needs.



Management believes Interactive Medias extensive
experience in applications development and interactive televisions system implementation, the broad scope of developed applications, the large installed base of existing systems, and the cost effectiveness of the Companys scalable interactive
television solutions create competitive advantages for the Company over its competitors and make the Company the industry leader in providing interactive television services to the cruise market. The Company emphasizes these factors and the
availability of comprehensive support services in marketing Interactive Media services to the cruise industry. Interactive Medias management also evaluates opportunities for development and other consulting or systems integration services that
arise with organizations outside the cruise industry.



The
Company utilizes the Allin Solutions Framework for guiding the planning and conduct of the solutions-oriented projects performed by the Technology Infrastructure, Collaborative Solutions, Business Process and Interactive Media Practice Areas. The
Allin Solutions Framework assists customers in aligning their business and technology objectives, allows solution planning to draw upon a resource knowledge base developed through past projects and provides a solution development discipline for
organizing project teams and managing project lifecycles. The Allin Solutions Framework provides a foundation for planning and controlling projects based on scope, schedule and resources. The adaptable process includes four phases: The Solution
Vision phase articulates the ultimate goals for the solution and defines the solution scope and the project boundaries. The Solution Design phase focuses on the delivery and acceptance of the design specifications, test and project plans
and the schedule for solution development. The Solution Development phase results in the delivery of a functionally complete solution, ready for pilot usage. The Solution Deployment phase culminates in the production release of the
installed application, training and documentation, and conversion of, or integration with, existing systems.



The Companys Technology Infrastructure, Collaborative Solutions, Business Process and Interactive Media Practice Areas primarily deliver consulting
services that are either Allin-managed or co-managed with the customer. With the Allin-managed delivery method, practice area managers and consultants fully control the planning, development and implementation of turnkey solutions. Client personnel
function as sources of



27



---

##### Table of Contents

information concerning the business need for which a solution is sought. With the co-managed delivery method, practice
area managers and consultants and customer technical staff members work on a collaborative basis in planning, developing and implementing solutions. The Company is fully or partially responsible for the development and implementation of
technology-based solutions under the Allin-managed or co-managed delivery methods. Services delivered under these methods are viewed by management as being solutions-oriented due to the Companys performance of high level managerial tasks.



In addition to the practice areas described above, the
Companys operations include three other segments, Outsourced Services, Information System Product Sales and Other Services. Outsourced Services provides resources with varied technical skill sets that customers utilize to complement and assist
the customers internal staff in the execution of customer-managed projects. Information System Product Sales reflects the Companys sales of computer software, interactive television equipment and other technology products. The Company
actively promotes the sale of Microsoft Business Solutions software and associated products in association with the services of the Business Process Practice Area. The capability to provide other information system products is maintained primarily
as a means to ensure customer convenience and satisfaction with the technology solutions recommended and implemented by the practice areas. Product sale and service-based revenue are accounted for separately, with any revenue from product sales
included with the Information System Product Sales segment. The Other Services segment reflects amounts billed for out-of-pocket cost, the Companys occasional performance of website hosting and archival services and revenue from referral
commissions or placement fees. These three segments collectively accounted for 15% or less of the Companys revenue during the three-month periods ended March 31, 2004 and 2005.



Critical Accounting Policies, Estimates and Judgments



The Companys significant accounting policies are described in Notes 2, 6, 8, 12 and 14 in the Notes to Consolidated
Financial Statements included in Item 8  Financial Statements and Supplementary Data in the Companys Report on Form 10-K for the year ended December 31, 2004 and in notes 1, 5, 6 and 7 in the Notes to Consolidated Financial
Statements included in Part I, Item 1  Financial Statements in this Report on Form 10-Q. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to
make estimates and assumptions to apply certain of these critical accounting policies. These estimates and assumptions affect the reported amounts of assets and liabilities as of the reporting date and the reported amounts of revenue and expenses
for the reporting periods. In applying policies requiring estimates and assumptions, management uses its judgment based on historical experience, terms of existing contracts, industry practices and trends, information available from customers,
publicly available information and other factors deemed reasonable under the circumstances. Actual results may differ from estimates. Critical accounting policies requiring the use of estimates and assumptions include the following.



Revenue Recognition. Interactive Media consulting and systems
integration projects are frequently part of related arrangements, including services, computer hardware and equipment for interactive television systems, software, and post-contract support (PCS). Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2), specifies that if an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of
software, the entire arrangement should be accounted for in conformity with the contract accounting guidance of Accounting Research Bulletin No. 45, Long-Term Construction-Type Contracts (ARB No. 45), and Statement of Position
81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1). Interactive Medias arrangements frequently involve significant software modification including the installation of
customized software applications previously developed for the customer. Revenue associated with Interactive Media operations involving multiple-deliverable arrangements that included significant software modification accounted for under the contract
accounting standards described above was approximately 33% and 17% of the Companys total revenue for the three-month periods ended March 31, 2004 and 2005, respectively.



Revenue for fixed-price service-based arrangements associated with these projects is recognized on the percentage of
completion method of contract accounting, based on the proportion of labor expended through the end of the period to expected total project labor. Management must estimate expected labor for project completion at the beginning of each project.
Interactive Media consulting projects of this type are reviewed monthly, including consideration of any factors related to current or expected future progress on the projects and the Companys past



28



---

##### Table of Contents

performance of similar projects. Any resulting changes to expected project labor are factored into the determination of
cumulative percentage of completion used to determine current revenue recognition. Interactive Media arrangements frequently include PCS for a three-month period following the installation of interactive television systems. A portion of the contract
value is allocated to the PCS based on the proportion of expected PCS-related labor to expected total project labor and, in accordance with SOP 97-2, revenue is recognized for PCS over the period when services are performed.



The Companys recognition method for revenue for systems integration
projects is based on the size and expected duration of the project. For projects in excess of $250,000 of revenue and expected to be of greater than 90 days duration, revenue is recognized based on percentage of completion. The proportion of labor
incurred to expected total project labor is utilized as a quantitative factor in determining the percentage of completion recognized for projects when the proportion of total project costs incurred to expected total project costs is not
representative of actual project completion status. The majority of the equipment for systems integration projects is typically ordered, and associated costs are incurred, in the early stages of a project. Consequently, the proportion of labor
incurred to expected total project labor is more frequently representative of percentage of completion than the proportion of total project costs incurred to expected total project costs. The labor factor is therefore most often used to determine
the percentage of completion. For systems integration projects of this type, management must estimate expected total labor hours and costs at the beginning of the project. Management reviews the status of projects monthly, including labor hours
incurred to date and expected for completion of the project, project timing, and issues impacting project performance. Management also considers the Companys prior performance related to similar projects in determining expectations for current
projects. Any changes to expected labor hours for project completion are factored into the monthly estimate of project cumulative percentage of completion, which is used to determine current revenue recognition. Interactive Media arrangements do not
include rights for software, hardware or equipment upgrades.



The Companys practice areas also perform consulting engagements on a fixed-price basis. The Company follows the contract accounting guidance of ARB No. 45 and SOP 81-1 and recognizes revenue on a proportional performance basis,
utilizing the proportion of labor expended through the end of the period to expected total project labor. Management must estimate expected labor for project completion at the beginning of each project. Fixed-price consulting projects are reviewed
monthly, with any changes to expected project labor factored into the determination of proportional performance, which is used to determine current revenue recognition. Revenue associated with these projects was approximately 7% and 1% of the
Companys total revenue for the three-month periods ended March 31, 2004 and 2005, respectively.



Usage of the revenue recognition methods described above can result in acceleration of, or delay in, recognition of revenue if managements estimates
of certain critical factors such as expected total project labor are materially less than or greater than actual project requirements. The Company believes its monthly reviews of project status and consideration of past performance on similar
projects mitigate the potential for inappropriate revenue recognition since the reviews result in each update of revenue recognition being based on both the latest available information and the Companys project experience. Managements
estimates and assumptions also impact the Companys assets and liabilities as revenue recognition for these projects may also impact the carrying value, if any, of unbilled receivables, costs and estimated gross margins in excess of billings,
billings in excess of costs and estimated gross margins and deferred revenue on the Companys Consolidated Balance Sheets.



Goodwill and Intangible Assets. The Companys intangible assets include goodwill associated with the acquisitions of Allin
Consulting-California in 1996, Allin Consulting-Pennsylvania and MEGAbase, Inc. (merged into Allin-Consulting-California) in 1998 and Accounting Technology Professionals L.L.C. d/b/a Jimary Business Systems (Jimary Business Systems) in
2004, customer lists associated with the acquisitions of Allin Consulting-Pennsylvania and Jimary Business Systems and the 2004 acquisition of McCrory & McDowell LLCs Computer Resources division (Computer Resources) and a
non-competition agreement associated with the Jimary Business Systems acquisition. As of March 31, 2005, recognized balances for the customer lists, non-competition agreement and goodwill were approximately $1,076,000, $29,000 and $996,000,
respectively.



The Company follows the requirements of
Statements of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets (SFAS No. 142), and No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), regarding
amortization and testing for the potential impairment of



29



---

##### Table of Contents

intangible assets. Under SFAS No. 142, goodwill and other separable intangible assets with indefinite lives are not
amortized, but separable intangible assets that are deemed to have definite lives, such as the customer lists and non-competition agreement, are amortized over their useful lives. SFAS No. 142 also sets forth guidance as to required annual testing
for the potential impairment of goodwill. SFAS No. 144 sets forth standards for testing for the potential impairment of long-lived assets, including amortized intangible assets. The Company performs annual testing as of December 31 of each fiscal
year. Key risk factors are monitored on an ongoing basis and interim testing for potential impairment of goodwill or intangible assets will be performed if indicators of potential impairment arise.



Testing for potential impairment of goodwill involves an attribution of the
recognized assets and liabilities of the acquired businesses to reporting units. The recognized assets and liabilities include cash, accounts receivable, prepaid expenses, deferred tax assets, property and equipment, intangible assets and goodwill,
accounts payable, accrued liabilities and deferred revenue. The reporting units utilized are the Companys reported segments as applicable to the acquired operations, Technology Infrastructure, Collaborative Solutions, Business Process,
Outsourced Services and Information System Product Sales, further broken down geographically between Northern California-based and Pittsburgh-based operations. Recognized assets are attributed to reporting units in a manner consistent with that used
for segment reporting. Management utilizes industry information for public technology consulting businesses to develop assumptions for appropriate revenue multiples for estimating the fair values of the reporting units. Estimated fair values are
compared to the attributed recognized assets for each reporting unit, and an impairment loss is recognized to the extent that attributed assets exceed the estimated fair value of any reporting unit. Key risk factors the Company monitors regarding
goodwill are the industry valuation multiple and the revenue levels of the reporting units. Significant declines in these factors could indicate potential impairment of goodwill. The estimated fair values of all reporting units exceeded the
recognized assets attributed to the reporting units in the annual test performed as of December 31, 2004, indicating no impairment of goodwill.



To test for potential impairment of the customer lists, the Company utilizes a cash flow model to estimate fair value. The critical judgments and
estimates are the determination of which Allin Consulting-Pennsylvania reporting units will be utilized in testing each customer list, the proportions of the reporting unit cash flows to attribute to the acquired customer lists in each period and
the assumed growth rates for the overall business operations. Management uses its judgment to match reporting units with customer lists based on the areas of specialization of the predecessor businesses as well as the Companys long-term
marketing objectives regarding the customers on the acquired list. Management utilizes historical information related to business derived from the customers included on each acquired list, future projections for the operations of the applicable
reporting units of Allin Consulting-Pennsylvania and industry information concerning expected growth in the technology consulting industry to develop estimates of future cash flows for the reporting units and the portions of the estimated cash flows
to be attributed to each customer list. If the sum of the undiscounted cash flows attributable to a customer list exceeds the recognized value of the customer list, no impairment is indicated. If the sum of the undiscounted cash flows is less than
the recognized value, an impairment loss is recognized for the difference between the recognized value and the sum of the discounted cash flows attributable to the customer list. Key risk factors the Company monitors regarding the customer lists are
forecast growth rates for the technology consulting industry and revenue derived from customers on the acquired lists. Significant declines in these factors could indicate potential impairment of the customer lists. Testing of the non-competition
agreement utilizes a similar cash flow-based method. Industry information utilized for the annual testing as of December 31, 2004 indicated lower long-term growth rates for the technology consulting industry than had been indicated in previous
information. The forecast reduction in longer-term growth rates resulted from expectations that future growth will more closely correlate with overall economic conditions, will be more dependent on economic return requirements than in the past, and
from the growing outsourcing of business to offshore technology enterprises. The Company recorded a loss of $191,000 as of December 31, 2004 to reflect the impairment of the customer list associated with the 1998 acquisition of Allin
Consulting-Pennsylvania and to adjust the recognized value of the list to the then estimated level of discounted cash flows attributed to the list. No impairment was indicated for the other customer lists or the non-competition agreement.



Income Taxes.The Company records current and deferred
provisions for, or benefits from, income taxes and deferred tax assets and liabilities in accordance with the requirements of Statement of Financial Accounting Standards No. 109  Accounting for Income Taxes. Valuation allowances will
reduce deferred tax assets if there is material uncertainty as to the ultimate realization of the deferred tax benefits. Results of operations for future



30



---

##### Table of Contents

periods are subject to a number of material risks, including risks arising from customer and industry concentrations
related to the operations of the Interactive Media Practice Area. In recent periods, Interactive Media revenue has primarily resulted from a small number of large projects each year for a small number of customers concentrated in the cruise
industry. Interactive Media revenue experienced a significant period-to-period decline comparing the first quarters of 2004 and 2005 due to a decline in the number of large projects undertaken and could continue to decline over the remainder of 2005
if the Company fails to obtain additional projects from existing or new customers. Accordingly, the Companys estimates of the realizability of deferred tax assets arising primarily from net operating loss carryforwards include projections for
Interactive Medias future operations based solely on projects included in committed backlog or considered highly likely to be undertaken.



Valuation allowances have been recorded based on the Companys realizability estimates such that the Companys Consolidated Balance Sheets
include net deferred tax assets of $138,000 as of December 31, 2004 and March 31, 2005. Valuation allowances offset any additional net deferred tax assets. Management believes it is more likely than not that the recognized deferred tax assets will
be realized in future periods. During 2004, the Company realized benefits from the use of previously recorded deferred tax assets for net operating loss carryforwards to reduce taxable income. Given the risks associated with the Companys
operations, the Company believes that material uncertainty continues to exist as to the long-term realization of deferred tax benefits greater than the recognized balance as of March 31, 2005. Management assesses the realizability of deferred tax
assets quarterly and adjusts the valuation allowance based on its assessment.



Reclassifications. The Consolidated Statement of Operations for the three months ended March 31, 2004 reflects a reclassification to the statement as previously reported to conform the prior period information
to the current presentation of the statement. The reclassification did not impact the Companys results of operations or earnings per share during this period. On the Consolidated Statement of Operations, amounts billed to customers for
recovery of out-of-pocket costs associated with performance of the Companys services are reflected as other services revenue while the associated costs are reflected as other services cost of sales. Previously, amounts billed had been netted
against the costs. As a result of the reclassification, aggregate revenue and cost of sales have been increased by $12,000 for the three months ended March 31, 2004. There is no change to aggregate gross profit for this period.



Certain Related Party Transactions



During the three-month periods ended March 31, 2004 and 2005, the Company
engaged in transactions with related parties, including the sale of services and products and rental payments for office space. Services and products sold represented 1% or less of the Companys revenue in each of these periods. The charges for
services and products sold to related parties were comparable to charges for similar services and products sold to non-related entities.



The Companys office space in Pittsburgh, Pennsylvania is rented from an entity in which a beneficial holder of greater than five percent of the
Companys common stock, as well as certain of his family members, have equity interests. Rental expense related to this office was $34,000 during each of the three-month periods ended March 31, 2004 and 2005. This represented 2% of selling,
general and administrative expenses during each of these periods. The Company has rented its Pittsburgh office space on a month-to-month basis since the expiration of a five-year lease on January 31, 2002. The Companys landlord agreed to this
arrangement until such time as the landlord identifies an alternate tenant for the Companys space. At that time, the Company will likely move to other space within the same building commensurate with its needs or, if such space is not
available, space in another building. Management believes the current arrangement benefits both parties as the Company benefited from an expense reduction as compared to its previous lease rental costs and has deferred the cost and inconvenience of
moving while the landlord has deferred the costs associated with buildout of new space for the Company.



31



---

##### Table of Contents

Results of Operations

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004



Revenue



The following
table sets forth revenue for the Companys operating segments for the three-month periods ended March 31, 2004 and 2005 and period-to-period percentage changes for each segment.



|                                      |  |                                |       |                                |   |                                      |  |     |   
|------------------------------------- |  | ------------------------------ | ----- | ------------------------------ | - | ------------------------------------ |  | --- | --
|Revenue (Dollars in thousands)        |  | Three MonthsEndedMarch 31,2004 |       | Three MonthsEndedMarch 31,2005 |   | Period-to-Period %Increase(Decrease) | 
|Technology Infrastructure             |  | $                              | 874   |                                | $ | 643                                  |  | (26 | )%
|Collaborative Solutions               |  |                                | 758   |                                |   | 1,026                                |  | 35  | % 
|Business Process                      |  |                                | 52    |                                |   | 318                                  |  | 512 | % 
|Interactive Media Consulting          |  |                                | 489   |                                |   | 461                                  |  | (6  | )%
|Interactive Media Systems Integration |  |                                | 903   |                                |   | 152                                  |  | (83 | )%
|Outsourced Services                   |  |                                | 162   |                                |   | 160                                  |  | (1  | )%
|Information System Product Sales      |  |                                | 98    |                                |   | 248                                  |  | 153 | % 
|Other Services                        |  |                                | 20    |                                |   | 67                                   |  | 235 | % 
|                                      |  |                                |       |                                |   |                                      |  |     |   
|Consolidated Revenue                  |  | $                              | 3,356 |                                | $ | 3,075                                |  | (8  | )%
|                                      |  |                                |       |                                |   |                                      |  |     |   



Management attributes
the decline of $231,000 in Technology Infrastructure revenue comparing the first quarters of 2004 and 2005 primarily to an easing of demand following a peak period. Management believes the period from the fourth quarter of 2003 through 2004
reflected unusually high demand for the Technology Infrastructure Practice Area due to the release of pent-up demand for network architecture, server and storage upgrades, and demand driven by security concerns and related disaster recovery planning
following several years during which demand was negatively impacted by a significant curtailment in technology-based spending due to domestic economic conditions. Management believes the level of Technology Infrastructure revenue realized in the
first quarter of 2005 represents a more normal level of demand than was experienced in the first quarter of 2004. Management believes that certain trends in technology remain favorable to long-term growth for Technology Infrastructure. Among these
trends are heightened network security concerns due to threats from virus attacks and spyware, lost productivity from the intrusion of spam messages and increasing decentralization of information systems due to increasing service-oriented
architecture (SOA) proliferation. There can be no assurance, however, that these trends will result in the future realization of Technology Infrastructure revenue equal to or greater than current levels or that any growth realized will
result in improvement to the Companys results of operations and financial condition.



A period-to-period increase of $268,000 in revenue for the Collaborative Solutions Practice Area was realized in the first quarter of 2005 as compared to the first quarter of 2004. Collaborative Solutions projects are
less frequently associated with expenditures for upgrading computer hardware, software and networking equipment than Technology Infrastructure projects. Management believes this generally results in a lower variation in demand over business cycles
for Collaborative Solutions, but also results in a substitution effect whereby application development and business intelligence services receive lower priority during periods of peak infrastructure-related demand. Management believes this was the
case during 2004 and that the results of the first quarter of 2005 reflect an improving priority for Collaborative Solutions services following the end of a peak period of demand for Technology Infrastructure services. Management believes certain
trends in technology are also favorable to long-term growth for Collaborative Solutions, including expected continuing growth of Internet-based commerce, increasing demand for customized applications meeting specific business needs, and applications
supporting SOA proliferation and other emerging technologies such as voice over internet protocol. There can be no assurance, however, that the Company will realize revenue growth in future periods for its Collaborative Solutions services as a
result of these or any other factors.



In December 2003, the
Company commenced the operations of its Business Process Practice Area, which specializes in services based on Microsoft Business Solutions software. The Business Process Practice Area built on this initial base of operations throughout 2004 through
increased marketing efforts and expansion of dedicated staff. In November 2004, the Company acquired two complementary businesses with a Microsoft Business Solutions focus, substantially increasing the breadth of technical expertise and marketing
capabilities of the Business Process operations. Management primarily attributes the substantial period-to-period increase in Business Process revenue



32



---

##### Table of Contents

of $266,000 comparing the three months ended March 31, 2005 with the three months ended March 31, 2004 to the November
2004 acquisitions of Computer Resources and Jimary Business Systems. Approximately 75% of the period-to-period increase in revenue was derived from customers of the acquired businesses. The increase in Business Process revenue resulting from the
acquired businesses also represents a majority of the Companys overall increase in consulting revenue. No assurance can be given that the Business Process Practice Area will realize revenue equal to or greater than the current level in any
future period. There can also be no assurance that the Company will achieve successful long-term integration of the recently acquired businesses with the pre-existing Business Process operations.



The majority of Interactive Media revenue in the first quarters of both 2004
and 2005 was realized from related consulting and systems integration arrangements that included services for applications development, technical architecture design, configuration and implementation of interactive television systems aboard cruise
ships, computer hardware and equipment, software, and post-contract support. During the first quarter of 2004, the Interactive Media Practice Area performed the majority of project activity related to two interactive television system implementation
projects. There were no projects with periods of peak activity that occurred during the first quarter of 2005, significantly negatively impacting Interactive Media systems integration revenue. However, the latter phases of several projects were
completed during the first quarter of 2005, and the remaining consulting revenue under two fixed price arrangements was recognized upon the customers acceptance of the projects following their decision to not utilize certain alternate system
components. The level of cruise industry new-build commitments is expected to remain low during 2005. The Company currently has only one major interactive television system implementation project committed for 2005 for the Carnival Liberty
under an August 2004 amendment to a prior agreement with Carnival. There can be no assurance that the Company will receive orders for additional systems or that any orders received will result in improvement to the Companys financial condition
or results of operations. Management is actively marketing interactive television systems for ships currently in service, is seeking to engage additional cruise industry customers and is pursuing opportunities in other markets for services based on
interactive media technology. The level of Interactive Media revenue realized in 2005 will be significantly impacted by the Companys success with these initiatives. Interactive Media revenue for 2005 will likely decline significantly from
levels realized in 2004 and prior years if the Company is unsuccessful in obtaining new projects.



Management believes the period-to-period stability in Outsourced Services revenue reflects the long-term nature of the existing engagements. There was no
significant change in the level of services performed from the first quarter of 2004 to the first quarter of 2005. The $150,000 period-to-period increase in revenue for the Information System Product Sales segment, comparing the first quarters of
2004 and 2005, was primarily attributable an increase in sales of Microsoft Business Solutions products in association with Business Process consulting services resulting from the Companys November 2004 business acquisitions. Revenue for the
Other Services segment represented no more than 2% of consolidated revenue in the first quarter of either 2004 or 2005. The period-to-period increase in revenue related primarily to referral commissions.



Cost of Sales and Gross Profit



The following table sets forth cost of sales for the Companys
operating segments for the three-month periods ended March 31, 2004 and 2005 and period-to-period percentage changes for each segment.



|                                      |  |                                |       |                                |   |                                      |  |     |   
|------------------------------------- |  | ------------------------------ | ----- | ------------------------------ | - | ------------------------------------ |  | --- | --
|Cost of Sales (Dollars in thousands)  |  | Three MonthsEndedMarch 31,2004 |       | Three MonthsEndedMarch 31,2005 |   | Period-to-Period %Increase(Decrease) | 
|Technology Infrastructure             |  | $                              | 382   |                                | $ | 289                                  |  | (24 | )%
|Collaborative Solutions               |  |                                | 362   |                                |   | 468                                  |  | 29  | % 
|Business Process                      |  |                                | 23    |                                |   | 120                                  |  | 422 | % 
|Interactive Media Consulting          |  |                                | 165   |                                |   | 42                                   |  | (75 | )%
|Interactive Media Systems Integration |  |                                | 423   |                                |   | 72                                   |  | (83 | )%
|Outsourced Services                   |  |                                | 129   |                                |   | 124                                  |  | (4  | )%
|Information System Product Sales      |  |                                | 61    |                                |   | 177                                  |  | 190 | % 
|Other Services                        |  |                                | 12    |                                |   | 21                                   |  | 75  | % 
|                                      |  |                                |       |                                |   |                                      |  |     |   
|Consolidated Cost of Sales            |  | $                              | 1,557 |                                | $ | 1,313                                |  | (16 | )%
|                                      |  |                                |       |                                |   |                                      |  |     |   



33



---

##### Table of Contents

The period-to-period decrease in cost of sales for the Technology Infrastructure Practice Area
corresponds with the change in revenue, comparing the first quarter of 2005 to the first quarter of 2004, and results from the decrease in the level of services provided. In percentage terms, the decrease in cost of sales was slightly less than the
decrease in revenue, indicating an increase in the average hourly cost of consultant labor for Technology Infrastructure in relation to average hourly fees. The period-to-period increase in cost of sales for the Collaborative Solutions Practice Area
is consistent with the change in revenue, but smaller in percentage terms, indicating overall improvement in the fee to cost relationship for consultants. The significant period-to-period increase in cost of sales for the Business Process Practice
Area is primarily attributable to the increase in the level of services following the Computer Resources and Jimary Business Systems acquisitions. The increase in cost of sales for Business Process is consistent with the change in revenue, but also
smaller in percentage terms, indicating overall improvement in the fee to consultant cost relationship following the acquisitions.



The decrease in Interactive Media consulting cost of sales, comparing the three months ended March 31, 2005 with the three months ended March 31, 2004, is
much larger than the corresponding period-to-period decrease in revenue. This is attributable to customer acceptance of two fixed price projects which resulted in recognition of the remaining project revenue without significant additional cost of
sales on the projects. The customers decision to not utilize certain alternate system components resulted in project completion at a reduced labor budget. The period-to-period decrease in Interactive Media systems integration cost of sales is
primarily attributable to the corresponding decrease in revenue which resulted because there were no projects with periods of peak activity occurring during the first quarter of 2005.



The period-to-period decrease in cost of sales for the Outsourced Services segment, comparing the first quarters of 2004 and
2005, was larger in percentage terms than the corresponding period-to-period decrease in revenue, indicating overall improvement in the fee to cost relationship for Outsourced Services technical resources. The significant increase in cost of sales
for the Information System Product Sales segment, comparing the first quarters of 2004 and 2005, resulted from significant growth in sales of Microsoft Business Solutions software and related products following the Companys November 2004
acquisitions of two businesses specializing in this area of technology. The period-to-period increase in Other Services cost of sales relates to an increase in the amount of out-of-pocket expenses billed to customers.



The following table sets forth gross profit for the Companys operating
segments for the three-month periods ended March 31, 2004 and 2005 and period-to-period percentage changes for each segment.



|                                      |  |                                |       |                                |   |                                      |  |     |   
|------------------------------------- |  | ------------------------------ | ----- | ------------------------------ | - | ------------------------------------ |  | --- | --
|Gross Profit (Dollars in thousands)   |  | Three MonthsEndedMarch 31,2004 |       | Three MonthsEndedMarch 31,2005 |   | Period-to-Period %Increase(Decrease) | 
|Technology Infrastructure             |  | $                              | 492   |                                | $ | 354                                  |  | (28 | )%
|Collaborative Solutions               |  |                                | 396   |                                |   | 558                                  |  | 41  | % 
|Business Process                      |  |                                | 29    |                                |   | 198                                  |  | 583 | % 
|Interactive Media Consulting          |  |                                | 324   |                                |   | 419                                  |  | 29  | % 
|Interactive Media Systems Integration |  |                                | 480   |                                |   | 80                                   |  | (83 | )%
|Outsourced Services                   |  |                                | 33    |                                |   | 36                                   |  | 9   | % 
|Information System Product Sales      |  |                                | 37    |                                |   | 71                                   |  | 92  | % 
|Other Services                        |  |                                | 8     |                                |   | 46                                   |  | 475 | % 
|                                      |  |                                |       |                                |   |                                      |  |     |   
|Consolidated Gross Profit             |  | $                              | 1,799 |                                | $ | 1,762                                |  | (2  | )%
|                                      |  |                                |       |                                |   |                                      |  |     |   



The period-to-period
decrease in gross profit for the Technology Infrastructure Practice Area, comparing the three months ended March 31, 2005 to the three months ended March 31, 2004, reflected an easing of demand following a peak demand period from late 2003 through
2004. The decrease exceeded the related decrease in Technology Infrastructure revenue in percentage terms, indicating an increase in the average hourly cost of labor



34



---

##### Table of Contents

relative to hourly fees. The Collaborative Solutions Practice Area experienced a period-to-period improvement in gross
profit of $162,000. As discussed above, management believes the change reflects an improving priority for Collaborative Solutions services following the end of a peak period of demand for Technology Infrastructure services and improvement in the
relationship between average hourly fees and the average hourly cost of labor for the Companys Collaborative Solutions consultants. There can be no assurance, however, that this trend will continue in future periods. The substantial growth in
gross profit for the Business Process Practice Area, comparing the first quarter of 2005 to the first quarter of 2004, resulted from the acquisitions of Computer Resources and Jimary Business Systems late in 2004 and increased marketing efforts and
expansion of dedicated staff throughout 2004. The period-to-period improvement in gross profit for Collaborative Solutions and Business Process of $331,000 more than offset of the period-to-period decline in gross profit of $138,000 for the
Technology Infrastructure Practice Area.



Gross profit from
Interactive Media consulting services increased by 29%, comparing the first quarters of 2004 and 2005, despite a 6% period-to-period reduction in consulting revenue. As discussed above, customer acceptance of two fixed price projects during the
first quarter of 2005 resulted in recognition of the remaining project revenue without significant additional cost of sales on the projects. The period-to-period decrease in systems integration gross profit of 83% for the Interactive Media Practice
Area was consistent with the decline in revenue and was primarily attributable to a lack of major project activity due to a decline in new-build ship commitments in 2005 among Interactive Medias customers.



The period-to-period increase in gross profit for the Outsourced Services
segment reflects improvement in the fee to cost relationship for Outsourced Services technical resources. The significant increase in gross profit for the Information System Product Sales segment resulted from significant period-to-period growth in
sales of Microsoft Business Solutions software and related products following the November 2004 acquisitions of two businesses specializing in this area of technology. In percentage terms, Information System Product Sales gross profit increased at a
lower rate than revenue. Management attributes this to sales relating to Microsoft Business Solutions technology involving a larger proportion of activity in the first quarter of 2005. These sales involve only new product whereas the Companys
sales of interactive television system equipment components involves the sale of both new and salvaged products, which have low associated costs. The period-to-period increase in Other Services gross profit related primarily to referral commissions.



Selling, General & Administrative Expenses



The Company recorded $1,928,000 in selling, general & administrative
expenses during the three months ended March 31, 2005, including $65,000 for depreciation and amortization and $1,863,000 for other selling, general & administrative expenses. Selling, general & administrative expenses were $1,605,000 during
the three months ended March 31, 2004, including $46,000 for depreciation and amortization and $1,568,000 for other selling, general & administrative expenses, net of a $9,000 gain on disposal of assets. The increase in aggregate selling,
general & administrative expenses was $323,000, or 20%.



The period-to-period increase in other selling, general & administrative expenses was $295,000, or 19%. The most significant factor in the increase are labor-related and include a period-to-period increase in the Companys
workforce, primarily for consultants for the Microsoft-focused practice areas and sales and marketing personnel, and a period-to-period decrease in average utilization rates for the technical staff. The general expenses of the Company include
compensation related to non-billable time for the Companys consultants and, consequently, will often increase in periods when the Company is adding to its productive workforce. The increase in the size of the Companys technical workforce
was concentrated in the Technology Infrastructure and Collaborative Solutions Practice Areas, which experienced periods of increasing demand over 2004 and the first quarter of 2005, respectively, and in the Business Process Practice Area as a result
of demand growth and acquisitions. Average utilization rates dropped when comparing the first quarters of 2004 and 2005, primarily due to a significant 2005 decline in the activity level for interactive television implementation projects for the
Interactive Media Practice Area, which resulted in a significant increase in non-billable time for Interactive Media consultants. There were no significant period-to-period increases among the non-compensation-related components of other selling,
general and administration expenses.



35



---

##### Table of Contents

Depreciation and amortization were $65,000 for the first quarter of 2005, as compared to $46,000 for the
first quarter of 2004. The decrease of $19,000, or 41%, is primarily due to the 2005 period including amortization expense related to the customer lists and non-competition agreement recorded in association with the November 2004 acquisitions of
Jimary Business Systems and Computer Resources.



Net Income (Loss)



The Company recorded a net loss of $174,000 for the three
months ended March 31, 2005, as compared to net income of $182,000 for the three months ended March 31, 2004. The $356,000 decline in profitability is attributable to the $37,000 decline in gross profit from operations and the $323,000 increase in
selling, general & administrative expenses resulting from the factors discussed above.



Off-Balance Sheet Arrangements



The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Companys financial condition, changes in financial condition, revenue or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to investors, and the Company does not have any non-consolidated special purpose entities.



Liquidity and Capital Resources



At March 31, 2005, the Company had cash and liquid cash equivalents of $2,356,000 available to meet its working capital and operational needs. The net
change in cash from December 31, 2004 was a decrease of $735,000. The Company recognized a net loss for the three months ended March 31, 2005 of $174,000. The Company recorded net non-cash expenses of $65,000 for depreciation of property and
equipment and amortization of intangible assets, resulting in net cash used of $109,000 related to the income statement. Changes in working capital resulted in a net cash use of $507,000. Major working capital adjustments resulting in cash used
included decreases in billings in excess of costs and estimated gross margins and other accrued liabilities of $358,000 and $145,000, respectively. The net result of the income statement activity and working capital adjustments was net cash used of
$616,000 related to operating activities. Investing activities resulted in a net cash use of $31,000 for the three months ended March 31, 2005, primarily for capital expenditures for computer hardware for the Companys increased workforce and
periodic upgrading of technology and for improvements to the Companys communications systems. Financing activities resulted in a net cash use of $88,000 for the three months ended March 31, 2005, primarily for preferred stock dividends.



On October 1, 1998, the Company and S&T Bank, a
Pennsylvania banking association, entered into a Loan and Security Agreement (the S&T Loan Agreement), under which S&T Bank agreed to extend the Company a revolving credit loan. The S&T Loan Agreement has subsequently been
renewed in each of the six succeeding years. The current expiration date of the S&T Loan Agreement is September 30, 2005. The maximum borrowing availability under the S&T Loan Agreement is the lesser of $5,000,000 or 80% of the aggregate
gross amount of eligible trade accounts receivable aged sixty days or less from the date of invoice. Accounts receivable qualifying for inclusion in the borrowing base are net of any prepayments, progress payments, deposits or retention and must not
be subject to any prior assignment, claim, lien, or security interest. As of March 31, 2005, maximum borrowing availability under the S&T Loan Agreement was approximately $1,834,000. There was no outstanding balance under the S&T Loan
Agreement as of March 31, 2005 and there have been no borrowings subsequent to that date.



Borrowings may be made under the S&T Loan Agreement for general working capital purposes. Loans made under the S&T Loan Agreement bear interest at the banks prime interest rate plus one percent. During
2005, the interest rate under the S&T Loan Agreement has ranged from a low of 6.25% to a high of 6.75%, which was in effect as of March 31, 2005. Subsequently in May 2005, the interest rate under the S&T Loan Agreement increased to 7.00%.
Interest payments on any outstanding loan balances are due monthly on the first day of the month. The Company did not record any interest expense related to this revolving credit loan during 2004 or the first quarter of 2005 as the Company had no
borrowings outstanding during this period. If additional borrowings are made under the revolving credit loan, the principal will be due at maturity, although any outstanding principal balances may be repaid in whole or part at any time without
penalty.



36



---

##### Table of Contents

The S&T Loan Agreement includes provisions granting S&T Bank a security interest in certain
assets of the Company including its accounts receivable, equipment, lease rights for real property, and inventory. The Company and its subsidiaries, except for Allin Consulting-California and Allin Holdings, are required to maintain depository
accounts with S&T Bank, in which accounts the bank has a collateral interest.



The S&T Loan Agreement, as amended, includes various covenants relating to matters affecting the Company, including insurance coverage, financial accounting practices, audit rights, prohibited transactions,
dividends and stock purchases, which are disclosed in their entirety in the text of the S&T Loan Agreement filed as Exhibit 4 to the Companys Current Report on Form 8-K filed on October 9, 1998, the Second Amendment to Note and Loan and
Security Agreement filed as Exhibit 4.1 to the Companys Report on Form 10-Q for the quarterly period ended September 30, 1999 and the Change in Terms Agreement filed as Exhibit 10.1 to the Companys Report on Form 10-Q for the quarterly
period ended June 30, 2004. The covenant concerning dividends and purchases of stock prohibits the Company from paying cash dividends or redeeming, purchasing or otherwise acquiring outstanding shares of any class of the Companys stock, except
for dividends payable in the ordinary course of business on the Companys Series D, F and G preferred shares. Declaration, but not payment, of dividends related to the Companys Series C Redeemable Preferred Stock is permitted. The
covenants also include a cash flow to interest ratio of not less than 1.0 to 1.0. Cash flow is defined as operating income before depreciation, amortization and interest. The cash flow coverage ratio is measured for each of the Companys fiscal
quarters. S&T Bank granted the Company a waiver of compliance with the cash flow covenant for the fiscal quarter ended March 31, 2005, which the Company would not have otherwise met. The Company was in compliance with all other covenants as of
March 31, 2005 and currently remains in compliance with all other covenants. The S&T Loan Agreement also includes reporting requirements regarding annual and monthly financial reports, accounts receivable and payable statements, weekly borrowing
base certificates and audit reports.



As of March 31, 2005, the
Company had outstanding 25,000 shares of the Companys Series C Redeemable Preferred Stock having a liquidation preference of $100 per share. There is no mandatory redemption date for the Series C preferred stock; however, the Company may
redeem shares of Series C preferred stock at any time. There are no sinking fund provisions applicable to the Series C preferred stock. Series C preferred stock earns dividends at the rate of 8% of the liquidation value thereof per annum, compounded
quarterly, until the scheduled payment date of June 30, 2006 Any accrued and unpaid dividends as of June 30, 2006 on Series C preferred stock are a legally enforceable obligation of the Company, whether the dividends have been declared or not.
Accordingly, dividends are accrued on an ongoing basis. The Companys Board of Directors has declared dividends on the Series C preferred stock accrued since issuance of the preferred stock in 1996 through June 30, 2005. Accrued but unpaid
dividends on the Series C preferred stock were approximately $2,452,000 as of March 31, 2005 and approximately $2,499,000 as of May 13, 2005. Payment of accrued dividends on Series C preferred stock on June 30, 2006 or thereafter is subject to
legally available funds for the payment of dividends as prescribed by the Delaware General Corporation Law. The Companys current credit agreement with S&T Bank prohibits payment of dividends on Series C preferred stock during the term of
the agreement. The Company will monitor business conditions and evaluate liquidity considerations during the period prior to June 30, 2006 to determine the advisability of meeting the scheduled payment. If the Company determines that payment would
be advisable, it will seek elimination of the prohibition of payment under the S&T Loan Agreement prior to the scheduled payment. Accrued dividends on Series C preferred stock are expected to be $2,967,000 as of June 30, 2006. Any accrued
dividends on the Series C preferred stock not paid within ten days of June 30, 2006 will compound thereafter at a rate of 12% of the liquidation value thereof per annum. After June 30, 2006, further dividends on the Series C preferred stock will
accrue and compound at a rate of 12% per annum and will be payable quarterly, subject to legally available funds.



As of March 31, 2005, the Company had outstanding 2,750 shares of the Companys Series D Convertible Redeemable Preferred Stock having a liquidation
preference of $1,000 per share. There is no mandatory redemption date for the Series D preferred stock; however, the Company may redeem shares of Series D preferred stock at any time. There are no sinking fund provisions applicable to the Series D
preferred stock. Series D preferred stock earns dividends at the rate of 6% of the liquidation value thereof per annum, compounded quarterly if unpaid. Dividends on Series D preferred stock are payable quarterly in arrears as of the last day of
January, April, July and October, subject to legally available funds. Accrued but unpaid dividends on Series D preferred stock were approximately $27,000 as of March 31, 2005 and approximately $6,000 as of May 13, 2005.



37



---

##### Table of Contents

As of March 31, 2005, the Company had outstanding 1,000 shares of the Companys Series F Convertible
Redeemable Preferred Stock having a liquidation preference of $1,000 per share. There is no mandatory redemption date for the Series F preferred stock; however, the Company may redeem shares of Series F preferred stock at any time. There are no
sinking fund provisions applicable to the Series F preferred stock. Series F preferred stock earns dividends at the rate of 7% of the liquidation value thereof per annum. Dividends are payable quarterly in arrears on the 15thof January, April, July and October, subject to legally available funds. Dividends accrued for seven months during 1999 of
approximately $41,000 are not required to be paid prior to redemption, if any. Dividends not paid at scheduled dates will compound quarterly thereafter. Accrued but unpaid dividends on Series F preferred stock were approximately $58,000 as of March
31, 2005 and approximately $49,000 as of May 13, 2005.



As of
March 31, 2005, the Company had outstanding 150 shares of the Companys Series G Convertible Redeemable Preferred Stock having a liquidation preference of $10,000 per share. There is no mandatory redemption date for the Series G preferred
stock; however, the Company may redeem Series G shares after December 29, 2005. The redemption price for each share of Series G preferred stock will be the liquidation value of such share, plus an amount that would result in an aggregate 25%
compounded annual return on such liquidation value to the date of redemption after giving effect to all dividends paid on such share through the date of redemption. There are no sinking fund provisions applicable to the Series G preferred stock.
Prior to redemption by the Company, if any, each share of Series G preferred stock is convertible into 28,571 shares of the Companys common stock. Any holder of Series G preferred stock wishing to exercise the conversion right must give
written notice thereof to the Company, after which the Company shall set a date for conversion of the Series G preferred stock which shall be no later than thirty days from the date of notice. Any shares of Series G preferred stock which are not
converted to common stock will remain outstanding until converted or until redeemed. Unless redeemed or converted to common stock sooner, Series G preferred stock earns cumulative quarterly dividends at the rate of 8% of the liquidation value
thereof per annum until December 29, 2005. Thereafter, the dividend rate will increase to 12% of the liquidation value until the earlier of the date of any redemption or the date of conversion into common stock. Dividends are payable quarterly in
arrears on the first day of each calendar quarter, subject to legally available funds. Dividends not paid at scheduled dates will compound quarterly thereafter. Accrued but unpaid dividends on the Series G preferred stock were approximately $30,000
as of March 31, 2005 and approximately $14,000 as of May 13, 2005. Holders of the Series G preferred stock who exercise the conversion right will have the right to receive any accrued and unpaid dividends through the date of conversion.



The order of liquidation preference of the Companys outstanding
preferred stock, from senior to junior, is Series F, Series G, Series D and Series C. The S&T Loan Agreement prohibits the Company from paying dividends on any shares of its capital stock, except for current dividends payable in the ordinary
course of business on the Companys Series D, F and G preferred stock. Each of the Certificates of Designation governing the Series C, D, F and G preferred stock prohibits the Company from declaring or paying dividends or any other distribution
on the common stock or any other class of stock ranking junior as to dividends and upon liquidation unless all dividends on the senior series of preferred stock for the dividend payment date immediately prior to or concurrent with the dividend or
distribution as to the junior securities are paid or are declared and funds are set aside for payment. In the event that the number of shares of outstanding common stock is changed by any stock dividend, stock split or combination of shares at any
time shares of Series G preferred stock are outstanding, the number of shares of common stock that may be acquired upon conversion will be proportionately adjusted. The conversion rate for Series G preferred stock may also be adjusted in the event
of certain dilutive issuances of equity stock or stock equivalents of the Company, as described in the Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations
or Restrictions Thereof, of the Series G Convertible Redeemable Preferred Stock, which was filed as Exhibit 4.1 to the Companys Report on Form 8-K filed on January 4, 2001.



The Company expects to continue to accrue dividends for the Series C, D, F and G preferred stock in a manner similar to its
current practice. The Company has, to date, made all scheduled dividend payments for Series D, F and G preferred stock. Continued payment of dividends related to the Companys preferred stock is subject to legally available funds for the
payment of dividends as prescribed by the Delaware General Corporation Law. Scheduled dividend payments may also be deferred for other reasons. The Companys Board of Directors pre-approves all payments of dividends. Assuming no redemption or
conversion into common stock occurs related to the Series G preferred stock, aggregate scheduled dividend payments related to the Series D, F, and G preferred stock are approximately $266,000 for the remainder of 2005. If the Company has legally
available funds, the Company determines that business conditions and liquidity considerations would make payment advisable and the current prohibition under the Companys credit



38



---

##### Table of Contents

facility of payment of dividends on Series C preferred stock is eliminated prior to the first scheduled payment for that
series, $2,967,000 of dividends may be paid within ten days of June 30, 2006 related to the Series C preferred stock. If the initial scheduled payment of dividends on Series C preferred stock is made, aggregate scheduled quarterly dividend payments
for 2006 for Series D, F and G and for Series C preferred stock subsequent to the initial scheduled payment are approximately $490,000. Since none of the issues of preferred stock are mandatorily redeemable, dividend payments could extend for an
indefinite period beyond 2006. Assuming no redemption or conversion of preferred stock occurs, estimated annual dividend payment requirements for 2007 and beyond are approximately $715,000 per year.



In connection with the Companys December 29, 2000 sale of Series G
Convertible Redeemable Preferred Stock, the purchasers of Series G preferred stock also received warrants to purchase an aggregate of 857,138 shares of common stock which have an exercise price of $1.75 per share. The exercise price may be paid in
cash or by delivery of a like value, including accrued but unpaid dividends, of Series C Redeemable Preferred Stock or Series D Convertible Redeemable Preferred Stock. The warrants will expire December 29, 2005, unless exercised earlier.



The Company repaid an outstanding note in the principal amount of
$1,000,000 related to the November 1996 acquisition of Allin Consulting-California on April 15, 2005, the maturity date of the note. The note provided for interest at the rate of 7% per annum. Accrued interest of approximately $58,000 applicable to
the period June 1, 1999 to December 31, 1999 and $21,000 applicable to the period January 1, 2005 to April 15, 2005 was also paid on April 15, 2005.



The Asset Purchase Agreement for the November 2004 acquisition of Jimary Business Systems provides for contingent consideration for the purchased assets
in the form of annual earn-out payments in cash for each of three annual periods ending November 30, 2005, 2006 and 2007 based on agreed upon percentages of Earn-Out Margin for each of such annual periods generated from consulting and
certain related revenue, determined and adjusted in accordance with the Asset Purchase Agreement. The aggregate amount of all such annual earn-out payments shall not exceed $252,000. The Company is monitoring the results of its operations to assess
the likelihood that contingent purchase consideration will be paid. Management does not believe the period of operations from the acquisition through March 31, 2005 has been long enough to determine if expected payment is more likely than not or to
reasonably estimate the amount of any future payment. Any contingent purchase consideration due is to be remitted within sixty days of the end of each such annual period.



The Asset Purchase Agreement for the November 2004 acquisition of Computer Resources provides for the payment of contingent
purchase consideration for the purchased assets based on agreed upon percentages of earned and collected revenue from consulting services and product sales related to projects identified on schedules to the agreement and certain additional future
projects that may be obtained with customers included on the acquired customer list. Any contingent purchase consideration due will be calculated based on applicable amounts collected during each calendar quarter and is to be remitted within fifteen
days of the end of each calendar quarter. Allin Consulting-Pennsylvania paid no cash or other form of purchase consideration at the time it acquired the assets, and it assumed no liabilities related to the operations of Computer Resources.
Contingent purchase consideration paid in respect of the fourth quarter of 2004 and the first quarter of 2005 was approximately $6,000. Management does not believe the period of operations from the acquisition through March 31, 2005 has been long
enough to reasonably estimate the amount of future purchase consideration payments.



In February 2005, Allin Consulting-Pennsylvania and Truefit Solutions, Inc. (Truefit) entered into an Asset Purchase Agreement under which Allin Consulting-Pennsylvania purchased from Truefit a customer
list and became obligated to make payments of contingent purchase consideration based on agreed upon percentages of earned and collected revenue from consulting services and product sales related to customers identified on schedules to the
agreement. Any contingent purchase consideration due will be calculated based on applicable amounts collected during each calendar quarter and is to be remitted within fifteen days of the end of each calendar quarter. Allin Consulting-Pennsylvania
paid no cash or other form of purchase consideration at the time it purchased the customer list and no consideration was due in respect of the first quarter of 2005. Management does not believe the period from purchase of the customer list through
March 31, 2005 has been long enough to reasonably estimate the amount of any future purchase consideration payments.



Capital expenditures during the three months ended March 31, 2005 were $39,000 and included purchases of computer hardware for the Companys
increased workforce and periodic upgrading of technology and for improvements to the Companys communications systems. Management forecasts that capital expenditures during the remainder of 2005 will not exceed $160,000. Management expects that
capital expenditures during this period will be for the Companys periodic upgrading of technology and necessary leasehold improvements for the Companys offices. Business conditions and managements plans may change during 2005 so
there can be no assurance that the Companys actual amount of capital expenditures will not exceed the planned amount.



The Companys cash balances may be diminished over the remainder of 2005 due to many factors, including the use of cash for operations, changes in
working capital, capital expenditures, dividends on preferred stock and other factors. The number of major consulting and systems integration projects for the Interactive Media



39



---

##### Table of Contents

Practice Area currently committed for 2005 is fewer than were performed in 2004, which may negatively impact the
Companys cash balances if the Company is unsuccessful in obtaining additional projects to be performed over the remainder of 2005. Despite these factors, the Company believes that available funds and cash flows expected to be generated by
current operations will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for its existing operations for at least the next twelve months.



As part of its general business strategy, the Company may from time-to-time seek opportunities to acquire businesses or
assets that would complement existing operations or expand the geographic scope of the Companys operations. The Company may be required to consider other financing alternatives during the next twelve months or thereafter as a result of future
business developments, including any acquisitions of businesses or assets, any shortfall of cash flows generated by future operations in meeting the Companys ongoing cash requirements, or if the Company was unable to renew or replace the
current credit facility after its expiration in September 2005. Such financing alternatives could include selling additional equity or debt securities, obtaining long or short-term credit facilities, or selling other operating assets. No assurance
can be given, however, that the Company could obtain such financing on terms favorable to the Company or at all. Any sale of additional common stock or convertible equity or debt securities would result in additional dilution to the Companys
stockholders.



Risk Factors



Certain matters in this annual Report on Form 10-K, including, without
limitation, certain matters discussed in this Managements Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. Forward-looking statements are typically identified by the words
believes, expects, intends, will, seek, continue, pursue and similar expressions. In addition, any statements that refer to expectations or other characterizations
of future events or circumstances are forward-looking statements. These statements are based on a number of assumptions that could ultimately prove inaccurate, and, therefore there can be no assurance that they will prove to be accurate. Readers are
cautioned that any such forward-looking statements are not guarantees of performance and that matters referred to in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results,
performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Among the factors that could affect performance are those risks and
uncertainties discussed below, which are representative of factors which could affect the outcome of the forward-looking statements as well as the Companys overall future performance. In addition, such statements and the Companys overall
future performance could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions and geopolitical considerations or other events that may negatively impact the markets where the
Company competes. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.



Backlog. As of March 31, 2005, the Companys total committed backlog for consulting and integration services was
$3,504,000, all of which is expected to be realized as revenue during 2005. Revenue realized during the first three months of 2005 plus backlog as of March 31, 2005 represents 55% of 2004 consulting and integration services revenue. Backlog includes
unrealized revenue for fixed price projects and managements estimate of future fees for projects billed on an hourly basis. The actual revenue realized from the projects included in backlog is subject to variability in timing due to project
schedule delays or acceleration and to variability in amount due to many factors, including the actual project needs for hourly-based projects and additions or reductions in project scope.



As of March 31, 2005, committed backlog for the Interactive Media Practice
Area was approximately $1,485,000, all of which is expected to be realized during 2005. Revenue realized during the first three months of 2005 plus backlog as of March 31, 2005 represents 47% of 2004 Interactive Media revenue. To date, the majority
of significant Interactive Media projects have been for installation of interactive television systems on newly built ships. However, the new-build commitments among the Companys existing customers are fewer in 2005 than in 2003 or 2004. The
remaining work to be performed for one significant interactive television system implementation project, for the CarnivalLiberty, is the only project of this type included in the backlog as of March 31, 2005. The Company is actively seeking
to secure additional consulting and systems integration projects with existing clients in



40



---

##### Table of Contents

the cruise industry, their affiliates and cruise lines for which the Company does not presently provide services.
Management is also making ongoing efforts to lower system costs and create programs that enhance cruise lines incremental revenue and return on investment, as well as seeking opportunities outside of the cruise industry. Failure to obtain a
significant level of additional projects or project cancellations for projects currently in the Interactive Media backlog would likely significantly negatively impact the Companys business, results of operations and financial condition during
2005. The level of cruise industry new-build commitments is expected to increase beginning in 2006. However, there can be no assurance that an increase in newly built ships for the cruise industry will result in additional system orders for the
Company.



As of March 31, 2005, backlogs for the Technology
Infrastructure, Collaborative Solutions and Business Process Practice Areas were $748,000, $366,000 and $905,000, respectively. Revenue realized during the three months ended March 31, 2005 plus backlog as of March 31, 2005 for these practice areas
represents 38%, 54% and 282%, respectively, of 2004 Technology Infrastructure, Collaborative Solutions and Business Process revenue. The committed backlog for the Technology Infrastructure and Collaborative Solutions Practice Areas represents a
short lead time for expected performance of the projects, which is consistent with the Companys experience with recent years sales for these practice areas. The backlog for the Business Process Practice Areas represents a comparatively
high percentage of 2004 revenue for this practice area. Management attributes this to a significant increase in the level of activity for Business Process following the November 2004 acquisitions of two businesses. There can be no assurance that the
Company will be able to continue to sustain or improve the backlog levels for the Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas. The future success of these practice areas is dependent on the ability of their
sales and marketing resources to continually identify and obtain new engagements from existing and prospective customers. General economic conditions and other risk factors such as geopolitical considerations may make future business more difficult
to obtain, which would negatively impact the Companys business, results of operations and financial condition.



Practice Area and Customer Concentration. Interactive Media consulting and systems integration services accounted for 35% and 39%, respectively of
the Companys revenue and gross profit for the year ended December 31, 2004 and 20% and 28%, respectively, of revenue and gross profit for the three months ended March 31, 2005. Interactive Media revenue has been highly concentrated among a few
customers in the cruise industry over recent years. During the year ended December 31, 2004 and the three-month period ended March 31, 2005, Carnival, a significant Interactive Media customer operating in the cruise industry, accounted for 20% and
18%, respectively, of the Companys consolidated revenue. Costa, an affiliate of Carnival, accounted for another 7% and 1%, respectively, of consolidated revenue during these respective periods. The loss of any cruise industry customer would
likely negatively impact the Companys business, results of operations and financial condition. The cruise industry is subject to various risks from geopolitical and economic considerations, future potential increases in passenger costs related
to security and tax initiatives, fuel costs and other factors. Any factors which negatively impact the cruise industry could decrease demand for Interactive Media services.



Integration of Acquired Businesses. Since December 2003, the Company has acquired the business operations of
Information Designs, Inc. (Information Designs), and the operating assets of Computer Resources and Jimary Business Systems, each of which offered consulting services based on Microsoft Business Solutions technology and sold Microsoft
Business Solutions technology products. All of the businesses were based in Pittsburgh, Pennsylvania. The Company utilized the operations acquired from Information Designs as the initial base of a Business Process Practice Area for its Pittsburgh
operations. The Company integrated the Computer Resources and Jimary Business Systems operations into the Business Process Practice Area following the November 2004 acquisitions of the businesses. Since the period of operation as a combined practice
has been brief, there can be no assurance that the integration of these businesses will be successful on a long-term basis. The Company could have difficulty over the remainder of 2005 with retention of personnel and customers from the acquired
businesses and assimilation of the services of the acquired businesses into the Companys operations. These difficulties could disrupt the Companys business, distract its management and employees, increase expenses and adversely affect
the Companys business, results of operations and financial condition. As part of its general business plan, the Company may from time to time seek the acquisition of additional businesses or assets that are complimentary to the Companys
operations. There can be no assurance that the Company will be able to successfully integrate any businesses or assets that it may acquire with the Companys existing operations. Similar difficulties as described above could occur following any
future acquisition.



41



---

##### Table of Contents

Risks Associated with Significant Suppliers. The Company utilizes end-user components and computer
hardware platforms and configurations developed by On Command Corporation (On Command) for its interactive television systems integration projects. The Company has developed software applications and interfaces for the On Command
components and hardware platforms. The Company operates under a License and Supply Agreement with On Command, which became effective June 30, 2003 and has a term of five years, expiring on June 30, 2008. Under the terms of the agreement, On Command
granted Allin Interactive exclusivity in purchasing hardware and end-user components for interactive television systems for the cruise line market. Such exclusivity shall be in effect for the first two years of the term and for each succeeding year
of the term if a minimum threshold for equipment purchases over the preceding two years has been attained. Allin Interactive is not obligated to purchase equipment, but risks the loss of exclusivity if purchases are less than the threshold level.
Based on aggregate purchases through March 31, 2005 and purchases expected to be made over the second quarter of 2005 to fulfill Interactive Media backlog for systems integration projects, the Company does not expect the minimum threshold required
to maintain exclusivity beyond June 30, 2005 will be reached. The Company does not expect that the expected loss of exclusivity for the cruise line market will negatively impact its ability to purchase interactive television equipment, computer
hardware, networking equipment and software from On Command. However, should some of the Companys competitors begin to utilize hardware and end-user components from On Command for interactive television projects, the Companys competitive
position may be negatively impacted.



The Companys
Business Process Practice Area specializes in services based on Microsoft Business Solutions financial and customer relationship management software. The sale of these products, particularly Great Plains, Solomon and MS CRM, is actively promoted in
conjunction with Business Process services. Microsoft Business Solutions supplied 13% and 19%, respectively, of the technology products purchased in 2004 and the first quarter of 2005 for the Companys integration and product sales operations.
Due to the November 2004 acquisitions of Jimary Business Systems and Computer Resources, management expects the level of revenue from the sale of Microsoft Business Solutions products will likely increase in 2005, although no assurance can be given
that such an increase in revenue will be realized. The availability of Microsoft Business Solutions products is critical to the Companys ability to realize increased revenue for its Business Process and Information System Product Sales
segments. These products are available primarily through Microsofts partner channel. Although the Company does not expect difficulty in maintaining its ability to purchase Microsoft Business Solutions products, significant turnover among its
Business Process staff could make continued partner qualification difficult. Similarly, financial setbacks that negatively impact the Companys ability to make timely payments for purchases of Microsoft Business Solutions products or the annual
partner fee could result in difficulty in obtaining these products in future periods.



Fluctuations in Operating Results.The Company expects to experience significant fluctuations in its future operating results, particularly for quarterly periods, that may be caused by many factors, including
fluctuations in backlog and changes in the scheduling, or the commencement or conclusion, of significant consulting or systems integration engagements. Accordingly, revenue and operating results will be difficult to forecast, and the Company
believes that period-to-period comparisons of its operating results will not necessarily be meaningful and should not be relied upon as an indication of future performance.



Competitive Market Conditions.The technology consulting industry remains fragmented with a large number of
smaller-sized participants despite a long-term trend toward consolidation in the industry. There are also large national or multinational firms competing in this market. Changes in the development and usage of computer hardware, software, Internet
applications and networking capabilities require continuing education and training of the Companys technical consultants and a sustained effort to monitor developments in the technology industry to maintain services that provide value to the
Companys customers. The Companys competitors may have resources to develop training and industry monitoring programs that are superior to the Companys. Offshore outsourcing of information technology services, particularly
application development services, has grown in significance in recent years and impacts demand for and pricing of services by domestic providers, as well as the supply and compensation for domestic labor. There can be no assurance that the Company
will be able to compete effectively with current or future competitors on the basis of quality of services or price or that the competitive pressures faced by the Company will not have a material adverse effect on the Companys business,
financial condition and results of operations.



The Companys Interactive Media consulting and systems integration services are currently provided to a limited market of cruise lines. The Company believes its application development expertise and hardware platforms



42



---

##### Table of Contents

offer cost-effective, flexible solutions with a broad range of functionality. However, the types of interactive
television systems and applications offered by the Company are significant capital expenditures for potential customers. Some of the Companys current and potential competitors may have longer operating histories and significantly greater
financial, technical, marketing and other resources than the Company and, therefore, may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. There can also be no assurance that competitors will
not develop systems and applications with superior functionality or cost advantages over the Companys systems and applications.



Geopolitical Considerations. Following the terrorist attacks in the United States in September 2001, the cruise industry experienced declines in
passenger occupancy and revenue. From 2002 through 2004, passenger occupancy recovered from this decline and realized additional growth, but fare discounting persisted through much of this period, negatively impacting cruise industry returns. In the
future, should any war, incidents of terrorism or the threat of retaliatory attacks cause further negative economic impact to the cruise industry, customers may seek to delay or cancel projects. Any such delays or cancellations would have a negative
impact on the Companys business, results of operations and financial condition. Any events which negatively impact the cruise industry or potential customers in other markets may also negatively impact the Interactive Media Practice
Areas ability to obtain additional future business. To the extent that any future incidents of war or terrorism or other geopolitical considerations negatively impact the economy in general or any businesses that are current or potential
Technology Infrastructure, Collaborative Solutions, Business Process or Outsourced Services customers, the Companys business, results of operations and financial condition may also be negatively impacted.



Liquidity Risk. The Companys cash resources and cash flow
generated from operations have been adequate to meet its needs to date, but there can be no assurance that a prolonged downturn in operations or business setbacks to the Companys operating entities will not result in working capital shortages
that may adversely impact the Companys operations. The liquidity risk is mitigated somewhat by the Companys current revolving credit facility, which permits borrowing for general working capital needs. The Companys revolving credit
facility expires September 30, 2005. Failure to renew the existing credit facility beyond September 30, 2005 or replace it with another facility with similar terms may adversely impact the Companys operations in the future.



Dependence on Key Personnel.The Companys success is dependent
on a number of key management, technical and operational personnel for the management of consulting and systems integration operations, development of new markets and timely execution of projects. The loss of one or more of these individuals could
have an adverse effect on the Companys business and results of operations. The Company depends on its continued ability to attract and retain highly skilled and qualified personnel. There can be no assurance that the Company will be successful
in attracting and retaining such personnel.



Credit
Risk. A significant portion of the Companys assets consist of cash and accounts receivable. Cash balances are maintained in several domestic banks and are subject to credit risk to the extent that balances in the Companys various
bank accounts exceed available banking system insurance coverage. Accounts receivable are subject to credit risk from customers failing to make full or timely payment for the amounts billed by the Company for services or products. Any losses
incurred by the Company could negatively impact the Companys business, results of operations and financial condition.



Public Market and Trading Issues. A public market for the Companys common stock developed following the Companys initial public
offering in November 1996. The Companys common stock has been quoted on the OTC Bulletin Board since May 9, 2001, following delisting of the Companys common stock from Nasdaqs National Market. Trading of the common stock has been
sporadic and the trading volume has generally been low and typical trading volume has been reduced since the common stock has been quoted on the OTC Bulletin Board. Even a small trading volume on a particular day or over a few days may affect the
market price of the common stock. The market price of the common stock could also be subject to fluctuations in response to variations in results of operations, changes in earnings estimates by securities analysts, announcements by competitors,
general economic and market conditions and other factors. These market fluctuations may adversely affect the market price of the common stock. Should quotation of the common stock on the OTC Bulletin Board or a similar facility cease for any reason,
the liquidity of the common stock and the Companys ability to raise equity capital would likely decrease.



43



---

##### Table of Contents

Public Company Requirements.The Company is subject to various laws and governmental regulations
relating to its status as a public company. The Sarbanes-Oxley Act of 2002 (SOX) and related Securities and Exchange Commission (SEC) regulations have resulted in the implementation of increased financial reporting and
disclosure requirements and new requirements for corporate governance. Some of these requirements are currently in effect and others will become effective in the future. Management believes compliance with the legislation and regulations has
resulted in additional costs to the Company associated with professional services, including legal and accounting services, regulatory reporting and investor information distribution. Management believes these costs will likely continue to increase
with the pending implementation of additional provisions of SOX and related regulations of the SEC and the Public Company Accounting Oversight Board, as well as other SEC regulations. Since the enactment of SOX and related SEC regulations, an
increasing number of smaller public companies have elected to deregister from public company status due to the increasing costs and administrative burden of compliance. The Company has and expects to continue to evaluate the benefits versus the
costs of remaining a public reporting company. Should the Company elect to deregister from public company status in the future, the liquidity of the common stock and the Companys ability to raise equity capital would likely decrease.



Risk of Technological Obsolescence.The ability of the
Company to maintain a standard of technological competitiveness is a significant factor in the Companys ability to maintain and expand its customer base, enter new markets and generate revenue. The Companys success will depend in part
upon its ability and the ability of key suppliers to develop, refine and introduce high quality improvements in the functionality and features of their system configurations, software, designs and applications in a timely manner and on competitive
terms. There can be no assurance that future technological advances by direct competitors or other providers will not result in improved technology systems and applications that could adversely affect the Companys business, financial condition
and results of operations.



Proprietary Technology; Absence
of Patents.The Company does not have patents on any of the system configurations, designs or applications it utilizes and relies on a combination of copyright and trade secret laws and contractual restrictions for protection. It is the
Companys policy to require employees, consultants and clients to execute nondisclosure agreements upon commencement of a relationship with the Company, and to limit access to and distribution of the Companys or customers software,
documentation and other proprietary information. Nonetheless, it may be possible for third parties to misappropriate the system configurations, designs or applications and proprietary information utilized by the Company or to independently develop
similar or superior technology. There can be no assurance that the legal protections afforded to the Company and the measures taken by the Company will be adequate to protect the utilized system configurations, designs or applications. Any
misappropriation of the Companys proprietary information could have a material adverse effect on the Companys business, financial condition and results of operations. There can be no assurance that other parties will not assert
technology infringement claims against the Company, or that, if asserted, such claims will not prevail. In this were to occur, the Company may be required to engage in protracted and costly litigation, regardless of the merits of such claims;
discontinue the use of certain software codes or processes; develop non-infringing technology; or enter into license arrangements with respect to the disputed intellectual property. There can be no assurance that the Company would be able to
identify or develop alternative technology or that any necessary licenses would be available or that, if available, such licenses could be obtained on commercially reasonable terms. Responding to and defending against any of these claims could have
a material adverse effect on the Companys business, financial condition and results of operations.



Government Regulation and Legal Uncertainties.The Company is subject, both directly and indirectly, to various laws and governmental regulations
relating to its business. As a result of technology changes and other related factors, laws and regulations may be adopted which significantly impact the Companys business.



Recently Issued Accounting Standards



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R), which replaces Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation(SFAS No. 123), and supercedes Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based payments, including grants of stock options, to be recognized in the financial statements based on their fair values. In April 2005 the deadline for
adoption of SFAS No. 123R was revised such



44



---

##### Table of Contents

that the requirement will become effective for the first annual period beginning after December 15, 2005. The pro forma
disclosures previously permitted under SFAS No. 123 (See Stock-Based Compensation under Note 1.  Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements under Part I, Item 1. 
Financial Statements above.) will no longer be an alternative to financial statement recognition after adoption of SFAS No. 123R. The Company will be required to adopt SFAS No. 123R beginning January 1, 2006. SFAS No. 123R requires determination
of the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition methods include prospective and retroactive
alternatives. Under the retroactive method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented, with compensation expense for all unvested stock options and restricted stock beginning with
the first period restated. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the period of adoption of SFAS No. 123R. The Company is evaluating the
requirements of SFAS No. 123R and has not yet determined the method of adoption or the effect that adoption of the new standard will have on the Companys results of operations or financial condition.



Item 3. Quantitative and Qualitative Disclosure about Market Risk



The Company currently does not invest excess funds in derivative financial instruments or other market rate sensitive instruments for the purpose of managing its foreign currency exchange rate risk or for any
other purpose.



Item 4. Controls and Procedures



Prior to the filing of this Report on Form 10-Q, an evaluation was performed under the supervision of and with the participation of the Companys management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the Companys disclosure controls and procedures. Based on the evaluation, the CEO and CFO have concluded that, as of March 31, 2005, the Companys disclosure controls and
procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms. During the fiscal quarter ended March 31, 2005, there were no significant changes in the Companys internal control over financial reporting that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.



Part II



Item 3. Defaults Upon Senior Securities



To date, the Company has paid all dividends required and legally and contractually permissible under the terms of each of the Certificates of Designation governing the Companys Series C, D, F and G preferred stock. Significant
arrearages of dividends have accrued on certain of these series, as discussed in the following paragraphs, because dividends accrued to date or for certain periods of time are not required to be paid until a future date or until redemption of the
preferred stock, if any. Each of the Certificates of Designation prohibits the Company from declaring or paying dividends or any other distribution on the common stock or any other class of stock ranking junior as to dividends and upon liquidation
unless all dividends on the senior series of preferred stock for the dividend payment date immediately prior to or concurrent with the dividend or distribution as to the junior securities are paid or are declared and funds are set aside for payment.
The order of liquidation preference of the Companys outstanding preferred stock, from senior to junior, is Series F, Series G, Series D and Series C. The S&T Loan Agreement prohibits the Company from paying dividends on any shares of its
capital stock, except for current dividends payable in the ordinary course of business on the Companys Series D, F and G preferred stock.



As of March 31, 2005, the Company had outstanding 25,000 shares of the Companys Series C Redeemable Preferred Stock, having a liquidation preference
of $100 per share. Accrued but unpaid dividends on the Series C preferred stock were approximately $2,452,000 as of March 31, 2005 and approximately $2,499,000 as



45



---

##### Table of Contents

of May 13, 2005. Series C preferred stock earns dividends at the rate of 8% of the liquidation value thereof per annum,
compounded quarterly, until June 30, 2006, within ten days of which initial payment of accrued dividends is scheduled. The Companys current credit agreement with S&T Bank prohibits payment of dividends on Series C preferred stock during
the term of the agreement. If the Company has legally available funds for the payment of dividends as prescribed by the Delaware General Corporation Law, the Company determines that business conditions and liquidity considerations would make payment
advisable and the current prohibition under the Companys credit facility of payment of dividends on Series C preferred stock is eliminated prior to the first scheduled payment for that series, $2,967,000 of dividends may be paid within ten
days of June 30, 2006 related to the Series C preferred stock. Any accrued dividends on the Series C preferred stock not paid within ten days of June 30, 2006 will compound thereafter at a rate of 12% of the liquidation value thereof per annum.
After June 30, 2006, dividends on the Series C preferred stock will accrue and compound at a rate of 12% per annum and will be payable quarterly, subject to legally available funds.



As of March 31, 2005, the Company had outstanding 2,750 shares of the Companys Series D Convertible Redeemable
Preferred Stock having a liquidation preference of $1,000 per share. Series D preferred stock earns dividends at the rate of 6% of the liquidation value thereof per annum, compounded quarterly if unpaid. To date, all required payments of dividends
on Series D preferred stock have been made. Accrued but unpaid dividends on Series D preferred stock were approximately $27,000 as of March 31, 2005 and approximately $6,000 as of May 13, 2005.



As of March 31, 2005, the Company had outstanding 1,000 shares of the
Companys Series F Convertible Redeemable Preferred Stock having a liquidation preference of $1,000 per share. Series F preferred stock earns dividends at the rate of 7% of the liquidation value thereof per annum, compounded quarterly if
unpaid. Dividends accrued for seven months during 1999 of approximately $41,000 are not required to be paid prior to redemption. To date, all required payments of dividends on Series F preferred stock have been made. Accrued but unpaid dividends on
Series F preferred stock were approximately $58,000 as of March 31, 2005 and approximately $49,000 as of May 13, 2005.



As of March 31, 2005, the Company had outstanding 150 shares of the Companys Series G Convertible Redeemable Preferred Stock having a liquidation
preference of $10,000 per share. Unless redeemed or converted to common stock sooner, Series G preferred stock earns cumulative quarterly dividends at the rate of 8% of the liquidation value thereof per annum until December 29, 2005. Thereafter, the
dividend rate will increase to 12% of the liquidation value until the earlier of the date of any redemption or the date of conversion into common stock. Dividends not paid at scheduled dates will compound quarterly thereafter. To date, all required
payments of dividends on Series G preferred stock have been made. Accrued but unpaid dividends on the Series G preferred stock were approximately $30,000 as of March 31, 2005 and approximately $14,000 as of May 13, 2005.



The payment of any dividend on shares of any outstanding series of the
Companys preferred stock is subject to legally available funds under Delaware law. See Part I  Item 2 of this Report on Form 10-Q, Managements Discussion and Analysis of Financial Condition and Results of Operations, under
the caption Liquidity and Capital Resources for more information about the Companys outstanding preferred stock.



Item 6. Exhibits



|              |  |                                                                                                                                                                                                                                                                                                                                                        
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                 
|3(i)(a)       |  | Certificate of Incorporation of Allin Corporation, as amended (incorporated by reference to Exhibit 3(i)(a) to Allin Communications Corporations Registration Statement No. 333-10447 on
Form S-1)                                                                                                                                                    
|              | 
|3(i)(b)       |  | Certificate of Amendment of the Certificate of Incorporation changing the Companys name from Allin Communications Corporation to Allin Corporation (incorporated by reference to Exhibit
3(i)(b) to Allin Corporations Annual Report on Form 10-K for the fiscal year ended December 31, 2004)                                                       
|              | 
|3(i)(c)       |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series C
Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.1 to Allin Corporations Report on Form 8-K filed on June 18, 1999)



46



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                               
|3(i)(d)       |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series D
Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.2 to Allin Corporations Report on Form 8-K filed on June 18, 1999)  
|              | 
|3(i)(e)       |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series F
Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.4 to Allin Corporations Report on Form 8-K filed on June 18, 1999)  
|              | 
|3(i)(f)       |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series G
Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.1 to Allin Corporations Report on Form 8-K filed on January 4, 2001)
|              | 
|3(ii)(a)      |  | Amended and Restated By-laws of Allin Corporation (incorporated by reference to Exhibit 3(ii) to Allin Communications Corporations Registration Statement No. 333-10447 on Form
S-1)                                                                                                                                                                                
|              | 
|3(ii)(b)      |  | Amendment to By-laws of Allin Corporation (incorporated by reference to Exhibit 3(ii) to Allin Communications Corporations Report on Form 10-Q for the period ended June 30,
1998)                                                                                                                                                                                  
|              | 
|3(ii)(c)      |  | Amendment to By-laws of Allin Corporation (incorporated by reference to Exhibit 3(ii)(c) to Allin Corporations Report on Form 10-K for the fiscal year ended December 31,
2000)                                                                                                                                                                                     
|              | 
|4.1           |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series C
Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.1 to Allin Corporations Report on Form 8-K filed on June 18, 1999)              
|              | 
|4.2           |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series D
Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.2 to Allin Corporations Report on Form 8-K filed on June 18, 1999)  
|              | 
|4.3           |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series F
Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.4 to Allin Corporations Report on Form 8-K filed on June 18, 1999)  
|              | 
|4.4           |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series G
Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.1 to Allin Corporations Report on Form 8-K filed on January 4, 2001)
|              | 
|4.5           |  | Form of Warrant for purchasers of Series G Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.2 to Allin Corporations Report on Form 8-K
filed on January 4, 2001)                                                                                                                                                 
|              | 
|10.1          |  | Summary of Bonuses Awarded to Executive Officers of Allin Corporation in Respect of 2004                                                                                                                                                                                                                                                                             



47



---

##### Table of Contents

|              |  |                                                                             
|------------- |  | ----------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                      
|10.2          |  | Summary of Compensation of the Directors of Allin Corporation               
|              | 
|11            |  | Computation of Earnings per Share                                           
|              | 
|31.1          |  | Rule 13a-14(a) Certification of Richard W. Talarico, Chief Executive Officer
|              | 
|31.2          |  | Rule 13a-14(a) Certification of Dean C. Praskach, Chief Financial Officer   
|              | 
|32            |  | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    



48



---

##### Table of Contents

Signatures



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



|                   |  |                   |  |                                                     
|------------------ |  | ----------------- |  | ----------------------------------------------------
|                   |  | ALLIN CORPORATION
|                   |  | (Registrant)     
|                   |  |                  
|Date: May 13, 2005 |  | By:               |  | /s/ Richard W. Talarico                             
|                   |  |                   |  | Richard W. Talarico                                 
|                   |  |                   |  | Chairman and Chief Executive Officer                
|                   |  |                  
|Date: May 13, 2005 |  | By:               |  | /s/ Dean C. Praskach                                
|                   |  |                   |  | Dean C. Praskach                                    
|                   |  |                   |  | Chief Financial Officer and Chief Accounting Officer



49



---

##### Table of Contents

Allin Corporation

Form 10-Q

March 31, 2005

Exhibit Index



|              |  |                                                                                                                                                                                                                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                               
|3(i)(a)       |  | Certificate of Incorporation of Allin Corporation, as amended (incorporated by reference to Exhibit 3(i)(a) to Allin Communications Corporations Registration Statement No. 333-10447 on
Form S-1)                                                                                                                                                                  
|              | 
|3(i)(b)       |  | Certificate of Amendment of the Certificate of Incorporation changing the Companys name from Allin Communications Corporation to Allin Corporation (incorporated by reference to Exhibit
3(i)(b) to Allin Corporations Annual Report on Form 10-K for the fiscal year ended December 31, 2004)                                                                     
|              | 
|3(i)(c)       |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series C
Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.1 to Allin Corporations Report on Form 8-K filed on June 18, 1999)              
|              | 
|3(i)(d)       |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series D
Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.2 to Allin Corporations Report on Form 8-K filed on June 18, 1999)  
|              | 
|3(i)(e)       |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series F
Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.4 to Allin Corporations Report on Form 8-K filed on June 18, 1999)  
|              | 
|3(i)(f)       |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series G
Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.1 to Allin Corporations Report on Form 8-K filed on January 4, 2001)
|              | 
|3(ii)(a)      |  | Amended and Restated By-laws of Allin Corporation (incorporated by reference to Exhibit 3(ii) to Allin Communications Corporations Registration Statement No. 333-10447 on Form
S-1)                                                                                                                                                                                
|              | 
|3(ii)(b)      |  | Amendment to By-laws of Allin Corporation (incorporated by reference to Exhibit 3(ii) to Allin Communications Corporations Report on Form 10-Q for the period ended June 30,
1998)                                                                                                                                                                                  
|              | 
|3(ii)(c)      |  | Amendment to By-laws of Allin Corporation (incorporated by reference to Exhibit 3(ii)(c) to Allin Corporations Report on Form 10-K for the fiscal year ended December 31,
2000)                                                                                                                                                                                     
|              | 
|4.1           |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series C
Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.1 to Allin Corporations Report on Form 8-K filed on June 18, 1999)              
|              | 
|4.2           |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series D
Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.2 to Allin Corporations Report on Form 8-K filed on June 18, 1999)  



50



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                               
|4.3           |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series F
Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.4 to Allin Corporations Report on Form 8-K filed on June 18, 1999)  
|              | 
|4.4           |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series G
Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.1 to Allin Corporations Report on Form 8-K filed on January 4, 2001)
|              | 
|4.5           |  | Form of Warrant for purchasers of Series G Convertible Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.2 to Allin Corporations Report on Form 8-K
filed on January 4, 2001)                                                                                                                                                 
|              | 
|10.1          |  | Summary of Bonuses Awarded to Executive Officers of Allin Corporation in Respect of 2004                                                                                                                                                                                                                                                                             
|              | 
|10.2          |  | Summary of Compensation of the Directors of Allin Corporation                                                                                                                                                                                                                                                                                                        
|              | 
|11            |  | Computation of Earnings per Share                                                                                                                                                                                                                                                                                                                                    
|              | 
|31.1          |  | Rule 13a-14(a) Certification of Richard W. Talarico, Chief Executive Officer                                                                                                                                                                                                                                                                                         
|              | 
|31.2          |  | Rule 13a-14(a) Certification of Dean C. Praskach, Chief Financial Officer                                                                                                                                                                                                                                                                                            
|              | 
|32            |  | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                             



51