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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended September 30, 2007

OR



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

For the transition period from  to

Commission file number: 0-21395



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ALLIN CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)                 |  | (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)



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                                        |  |                                
|--------------------------------------- |  | -------------------------------
|Class                                   |  | Outstanding at November 7, 2007
|Common Stock, $0.01 par value per share |  | 8,271,819 shares               



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##### 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 |  | 28
|                               |  |          |  |                                                                                      
|                               |  | Item 3.  |  | Quantitative and Qualitative Disclosure about Market Risk                             |  | Page |  | 53
|                               |  |          |  |                                                                                      
|                               |  | Item 4.  |  | Controls and Procedures                                                               |  | Page |  | 53
|                               |  |         
|Part II Other Information     |  |          |  |                                                                                      
|                               |  |          |  |                                                                                      
|                               |  | Item 1A. |  | Risk Factors                                                                          |  | Page |  | 53
|                               |  |          |  |                                                                                      
|                               |  | Item 2.  |  | Unregistered Sales of Securities and Use of Proceeds                                  |  | Page |  | 55
|                               |  |          |  |                                                                                      
|                               |  | Item 3.  |  | Defaults Upon Senior Securities                                                       |  | Page |  | 55
|                               |  |          |  |                                                                                      
|                               |  | Item 6.  |  | Exhibits                                                                              |  | Page |  | 57
|                               |  |         
|Signatures                     |  | Page     |  | 59                                                                                   

Unless the context otherwise requires, all references herein to the Company, we,
us and our refer to Allin Corporation and its subsidiaries.



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Forward-Looking Information

Certain matters in this Form 10-Q, including, without limitation, certain matters
discussed under Part I, Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 1A  Risk Factors 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, estimate, likely, anticipate, may, could, future, project 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 Part II, Item 1ARisk Factors as well as throughout Part I, Item 1A  Risk Factors included in Allin
Corporations Report on Form 10-K for the year ended December 31, 2006. Allin Corporation undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.



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##### Table of Contents

Part I - Financial Information

Item 1. - Financial Statements

ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)



|                                                                              |  |                  |        |   |                   |   |        |  
|----------------------------------------------------------------------------- |  | ---------------- | ------ | - | ----------------- | - | ------ | -
|                                                                              |  | December 31,2006 |        |   | September 30,2007 |  
|                                                                              |  | (See Note 1)     |        |   | (Unaudited)       |  
|ASSETS                                                                        |  |                  |        |   |                   |   |        |  
|                                                                              |  |                 
|Current assets:                                                               |  |                  |        |   |                   |   |        |  
|Cash and cash equivalents                                                     |  | $                | 369    |   |                   | $ | 402    |  
|Accounts receivable, net of allowance for doubtful accounts of $120 and $146  |  |                  | 4,174  |   |                   |   | 5,728  |  
|Unbilled services                                                             |  |                  | 66     |   |                   |   | 283    |  
|Current portion of note receivable from employee                              |  |                  | 3      |   |                   |   | 3      |  
|Inventory                                                                     |  |                  | 183    |   |                   |   | 222    |  
|Prepaid expenses                                                              |  |                  | 312    |   |                   |   | 278    |  
|Costs and estimated gross margins in excess of billings                       |  |                  | 7      |   |                   |   | 483    |  
|Current portion of deferred income tax asset                                  |  |                  | 835    |   |                   |   | 904    |  
|                                                                              |  |                  |        |   |                   |   |        |  
|Total current assets                                                          |  |                  | 5,949  |   |                   |   | 8,303  |  
|                                                                              |  |                 
|Property and equipment, at cost:                                              |  |                  |        |   |                   |   |        |  
|Leasehold improvements                                                        |  |                  | 473    |   |                   |   | 477    |  
|Furniture and equipment                                                       |  |                  | 1,296  |   |                   |   | 1,620  |  
|                                                                              |  |                  |        |   |                   |   |        |  
|                                                                              |  |                  | 1,769  |   |                   |   | 2,097  |  
|Lessaccumulated depreciation                                                 |  |                  | (1,580 | ) |                   |   | (1,708 | )
|                                                                              |  |                  |        |   |                   |   |        |  
|                                                                              |  |                  | 189    |   |                   |   | 389    |  
|                                                                              |  |                 
|Other assets:                                                                 |  |                  |        |   |                   |   |        |  
|Non-current portion of note receivable from employee                          |  |                  | 3      |   |                   |   |       |  
|Non-current portion of deferred income tax asset                              |  |                  | 280    |   |                   |   | 1,201  |  
|Software development costs, net of accumulated amortization of $-0- and $105  |  |                  | 526    |   |                   |   | 653    |  
|Goodwill                                                                      |  |                  | 4,961  |   |                   |   | 5,219  |  
|Other intangible assets, net of accumulated amortization of $1,475 and $1,677 |  |                  | 1,327  |   |                   |   | 1,122  |  
|                                                                              |  |                  |        |   |                   |   |        |  
|Total assets                                                                  |  | $                | 13,235 |   |                   | $ | 16,887 |  
|                                                                              |  |                  |        |   |                   |   |        |  

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



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ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)



|                                                                                                   |  |                  |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                   |  | December 31,2006 |         |   | September 30,2007 |  
|                                                                                                   |  | (See Note 1)     |         |   | (Unaudited)       |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                               |  |                  |         |   |                   |   |         |  
|                                                                                                   |  |                 
|Current liabilities:                                                                               |  |                  |         |   |                   |   |         |  
|Bank line of credit                                                                                |  | $                |        |   |                   | $ | 1,770   |  
|Accounts payable                                                                                   |  |                  | 1,133   |   |                   |   | 977     |  
|Accrued liabilities:                                                                               |  |                  |         |   |                   |   |         |  
|Compensation and payroll taxes                                                                     |  |                  | 261     |   |                   |   | 566     |  
|Current portion of dividends on preferred stock                                                    |  |                  | 141     |   |                   |   | 141     |  
|Other                                                                                              |  |                  | 169     |   |                   |   | 165     |  
|Customer deposits                                                                                  |  |                  | 142     |   |                   |   | 210     |  
|Billings in excess of costs and estimated gross margins                                            |  |                  | 1,062   |   |                   |   | 273     |  
|Deferred revenue                                                                                   |  |                  | 323     |   |                   |   | 628     |  
|Income taxes payable                                                                               |  |                  | 15      |   |                   |   | 0       |  
|Accrued acquisition consideration                                                                  |  |                  | 1,602   |   |                   |   | 1,876   |  
|                                                                                                   |  |                  |         |   |                   |   |         |  
|Total current liabilities                                                                          |  |                  | 4,848   |   |                   |   | 6,606   |  
|                                                                                                   |  |                 
|Non-current portion of dividends on preferred stock                                                |  |                  | 3,344   |   |                   |   | 3,880   |  
|                                                                                                   |  |                  |         |   |                   |   |         |  
|Total liabilities                                                                                  |  |                  | 8,192   |   |                   |   | 10,486  |  
|                                                                                                   |  |                 
|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     |  |                  | 1,081   |   |                   |   | 1,081   |  
|Series H redeemable preferred stock, designated, issued and outstanding 250 shares                 |  |                  | 1,910   |   |                   |   | 1,910   |  
|Common stock, par value $.01 per share, authorized 20,000,000 shares, outstanding 7,828,981 shares |  |                  | 78      |   |                   |   | 78      |  
|Additional paid-in-capital                                                                         |  |                  | 38,108  |   |                   |   | 37,069  |  
|Warrants                                                                                           |  |                  | 590     |   |                   |   | 590     |  
|Treasury stock at cost, 8,167 common shares                                                        |  |                  | (27     | ) |                   |   | (27     | )
|Accumulated deficit                                                                                |  |                  | (42,349 | ) |                   |   | (39,952 | )
|                                                                                                   |  |                  |         |   |                   |   |         |  
|Total shareholders equity                                                                         |  |                  | 5,043   |   |                   |   | 6,401   |  
|                                                                                                   |  |                  |         |   |                   |   |         |  
|Total liabilities and shareholders equity                                                         |  | $                | 13,235  |   |                   | $ | 16,887  |  
|                                                                                                   |  |                  |         |   |                   |   |         |  

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



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ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)



|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|----------------------------------------------------- |  | ---------------------------------- | --------- | - | ---------------------------------- | - | ---------- | --------------------------------- |  | - | --------------------------------- | - |  | - | ---------- | -
|                                                      |  | Three MonthsEndedSeptember 30,2006 |           |   | Three MonthsEndedSeptember 30,2007 |   |            | Nine MonthsEndedSeptember 30,2006 |  |   | Nine MonthsEndedSeptember 30,2007 |  
|Revenue:                                              |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Consulting services                                   |  | $                                  | 3,466     |   |                                    | $ | 4,405      |                                   |  | $ | 10,705                            |   |  | $ | 13,287     |  
|Systems integration                                   |  |                                    | 287       |   |                                    |   | 782        |                                   |  |   | 2,424                             |   |  |   | 3,610      |  
|Information system product sales                      |  |                                    | 278       |   |                                    |   | 162        |                                   |  |   | 852                               |   |  |   | 788        |  
|Other services                                        |  |                                    | 370       |   |                                    |   | 333        |                                   |  |   | 1,064                             |   |  |   | 963        |  
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Total revenue                                         |  |                                    | 4,401     |   |                                    |   | 5,682      |                                   |  |   | 15,045                            |   |  |   | 18,648     |  
|                                                      |  |                                    |           |  
|Cost of sales:                                        |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Consulting services                                   |  |                                    | 1,603     |   |                                    |   | 1,787      |                                   |  |   | 4,447                             |   |  |   | 5,492      |  
|Systems integration                                   |  |                                    | 134       |   |                                    |   | 496        |                                   |  |   | 1,074                             |   |  |   | 1,971      |  
|Information system product sales                      |  |                                    | 195       |   |                                    |   | 113        |                                   |  |   | 623                               |   |  |   | 565        |  
|Other services                                        |  |                                    | 172       |   |                                    |   | 138        |                                   |  |   | 581                               |   |  |   | 621        |  
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Total cost of sales                                   |  |                                    | 2,104     |   |                                    |   | 2,534      |                                   |  |   | 6,725                             |   |  |   | 8,649      |  
|                                                      |  |                                    |           |  
|Gross profit:                                         |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Consulting services                                   |  |                                    | 1,863     |   |                                    |   | 2,618      |                                   |  |   | 6,258                             |   |  |   | 7,795      |  
|Systems integration                                   |  |                                    | 153       |   |                                    |   | 286        |                                   |  |   | 1,350                             |   |  |   | 1,639      |  
|Information system product sales                      |  |                                    | 83        |   |                                    |   | 49         |                                   |  |   | 229                               |   |  |   | 223        |  
|Other services                                        |  |                                    | 198       |   |                                    |   | 195        |                                   |  |   | 483                               |   |  |   | 342        |  
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Total gross profit                                    |  |                                    | 2,297     |   |                                    |   | 3,148      |                                   |  |   | 8,320                             |   |  |   | 9,999      |  
|                                                      |  |                                    |           |  
|Selling, general & administrative expenses:           |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Depreciation and amortization                         |  |                                    | 99        |   |                                    |   | 184        |                                   |  |   | 302                               |   |  |   | 448        |  
|Loss (gain) on disposal of assets                     |  |                                    |          |   |                                    |   |           |                                   |  |   | 3                                 |   |  |   | (1         | )
|Other selling, general & administrative expenses      |  |                                    | 2,229     |   |                                    |   | 2,769      |                                   |  |   | 6,816                             |   |  |   | 8,046      |  
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Total selling, general & administrative expenses      |  |                                    | 2,328     |   |                                    |   | 2,953      |                                   |  |   | 7,121                             |   |  |   | 8,493      |  
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|                                                      |  |                                    |           |  
|(Loss) income from operations                         |  |                                    | (31       | ) |                                    |   | 195        |                                   |  |   | 1,199                             |   |  |   | 1,506      |  
|                                                      |  |                                    |           |  
|Interest income                                       |  |                                    |          |   |                                    |   |           |                                   |  |   | (1                                | ) |  |   | (1         | )
|Interest expense                                      |  |                                    |          |   |                                    |   | 28         |                                   |  |   | 11                                |   |  |   | 73         |  
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Income before provision for income taxes              |  |                                    | (31       | ) |                                    |   | 167        |                                   |  |   | 1,189                             |   |  |   | 1,434      |  
|                                                      |  |                                    |           |  
|(Benefit from) provision for income taxes             |  |                                    | (17       | ) |                                    |   | (1,037     | )                                 |  |   | 15                                |   |  |   | (964       | )
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Net (loss) income                                     |  |                                    | (14       | ) |                                    |   | 1,204      |                                   |  |   | 1,174                             |   |  |   | 2,398      |  
|                                                      |  |                                    |           |  
|Dividends on preferred stock                          |  |                                    | 346       |   |                                    |   | 366        |                                   |  |   | 911                               |   |  |   | 1,071      |  
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Net (loss) income attributable to common shareholders |  | $                                  | (360      | ) |                                    | $ | 838        |                                   |  | $ | 263                               |   |  | $ | 1,327      |  
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|(Loss) earnings per common share - basic              |  | $                                  | (0.05     | ) |                                    | $ | 0.11       |                                   |  | $ | 0.04                              |   |  | $ | 0.17       |  
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Earnings per common share - diluted                   |  | $                                  | (0.05     | ) |                                    | $ | 0.07       |                                   |  | $ | 0.03                              |   |  | $ | 0.12       |  
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Weighted average shares outstanding - basic           |  |                                    | 7,467,339 |   |                                    |   | 7,828,981  |                                   |  |   | 7,467,339                         |   |  |   | 7,828,981  |  
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Weighted average shares outstanding - diluted         |  |                                    | 7,467,339 |   |                                    |   | 12,343,961 |                                   |  |   | 11,931,184                        |   |  |   | 12,323,341 |  
|                                                      |  |                                    |           |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  

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



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##### Table of Contents

ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



|                                                                                 |  |                                   |   |  |                                   |  
|-------------------------------------------------------------------------------- |  | --------------------------------- | - |  | --------------------------------- | -
|                                                                                 |  | Nine MonthsEndedSeptember 30,2006 |   |  | Nine MonthsEndedSeptember 30,2007 |  
|Cash flows from operating activities:                                            |  |                                   |   |  |                                   |  
|Net income                                                                       |  | 1,174                             |   |  | 2,398                             |  
|Adjustments to reconcile net income to net cash flows from operating activities: |  |                                   |   |  |                                   |  
|Depreciation and amortization                                                    |  | 302                               |   |  | 448                               |  
|Loss (gain) on disposal of assets                                                |  | 3                                 |   |  | (1                                | )
|Benefit from deferred income taxes                                               |  | (5                                | ) |  | (991                              | )
|Provision for uncollectable accounts receivable                                  |  | 50                                |   |  | 76                                |  
|Fair value expense for stock options                                             |  | 17                                |   |  | 32                                |  
|Changes in certain assets and liabilities:                                       |  |                                   |   |  |                                   |  
|Accounts receivable                                                              |  | (1,363                            | ) |  | (1,630                            | )
|Unbilled services                                                                |  | (40                               | ) |  | (217                              | )
|Inventory                                                                        |  | (157                              | ) |  | (38                               | )
|Prepaid expenses                                                                 |  | 8                                 |   |  | 31                                |  
|Costs and estimated gross margins in excess of billings                          |  | (297                              | ) |  | (475                              | )
|Software development costs                                                       |  | (345                              | ) |  | (232                              | )
|Accounts payable                                                                 |  | 525                               |   |  | (156                              | )
|Accrued compensation and payroll taxes                                           |  | 159                               |   |  | 305                               |  
|Other accrued liabilities                                                        |  | 100                               |   |  | 45                                |  
|Customer deposits                                                                |  | (21                               | ) |  | 68                                |  
|Billings in excess of costs and estimated gross margins                          |  | (395                              | ) |  | (789                              | )
|Income taxes payable                                                             |  | (21                               | ) |  | (15                               | )
|Deferred revenue                                                                 |  | 142                               |   |  | 305                               |  
|                                                                                 |  |                                   |   |  |                                   |  
|Net cash flows used for operating activities                                     |  | (164                              | ) |  | (836                              | )
|                                                                                 |  |                                   |   |  |                                   |  
|Cash flows from investing activities:                                            |  |                                   |   |  |                                   |  
|Proceeds from sale of assets                                                     |  |                                  |   |  | 1                                 |  
|Capital expenditures                                                             |  | (84                               | ) |  | (340                              | )
|Acquisition of businesses                                                        |  | (34                               | ) |  | (29                               | )
|                                                                                 |  |                                   |   |  |                                   |  
|Net cash flows used for investing activities                                     |  | (118                              | ) |  | (368                              | )
|                                                                                 |  |                                   |   |  |                                   |  
|Cash flows from financing activities:                                            |  |                                   |   |  |                                   |  
|Loan repayment received from employee                                            |  | 2                                 |   |  | 2                                 |  
|Net borrowing (repayment) on line of credit                                      |  |                                  |   |  | 1,770                             |  
|Payment of dividends on preferred stock                                          |  | (520                              | ) |  | (535                              | )
|                                                                                 |  |                                   |   |  |                                   |  
|Net cash flows (used for) provided by financing activities                       |  | (518                              | ) |  | 1,237                             |  
|                                                                                 |  |                                   |   |  |                                   |  
|Net change in cash and cash equivalents                                          |  | (800                              | ) |  | 33                                |  
|Cash and cash equivalents, beginning of period                                   |  | 1,531                             |   |  | 369                               |  
|                                                                                 |  |                                   |   |  |                                   |  
|Cash and cash equivalents, end of period                                         |  | 731                               |   |  | 402                               |  
|                                                                                 |  |                                   |   |  |                                   |  

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



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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- and nine-month periods ended September 30, 2006
and 2007 should be read in conjunction with the audited financial statements and notes for the years ended December 31, 2005 and 2006, contained in the Annual Report on Form 10-K of Allin Corporation (the Company) for the year ended
December 31, 2006. 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 2  Share-Based Payment, 5  Goodwill and Other 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, 2006
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.

Reclassification

The Consolidated Statement of Cash
Flows for the nine-month period ended September 30, 2006 reflects a reclassification to the statement as originally reported to conform the prior period information to the current presentation. The increase in the allowance for doubtful
accounts receivable recorded by the Company is now shown as an adjustment to reconcile net loss to net cash flows from operating activities. In the previous presentation, the increase in the allowance for doubtful accounts had been netted with the
change in accounts receivable shown under changes in certain assets and liabilities. There are no changes to the net cash flows used by operating activities or the net change in cash and cash equivalents for the nine-month period ended
September 30, 2006.

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.

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 revenue captions on the
Companys Consolidated Statements of Operations.



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



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. The practice areas also operate under service contracts for which a fixed amount is charged for services for a specified time period. Revenue is recognized for service contracts on a pro-rata basis over the applicable time
period. Certain consulting engagements for these practice areas are performed on a fixed-price basis. 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.

Certain consulting projects are part of related arrangements, including computer hardware and equipment for
specialized technology platforms, 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. Arrangements for these projects 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. Arrangements for these projects frequently include PCS for a ninety-day period following
system installation. A portion of the contract value is allocated to the PCS based on vendor-specific objective evidence (VSOE) of fair value based on rates when sold separately 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 VSOE, in accordance with SOP 97-2 and EITF No. 00-21.

Systems Integration

Systems integration includes projects conducted by the Companys practice areas that are part of related
arrangements, including computer hardware and other equipment, 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 revenue recognition method 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. 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. Systems integration arrangements do not include rights for hardware or equipment upgrades, and the majority do not include rights for software upgrades. Certain
arrangements include rights for software upgrades upon the Companys development of any upgrades. However, the Company is under no obligation to develop upgrades on any schedule or at all.

Information System Product Sales

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



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



information system product sales is 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 on the Companys assumption of primary responsibility for fulfillment of the sales, collection risk on amounts billed to customers and inventory risk. Amounts billed to
customers for shipping charges are recorded as revenue. Amounts billed for sales tax are not recorded as revenue.

Other Services

The Company has a small number of engagements under which technical resources are provided to customers on an outsourced basis. The Company recognizes
revenue for these engagements in a similar manner as discussed above for time-based consulting services. Other services revenue also results from software license fees, website hosting and archival fees, contractual commissions, placement fees and
customer billings for recovery of out-of-pocket costs associated with the performance of consulting and systems integration engagements. 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.

Cost of Sales

Cost of sales for consulting services includes labor cost for customer projects applied at the consultants standard hourly cost rates times hours
charged. The standard hourly cost rates for salaried consultants, who represent a significant majority of the Companys labor force, are determined by dividing their annual salary by the Companys estimate of standard annual hours
available for customer projects, and then adding a burden percentage estimate for payroll taxes, benefits and workers compensation. For hourly-based consultants, the standard hourly cost rate is the hourly rate plus a burden percentage. The Company
also utilizes independent contractors for customer projects and records labor costs at their respective hourly rates. Labor cost is applied in this manner for consulting projects where revenue is recognized based on hourly fees and under service
contracts where fixed amounts of revenue are recognized on a pro-rata basis over specified time periods. The Company uses incurred labor to expected total project labor as the basis for recognition of labor cost of sales where revenue is recognized
on a proportional performance basis. The aggregate of project labor charges at standard hourly cost rates and estimated burden is utilized as incurred labor cost.

The Company follows contract accounting in recording cost of sales for systems integration projects involving significant software modification. The Company applies project cost of sales for computer hardware,
software, equipment and other costs in a manner consistent with the basis for recognition of revenue on the project, percentage of completion or completed contract. 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, cost of sales is recognized upon completion of the project.

Cost of sales associated with information system product sales is recognized when delivery of the product has occurred. Where information system product sales are part of multiple-deliverable arrangements, cost of sales for products and
consulting services are recognized separately based on SOP 97-2 and EITF No. 00-21. Cost of sales for the Companys information system product sales is reported on a gross basis and includes both product and shipping cost.

The Company recognizes cost of sales for its outsourced resource engagements in a similar manner as discussed above for time-based practice area
consulting services. Other services cost of sales also results from operations such as website hosting and archival. Other services cost of sales is recognized for out-of-pocket costs associated with the performance of consulting and systems
integration engagements.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include compensation and related payroll taxes, benefits and workers compensation for the Companys executive management, practice area management, sales, marketing,
financial and administrative employees. Selling, general and administrative expenses also reflect the portion of consulting staff time not associated directly with customer projects. Such time for consultants includes education and training,
technical



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



evaluation of customer requests for proposal and assistance with project proposal preparation. Selling, general and administrative expenses include the cost
for paid time off for all employees. Other significant selling, general and administrative expenses include professional legal, accounting and consulting services, rent and operating expenses for the Companys offices, travel, entertainment,
communications and insurance. Expense is recorded for any sales tax charged by vendors or use tax accrued by the Company related to purchases recorded as selling, general and administrative expense. Selling, general and administrative expenses
include depreciation and amortization and any losses recognized due to impairment or disposal of assets.

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. Prior to the expiration of their exercise or convertibility
period, if any, outstanding stock options, warrants and convertible preferred stock would all be considered dilutive securities under SFAS No. 128. The following schedule summarizes the calculation of basic and diluted earnings per share under
SFAS No. 128:



|                                                                      |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|--------------------------------------------------------------------- |  | ------------------------------ | --------- | ----------------------------- | ---- | - | ---------- |  | ---- | ---------- |  | - | ----------
|Calculation of Basic and Diluted Earnings per CommonShare             |  | Three Months EndedSeptember 30 |           | Nine Months EndedSeptember 30
|Dollars in thousands, except per share data                           |  | 2006                           |           |                               | 2007 |   | 2006       |  | 2007
|Earnings per common share  basic:                                    |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Numerator:                                                            |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Net (loss) income                                                     |  | $                              | (14       | )                             |      | $ | 1,204      |  | $    | 1,174      |  | $ | 2,398     
|Dividends on preferred stock                                          |  |                                | 346       |                               |      |   | 366        |  |      | 911        |  |   | 1,071     
|                                                                      |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Net (loss) income attributable to common shareholders                 |  | $                              | (360      | )                             |      | $ | 838        |  | $    | 263        |  | $ | 1,327     
|                                                                      |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Denominator:                                                          |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Shares used in calculating basic (loss) earnings per common share     |  |                                | 7,467,339 |                               |      |   | 7,828,981  |  |      | 7,467,339  |  |   | 7,828,981 
|                                                                      |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|(Loss) earnings per common share  basic                              |  | $                              | (0.05     | )                             |      | $ | 0.11       |  | $    | 0.04       |  | $ | 0.17      
|                                                                      |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Earnings per common share  diluted:                                  |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Numerator:                                                            |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Net (loss) income                                                     |  | $                              | (14       | )                             |      | $ | 1,204      |  | $    | 1,174      |  | $ | 2,398     
|Dividends on preferred stock                                          |  |                                | 346       |                               |      |   | 366        |  |      | 911        |  |   | 1,071     
|                                                                      |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Net (loss) income attributable to common shareholders                 |  | $                              | (360      | )                             |      | $ | 838        |  | $    | 263        |  | $ | 1,327     
|                                                                      |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Add dividends on convertible preferred stock                          |  |                                |          |                               |      |   | 45         |  |      | 135        |  |   | 135       
|                                                                      |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Numerator for diluted EPS calculation                                 |  | $                              | (360      | )                             |      | $ | 883        |  | $    | 398        |  | $ | 1,462     
|                                                                      |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Denominator:                                                          |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Weighted average common shares outstanding                            |  |                                | 7,467,339 |                               |      |   | 7,828,981  |  |      | 7,467,339  |  |   | 7,828,981 
|Effect of outstanding stock options                                   |  |                                |          |                               |      |   | 229,266    |  |      | 178,131    |  |   | 208,646   
|Effect of convertible preferred stock                                 |  |                                |          |                               |      |   | 4,285,714  |  |      | 4,285,714  |  |   | 4,285,714 
|                                                                      |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|Shares used in calculating diluted net (loss) income per common share |  |                                | 7,467,339 |                               |      |   | 12,343,961 |  |      | 11,931,184 |  |   | 12,323,341
|                                                                      |  |                                |           |                               |      |   |            |  |      |            |  |   |           
|(Loss) earnings per common share  diluted                            |  | $                              | (0.05     | )                             |      | $ | 0.07       |  | $    | 0.03       |  | $ | 0.12      
|                                                                      |  |                                |           |                               |      |   |            |  |      |            |  |   |           

Each of the Companys 150 shares of Series G Convertible Redeemable Preferred Stock is
convertible into 28,571 shares of the Companys common stock. The potentially convertible shares were not included in the calculation of diluted EPS for the three-month period ended September 30, 2007 as the effect would have been
anti-dilutive. The exercise price of warrants outstanding exceeded the average market price of the Companys common stock for the three- and nine-month periods ended September 30, 2006 and 2007. Accordingly, warrants were not included in
the calculation of diluted EPS for those periods. Outstanding warrants to purchase common shares for which the exercise prices exceeded the respective periods average market price of the common shares covered 2,500,000 shares of common stock
as of September 30, 2006 and 2007. The average market prices of the common stock for each of the three- and nine-



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



month periods ended September 30, 2006 exceeded the exercise prices for 345,000 stock options outstanding as of September 30, 2006. The average
market prices of the common stock for each of the three- and nine-month periods ended September 30, 2007 exceeded the exercise prices for 455,000 stock options outstanding as of September 30, 2007. No additional shares were included in the
calculation of diluted EPS for the three-month period ended September 30, 2006 as the effect would have been anti-dilutive. The calculations of diluted EPS for the other periods included the numbers of shares related to the stock options
included in the table above.

Accounts Receivable and Unbilled Services

The Companys subsidiaries record accounts receivable based upon billing for services and products. Unbilled services 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 December 31, 2006 and September 30, 2007, the Companys risk of loss for accounts
receivable and unbilled services 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 based on the Companys history with write-offs of 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 September 30, 2007, one significant customer
comprised 10% of the Companys accounts receivable. As of December 31, 2006, one significant customer comprised 11% of the Companys accounts receivable.

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 reflect projects with related Consulting Services, Systems Integration and Other Services elements
for which revenue and cost of sales are being recognized on a contract basis of accounting. For individual projects, costs and estimated gross margins in excess of billings consist of costs not yet recognized as cost of sales and estimated gross
margins, net of amounts billed but not yet recognized as revenue, while billings in excess of costs and estimated gross margins consist 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. 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.

Software Development Costs and Research and Development Expense

The Consolidated Balance Sheets as of December 31, 2006 and September 30, 2007 include capitalized software development costs of $526,000 and
$653,000, respectively, net of accumulated amortization. Software development costs include purchased software development tools, testing equipment and the cost of Company labor incurred during the period subsequent to the Companys
determination that technical feasibility had been achieved for the developed software applications but prior to commercial introduction of the software applications. Costs incurred prior to the attainment of technical feasibility in 2005 and costs
incurred subsequent to commercial introduction in May 2007, consisting primarily of internal labor, have been expensed. There was no expense recorded during the three- and nine-month periods ended September 30, 2006. During the three- and
nine-month periods ended September 30, 2007, $109,000 and $210,000, respectively, of research and development expense was recorded. Additionally, there was $63,000 and $105,000, respectively, of amortization expense recorded during each of the
three- and nine-month periods ended September 30, 2007 related to capitalized software development costs.



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



Market Risk Sensitive Instruments

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

Deferred Revenue

Deferred revenue is recorded for
customer billings for which services will be performed or products delivered in future periods. Such amounts are recognized as revenue when services are performed or products are delivered. As of December 31, 2006 and September 30, 2007,
respectively, deferred revenue represented amounts expected to be recognized as revenue within one year of the applicable date.

Accrued Acquisition
Consideration

Emerging Issues Task Force Issue No. 95-8 Accounting for Contingent Consideration Paid to the Shareholders of an
Acquired Enterprise in a Purchase Business Combination (EITF No. 95-8) provides guidance for accounting for contingent consideration. EITF No. 95-8 states that the determination of whether contingent consideration based on
earnings or other performance measures should be accounted for as an adjustment of the purchase price of the acquired enterprise or as expense for compensation for services or profit sharing is a matter of judgment that depends on the relevant facts
and circumstances. EITF No. 95-8 specifies that an evaluation of the appropriate accounting for contingent consideration should include a review of factors involving continuing employment of former equity holders of the acquired enterprise,
components of the shareholder group, reasons for the contingent payments, the formula for determining contingent consideration payments and other arrangements and issues.

The Stock Purchase Agreement entered into for the Companys 2005 acquisition of CodeLab Technology Group, Inc. (CodeLab) provides for annual payments of contingent consideration to be paid to the
former holders of equity interests in CodeLab for each of the three annual periods ending July 31, 2006, 2007 and 2008, consisting of a combination of cash and shares of the Companys common stock. Any contingent payments due for the three
annual periods are to be calculated pursuant to a negotiated formula, as specifically set forth in the Purchase Agreement, that is based upon an agreed to multiple of the net operating profit of CodeLabs business, determined on an accrual
basis before deductions for income taxes, interest, depreciation and amortization, in the relevant annual period, and subject to further adjustments as set forth in the Purchase Agreement, including potential setoffs by the Company for certain
indemnification claims. The total annual contingent payments shall not exceed $5,600,000 in any or all of the three annual periods and if due shall be made by the Company not later than 120 days following the end of such annual period. The Company
does not believe that the final amount of consideration to be paid under the terms of the Stock Purchase Agreement, even if it includes the maximum contingent consideration, is in excess of the fair value of the CodeLab equity interests received.

As of July 31, 2007, based on the results of operations during the second annual period following acquisition, the Companys
calculation for contingent consideration to be paid for the second annual period was $1,534,000. A portion of the estimated consideration, $96,000, was recorded as expense for compensatory elements over the second annual period. Expense of $48,000
was included in selling, general and administrative expenses for each of the five-month period ended December 31, 2006 and seven-month period ended July 31, 2007 for compensatory elements for the second annual period following acquisition.
The remainder of the estimated contingent consideration for the second annual period, $1,438,000, was regarded as additional purchase price and was recorded as goodwill. Accrued acquisition consideration of $1,570,000 and $1,534,000 is reflected on
the Consolidated Balance Sheets as of December 31, 2006 and September 30, 2007, respectively, related to the second annual period. See Note 8  Subsequent Events for additional information concerning the Companys October
2007 payment of a portion of the accrued acquisition consideration related to the second annual period following acquisition and issuance of a note payable for the remainder. As of September 30, 2007, the Company has recorded an additional
$150,000 of accrued purchase consideration as an estimate for the third annual period following acquisition, which will end July 31, 2008. This estimate was regarded as additional purchase price and was recorded as goodwill.



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



The Asset Purchase Agreement entered into in 2004 under which Allin Consulting of Pennsylvania, Inc.
(Allin Consulting-Pennsylvania) acquired certain assets owned by, and assumed certain liabilities of, Accounting Technology Professionals, L.L.C. d/b/a Jimary Business Systems (Jimary Business Systems) also provided 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
annual period generated from consulting and product sale 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. Any contingent purchase
consideration due is to be remitted to Jimary Business Systems within sixty days of the end of each such annual period. Contingent consideration of $29,000 for the second annual period ended November 30, 2006 is included in accrued acquisition
consideration on the Consolidated Balance Sheet as of December 31, 2006, and was subsequently paid in January 2007. The contingent consideration for the second annual period was recorded as goodwill. As of March 31, 2007, on the basis of
managements evaluation of Allin Consulting-Pennsylvanias operating results for December 2006 through March 2007 and projections for the remainder of the third annual period, the Company believed it was highly likely that contingent
consideration would be paid for the annual period ending November 30, 2007 and that the amount could be reasonably estimated as $213,000. The estimated contingent consideration was regarded as additional purchase price and was recorded as
goodwill. As of June 30, 2007, based on subsequent operations and revised projections, the Companys estimate of contingent consideration to be paid for the second annual period was $192,000. The change in estimate was recorded through
reductions of $21,000 to goodwill and accrued acquisition consideration. There have been no subsequent changes in the estimate. Accrued acquisition consideration of $192,000 is reflected on the Consolidated Balance Sheet as of September 30,
2007 related to the third annual period.

As of December 31, 2006, the accrued acquisition consideration balance also included $3,000
related to Allin-Consulting-Pennsylvanias 2004 acquisition of certain assets owned by McCrory & McDowell LLC and utilized in the operations of its Computer Resources division (Computer Resources). During the nine-month
period ended September 30, 2007, $1,000 was paid. As of September 30, 2007, the recorded value of the customer list and the accrued acquisition consideration related to the Computer Resources acquisition were each reduced by $2,000 based
on the Companys determination that no further payments would become due.

Recently Issued Accounting Standards

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement
No. 109 (FIN No. 48), which prescribes measurement attributes and a recognition threshold, as well as criteria for subsequently recognizing, derecognizing and measuring uncertain tax positions for financial reporting
purposes. FIN No. 48 also requires additional disclosure concerning uncertainty related to deferred income tax assets and liabilities. Any adjustments resulting from implementation of FIN No. 48 are required to be recognized as changes in
accounting principles with a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. Implementation of FIN No. 48 is required for the first annual period beginning after December 15, 2006. The Company
adopted FIN No. 48 beginning January 1, 2007. The Company reviewed its previously recognized tax benefits and determined that no material uncertainty was indicated as of the implementation of the new standard. There have been no subsequent
changes to the Companys determination regarding its previously recognized tax benefits. In 2007, the FASB issued Financial Interpretation No. 48-1, Definition of Settlement in FASB Interpretation No. 48(FIN
No. 48-1), which provides clarification regarding the effective settlement of tax positions upon examination by a taxing authority. FIN No. 48-1 has not to date impacted the Companys application of FIN No. 48.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS
No. 157), which provides guidance for using fair value to measure assets and liabilities and expands required information about the extent to which companies measure assets and liabilities at fair value, the information used to measure
fair value and the effect of fair value measurements on earnings. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. Implementation of
SFAS No. 157 is required for the fiscal years beginning after November 15, 2007. The Company plans to adopt SFAS No. 157 beginning January 1, 2008. The Company is currently evaluating the potential impact of adoption of SFAS
No. 157.



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115 (SFAS No. 159), which permits entities to choose fair value measurement for many financial instruments
and certain other items as of specified election dates. Business entities will thereafter report in earnings the unrealized gains and losses on items for which the fair value option has been chosen. The fair value option may be applied instrument by
instrument, may not be applied to portions of instruments and is irrevocable unless a new election date occurs. SFAS No. 159 is effective for an entitys first fiscal year beginning after November 15, 2007. The Company plans to adopt
SFAS No. 159 beginning January 1, 2008. The Company is currently evaluating the potential impact of adoption of SFAS No. 159.

Supplemental Disclosure of Cash Flow Information

Cash payments for income taxes were $2,000 and $7,000 during the
three-month periods ended September 30, 2006 and 2007, respectively. Cash payments for interest were less than $1,000 and $28,000 during the three-month periods ended September 30, 2006 and 2007, respectively. Cash payments of dividends
were $180,000 during each of the three-month periods ended September 30, 2006 and 2007.

Cash payments for income taxes were $46,000
and $33,000 during the nine-month periods ended September 30, 2006 and 2007, respectively. Cash payments for interest were $11,000 and $73,000 during the nine-month periods ended September 30, 2006 and 2007, respectively. Cash payments of
dividends were $520,000 and $535,000 during the nine-month periods ended September 30, 2006 and 2007, respectively.

The
Companys Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2006 and 2007, respectively, include cash used of $34,000 and $29,000 related to the acquisitions of Computer Resources, Jimary Business Systems
and CodeLab. The cash used has been recorded as follows:



|                                            |  |      |      |   |      |   |      |  
|------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|Nine months ended September 30              |  | 2006 |      |   | 2007 |  
|(Dollars in thousands)                      |  |      |      |   |      |  
|Accounts Receivable                         |  | $    |     |   |      | $ | (1   | )
|Goodwill                                    |  |      | 262  |   |      |   | 258  |  
|Other intangible assets                     |  |      |     |   |      |   | (2   | )
|Accounts payable                            |  |      | 3    |   |      |   |     |  
|Accrued acquisition consideration           |  |      | (238 | ) |      |   | (226 | )
|Other accrued liabilities                   |  |      | 9    |   |      |   |     |  
|Deferred revenue                            |  |      | (2   | ) |      |   |     |  
|                                            |  |      |      |   |      |   |      |  
|Net cash used for acquisition of businesses |  | $    | 34   |   |      | $ | 29   |  
|                                            |  |      |      |   |      |   |      |  

2. Share-Based Payment

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), which replaced Accounting for
Stock-Based Compensation (SFAS No. 123) and superseded Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (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. The Company used the modified prospective transition method, which requires that compensation expense be recorded for all unvested
stock options beginning with the period of adoption of SFAS No. 123R.

The Company has four plans providing for the award of stock
options, stock appreciation rights, restricted shares and restricted units for executive management, employees, non-employee directors, consultants and advisors of the Company and its subsidiaries. In October 1996, the Company adopted the 1996 Stock
Plan (the 1996 Plan). In May 1997, December 1998 and May 2000, respectively, the Companys stockholders approved the Companys 1997 Stock Plan (the 1997 Plan), 1998 Stock Plan (the 1998 Plan) and
2000 Stock Plan (the 2000 Plan). The 1996 Plan, 1997 Plan, 1998 Plan and 2000 Plan are collectively referred to below as the Allin Stock Plans. Stock options awarded under the Allin Stock Plans are exercisable based on prices
established at the grant date. Forfeited or expired stock options are eligible for reissuance under the terms of the Allin Stock Plans. Stock options granted to employees, consultants and



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Notes to Consolidated Financial Statements



advisors of the Company normally vest at 20% of the award per year for five years on the anniversaries of the grant dates. Stock options granted to
non-employee directors normally vest on the first anniversaries of the grant dates. As of September 30, 2007, aggregate reserved shares for the Allin Stock Plans and shares available for future grants undesignated as of this date under the
Allin Stock Plans are as follows:



|                        |  |                          |  |                                                                     
|----------------------- |  | ------------------------ |  | --------------------------------------------------------------------
|                        |  | AggregateReserved Shares |  | Shares Availablefor Future GrantsUndesignated as ofSeptember 30,2007
|1996 Plan               |  | 266,000                  |  | 12,055                                                              
|1997 Plan               |  | 300,000                  |  | 4,444                                                               
|1998 Plan               |  | 375,000                  |  | 2,000                                                               
|2000 Plan               |  | 295,000                  |  | 59,500                                                              
|                        |  |                          |  |                                                                     
|Total Allin Stock Plans |  | 1,236,000                |  | 77,999                                                              
|                        |  |                          |  |                                                                     

Summary of Stock Option Activity for the Allin Stock Plans from January 1, 2007 through September 30,
2007:



|             |  |                                      |  |                                  |     
|------------ |  | ------------------------------------ |  | -------------------------------- | ----
|             |  | Nine Months Ended September 30, 2007
|             |  | Number of Options                    |  | Weighted - AverageExercise Price
|January 1    |  |                                      |  |                                  |     
|Outstanding  |  | 961,650                              |  | $                                | 1.01
|Exercisable  |  | 686,650                              |  | $                                | 1.27
|Activity:    |  |                                      |  |                                  |     
|Granted      |  | 285,000                              |  | $                                | 0.84
|Forfeitures  |  |                                     |  |                                  |    
|Exercised    |  |                                     |  |                                  |    
|Expired      |  | 107,150                              |  | $                                | 3.26
|             |  |                                      |  |                                  |     
|September 30 |  |                                      |  |                                  |     
|Outstanding  |  | 1,139,500                            |  | $                                | 0.75
|Exercisable  |  | 640,500                              |  | $                                | 0.84

Summary of Information on Fair Value of Option Grants:

On February 13, July 10 and August 8, 2007, respectively, the Company awarded options to purchase 5,000, 270,000 and 10,000 shares of
common stock under one of the Allin Stock Plans. The grant prices were $0.47, $0.85 and $0.61 per share, respectively, for the February, July and August grants, which reflected the market prices of the Companys common stock on the grant dates.
The options to purchase shares of common stock granted on February 13 and August 8, 2007 will vest on the first anniversaries of the grant dates and do not include an early expiration provision, while 20% of the options granted on
July 10, 2007 will vest on each of the first five anniversaries of the grant date.

The Company utilizes a closed-form model
(Black-Scholes) to estimate the fair value of stock option grants on the dates of grant. The following are the assumptions for the 2007 grants under the Allin Stock Plans.



|                         |  |                 |   |  |               |   |  |                |  
|------------------------ |  | --------------- | - |  | ------------- | - |  | -------------- | -
|                         |  | WeightedAverage |   |  | LowAssumption |   |  | HighAssumption |  
|Risk free interest rate  |  | 4.86            | % |  | 4.50          | % |  | 4.88           | %
|Expected dividend yield  |  | 0.00            | % |  | 0.00          | % |  | 0.00           | %
|Expected life of options |  | 6.8 yrs         |   |  | 6.8 yrs       |   |  | 7.0 yrs        |  
|Expected volatility rate |  | 152             | % |  | 152           | % |  | 152            | %



|                                                           |  |   |     
|---------------------------------------------------------- |  | - | ----
|Weighted average fair value of options granted during 2007 |  | $ | 0.80



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



Summary of Information for Stock Options Outstanding or Exercisable at September 30, 2007:



|                                                         |  |                             |  |                                |      |                                 |           |                             |         |                                |   |     
|-------------------------------------------------------- |  | --------------------------- |  | ------------------------------ | ---- | ------------------------------- | --------- | --------------------------- | ------- | ------------------------------ | - | ----
|Information for Allin Stock Plans at September 30, 2007: |  | Number ofOptionsOutstanding |  | Weighted-AverageExercise Price |      | Weighted-AverageContractualLife |           | Number ofOptionsExercisable |         | Weighted-AverageExercise Price
|Exercise Price:                                          |  |                             |  |                                |      |                                 |           |                             |         |                                |   |     
|Less than $1.00                                          |  | 725,000                     |  | $                              | 0.53 |                                 | 5.4 years |                             | 226,000 |                                | $ | 0.29
|From $1.00 to $1.99                                      |  | 414,500                     |  | $                              | 1.15 |                                 | 2.6 years |                             | 414,500 |                                | $ | 1.15
|                                                         |  |                             |  |                                |      |                                 |           |                             |         |                                |   |     
|                                                         |  | 1,139,500                   |  | $                              | 0.75 |                                 | 4.4 years |                             | 633,000 |                                | $ | 0.84
|                                                         |  |                             |  |                                |      |                                 |           |                             |         |                                |   |     

A total of 499,000 non-vested stock options were outstanding as of September 30, 2007, with
23,000 scheduled to vest during the remainder of 2007, 128,000 scheduled to vest in 2008, 113,000 scheduled to vest in each of the years 2009 and 2010, 68,000 scheduled to vest in 2011 and 54,000 scheduled to vest in 2011, unless forfeited earlier.
A total of 95,000 of the non-vested options will vest upon a change in control of the Company, as defined in certain employment agreements, if earlier than the normal vesting schedule.

Rights to purchase shares for awards made to date under the Allin Stock Plans expire seven years from the date of grant or earlier if an option holder
ceases to be employed by or ceases to provide consulting or advisory services to the Company or a subsidiary for any reason, except for options to purchase 190,000 shares, which do not have an early expiration provision.

Fair Value Expense for Share-Based Payment Arrangements

Information regarding the recognized expense related to the fair value of share-based payment arrangements recorded during the three- and nine-month periods ended September 30, 2006 and 2007, and expected for the next five years, is as
follows.



|                                                                       |  |   |   
|---------------------------------------------------------------------- |  | - | --
|Fair Value Expense for Share-Based Arrangements (Dollars in thousands) |  |  
|                                                                       | 
|Recorded expense for the:                                              |  |   |   
|Three months ended September 30, 2006                                  |  | $ | 6 
|Three months ended September 30, 2007                                  |  |   | 18
|Nine months ended September 30, 2006                                   |  |   | 18
|Nine months ended September 30, 2007                                   |  |   | 32
|Estimated expense to be recognized for the:                            |  |   |   
|Year ended December 31, 2007                                           |  |   | 51
|Year ended December 31, 2008                                           |  |   | 65
|Year ended December 31, 2009                                           |  |   | 61
|Year ended December 31, 2010                                           |  |   | 57
|Year ended December 31, 2011                                           |  |   | 51
|Year ended December 31, 2012                                           |  |   | 23

3. Preferred Stock and Changes in Shareholders Equity

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, 25,000 have been designated as Series C Redeemable Preferred Stock, 2,750 as Series D Convertible Redeemable Preferred Stock, 1,000 as Series F
Convertible Redeemable Preferred Stock, 150 as Series G Convertible Redeemable Preferred Stock and 250 as Series H Redeemable Preferred Stock. As of September 30, 2007,



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



all of the designated shares of Series C, D, F, G and H preferred stock were outstanding and the Company has no plans to issue any additional shares of any
of the series of preferred stock. The order of liquidation preference of the series of the Companys preferred stock outstanding as of this date, from senior to junior, is Series H, Series F, Series G, Series D and Series C.

Accrued dividends on Series C preferred stock were $3,840,000 as of September 30, 2007. The initial payment of accrued dividends on Series C
preferred stock was scheduled to occur within ten days of June 30, 2006. However, the Companys management determined that meeting the scheduled payment was inadvisable because, among other reasons, the Companys credit agreement with
S&T Bank currently prohibits payment of dividends on Series C preferred stock. Management deferred payment of the accrued dividends. Any future payment of dividends on Series C preferred stock is subject to legally available funds for the
payment of dividends as prescribed by the Delaware General Corporation Law. If at a future time the Company determines that payment would be advisable, it will seek elimination of the prohibition of payment under the S&T Loan Agreement if still
in effect. Dividends accrued as of June 30, 2006 on the Series C preferred stock compound at a rate of 12% of the liquidation value thereof per annum effective July 1, 2006. Dividends accrued subsequent to July 1, 2006 also accrue and
compound at a rate of 12% per annum. Management does not currently expect dividend payments will be commenced for Series C preferred stock during the remainder of 2007 or during 2008.

Changes in Shareholders Equity

Information
concerning changes to certain components of shareholders equity during the nine months ended September 30, 2007 is as follows:



|                                     |  |                           |        |   |                    |   |         |  
|------------------------------------ |  | ------------------------- | ------ | - | ------------------ | - | ------- | -
|(Dollars in thousands)               |  | AdditionalPaid-in-Capital |        |   | AccumulatedDeficit |  
|Balance, December 31, 2006           |  | $                         | 38,108 |   |                    | $ | (42,350 | )
|Fair value of stock options          |  |                           | 32     |   |                    |   |        |  
|Dividends accrued on preferred stock |  |                           | (1,071 | ) |                    |   |        |  
|Net income                           |  |                           |       |   |                    |   | 2,398   |  
|                                     |  |                           |        |   |                    |   |         |  
|Balance, September 30, 2007          |  | $                         | 37,069 |   |                    | $ | (39,952 | )
|                                     |  |                           |        |   |                    |   |         |  

There were no changes to the other components of shareholders equity during this period.

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 (the S&T Loan Agreement), under which S&T Bank agreed to extend the Company a line of credit. The original term of
the line of credit was one year, and it has subsequently been renewed for nine annual periods. The current expiration date of the line of credit is September 30, 2008. Borrowings may be made under the S&T Loan Agreement for general working
capital purposes. The maximum borrowing availability under the line of credit is the lesser of $5,000,000 or 80% of the aggregate gross amount of eligible trade accounts receivable. 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. Accounts receivable aged ninety days or less from the date of invoice are eligible for inclusion
in the maximum borrowing availability, except that accounts receivable from two customers aged up to one hundred twenty days may also be included. During July 2007, the S&T Loan Agreement was amended such that a large invoice receivable from one
of these customers was eligible for inclusion in the maximum borrowing availability through July 31, 2007 despite being aged greater than one hundred twenty days. The Company received payment of this invoice during July 2007.



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



As of September 30, 2007, maximum borrowing availability under the line of credit was
$3,448,000. The outstanding balance under the S&T Loan Agreement as of September 30, 2007 was $1,770,000. There was no outstanding balance as of December 31, 2006. The increase in the line of credit balance was attributable to an
increase in accounts receivable of $1,554,000 during the first nine months of 2007, as well as other working capital changes. Significant collections of accounts receivable have occurred subsequent to September 30, 2007. As of November 7,
2007, the outstanding balance under the S&T Loan Agreement was $915,000, a net repayment of $855,000 since September 30, 2007.

Effective with the renewal of the S&T Loan Agreement for the period ending September 30, 2008, loans made under the revolving credit loan bear interest at the banks prime interest rate plus one-half percent, which represents
a decrease of one-half percent from the interest rate previously in effect. During the nine months ended September 30, 2007, the rate of interest applicable to outstanding borrowings under the revolving credit loan ranged from 8.25% to 9.25%.
Subsequent to September 30, 2007, the rate of interest was reduced to 8.00%.

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 in compliance with the cash flow covenant for the first three fiscal quarters of 2007 and is in
compliance with all other covenants as of the date of filing this Report on Form 10-Q.

5. Goodwill and Other 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), in accounting for goodwill and other
intangible assets. Under SFAS No. 142, goodwill is not amortized, but separable intangible assets deemed to have definite lives are amortized over their useful lives. SFAS No. 144 sets forth standards for testing for the potential
impairment of long-lived assets, including amortized intangible assets. Goodwill and intangible assets associated with acquisitions prior to 2002, when SFAS Nos. 141, 142 and 144 were adopted, were valued in accordance with Accounting Principals
Board Opinion No. 16, Accounting for Business Combinations(APB No. 16). Under APB No. 16, goodwill was an amortizable asset. The table below lists businesses acquired by the Company, year of acquisition and types
of intangible assets acquired.



|                                       |  |                                                              |  | 
|-------------------------------------- |  | ------------------------------------------------------------ |  | 
|Allin Corporation of California        |  | 1996      Goodwill                                           |  | 
|Allin Consulting of Pennsylvania, Inc. |  | 1998      Goodwill, customer list                            |  | 
|MEGAbase, Inc.                         |  | 1998      Goodwill                                           |  | 
|Computer Resources                     |  | 2004      Customer list                                      |  | 
|Jimary Business Systems                |  | 2004      Goodwill, customer list, non-competition agreement
|CodeLab                                |  | 2005      Goodwill, customer list, non-competition agreement

The Company believes that evaluation of risk factors and testing for potential impairment are most
beneficial to financial reporting when done as of the end of a fiscal period because this timing results in estimates and determinations based on the most recent data. Consequently, the Company performs annual tests for the potential impairment of
goodwill and other intangible assets as of December 31. Key risk factors are monitored on an ongoing basis and testing for potential impairment of goodwill or other intangible assets will be performed on an interim basis if indicators of
potential impairment arise.



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



Goodwill

As of September 30, 2007, the Companys Consolidated Balance Sheet includes goodwill of $5,219,000. The table below reflects the changes in recognized value of goodwill during the year ended December 31, 2006 and the
nine-month period ended September 30, 2007, by reportable segment.



|                                  |  |                       |       |                                        |   |                         |  |                                        |       |                          |   |     |  |   |      
|--------------------------------- |  | --------------------- | ----- | -------------------------------------- | - | ----------------------- |  | -------------------------------------- | ----- | ------------------------ | - | --- |  | - | -----
|Dollars in thousands              |  | BalanceJanuary 1,2006 |       | 2006AcquisitionContingentConsideration |   | BalanceDecember 31,2006 |  | 2007AcquisitionContingentConsideration |       | BalanceSeptember 30,2007
|Attributed Segment:               |  |                       |       |                                        |   |                         |  |                                        |       |                          |   |     |  |   |      
|Technology Infrastructure         |  | $                     | 215   |                                        | $ | 90                      |  | $                                      | 305   |                          | $ | 5   |  | $ | 310  
|Collaborative Solutions           |  |                       | 2,572 |                                        |   | 1,430                   |  |                                        | 4,002 |                          |   | 55  |  |   | 4,057
|Business Process                  |  |                       | 178   |                                        |   | 23                      |  |                                        | 201   |                          |   | 173 |  |   | 374  
|Systems Integration               |  |                       |      |                                        |   | 176                     |  |                                        | 176   |                          |   | 3   |  |   | 179  
|Information Systems Product Sales |  |                       | 44    |                                        |   | 6                       |  |                                        | 50    |                          |   | 20  |  |   | 70   
|Other Services                    |  |                       | 139   |                                        |   | 88                      |  |                                        | 227   |                          |   | 2   |  |   | 229  
|                                  |  |                       |       |                                        |   |                         |  |                                        |       |                          |   |     |  |   |      
|Total                             |  | $                     | 3,148 |                                        | $ | 1,813                   |  | $                                      | 4,961 |                          | $ | 258 |  | $ | 5,219
|                                  |  |                       |       |                                        |   |                         |  |                                        |       |                          |   |     |  |   |      

The goodwill attributed to the segments during 2006 and 2007 resulted from contingent
consideration related to the acquisitions of Jimary Business Systems and CodeLab. The goodwill attributed to the Business Process and Information Systems Product Sales segments related to the acquisition of Jimary Business Systems, while goodwill
attributed to the Technology Infrastructure, Collaborative Solutions, Systems Integration and Other Services segments related to the acquisition of CodeLab.

Testing for potential impairment of goodwill involves an attribution of the recognized assets of the acquired businesses, including cash, accounts receivable, unbilled services, prepaid expenses, deferred tax assets,
property and equipment, customer lists, non-competition agreements and goodwill, net of accounts payable, accrued liabilities, deferred revenue and deferred tax liabilities, to reporting units. The reporting units utilized are the Companys
reported segments applicable to the acquired businesses, Technology Infrastructure, Collaborative Solutions, Business Process, Systems Integration, Information System Product Sales and Other Services, further broken down geographically between
Northern California-based, Pittsburgh-based and Boston-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 or earnings 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 multiples and the revenue levels of
the reporting units. Significant declines in these factors could indicate potential impairment of goodwill. There was no impairment indicated in the annual testing of goodwill performed as of December 31, 2006.

Customer Lists and Non-Competition Agreements

As of
September 30, 2007, the Companys Consolidated Balance Sheet includes customer lists and non-competition agreements associated with acquisitions as follows:



|                                                |  |                      |       |                         |   |                    |  |   |      
|----------------------------------------------- |  | -------------------- | ----- | ----------------------- | - | ------------------ |  | - | -----
|As of September 30, 2007 (Dollars in thousands) |  | Gross CarryingAmount |       | AccumulatedAmortization |   | Net CarryingAmount
|Customer lists                                  |  | $                    | 2,659 |                         | $ | 1,599              |  | $ | 1,060
|Non-competition agreements                      |  |                      | 140   |                         |   | 78                 |  |   | 62   
|                                                |  |                      |       |                         |   |                    |  |   |      
|Total intangible assets                         |  | $                    | 2,799 |                         | $ | 1,677              |  | $ | 1,122
|                                                |  |                      |       |                         |   |                    |  |   |      



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Notes to Consolidated Financial Statements



During the year ended December 31, 2006 and the nine-month period ended June 30, 2007, the
customer list associated with the acquisition of CodeLab was amortized over a period ending in 2013, while the customer lists associated with the acquisitions of Allin Consulting-Pennsylvania, Computer Resources and Jimary Business Systems were
amortized over periods ending in 2009. The useful lives correspond with the periods of attributed cash flows in the Companys fair value estimates, or with CodeLab, the useful life recommended by independent appraisal at the time of
acquisition. The non-competition agreement associated with the Jimary Business System acquisition is being amortized over its three-year term, while the agreement associated with the CodeLab acquisition is being amortized over a five-year term, as
recommended in the independent appraisal.

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 flows for the applicable reporting units to attribute 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 operating projections for the applicable reporting units 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 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, revenue derived from customers on the acquired lists and changes to the projected cash flows of the reporting units. Significant declines in these factors could indicate potential impairment of the customer lists. There was no impairment
indicated from the annual testing as of December 31, 2006 for the customer lists.

The Company also utilizes a cash flow model to
estimate the fair value of the non-competition agreements. The model projects the cash flows of the acquired business with the non-competition provisions in place and assuming they were absent. The difference in these projections represents the fair
value of the non-competition provisions. Industry information concerning expected growth in the technology consulting industry is used to develop estimates of future cash flows over the remaining lives of the non-competition agreements. If the sum
of the undiscounted cash flows attributable to a non-competition agreement exceeds the recognized value of the agreement, 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. Key risk factors the Company monitors to evaluate the recorded value of the non-competition agreements are forecast growth rates for the technology
consulting industry and changes to the projected cash flows of the reporting units either with or without the non-competition provisions in place. Significant changes in these factors could indicate potential impairment of the non-competition
agreements. There was no impairment indicated in the testing of the non-competition agreements performed as of December 31, 2006.

Amortization
Expense

Information regarding aggregate amortization expense recorded during the three- and nine-month periods ended September 30,
2006 and 2007, and expected for the next five years, is as follows.



|                                            |  |   |    
|------------------------------------------- |  | - | ---
|Amortization Expense (Dollars in
thousands) |  |  
|                                            | 
|Recorded expense for the:                   |  |   |    
|Three months ended September 30, 2006       |  | $ | 69 
|Three months ended September 30, 2007       |  |   | 131
|Nine months ended September 30, 2006        |  |   | 201
|Nine months ended September 30, 2007        |  |   | 308



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Notes to Consolidated Financial Statements



|                                            |  |    
|------------------------------------------- |  | ---
|Amortization Expense (Dollars in
thousands) |  |    
|                                            | 
|Estimated expense to be recognized for the: |  |    
|Year ended December 31, 2007                |  | 437
|Year ended December 31, 2008                |  | 511
|Year ended December 31, 2009                |  | 511
|Year ended December 31, 2010                |  | 244
|Year ended December 31, 2011                |  | 147
|Year ended December 31, 2012                |  | 147

Amortization expense for three- and nine-month periods ended September 30, 2007,
respectively, includes $63,000 and $105,000 of amortization for capitalized software development. Estimated amortization expense for the years ended December 31, 2007 through December 31, 2010 includes anticipated amortization for
capitalized software development.

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 reduce deferred tax assets if there is material uncertainty as to the ultimate realization of the benefits.

Deferred Tax Assets and Liabilities

The components of the deferred tax assets and liabilities, as of
December 31, 2006 and September 30, 2007, are as follows:



|                                    |  |                  |        |   |                   |   |        |  
|----------------------------------- |  | ---------------- | ------ | - | ----------------- | - | ------ | -
|Deferred Tax Assets and Liabilities |  | December 31,2006 |        |   | September 30,2007 |  
|(Dollars in thousands)              |  |                  |        |   |                   |  
|Deferred tax assets:                |  |                  |        |   |                   |   |        |  
|Net operating loss carryforwards    |  | $                | 7,591  |   |                   | $ | 7,172  |  
|Intangible asset differences        |  |                  | 440    |   |                   |   | 395    |  
|Miscellaneous                       |  |                  | 62     |   |                   |   | 93     |  
|                                    |  |                  |        |   |                   |   |        |  
|                                    |  |                  | 8,093  |   |                   |   | 7,660  |  
|Valuation allowance                 |  |                  | (6,965 | ) |                   |   | (5,489 | )
|                                    |  |                  |        |   |                   |   |        |  
|Net deferred tax assets             |  | $                | 1,128  |   |                   | $ | 2,171  |  
|                                    |  |                  |        |   |                   |   |        |  
|Deferred tax liabilities:           |  |                  |        |   |                   |   |        |  
|Intangible asset differences        |  | $                | 13     |   |                   | $ | 66     |  
|                                    |  |                  |        |   |                   |   |        |  

On the Consolidated Balance Sheets as of December 31, 2006 and September 30, 2007, the
deferred tax liabilities are netted against the non-current portion of deferred tax assets, as required by SFAS No. 109.

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 $1,128,000 as of December 31, 2006 and $2,171,000 as of
September 30, 2007. Valuation allowances offset additional net deferred tax assets. Management believed it was more likely than not as of December 31, 2006 and September 30, 2007 that the net recognized deferred tax assets would be
realized in future periods. Management assesses the realizability of deferred tax assets quarterly and



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



adjusts the valuation allowance based on its assessment. The valuation allowance decreased by $1,310,000 and $1,476,000, respectively, during the year ended
December 31, 2006 and the nine-month period ended September 30, 2007. 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
Interactive Media and Systems Integration segments, where historical revenue has resulted from a small number of large projects for a small number of customers concentrated in one industry. Management evaluates the Companys results of
operations, the backlog of committed business for future periods and its assessment of opportunities that might arise from the Companys customers on a recurring basis. The Companys evaluations as of December 31, 2006 and as of
September 30, 2007 indicated the risks were mitigated by the other factors to an extent such that significant reductions in the valuation allowance were appropriate. The Company believes that material uncertainty continues to exist as to the
long-term realization of benefits greater than the recognized balance of deferred tax assets as of September 30, 2007.

As of
September 30, 2007, the Company estimates its potentially realizable net operating loss carryforwards are approximately $17,225,000 and $26,044,000 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 $5,856,000 and $1,316,000, respectively, as of September 30, 2007, depends on the Companys ability to generate future taxable
income. The net operating loss carryforwards are scheduled to expire at various times from 2010 through 2027. 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. During 2006 and the first nine months of 2007, the Company realized benefits
from the use of previously recorded deferred tax assets for net operating loss carryforwards to reduce taxable income.

Provision for Income Taxes

The (benefit from) provision for income taxes is comprised of the following for the three-and nine-month periods ended September 30,
2006 and 2007:



|                                     |  |                                    |     |   |                                    |   |        |                                   |  |   |                                   |   |  |   |        |  
|------------------------------------ |  | ---------------------------------- | --- | - | ---------------------------------- | - | ------ | --------------------------------- |  | - | --------------------------------- | - |  | - | ------ | -
|(Dollars in thousands)               |  | Three MonthsEndedSeptember 30,2006 |     |   | Three MonthsEndedSeptember 30,2007 |   |        | Nine MonthsEndedSeptember 30,2006 |  |   | Nine MonthsEndedSeptember 30,2007 |  
|Current                              |  |                                    |     |   |                                    |   |        |                                   |  |   |                                   |   |  |   |        |  
|Federal                              |  | $                                  | 8   |   |                                    | $ | 3      |                                   |  | $ | 20                                |   |  | $ | 25     |  
|State                                |  |                                    |    |   |                                    |   | (8     | )                                 |  |   | 1                                 |   |  |   | 2      |  
|                                     |  |                                    |     |   |                                    |   |        |                                   |  |   |                                   |   |  |   |        |  
|Total current                        |  |                                    | 8   |   |                                    |   | (5     | )                                 |  |   | 21                                |   |  |   | 27     |  
|Deferred                             |  |                                    | (15 | ) |                                    |   | 52     |                                   |  |   | 434                               |   |  |   | 485    |  
|Valuation Allowance                  |  |                                    | (10 | ) |                                    |   | (1,084 | )                                 |  |   | (440                              | ) |  |   | (1,476 | )
|                                     |  |                                    |     |   |                                    |   |        |                                   |  |   |                                   |   |  |   |        |  
|Total income tax (benefit) provision |  | $                                  | (17 | ) |                                    | $ | (1,037 | )                                 |  | $ | 15                                |   |  | $ | (964   | )
|                                     |  |                                    |     |   |                                    |   |        |                                   |  |   |                                   |   |  |   |        |  

A reconciliation of income taxes computed at the statutory federal income tax rate of 34% to the
provision for income taxes reflected in the Consolidated Statements of Operations follows for the three- and nine-month periods ended September 30, 2006 and 2007 follows:



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



|                                                               |  |                                    |     |   |                                    |   |        |                                   |  |   |                                   |   |  |   |        |  
|-------------------------------------------------------------- |  | ---------------------------------- | --- | - | ---------------------------------- | - | ------ | --------------------------------- |  | - | --------------------------------- | - |  | - | ------ | -
|(Dollars in thousands)                                         |  | Three MonthsEndedSeptember 30,2006 |     |   | Three MonthsEndedSeptember 30,2007 |   |        | Nine MonthsEndedSeptember 30,2006 |  |   | Nine MonthsEndedSeptember 30,2007 |  
|Estimated provision for income taxes at federal statutory rate |  | $                                  | (21 | ) |                                    | $ | 63     |                                   |  | $ | 393                               |   |  | $ | 494    |  
|                                                               |  |                                    |     |  
|Non-amortizable intangible asset                               |  |                                    | 18  |   |                                    |   | 18     |                                   |  |   | 55                                |   |  |   | 54     |  
|State income tax expense                                       |  |                                    |    |   |                                    |   | (8     | )                                 |  |   | 1                                 |   |  |   | 2      |  
|Change in valuation allowance                                  |  |                                    | (10 | ) |                                    |   | (1,084 | )                                 |  |   | (440                              | ) |  |   | (1,476 | )
|Change in estimates and other                                  |  |                                    | (4  | ) |                                    |   | (26    | )                                 |  |   | 6                                 |   |  |   | (38    | )
|                                                               |  |                                    |     |   |                                    |   |        |                                   |  |   |                                   |   |  |   |        |  
|(Benefit from) provision for income taxes                      |  | $                                  | (17 | ) |                                    | $ | (1,037 | )                                 |  | $ | 15                                |   |  | $ | (964   | )
|                                                               |  |                                    |     |   |                                    |   |        |                                   |  |   |                                   |   |  |   |        |  

Cash Payments

Cash payments for income taxes were $2,000 and $7,000 during the three-month periods ended September 30, 2006 and 2007, respectively. Cash payments for income taxes were $46,000 and $33,000 during the nine-month
periods ended September 30, 2006 and 2007, respectively.

Uncertainty Regarding Income Taxes

On January 1, 2007, the Company implemented FIN No. 48, which prescribes measurement attributes and a recognition threshold, as well as criteria
for subsequently recognizing, derecognizing and measuring uncertain tax positions for financial reporting purposes. For the Company and its subsidiaries, U.S. federal income tax returns are filed on a consolidated basis and California income tax
returns are filed on a unitary basis for the group. The Company and its subsidiaries also file various state income tax returns on a single corporation basis. The Company believes it is no longer subject to U.S. federal or state income tax
examinations by tax authorities for years before 2000. There were no income tax examinations in progress when the Company implemented FIN No. 48. During September 2007, the Internal Revenue Service commenced an audit of the Companys
consolidated return for the year ended December 31, 2007, which currently remains open. No other examinations have subsequently commenced, nor has the Company or any of its subsidiaries been given notice of any other impending examination.

The Company reviewed its previously recognized tax benefits and determined that no material uncertainty was indicated as of the
implementation of the new standard. Consequently, no adjustments were recorded upon implementation of FIN No. 48 to establish liabilities for unrecognized tax benefits. The Company also reviewed the tax benefits it expects to recognize in 2007
in estimating federal and state income tax provisions for the three- and nine-month periods ended September 30, 2007 and determined that no material uncertainty was indicated regarding the expected tax benefits. Consequently, a tabular
reconciliation of the beginning and ending amount of unrecognized tax benefits and any additions, reductions and changes has been omitted.

Based on the Companys determination that no material uncertainty was indicated regarding previously recognized or expected tax benefits, no accrual for interest and penalties was recognized upon implementation of FIN No. 48 or
for the three- or nine-month periods ended September 30, 2007.

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.



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



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 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, and distribution methods for the practice areas. The Companys reported segments are the following: Technology Infrastructure, Collaborative Solutions, Business Process, Interactive Media, Systems Integration, Information System
Product Sales and Other Services. On the Companys Consolidated Statements of Operations, the first four of the segments are aggregated and captioned as Consulting Services. The Systems Integration, 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.

Revenue

Information on revenue derived from external customers is as follows:



|                                             |  |                                    |       |                                    |   |                                   |  |                                   |        |  |   |       
|-------------------------------------------- |  | ---------------------------------- | ----- | ---------------------------------- | - | --------------------------------- |  | --------------------------------- | ------ |  | - | ------
|                                             |  | Revenue from External Customers   
|(Dollars in thousands)                       |  | Three MonthsEndedSeptember 30,2006 |       | Three MonthsEndedSeptember 30,2007 |   | Nine MonthsEndedSeptember 30,2006 |  | Nine MonthsEndedSeptember 30,2007
|Technology Infrastructure                    |  | $                                  | 730   |                                    | $ | 538                               |  | $                                 | 2,748  |  | $ | 1,788 
|Collaborative Solutions                      |  |                                    | 1,937 |                                    |   | 2,524                             |  |                                   | 5,459  |  |   | 7,351 
|Business Process                             |  |                                    | 633   |                                    |   | 863                               |  |                                   | 1,569  |  |   | 2,300 
|Interactive Media                            |  |                                    | 166   |                                    |   | 480                               |  |                                   | 929    |  |   | 1,848 
|Systems Integration                          |  |                                    | 287   |                                    |   | 782                               |  |                                   | 2,424  |  |   | 3,610 
|Information System Product Sales             |  |                                    | 278   |                                    |   | 162                               |  |                                   | 852    |  |   | 788   
|Other Services                               |  |                                    | 370   |                                    |   | 333                               |  |                                   | 1,064  |  |   | 963   
|                                             |  |                                    |       |                                    |   |                                   |  |                                   |        |  |   |       
|Consolidated Revenue from External Customers |  | $                                  | 4,401 |                                    | $ | 5,682                             |  | $                                 | 15,045 |  | $ | 18,648
|                                             |  |                                    |       |                                    |   |                                   |  |                                   |        |  |   |       

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 related entities is as follows:



|                                                 |  |                                    |    |                                    |   |                                   |  |                                   |    |  |   |    
|------------------------------------------------ |  | ---------------------------------- | -- | ---------------------------------- | - | --------------------------------- |  | --------------------------------- | -- |  | - | ---
|                                                 |  | Revenue from Related Entities     
|(Dollars in thousands)                           |  | Three MonthsEndedSeptember 30,2006 |    | Three MonthsEndedSeptember 30,2007 |   | Nine MonthsEndedSeptember 30,2006 |  | Nine MonthsEndedSeptember 30,2007
|Total Revenue from Services for Related Entities |  | $                                  | 20 |                                    | $ | 244                               |  | $                                 | 50 |  | $ | 387
|                                                 |  |                                    |    |                                    |   |                                   |  |                                   |    |  |   |    



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



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:



|                                 |  |                                    |       |                                    |   |                                   |  |                                   |       |  |   |      
|-------------------------------- |  | ---------------------------------- | ----- | ---------------------------------- | - | --------------------------------- |  | --------------------------------- | ----- |  | - | -----
|                                 |  | Gross Profit                      
|(Dollars in thousands)           |  | Three MonthsEndedSeptember 30,2006 |       | Three MonthsEndedSeptember 30,2007 |   | Nine MonthsEndedSeptember 30,2006 |  | Nine MonthsEndedSeptember 30,2007
|Technology Infrastructure        |  | $                                  | 383   |                                    | $ | 303                               |  | $                                 | 1,564 |  | $ | 985  
|Collaborative Solutions          |  |                                    | 1,022 |                                    |   | 1,484                             |  |                                   | 3,158 |  |   | 4,197
|Business Process                 |  |                                    | 358   |                                    |   | 502                               |  |                                   | 860   |  |   | 1,364
|Interactive Media                |  |                                    | 100   |                                    |   | 329                               |  |                                   | 676   |  |   | 1,249
|Systems Integration              |  |                                    | 153   |                                    |   | 286                               |  |                                   | 1,350 |  |   | 1,639
|Information System Product Sales |  |                                    | 83    |                                    |   | 49                                |  |                                   | 229   |  |   | 223  
|Other Services                   |  |                                    | 198   |                                    |   | 195                               |  |                                   | 483   |  |   | 342  
|                                 |  |                                    |       |                                    |   |                                   |  |                                   |       |  |   |      
|Consolidated Gross Profit        |  | $                                  | 2,297 |                                    | $ | 3,148                             |  | $                                 | 8,320 |  | $ | 9,999
|                                 |  |                                    |       |                                    |   |                                   |  |                                   |       |  |   |      

Assets

Information on total assets attributable to segments is as follows:



|                                 |  |                  |        |                   |   |       
|-------------------------------- |  | ---------------- | ------ | ----------------- | - | ------
|(Dollars in thousands)           |  | Total Assets    
|                                 |  | December 31,2006 |        | September 30,2007
|Technology Infrastructure        |  | $                | 1,228  |                   | $ | 1,010 
|Collaborative Solutions          |  |                  | 6,787  |                   |   | 8,188 
|Business Process                 |  |                  | 915    |                   |   | 1,674 
|Interactive Media                |  |                  | 657    |                   |   | 925   
|Systems Integration              |  |                  | 1,956  |                   |   | 2,838 
|Information System Product Sales |  |                  | 405    |                   |   | 269   
|Other Services                   |  |                  | 1,000  |                   |   | 1,134 
|Corporate & Other                |  |                  | 287    |                   |   | 849   
|                                 |  |                  |        |                   |   |       
|Consolidated Total Assets        |  | $                | 13,235 |                   | $ | 16,887
|                                 |  |                  |        |                   |   |       

Information about Major Customers

During the three-month period ended September 30, 2007, one significant customer accounted for 15% of the Companys consolidated revenue.
Segments earning revenue from this customer included Interactive Media, Systems Integration, Information Systems Product Sales and Other Services. A loss of this significant customer or a substantial decline in the level of services provided in a
future period for this customer could significantly negatively impact the Companys future results of operations and financial condition. During the nine-month period ended September 30, 2007 and the three- and nine-month periods ended
September 30, 2006, respectively, no customers accounted for greater than 10% of the Companys consolidated revenue.



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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements



Information about Major Suppliers

The Company purchases materials, including interactive television equipment, computer hardware, networking equipment and software, utilized in the
operations of the Systems Integration and Information System Product Sales segments. In recent periods, these materials purchases were highly concentrated with several major suppliers.

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. The License and Supply Agreement does not include any minimum purchase requirement. During the three-month periods ended September 30, 2006 and 2007, 69% and 12%, respectively, of
materials purchases for the operations of these segments were from this major supplier. During the nine-month periods ended September 30, 2006 and 2007, 56% and 15%, respectively, of materials purchases were from this major supplier. The
Companys introduction during 2007 of DigiMix technology platform refinements for interactive television systems resulted in a shift to purchasing key system components from other vendors. The vendor with which the Company has entered the
License and Supply Agreement is expected to be of less significance to the Company over the remainder of 2007 and in future periods than it was in periods prior to 2007.

Significant levels of purchases of materials for the DigiMix technology platform are being made from vendors that are relatively new to the Company. During the three- and nine-month periods ended
September 30, 2007, respectively, a significant vendor accounted for 48% and 39% of materials purchases for the Systems Integration and Information System Product Sales segments. Another significant vendor accounted for 14% of materials
purchases during the three-month period ended September 30, 2007, but purchases from this vendor were not significant during the nine-month period ended September 30,2007. Purchases of materials from these vendors were not significant
during the three- and nine-month periods ended September 30, 2006.

The Business Process services provided by the Company also result
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 financial software products are concentrated with one
significant supplier. During the three-month periods ended September 30, 2006 and 2007, 6% and 9%, respectively, of the Companys overall materials purchases were from this supplier. During the nine-month periods ended September 30,
2006 and 2007, 12% and 14%, respectively, of the Companys overall materials purchases were from this supplier.

8. Subsequent Event

In October 2007, in consideration of the second annual period ended July 31, 2007 following the Companys acquisition of
CodeLab pursuant to the Purchase Agreement, the Company delivered to the former holders of equity interests in CodeLab aggregate purchase consideration consisting of a cash payment of $545,000, 424,838 shares of the Companys common stock and a
promissory note for $700,000. The terms of the promissory note are described below. The stock issuance was recorded based on the market value of the Companys common stock on the issuance date of $0.61 per share, resulting in the recording of
$4,000 to common stock and $255,000 to additional paid-in-capital. As of September 30, 2007, the liability for accrued acquisition consideration on the Companys Consolidated Balance Sheet included the full amount of purchase consideration
delivered in October 2007.

The Company executed a Promissory Note in the principal amount of $700,000 payable to David Ritchie, the chief
executive officer of the Companys wholly-owned subsidiary, CodeLab and a beneficial owner of more than five percent of the outstanding common stock of the Company. The maturity date of the Promissory Note is July 31, 2008. The Company may
pre-pay the outstanding principal balance of the Promissory Note at any time in whole or in part prior to maturity. The Promissory Note bears interest at a rate of 12% per annum, with interest due and payable quarterly on December 31,
2007, March 31, 2008, June 30, 2008 and at maturity. The interest rate will increase by 2% in the event any scheduled payment of interest is not made, with the increased rate remaining in effect until the scheduled interest
payment is made. The Promissory Note is subordinated to and junior in right of payment to all currently existing or future obligations, indebtedness or other liabilities of the Company to any commercial banks or other financial institutions
providing financing to the Company. With regard to the Promissory Note, S&T Bank waived the terms prohibiting the Company from incurring additional debt included in the S&T Loan Agreement, as amended, between the Company and S&T Bank.
The Promissory Note was filed as Exhibit 10.1 to the Companys Report on Form 8-K, which was filed on October 10, 2007.



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|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- and nine-month
periods ended September 30, 2006 and 2007. This discussion should be read in conjunction with the information contained in Part I, Item 1A  Risk Factorsand Part II, Item 8  Financial Statements and Supplementary
Data in the Companys Annual Report on Form 10-K for the year ended December 31, 2006, and the information contained in Part I, Item 1  Financial Statements and Part II, Item 1ARisk Factors in this
Quarterly Report on Form 10-Q. 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.

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, estimate, likely, anticipate, may,
could, future, project 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, dependence on key personnel, committed backlog,
practice area and customer concentration, risks associated with significant suppliers, fluctuations in operating results, competitive market conditions in the Companys existing lines of business, geopolitical considerations, liquidity and
credit risk, public market and trading issues and technological obsolescence, as well as other risks and uncertainties. See Part II, Item 1ARisk Factors below.

Executive Summary

Overview of Services and Organization

The Company 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 applications, solutions and platforms that provide customers with the agility necessary to compete in todays fast-paced business climate. The Companys consulting services include
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 within budget. The Company is headquartered in Pittsburgh, Pennsylvania with additional offices located in Northern California in San Jose and Walnut Creek, in the Boston area in Wakefield, Massachusetts and in Ft.
Lauderdale, Florida.

Revenue derived from the four practice areas is collectively reflected as Consulting Services on the Companys
Consolidated Statements of Operations. 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 Microsoft technology that maximizes network availability and efficiency and enables 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, Pittsburgh and Boston offices. Technology Infrastructure revenue represented
17% and 10% of the Companys consolidated revenue during 2006 and the first nine months of 2007, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Collaborative Solutions Practice Area provides customized application development based on the Microsoft .NET framework, portals and information workflow
solutions, business intelligence solutions 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. Collaborative Solutions customized application development addresses customers needs for automated processes and streamlined workflows to gain cost, time and quality improvements. Portal and workflow
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | solutions ensure optimal delivery of information to employees, customers, partners and suppliers. Business intelligence solutions organize data into
understandable information for strategic decision making. 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, Pittsburgh and Boston offices. Collaborative Solutions revenue represented 38% and 39% of the Companys consolidated revenue during 2006 and the first
nine months of 2007, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Business Process Practice Area provides services that help 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 Dynamics software including Dynamics GP, Dynamics SL and Dynamics CRM. Dynamics GP-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 Dynamics SL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 Dynamics 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 and Northern California offices.
Business Process revenue represented 11% and 12% of the Companys consolidated revenue during 2006 and the first nine months of 2007, respectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Interactive Media Practice Area offers innovative solutions including technology architecture design and applications development for the on-demand
delivery of media rich video content. Interactive Media customers have historically been concentrated in the cruise industry. The Companys customers include premiere operating brands from the worlds largest cruise organizations, Carnival
Corporation & Plc. (Carnival), Royal Caribbean Cruises. Ltd. (Royal Caribbean), MSC Crociere S.p.A. (MSC) and NCL Corporation (NCL), as well as smaller cruise lines serving distinct markets.
The Companys DigiMix interactive television solutions support cruise lines onboard operations and enhance passenger amenities by providing in-cabin entertainment, shore excursion preview and ordering, real-time ship-to-cabin
communication and information and other services, including food and wine orders, spa/salon information and shopping. Interactive Medias solutions enable customers to generate incremental revenue, promote operating efficiencies and enhance
customer service. Interactive Media solutions are Internet accessible, highly-functional applications utilizing high-end graphics and digital video content. Interactive Media activities are provided from the Companys Ft. Lauderdale office,
which is located near the most active concentration of cruise line operations in the United States. Interactive Media revenue represented 6% and 10% of the Companys consolidated revenue during 2006 and the first nine months of 2007,
respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition to the practice areas described above, the Companys operations include three other
segments, Systems Integration, Information System Product Sales and Other Services:



| |  |  | Systems Integrationoperations focus on the implementation of specialized technology platforms that provide flexible, scalable solutions meeting
customers technology needs and preferences. Historically, Systems Integration revenue has been concentrated among cruise industry customers in projects related to the services provided by the Interactive Media Practice Area. The Companys
flexible DigiMix interactive television platform offers solutions for digital networks and radio frequency-based or hybrid distribution systems. Thirty-nine shipboard interactive television systems installed by the Company since 1996 are
currently in operation. Implementation of interactive television systems is also currently in progress on five ships and under agreement for three additional ships. Management believes this represents the largest base of cruise industry interactive
television operations by any provider of interactive television services. During 2006 and the first nine months of 2007, Systems Integration operations also included implementation of specialized technology platforms for customers in the financial
services and professional sports markets. Systems Integration operations are provided from the Companys Ft. Lauderdale and Boston offices. Systems Integration revenue represented 14% and 19% of the Companys consolidated revenue during
2006 and the first nine months of 2007, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Information System Product Sales reflects the Companys sales of computer software and other technology products. The Company actively promotes the sale
of Microsoft Dynamics software and related products in association with the services of the Business Process Practice Area. The Company also sells interactive
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | television equipment and other products based on customer needs. Information System Product Sales represented 7% and 4% of the Companys consolidated
revenue during 2006 and the first nine months of 2007, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Other Services segment reflects revenue derived from outsourced resources with varied technical skill sets that customers utilize to supplement internal
staff in the execution of customer-managed projects, amounts billed for out-of-pocket costs, software license fees, and other activities peripheral to the Companys operations, including website hosting and archival services, referral
commissions or placement fees. Other Services revenue represented 7% and 5% of the Companys consolidated revenue during 2006 and the first nine months of 2007.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 September 30, 2007, the organizational legal structure consists of Allin Corporation and six subsidiaries. Allin Interactive Corporation (Allin Interactive), Allin Corporation of California
(Allin Consulting-California), Allin Consulting of Pennsylvania, Inc. (Allin Consulting-Pennsylvania), CodeLab Technology Group, Inc. (CodeLab) and Allin Network Products, Inc. (Allin Network) are
operating subsidiaries focusing on different aspects of the Companys consulting and systems integration operations. Allin Holdings Corporation (Allin Holdings) is a non-operating subsidiary that provides treasury management
services to the Company. The Company utilizes the trade-names Allin Interactive, Allin Consulting and CodeLab Technology Group in its operations. Management believes the trade names are recognized in the markets the Company serves. All trade- and
brand-names included in this Quarterly Report on Form 10-Q are the property of their respective owners.

Financial Overview

The following table provides a summary of key financial information from the Companys Statements of Operations for the three-month periods ended
September 30, 2006 and 2007, as well as period-to-period percentage changes.



|                                             |  |                                 |       |                      |      |   |       |  |    |  
|-------------------------------------------- |  | ------------------------------- | ----- | -------------------- | ---- | - | ----- |  | -- | -
|(Dollars in thousands)                       |  | Three Months EndedSeptember 30, |       | % Increase(Decrease) |     
|                                             |  | 2006                            |       |                      | 2007 |   | 2007  | 
|Statement of Operations Data:                |  |                                 |       |                      |      |   |       |  |    |  
|Revenue                                      |  | $                               | 4,401 |                      |      | $ | 5,682 |  | 29 | %
|Gross profit                                 |  |                                 | 2,297 |                      |      |   | 3,148 |  | 37 | %
|Selling, general and administrative expenses |  |                                 | 2,328 |                      |      |   | 2,953 |  | 27 | %
|Net (loss) income                            |  |                                 | (14   | )                    |      |   | 1,204 |  |   | %

Comparing the three-month periods ended September 30, 2007 and 2006, the Company experienced
period-to-period increases in revenue of $1,281,000 and gross profit of $851,000. The Companys aggregate consulting services realized increases of $939,000 (27%) in revenue and $755,000 (41%) in gross profit. Significant
period-to-period improvements in revenue and gross profit were realized by the Collaborative Solutions, Business Process, Interactive Media and Systems Integration segments. However, the Technology Infrastructure and Information System Product Sales
segments experienced period-to-period declines in revenue and gross profit that partially offset the increases.

The period-to-period
increases in Collaborative Solutions revenue and gross profit were $587,000 (30%) and $462,000 (45%), respectively, comparing the quarterly periods ended September 30, 2006 and 2007. Management believes the increases resulted from strong
demand for business intelligence and custom application solutions utilizing Microsoft .NET, Microsoft SharePoint and Microsoft SQL Server 2005 technologies. Management attributes the higher rate of growth in gross profit to strong demand for
services and the inclusion of a significant project with unusually low cost of sales in the third quarter of 2007.

Comparing the quarters
ended September 30, 2006 and 2007, Business Process revenue and gross profit increased by $230,000 (36%) and $144,000 (40%), respectively. Management attributes the increases to strong demand for Microsoft Dynamics and CRM-based solutions,
including large projects in both Northern California and Pittsburgh.

Period-to-period changes in Interactive Media included increases in
revenue of $314,000 (189%) and gross profit of $229,000 (229%), comparing the quarters ended September 30, 2006 and 2007. During the third quarter of 2007, Interactive Media consulting included significant project activity for technical
architecture design and configuration of



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equipment for three shipboard systems, the Azamara Journey, Azamara Quest and NCL Gem. The third quarter of 2006 included an unusually
low level of activity related to shipboard systems. Comparing the three-month periods ended September 30, 2006 and 2007, Systems Integration revenue and gross profit increased by $495,000 (172%) and $133,000 (87%). Management attributes
the slower rate of growth in gross profit percentage to the transition to Systems Integration operations utilizing the DigiMix technology platform, with higher associated equipment cost of sales, and the Companys aggressive efforts over
the last year to increase market share by obtaining additional cruise line customers.

From July through October 2007, the Companys
backlog for the Interactive Media and Systems Integration segments increased significantly as a result of orders received for interactive television systems for the NCL Gem, the Mercury and Galaxy of Celebrity Cruises
(Celebrity), the MSC Musica and Poesia and the P&O Cruises Ventura. The systems for the Mercury and Galaxy will be replacements for systems originally installed by the Company in 1998 and 1996,
respectively. The majority of the revenue associated with the NCL Gem project was earned during the third quarter of 2007, while the majority of revenue associated with systems for the other ships listed above will be earned in 2008.

The period-to-period decreases in Technology Infrastructure revenue and gross profit were $192,000 (26%) and $80,000 (21%),
respectively, comparing the three-month periods ended September 30, 2006 and 2007. Management primarily attributes the decreases to a lull in market demand during the early adoption period for Microsofts updated versions of several
important technology products, including Windows and Office software. Management believes customers are deferring spending on technology-based projects at present in anticipation of undertaking projects following the early adoption period of the new
Microsoft technology.

The increase in selling, general and administrative expenses for the quarter ended September 30, 2007, as
compared to the comparable period of 2006, was $625,000. Period-to-period increases were realized in compensation for additions to the Companys technical consulting staffs, recruitment expenses, research and development expenses and
depreciation and amortization.

The following table provides a summary of key financial information from the Companys Statements of
Operations for the nine-month periods ended September 30, 2006 and 2007, as well as period-to-period percentage changes.



|                                             |  |                                |        |                      |   |        |  |     |  
|-------------------------------------------- |  | ------------------------------ | ------ | -------------------- | - | ------ |  | --- | -
|(Dollars in thousands)                       |  | Nine Months EndedSeptember 30, |        | % Increase(Decrease) |  
|                                             |  | 2006                           |        | 2007                 |   | 2007   | 
|Statement of Operations Data:                |  |                                |        |                      |   |        |  |     |  
|Revenue                                      |  | $                              | 15,045 |                      | $ | 18,648 |  | 24  | %
|Gross profit                                 |  |                                | 8,320  |                      |   | 9,999  |  | 20  | %
|Selling, general and administrative expenses |  |                                | 7,121  |                      |   | 8,493  |  | 19  | %
|Net income                                   |  |                                | 1,174  |                      |   | 2,398  |  | 104 | %

Comparing the nine-month periods ended September 30, 2007 and 2006, the Company experienced
period-to-period increases in revenue of $3,603,000 and gross profit of $1,679,000. The Companys aggregate consulting services realized increases of $2,582,000 (24%) in revenue and $1,537,000 (25%) in gross profit. Significant
period-to-period improvements in revenue and gross profit were realized by the Collaborative Solutions, Business Process, Interactive Media and Systems Integration segments. However, the Technology Infrastructure segment experienced significant
period-to-period declines in revenue and gross profit that partially offset the increases.

The period-to-period increases in Collaborative
Solutions revenue and gross profit were $1,892,000 (35%) and $1,039,000 (33%), respectively, comparing the nine-month periods ended September 30, 2006 and 2007. Management believes the increases resulted from strong demand for solutions
utilizing .NET development, Microsoft SharePoint and business intelligence technologies. The favorable improvement in gross profit percentage during the third quarter of 2007, as discussed above, resulted in improvement in the year-to-date gross
profit percentage on a level consistent with the rate of revenue growth year-to-date.

Comparing the nine-month periods ended
September 30, 2006 and 2007, Business Process revenue and gross profit increased by $731,000 (47%) and $504,000 (59%), respectively. Management attributes the increases to strong demand for Microsoft Dynamics SL and CRM-based solutions,
which resulted in a greater number of large projects during the first nine-months of 2007 than in the prior period.



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Period-to-period changes in Interactive Media included increases in revenue of $919,000 (99%) and
gross profit of $573,000 (85%), comparing the nine-month periods ended September 30, 2006 and 2007. During the first nine months of 2007, Interactive Media consulting included significant project activity for technical architecture design and
configuration of equipment for seven significant shipboard systems, as compared to three comparable projects during the first nine months of 2006. Comparing the nine-month periods ended September 30, 2006 and 2007, Systems Integration revenue
and gross profit increased by $1,186,000 (49%) and $289,000 (21%), respectively. As discussed above, the slower rate of growth in gross profit percentage resulted from the Companys efforts over the last year to increase market share by
obtaining additional cruise line customers and the transition to the DigiMix technology platform.

The period-to-period decreases in
Technology Infrastructure revenue and gross profit were $960,000 (35%) and $579,000 (37%), respectively, comparing the nine-month periods ended September 30, 2006 and 2007. Management believes customers are deferring spending on
technology-based projects in anticipation of undertaking projects following the early adoption period of Microsoft Windows and Office software updates introduced in late 2006 and early 2007. The percentage declines in Technology Infrastructure
revenue and gross profit are less when comparing third quarter results than year-to-date results.

The increase in selling, general and
administrative expenses for the nine months ended September 30, 2007, as compared to the comparable period of 2006, was $1,372,000. Period-to-period increases were realized consistent with those noted above for the quarterly periods.

The Companys cash balance increased from $369,000 as of December 31, 2006 to $402,000 as of September 30, 2007, an
increase of $33,000. Although the overall change in cash was modest, the result reflects the netting of significant cash flows provided by financing activities, primarily line of credit borrowings, and cash flows used for operating activities,
primarily working capital changes. Operating activities resulted in net cash used of $836,000 during the nine months ended September 30, 2007. Cash generated from operations was $1,962,000 while changes in working capital resulted in a net use
of $2,798,000. Working capital changes using cash included significant increases in accounts receivable and costs and estimated gross margins in excess of billings of $1,630,000 and $475,000, respectively, and a decrease in billings in excess of
costs and estimated gross margins of $789,000, which were partially offset by increases of $305,000 in each of deferred revenue and accrued compensation and payroll taxes. Management attributes the increase in accounts receivable to (i) the 24%
growth in revenue comparing the first three quarters of 2007 to the comparable period of the prior year and (ii) large accounts receivable related to significant Business Process projects undertaken during 2007, including one in which the
customer is utilizing government funding which has slowed their normal payment cycle. Investing activities resulted in net cash used of $368,000, primarily $340,000 for capital expenditures and $29,000 for contingent consideration related to
acquisitions. Financing activities resulted in net cash provided of $1,237,000, primarily from net borrowing of $1,770,000 on the Companys line of credit facility, partially offset by $535,000 of preferred stock dividend payments. The increase
in borrowings on the line of credit during the first nine months of 2007 occurred primarily as a result of the increase in accounts receivable. Significant collection of accounts receivable in October 2007 enabled the Company to reduce the line of
credit balance to $915,000 as of November 7, 2007. There can be no assurance that the Companys cash balance will increase during the remainder of 2007, or during 2008. The use of cash for operations, changes in working capital, capital
expenditures, dividends on preferred stock, acquisition of businesses and other factors may further decrease the Companys cash balance. The Companys material obligations may require significant cash payments over the remainder of 2007,
during 2008, and beyond.

Operational Focus, Marketing Strategy and Delivery Framework and Methods

The Companys operations include a focus on providing Microsoft-based technology solutions. The Companys Allin Consulting subsidiaries are
Microsoft Gold Certified Partners 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, Information Worker Solutions and Security Solutions competencies, while Allin Consulting-Pennsylvania is designated with the Microsoft
Business Solutions and Networking Solutions competencies and Allin Consulting-California is designated with the Custom Development Solutions competency. The Companys technical expertise and quality of services have been recognized by Microsoft
recently through several awards. In October 2007, Allin Consulting-California received a Northern California award for Customer Satisfaction. In July 2007, the Company received the worldwide award, Competing to Win Partner of the Year: Search at the
2007 Microsoft Worldwide Partner Conference for superior technology and innovation with Microsoft Search technologies. The Company also received several other awards during the conference. Allin Consulting-Pennsylvania was recognized by
Microsofts Eastern Region as the EPG Loyalty Award  Partner of the Year and the SMS&P Marketing Excellence 



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Partner of the Year, while Allin Consulting-California was recognized by Microsofts Western Region as the Regional VP Award  Partner of the Year
and with the Security Partners  Trusted Advisor Award. In July 2006, Allin Consulting-Pennsylvania received the Microsoft Eastern Region Partner of the Year Award in recognition of strong performance, leadership and outstanding results in
strategic alliance with Microsoft. In June 2007, the Company was selected by Microsoft for National Systems Integrator status, a national program designed to assist strategic Microsoft partners with effective marketing and delivery of solutions
across multiple geographic and product segments. The Company also participates as a member of the Microsoft US Sales & Service, Collaborative Solutions & Portals, and Enterprise Search Partner Advisory Councils which are comprised
of small groups of elite partners selected to provide insight and feedback on Microsofts strategic direction. The Company intends to continue its specialization in Microsoft-based technology.

Potential customers for the Technology Infrastructure, Collaborative Solutions, Business Process and Interactive Media Practice Areas include emerging
organizations, mid-sized enterprises and 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. The Company conducts joint marketing efforts with
Microsoft, which is an important source of leads for potential customers for Technology Infrastructure, Collaborative Solutions and Business Process operations. The Companys Pittsburgh and Northern California-based operations target businesses
across a wide spectrum of industries. The Companys experience in these regions has, however, resulted in the development of expertise in a number of industry vertical markets, including retail, manufacturing, technology, professional services
and health care.

The Companys Boston office focuses its marketing efforts on application development for financial services firms
that require flexible, high-value software solutions, including applications that address new legislative mandates or that improve existing business processes. Management believes the Boston offices well-tested development methodology, robust
technical framework and library of extensible software components enable delivery of high quality solutions to financial services customers providing an immediate return on investment. The Companys Boston operations develop opportunities with
potential and existing customers through direct sales and marketing efforts, client referrals, management networking and participation in professional organizations. The Boston operations also build awareness of its technical and financial services
industry expertise through published articles and advertising in specialized financial services industry publications and websites.

The
Companys Ft. Lauderdale-based Interactive Media consulting services and Systems Integration operations have been historically concentrated among customers in the cruise industry. Over the last year, the Company has added MSC, NCL, Regent Seven
Seas Cruises, Inc. (Regent), Disney Cruise Line (Disney), Fred. Olsen Cruise Lines (Fred. Olsen), P&O Cruises (P&O) and Silversea Cruises Ltd. (Silversea) to the Interactive Media
customer list, joining long-term customers Carnival, Celebrity, Costa and Royal Caribbean. Marketing for these operations focuses on the Companys DigiMix interactive television solutions, which feature the latest generation applications
and platform configurations. DigiMix solutions generate incremental revenue, support onboard operations, promote operating efficiencies, and enhance passenger services by providing on-demand in-cabin entertainment, communication and
information. The DigiMix platform utilizes high-end digital hardware, including set top boxes and head-end video servers and encoders while supporting flexible distribution methods over digital networks and radio frequency-based or hybrid
distribution systems. The Company believes flexibility in meeting customer needs is of critical importance and also offers and supports thin-client solutions for radio frequency-based distribution systems. Multiple generations of the Companys
interactive television solutions, some installed as long ago as 1996, are currently operating on thirty-nine ships. The Company emphasizes the platform flexibility and cost effectiveness of the Companys scalable interactive television
solutions, the broad scope of developed applications, the large installed base of shipboard interactive television systems and the availability of comprehensive support services in its marketing efforts.

The Company utilizes the Allin Solutions Framework for guiding the planning and conduct of 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. Guiding principles of the Allin Solutions Framework are to develop iteratively, manage requirements, use component architecture, continuously verify quality and manage change. The adaptable process includes
four phases. The Solution Vision phase articulates the



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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 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 information concerning the business need for which a
solution is sought. With the co-managed delivery method, practice area managers, consultants and customer technical staff members collaborate 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.

Critical Accounting Policies, Estimates and Judgments

The Companys significant accounting policies are described in Notes 2, 6, 7, 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, 2006 and in Notes 1, 2, 5, 6 and 7 in the Notes to Consolidated Financial
Statements included in Part I, Item 1  Financial Statements in this Quarterly 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. Certain projects undertaken by the Company involve design, configuration and implementation of specialized
technology platforms under related consulting and systems integration arrangements involving some or all of the following attributes: services, computer hardware and equipment for specialized technology platforms, software, and post-contract support
(PCS). Revenue 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). The arrangements underlying these
projects frequently involve significant software modification, including the installation of customized software applications previously developed for the customer. Revenue associated with these operations involving multiple-deliverable arrangements
that included significant software modification accounted for under the contract accounting standards described above was 5% and 21% of the Companys total revenue for the three-month periods ended September 30, 2006 and 2007,
respectively, and 15% and 26% of the Companys total revenue for the nine-month periods ended September 30, 2006 and 2007, 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. On a monthly basis, management reviews projects of this type and considers any factors related to current or expected
future progress on the projects and the Companys past 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. Project arrangements may include PCS for a period following implementation of the specialized technology platform. A portion of the contract value is allocated to the PCS based on vendor-specific objective evidence (VSOE) of
fair value based on rates when sold separately and, in accordance with SOP 97-2, revenue is recognized for PCS over the period when services are performed.



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The Companys recognition method for revenue for fixed-price 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 under the
related arrangements 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 on related projects 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 such 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. Systems
Integration arrangements do not include rights for software, hardware or equipment upgrades.

The Companys practice areas perform
certain 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 3% and 1% of the Companys total revenue for the three-month periods
ended September 30, 2006 and 2007, respectively, and 3% and 1% of the Companys total revenue for the nine-month periods ended September 30, 2006 and 2007.

Utilization 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 services, 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 Other Intangible Assets. The
Companys intangible assets include goodwill associated with: the acquisitions of Allin Consulting-California (1996), Allin Consulting-Pennsylvania (1998), Jimary Business Systems (2004) and CodeLab (2005); customer lists associated with
the acquisitions of Allin Consulting-Pennsylvania, Jimary Business Systems, Computer Resources (2004), and CodeLab; and non-competition agreements associated with the Jimary Business Systems and CodeLab acquisitions. As of September 30, 2007,
recognized balances for the customer lists, non-competition agreements and goodwill were $1,060,000, $62,000 and $5,219,000, respectively, net of amortization.

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 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 agreements, are amortized over their estimated 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. Key risk factors are monitored on an ongoing basis, and interim testing for potential impairment of goodwill or intangible assets is 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 and notes receivable, unbilled services, prepaid expenses, deferred tax assets, property and equipment, intangible assets and goodwill, accounts



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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, Information System Product Sales and Other Services, further broken down geographically between Northern California, Pittsburgh and Boston-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 or earnings
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 that the Company monitors regarding goodwill are the industry valuation multiples and the financial results 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 tests performed as of December 31, 2006, 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 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, and external information concerning expected growth in the information technology services 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 that the Company monitors regarding the customer lists are forecast growth
rates for the information technology services industry, revenue derived from customers on the acquired lists and the cash flows applicable to the segments attributed to the customer lists. Significant declines in these factors could indicate
potential impairment of the customer lists. As of December 31, 2006, no impairment was indicated in the annual tests of the customer lists.

The Company also utilizes cash flow models to estimate the fair value of the non-competition agreements. The models project the cash flows of the acquired business with the non-competition provisions in place and assuming they were absent.
The difference in these projections represents the fair value of the non-competition provisions. Management utilizes industry information concerning expected growth in the information technology services industry and future projections for the
operations of the applicable reporting units to develop estimates of future cash flows over the remaining lives of the non-competition agreements. If the sum of the undiscounted cash flows attributable to a non-competition agreement exceeds the
recognized value of the agreement, 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. Key risk factors the Company monitors to evaluate the recorded value of the non-competition agreements are forecast growth rates for the information technology services industry and changes to the projected cash flows of the
reporting units either with or without the non-competition provisions in place. Significant changes in these factors could indicate potential impairment of the non-competition agreements. There was no impairment indicated in the testing of the
non-competition agreements performed as of December 31, 2006.

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. Valuation allowances have been recorded as of September 30, 2007 based on the Companys realizability estimates and reduce the
Companys recognized deferred tax assets to $2,171,000. The non-current portion of deferred tax assets was offset by $66,000 of non-current deferred tax liabilities, resulting in a total of $2,105,000 of current and non-current deferred tax
assets being included in the Consolidated Balance Sheet as of September 30, 2007.

Results of operations for future 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 and Systems Integration segments. In recent periods, revenue from these segments has primarily resulted
from a small number of large projects each year for



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a small number of customers concentrated in one industry. However, as of December 31, 2006 and again as of September 30, 2007, based on the
Companys results of operations during recent periods, the backlogs of committed business for future periods as of each date and managements assessment, as of each date, of future opportunities that may arise from the Companys then
current customers, management believed the risks were mitigated such that material reductions in the valuation allowance were appropriate. The reduction in valuation allowance recognized during 2006 was $1,310,000, while the reduction in valuation
allowance recognized during the nine months ended September 30, 2007 was $1,476,000. The Company believes that material uncertainty continues to exist as to the long-term realization of benefits greater than the recognized balance of deferred
tax assets as of September 30, 2007 and valuation allowances offset any additional net deferred tax assets.

Management believes it is
more likely than not that the deferred tax assets of $2,171,000 will be realized in future periods. During the years ended December 31, 2004, 2005 and 2006, and the nine months ended September 30, 2007, the Company realized benefits from
the use of previously recorded deferred tax assets for net operating loss carryforwards to reduce taxable income. Management assesses the realizability of deferred tax assets quarterly and adjusts the valuation allowance based on its assessment.

The Company recognized deferred income tax liabilities of $66,000 as of September 30, 2007, arising primarily from intangible asset
differences, the difference between tax- and book-basis amortization of capitalized software development costs and the tax-basis amortization of goodwill associated with the acquisition of Jimary Business Systems. Management monitors deferred tax
liabilities quarterly and adjusts the recorded balance based on its assessment. See Note 6  Income Taxes in the Notes to Consolidated Financial Statements included in Part I, Item 1Financial Statements of this
Quarterly Report on Form 10-Q for additional information concerning the Companys accounting for income taxes.

Accrued Acquisition
Consideration. The Companys Consolidated Balance Sheet as of September 30, 2007 includes an estimated liability for accrued acquisition consideration of $1,876,000, including $1,684,000 and $192,000, respectively, related to the
acquisitions of CodeLab in 2005 and Jimary Business Systems in 2004.

The Purchase Agreement entered into by the Company and the former
holders of equity interests in CodeLab provides for annual payments of contingent consideration to be paid for each of the three annual periods ending July 31, 2006, 2007 and 2008. Any contingent payments due for the three annual periods will
be calculated pursuant to a negotiated formula, as specifically set forth in the Purchase Agreement, that is based upon an agreed to multiple of the net operating profit of CodeLabs business, determined on an accrual basis before deductions
for income taxes, interest, depreciation and amortization, in the relevant annual period, and subject to further adjustment as set forth in the Purchase Agreement, including potential setoffs by the Company for certain indemnification claims. The
aggregate amount of contingent payments shall not exceed $5,600,000.

On a recurring basis, management reviews the results of
CodeLabs operations, the terms of the Purchase Agreement, certain agreements with customers, budgetary and other financial projections to assess the likelihood of contingent consideration becoming due for the then current annual period and to
prepare an estimate of contingent consideration. If management determines that it is highly likely that contingent consideration will become due to the former holders of equity interests in CodeLab at the end of an annual period, an estimate will be
recorded for the contingent consideration expected to become due. When accrued acquisition consideration is recorded, management also estimates the portions to be recorded as expense for compensatory elements and as goodwill for additional purchase
consideration.

During October 2006, the Company made a cash payment of $1,085,000 and issued 361,642 shares of common stock as additional
purchase consideration in respect of the first annual period. The stock issuance was recorded based on the market value of the Companys common stock on the issuance date of $0.55 per share, resulting in the recording of $4,000 to common stock
and $195,000 to additional paid-in-capital.

During October 2007, the Company made a cash payment of $545,000, issued a note payable of
$700,000 to a former holder of an equity interest in CodeLab and issued 424,838 shares of common stock as additional purchase consideration in respect of the second annual period. The stock issuance was recorded based on the market value of the
Companys common stock on the issuance date of $0.61 per share, resulting in the recording of $4,000 to common stock and $255,000 to additional paid-in-capital. Following these transactions, a liability balance of $30,000 remains related to the
second annual period following acquisition by agreement of the parties pending resolution of a potential indemnification offset. As of September 30, 2007, accrued acquisition consideration of $150,000 has been recorded related to the third
annual period following acquisition, which will end July 31, 2008.



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The Asset Purchase Agreement related to the purchase of Jimary Business Systems provided 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 annual
period generated from consulting and product sale 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. Contingent consideration of
$29,000 for the second annual period ended November 30, 2006 was included in accrued acquisition consideration on the Consolidated Balance Sheet as of December 31, 2006, and was subsequently paid in January 2007. The contingent
consideration for the second annual period was recorded as goodwill.

During 2007, management reviewed the terms of the Asset Purchase
Agreement, applicable consulting and product sale revenue, and other financial information to assess the likelihood of contingent consideration becoming due for the third annual period. Management determined that it was highly likely that contingent
consideration would become due at the end of the third annual period at a significantly higher level than for either of the first two annual periods. An estimated liability of $192,000 for contingent consideration related to the acquisition of
Jimary Business Systems is included in the Consolidated Balance Sheet as of September 30, 2007. The additional purchase consideration was recorded as goodwill.

Software Development Costs. The Companys 2006 and 2007 research and development efforts and expenditures related primarily to application development and platform refinements for Interactive Medias
DigiMix interactive television solutions. Software development costs include purchased software development tools, testing equipment, consulting services and the cost of internal labor. A total of $758,000 was capitalized for software
development costs between managements determination of technical feasibility in December 2005 and commercial introduction of the software applications in May 2007. The Company also incurred research and development expenses of $90,000 in 2005
prior to the attainment of a working model demonstrating technical feasibility, and $210,000 in 2007 following commercial introduction. Managements key judgment was determination of the point of technical feasibility. Management reviewed
status reports and other records and discussed project progress with the technical management personnel overseeing the development project to determine that technical feasibility had been obtained. The Company anticipates any further costs incurred
for completion of the development process related to application development for DigiMix interactive television solutions will be expensed.

Certain Related Party Transactions

During the three- and nine-month periods ended September 30, 2006 and 2007, 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. During August 2006, the Company entered into a new five-year lease for the space. The Company had previously rented the space under a month-to-month arrangement since 2002. Minimum remaining lease commitments for the
Pittsburgh office space are $52,000 for the final three months of 2007, $208,000 per year from 2008 through 2010, and $121,000 for 2011. The rental rate is subject to annual adjustments based on a consumer price index-based formula as specified in
the lease. Rental expense under these arrangements was $46,000 and $52,000 for the three-month periods ended September 30, 2006 and 2007, respectively, and $114,000 and $156,000 for the nine-month periods ended September 30, 2006 and 2007.
This represented 2% of selling, general and administrative expenses during each of these respective periods.



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Results of Operations

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Revenue

The following table sets forth revenue for the Companys operating segments for the three-month periods ended September 30, 2006 and 2007 and
period-to-period percentage changes for each segment.



|                                 |  |                                    |       |                                    |   |                                      |  |     |   
|-------------------------------- |  | ---------------------------------- | ----- | ---------------------------------- | - | ------------------------------------ |  | --- | --
|Revenue  (Dollars in thousands)  |  | Three MonthsEndedSeptember 30,2006 |       | Three MonthsEndedSeptember 30,2007 |   | Period-to-Period% Increase(Decrease) | 
|Technology Infrastructure        |  | $                                  | 730   |                                    | $ | 538                                  |  | (26 | )%
|Collaborative Solutions          |  |                                    | 1,937 |                                    |   | 2,524                                |  | 30  | % 
|Business Process                 |  |                                    | 633   |                                    |   | 863                                  |  | 36  | % 
|Interactive Media                |  |                                    | 166   |                                    |   | 480                                  |  | 189 | % 
|Systems Integration              |  |                                    | 287   |                                    |   | 782                                  |  | 172 | % 
|Information System Product Sales |  |                                    | 278   |                                    |   | 162                                  |  | (42 | )%
|Other Services                   |  |                                    | 370   |                                    |   | 333                                  |  | (10 | )%
|                                 |  |                                    |       |                                    |   |                                      |  |     |   
|Consolidated Revenue             |  | $                                  | 4,401 |                                    | $ | 5,682                                |  | 29  | % 
|                                 |  |                                    |       |                                    |   |                                      |  |     |   

The Company realized a decrease of $192,000 in Technology Infrastructure revenue when comparing
the three-month periods ended September 30, 2006 and 2007. Management believes Technology Infrastructure has experienced a lull in market demand beginning in the second half of 2006 and continuing through the first three quarters of 2007.
Management believes customers deferred spending on technology-based projects in anticipation of undertaking projects following the introduction and early adoption period for Microsoft technology updates, including Windows Vista and Office software.
The respective updates were introduced in the fourth quarter of 2006 and the first quarter of 2007. Management believes that customers are continuing to wait to evaluate the benefits realized by early adopters of the new technology and that demand
related to the Microsoft technology upgrades will grow over 2008 as more information regarding the results of early adoption is disseminated. However, management anticipates that widespread business migration to these products is most likely to
occur during 2008. There can be no assurance that the Microsoft technology updates will result in the future realization of Technology Infrastructure revenue equal to or greater than current levels.

A period-to-period increase of $587,000 in revenue for the Collaborative Solutions Practice Area was realized for the quarter ended September 30,
2007, as compared to the quarter ended September 30, 2006. Management believes the period-to-period increase in revenue is attributable to strong demand for business intelligence solutions and custom application development utilizing Microsoft
..NET, Microsoft SQL Server 2005 and Microsoft SharePoint technologies. Management expects the future level of demand for Collaborative Solutions services will be impacted by a number of factors and trends, including demand for effective portals and
interfaces with transactional systems for Internet-based commerce, increasing demand for customized applications meeting specific business needs, the proliferation of web-based software applications, increasing compliance demands and the
implementation of voice-over Internet protocol technology. 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.

Management attributes the period-to-period increase in Business Process revenue of $230,000, comparing the three months ended
September 30, 2007 with the three months ended September 30, 2006, to strong demand for solutions based on Microsoft Dynamics CRM technology. Services related to several large CRM-based projects were carried out during the third quarter of
2007. Business Process also realized period-to-period revenue growth related to service contracts involving a fixed fee for services over a specified time period, typically an annual period. Revenue from service contracts is recognized on a pro-rata
basis over the terms of the contracts. As the Companys Business Process practice has grown over the last three years, the Company has entered into service contracts with most customers, and the resulting growth in service contracts also
contributed to the period-to-period increase in Business Process revenue.

The period-to-period increase in Interactive Media revenue when
comparing the quarters ended September 30, 2006 and 2007 was $314,000. During the third quarter of 2007, the majority of Interactive Media revenue related to technical architecture design, configuration and implementation services, and
post-installation technical support for



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interactive television systems installed on cruise ships. The third quarter of 2007 included the peak period of project activity for one large shipboard
system on the NCL Gem and significant project activity related to two smaller shipboard systems on the Azamara Journey and Azamara Quest. During the third quarter of 2006, project activity was unusually low. Management
anticipates Interactive Media revenue expected to be realized over the fourth quarter of 2007 will also represent increased levels from the comparable period of 2006. Projects may experience unforeseen delays due to shipyard activity or customer
preference. There can be no assurance that delays will not occur with the projects currently expected to be performed during the fourth quarter of 2007.

A period-to-period increase of $495,000 in revenue for the Systems Integration segment was realized for the three months ended September 30, 2007, as compared to the comparable period of the prior year. During
the third quarter of 2007, Systems Integration revenue was primarily realized from large projects involving the implementation of interactive television platforms aboard ships. Project activity during the third quarter of 2007 was at a significantly
higher level than during the third quarter of 2006. Systems Integration operations are expected to remain highly concentrated among a small number of projects and customers in future periods. Systems Integration revenue is expected to be higher
during the fourth quarter of 2007 than the fourth quarter of 2006. There can be no assurance, however, that projects will proceed without delays.

Revenue for the Information System Product Sales segment decreased by $116,000, when comparing the third quarters of 2007 and 2006. Management attributes the decrease to period-to-period variability in the level of sales of Microsoft
Dynamics software and interactive television equipment. Revenue for the Other Services segment decreased $37,000, when comparing the three-month periods ended September 30, 2006 and 2007. Management attributes the decrease in revenue to the
decrease in the number of engagements where the Company provided outsourced technical resources to customers to augment their information technology staffs for customer-managed projects during the third quarter of 2007 as compared to the third
quarter of 2006.

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 September 30, 2006 and 2007 and period-to-period percentage changes for each segment.



|                                      |  |                                    |       |                                    |   |                                      |  |     |   
|------------------------------------- |  | ---------------------------------- | ----- | ---------------------------------- | - | ------------------------------------ |  | --- | --
|Cost of Sales  (Dollars in thousands) |  | Three MonthsEndedSeptember 30,2006 |       | Three MonthsEndedSeptember 30,2007 |   | Period-to-Period% Increase(Decrease) | 
|Technology Infrastructure             |  | $                                  | 347   |                                    | $ | 235                                  |  | (32 | )%
|Collaborative Solutions               |  |                                    | 915   |                                    |   | 1,040                                |  | 14  | % 
|Business Process                      |  |                                    | 275   |                                    |   | 361                                  |  | 31  | % 
|Interactive Media                     |  |                                    | 66    |                                    |   | 151                                  |  | 129 | % 
|Systems Integration                   |  |                                    | 134   |                                    |   | 496                                  |  | 270 | % 
|Information System Product Sales      |  |                                    | 195   |                                    |   | 113                                  |  | (42 | )%
|Other Services                        |  |                                    | 172   |                                    |   | 138                                  |  | (20 | )%
|                                      |  |                                    |       |                                    |   |                                      |  |     |   
|Consolidated Cost of Sales            |  | $                                  | 2,104 |                                    | $ | 2,534                                |  | 20  | % 
|                                      |  |                                    |       |                                    |   |                                      |  |     |   

The period-to-period decrease in cost of sales for the Technology Infrastructure Practice Area of
$112,000, comparing the three months ended September 30, 2007 to the three months ended September 30, 2006, corresponds with the decrease in revenue but is higher in percentage terms. Management believes the decrease in the proportion of
the average hourly cost of consultant labor for Technology Infrastructure to average hourly fees indicates that the negative impact of the lull in demand for infrastructure-based services on pricing may be coming to an end. There can be no assurance
given, however, that improvement in demand from the low levels experienced for Technology Infrastructure services in recent periods will be realized in future periods.

The period-to-period increase in cost of sales for the Collaborative Solutions Practice Area of $125,000 corresponds with the change in revenue but is lower in percentage terms. As discussed in the Financial
Overview, the third quarter of 2007 included activity for a significant project with unusually low cost of sales.



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The period-to-period increase in cost of sales for the Business Process Practice Area of $86,000 is
primarily attributable to the increase in the level of services in the third quarter of 2007, as compared to the third quarter of 2006. The increase in cost of sales for Business Process is less than the change in revenue in percentage terms,
indicating a period-to-period decrease in the proportion of labor costs to revenue. Management believes that the Business Process staff has been able to support growth in service contract revenue that exceeds the corresponding growth in staff costs.

An increase of $85,000 was realized for Interactive Media cost of sales, comparing the three months ended September 30, 2007 with the
three months ended September 30, 2006. The increase in cost of sales was much lower in percentage terms than the increase in revenue from 2006 to 2007. Management attributes this to cost of sales in the third quarter of 2006 including a higher
proportion of higher-cost developers and consultants despite low overall project activity in that period.

The increase in Systems
Integration cost of sales of $362,000, comparing the quarters ended September 30, 2006 and 2007, corresponds with the period-to-period change in Systems Integration revenue but is higher in percentage terms. A contributing factor to the
increase was the introduction of new high-end technology with the DigiMix platform to provide the full benefits of the updated software applications, which increased the proportion of cost of sales relative to revenue.

The decrease in cost of sales of $82,000 for the Information System Product Sales segment, comparing the third quarters of 2006 and 2007, was
proportional to the change in revenue. The period-to-period decrease in Other Services cost of sales of $34,000 exceeded the corresponding decrease in revenue in percentage terms. There was a period-to-period decrease in activity from outsourced
services engagements, which typically accounts for a higher proportion of Other Services cost of sales than of Other Services revenue.

The
following table sets forth gross profit for the Companys operating segments for the three-month periods ended September 30, 2006 and 2007 and period-to-period percentage changes for each segment.



|                                     |  |                                    |       |                                    |   |                                      |  |     |   
|------------------------------------ |  | ---------------------------------- | ----- | ---------------------------------- | - | ------------------------------------ |  | --- | --
|Gross Profit  (Dollars in thousands) |  | Three MonthsEndedSeptember 30,2006 |       | Three MonthsEndedSeptember 30,2007 |   | Period-to-Period% Increase(Decrease) | 
|Technology Infrastructure            |  | $                                  | 383   |                                    | $ | 303                                  |  | (21 | )%
|Collaborative Solutions              |  |                                    | 1,022 |                                    |   | 1,484                                |  | 45  | % 
|Business Process                     |  |                                    | 358   |                                    |   | 502                                  |  | 40  | % 
|Interactive Media                    |  |                                    | 100   |                                    |   | 329                                  |  | 229 | % 
|Systems Integration                  |  |                                    | 153   |                                    |   | 286                                  |  | 87  | % 
|Information System Product Sales     |  |                                    | 83    |                                    |   | 49                                   |  | (41 | )%
|Other Services                       |  |                                    | 198   |                                    |   | 195                                  |  | (2  | )%
|                                     |  |                                    |       |                                    |   |                                      |  |     |   
|Consolidated Gross Profit            |  | $                                  | 2,297 |                                    | $ | 3,148                                |  | 37  | % 
|                                     |  |                                    |       |                                    |   |                                      |  |     |   

The period-to-period decrease in gross profit of $80,000 for the Technology Infrastructure
Practice Area, comparing the third quarter of 2007 to the third quarter of 2006, corresponds with period-to-period decline in revenue, but is slightly lower in percentage terms. As discussed above, management believes the decline reflects a
continuing low level of demand for Technology Infrastructure services in the third quarter of 2007, but believes the lower rate of decline than Technology Infrastructure revenue may indicate the negative impact of the lull in demand for
infrastructure-based services on pricing may be coming to an end.

The Collaborative Solutions Practice Area experienced an improvement in
gross profit of $462,000, comparing the third quarter of 2007 to the third quarter of 2006. The increase largely corresponds with significant period-to-period revenue growth, but is higher in percentage terms. Management believes the increase in
aggregate gross profit and gross profit percentage resulted primarily from strong demand for custom application development services and the inclusion of a significant project with unusually low cost of sales in the third quarter of 2007.

The growth in gross profit for the Business Process Practice Area of $144,000, comparing the quarters ended September 30, 2006 and
2007, is consistent with corresponding significant period-to-period revenue growth, but was slightly higher in percentage terms. As discussed above, management believes the growth in service contract revenue outpaced the increase in corresponding
labor costs. Management also believes activity on several large Microsoft CRM-based projects during the third quarter of 2007 has contributed to the growth in Business Process gross profit.



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Interactive Media gross profit increased by $229,000 when comparing the three-month periods ended
September 30, 2006 and 2007, consistent with the period-to-period increase in revenue, but higher in percentage terms. As discussed above, management attributes the increase primarily to the inclusion of significant project activity related to
three shipboard interactive television systems in the third quarter of 2007, while the third quarter of 2006 had an unusually low level of project activity. The increase in percentage terms can also be attributed to higher proportionate usage of
higher cost developers and consultants on projects during the third quarter of 2006.

The period-to-period decrease in Systems Integration
gross profit of $133,000, when comparing the three months ended September 30, 2007 to the comparable period of the prior year, is significantly lower in percentage terms than the corresponding period-to-period increase in revenue. A
contributing factor was the introduction of new high-end technology with the DigiMix platform to provide the full benefits of the updated software applications, with corresponding higher levels of cost of sales.

The decrease in gross profit for Information System Product Sales of $34,000, comparing the third quarters of 2006 and 2007, was consistent with the
change in revenue. Other Services gross profit decreased by $3,000, when comparing the quarters ended September 30, 2006 and 2007, as the lost outsourced services engagements included relatively low levels of gross profit.

Selling, General & Administrative Expenses

The Company recorded $2,953,000 in selling, general and administrative expenses during the three months ended September 30, 2007, including $184,000 for depreciation and amortization and $2,769,000 for other selling, general and
administrative expenses. Selling, general and administrative expenses were $2,328,000 during the three months ended September 30, 2006, including $99,000 for depreciation and amortization and $2,229,000 for other selling, general and
administrative expenses. The period-to-period increase in aggregate selling, general and administrative expense was $625,000, or 27%.

The
period-to-period increase in other selling, general and administrative expenses was $540,000, or 24%. Period-to-period increases were realized in compensation due to the increased size of technical consulting staffs, associated recruitment costs and
the inclusion of research and development expense during the third quarter of 2007.

The increase in depreciation and amortization,
comparing the third quarters of 2006 and 2007, was primarily attributable to the commencement of amortization of capitalized software development costs following the commercial introduction of the developed applications during the second quarter of
2007. Depreciation also experienced a period-to-period increase as a result of capital expenditures exceeding the cost of assets reaching the end of their depreciation periods over the second half of 2006 and the first half of 2007.

Benefit from Income Taxes

The Company recorded a
significant reduction in the valuation allowance associated with deferred tax assets during the three-month period ended September 30, 2007, which was the primary factor resulting in the recognition of a benefit from income taxes of $1,037,000
for the quarter. No significant change was made to the valuation allowance during the three-month period ended September 30, 2006, and the recognized benefit from income taxes for that quarter was $17,000.

Net (Loss) Income

The Company recorded net income of
$1,204,000 for the three months ended September 30, 2007, as compared to a net loss of $14,000 for the three months ended September 30, 2006. The $1,218,000 period-to-period increase in profitability resulted from the $851,000 increase in
gross profit from operations and the increase of $1,020,000 in benefit from income taxes, partially offset by the $625,000 increase in selling, general and administrative expenses. The factors resulting in the changes are discussed above.



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Results of Operations

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Revenue

The following table sets forth revenue for the Companys operating segments for the nine-month periods ended September 30, 2006 and 2007 and
period-to-period percentage changes for each segment.



|                                 |  |                                   |        |                                   |   |                                      |  |     |   
|-------------------------------- |  | --------------------------------- | ------ | --------------------------------- | - | ------------------------------------ |  | --- | --
|Revenue  (Dollars in thousands)  |  | Nine MonthsEndedSeptember 30,2006 |        | Nine MonthsEndedSeptember 30,2007 |   | Period-to-Period% Increase(Decrease) | 
|Technology Infrastructure        |  | $                                 | 2,748  |                                   | $ | 1,788                                |  | (35 | )%
|Collaborative Solutions          |  |                                   | 5,459  |                                   |   | 7,351                                |  | 35  | % 
|Business Process                 |  |                                   | 1,569  |                                   |   | 2,300                                |  | 47  | % 
|Interactive Media                |  |                                   | 929    |                                   |   | 1,848                                |  | 99  | % 
|Systems Integration              |  |                                   | 2,424  |                                   |   | 3,610                                |  | 49  | % 
|Information System Product Sales |  |                                   | 852    |                                   |   | 788                                  |  | (8  | )%
|Other Services                   |  |                                   | 1,064  |                                   |   | 963                                  |  | (9  | )%
|                                 |  |                                   |        |                                   |   |                                      |  |     |   
|Consolidated Revenue             |  | $                                 | 15,045 |                                   | $ | 18,648                               |  | 24  | % 
|                                 |  |                                   |        |                                   |   |                                      |  |     |   

The Company realized a decrease of $960,000 in Technology Infrastructure revenue when comparing
the nine-month periods ended September 30, 2006 and 2007. As discussed above, management believes customers deferred spending on technology-based projects during the first nine months of 2007 in anticipation of undertaking projects following
the introduction and early adoption period for Microsoft technology updates, including Windows Vista and Office software, in order to evaluate the benefits realized by early adopters of the new technology. Management anticipates that widespread
business migration to these products is most likely to occur during 2008. There can be no assurance that such migration to these products will occur or that other Microsoft technology updates will result in the future realization of Technology
Infrastructure revenue equal to or greater than current levels.

A period-to-period increase of $1,892,000 in revenue for the Collaborative
Solutions Practice Area was realized for the nine months ended September 30, 2007, as compared to the nine months ended September 30, 2006. Management believes the period-to-period increase in revenue is attributable to strong demand
during the first nine months of 2007 for solutions based on custom .NET-based application development and Microsoft SharePoint, SQL Server 2005 and business intelligence technologies.

Management attributes the period-to-period increase in Business Process revenue of $731,000, comparing the nine months ended September 30, 2007 with
the nine months ended September 30, 2006, to the Business Process Practice Area undertaking more complex Dynamics SL projects and strong demand for solutions based on Microsoft Dynamics CRM technology. Another contributing factor is revenue
from a growing base of service contracts for the Companys Business Process Practice Area.

The period-to-period increase in
Interactive Media revenue, when comparing the nine-month periods ended September 30, 2006 and 2007, was $919,000. In both periods, the majority of Interactive Media revenue related to technical architecture design, configuration and
implementation services, and post-installation technical support for interactive television systems installed on cruise ships. However, the first nine months of 2007 included the peak period of project activity for seven shipboard systems, as well
as a number of smaller projects. During the first nine months of 2006, there were only three ship-based projects with comparable levels of activity.

A period-to-period increase of $1,186,000 in revenue for the Systems Integration segment was realized for the nine months ended September 30, 2007, as compared to the comparable period of the prior year. During
the nine months ended September 30, 2007, Systems Integration revenue was realized from large projects involving the implementation of interactive television platforms aboard seven ships, the Azamara Journey and Quest, Carnival
Freedom, Costa Serena, MSC Orchestra, NCL Gem and Royal Caribbean Liberty of the Seas, as well as the upgrade of specialized technology platforms for a financial services customer. During the first nine months of
2006, there were only three large ship projects with a significant level of Systems Integration activity and implementation of specialized technology platforms for a financial services customer.



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Revenue for the Information System Product Sales segment decreased by $64,000, when comparing the first
nine months of 2007 with the first nine months of 2006. Management attributes the decrease to period-to-period variability in the level of sales of interactive television products and Microsoft Dynamics and related software products. Revenue for the
Other Services segment decreased $101,000, when comparing nine-month periods ended September 30, 2007 and 2006. A large placement fee was included in Other Services revenue during the first nine months of 2006, while no comparable fee was
included during the first nine months of 2007. Another contributing factor was the loss of engagements for outsourced technical resources during 2007.

Cost of Sales and Gross Profit

The following table sets forth cost of sales for the Companys operating segments for
the nine-month periods ended September 30, 2006 and 2007 and period-to-period percentage changes for each segment.



|                                      |  |                                   |       |                                   |   |                                      |  |     |   
|------------------------------------- |  | --------------------------------- | ----- | --------------------------------- | - | ------------------------------------ |  | --- | --
|Cost of Sales  (Dollars in thousands) |  | Nine MonthsEndedSeptember 30,2006 |       | Nine MonthsEndedSeptember 30,2007 |   | Period-to-Period% Increase(Decrease) | 
|Technology Infrastructure             |  | $                                 | 1,184 |                                   | $ | 803                                  |  | (32 | )%
|Collaborative Solutions               |  |                                   | 2,301 |                                   |   | 3,154                                |  | 37  | % 
|Business Process                      |  |                                   | 709   |                                   |   | 936                                  |  | 32  | % 
|Interactive Media                     |  |                                   | 253   |                                   |   | 599                                  |  | 137 | % 
|Systems Integration                   |  |                                   | 1,074 |                                   |   | 1,971                                |  | 84  | % 
|Information System Product Sales      |  |                                   | 623   |                                   |   | 565                                  |  | (9  | )%
|Other Services                        |  |                                   | 581   |                                   |   | 621                                  |  | 7   | % 
|                                      |  |                                   |       |                                   |   |                                      |  |     |   
|Consolidated Cost of Sales            |  | $                                 | 6,725 |                                   | $ | 8,649                                |  | 29  | % 
|                                      |  |                                   |       |                                   |   |                                      |  |     |   

The period-to-period decrease in cost of sales for the Technology Infrastructure Practice Area of
$381,000, comparing the nine months ended September 30, 2007 to the nine months ended September 30, 2006, corresponds with the decrease in revenue but is slightly lower in percentage terms. Management attributes the change to the negative
effect of upward pressure on compensation for technology professionals, primarily during the first half of 2007.

The period-to-period
increase in cost of sales for the Collaborative Solutions Practice Area of $853,000 corresponds with the change in revenue but is slightly higher in percentage terms. Management believes high demand for application development skills in the
technology labor market put upward pressure on compensation resulting in labor costs increasing at a higher percentage than revenue, primarily during the first half of 2007.

The period-to-period increase in cost of sales for the Business Process Practice Area of $227,000 is primarily attributable to the increase in the level
of services in the first nine months of 2007, as compared to the first nine months of 2006. The increase in cost of sales for Business Process is less than the change in revenue in percentage terms, indicating a period-to-period decrease in the
proportion of labor costs to revenue. Management believes that Business Process staff has realized growth in service contract revenue that exceeds the corresponding growth in staff costs.

An increase of $346,000 was realized for Interactive Media cost of sales, comparing the nine months ended September 30, 2007 with the nine months
ended September 30, 2006. While a period-to-period increase was also realized in revenue, the increase in cost of sales was greater in percentage terms. Management attributes this to increased usage of higher cost developers and consultants and
independent contractor labor during 2007 and additional labor associated with projects following the commercial introduction of new software applications for the Companys DigiMix interactive television solutions.

The increase in Systems Integration cost of sales of $897,000, comparing the first nine months of 2007 and 2006, corresponds with the period-to-period
change in Systems Integration revenue but is higher in percentage terms. A contributing factor to the increase was the introduction of new high-end technology with the DigiMix platform, which increased the proportion of cost of sales relative
to revenue.



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The decrease in cost of sales of $58,000 for the Information System Product Sales segment, comparing the
first nine months of 2007 and 2006, was proportional to the change in revenue. The period-to-period increase in Other Services cost of sales of $40,000 occurred despite a corresponding period-to-period decrease in revenue due to the inclusion of a
significant placement fee in the first nine months of 2006 without related cost of sales.

The following table sets forth gross profit for
the Companys operating segments for the nine-month periods ended September 30, 2006 and 2007 and period-to-period percentage changes for each segment.



|                                     |  |                                   |       |                                    |   |                                      |  |     |   
|------------------------------------ |  | --------------------------------- | ----- | ---------------------------------- | - | ------------------------------------ |  | --- | --
|Gross Profit  (Dollars in thousands) |  | Nine MonthsEndedSeptember 30,2006 |       | Nine MonthsEnded September 30,2007 |   | Period-to-Period% Increase(Decrease) | 
|Technology Infrastructure            |  | $                                 | 1,564 |                                    | $ | 985                                  |  | (37 | )%
|Collaborative Solutions              |  |                                   | 3,158 |                                    |   | 4,197                                |  | 33  | % 
|Business Process                     |  |                                   | 860   |                                    |   | 1,364                                |  | 59  | % 
|Interactive Media                    |  |                                   | 676   |                                    |   | 1,249                                |  | 85  | % 
|Systems Integration                  |  |                                   | 1,350 |                                    |   | 1,639                                |  | 21  | % 
|Information System Product Sales     |  |                                   | 229   |                                    |   | 223                                  |  | (3  | )%
|Other Services                       |  |                                   | 483   |                                    |   | 342                                  |  | (30 | )%
|                                     |  |                                   |       |                                    |   |                                      |  |     |   
|Consolidated Gross Profit            |  | $                                 | 8,320 |                                    | $ | 9,999                                |  | 20  | % 
|                                     |  |                                   |       |                                    |   |                                      |  |     |   

The period-to-period decrease in gross profit of $579,000 for the Technology Infrastructure
Practice Area, comparing the first nine months of 2007 to the first nine months of 2006, corresponds with period-to-period decline in revenue, but is slightly higher in percentage terms. As discussed above, management believes this result reflects
the low level of demand for Technology Infrastructure services in the first nine months of 2007, which resulted in downward pressure on pricing and upward pressure on compensation costs for technology professionals.

The Collaborative Solutions Practice Area experienced an improvement in gross profit of $1,039,000, comparing the first nine months of 2007 to the first
nine months of 2006. The increase largely corresponds with significant period-to-period revenue growth, but is slightly lower in percentage terms. Management believes the increase in gross profit resulted from strong demand for custom application
development services and business intelligence solutions but was partially offset by upward pressure on compensation costs, resulting in a period-to-period decline in the gross profit percentage.

The growth in gross profit for the Business Process Practice Area of $504,000, comparing the nine-month periods ended September 30, 2007 and 2006,
corresponds with significant period-to-period revenue growth, but was higher in percentage terms. As discussed above, management believes the growth in service contract revenue outpaced the increase in corresponding labor costs. Management also
believes several large Microsoft CRM-based projects undertaken during 2007 have contributed to the growth in Business Process gross profit.

Interactive Media gross profit increased by $573,000 when comparing the nine-month periods ended September 30, 2007 and 2006, consistent with the period-to-period increase in revenue, but lower in percentage terms. As discussed above,
management attributes the increase primarily to a larger number of significant projects during the nine months ended September 30, 2007 than in the first nine months of 2006. The period-to-period decline in gross profit percentage resulted from
increased usage of higher-cost developers and consultants and independent contractor labor during the first nine months of 2007.

The
period-to-period increase in Systems Integration gross profit of $289,000, when comparing the nine months ended September 30, 2007 to the comparable period of the prior year, trailed the corresponding increase in revenue in percentage terms. A
contributing factors was the introduction of new high-end technology with the DigiMix platform to provide the full benefits of the updated software applications.



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The decrease in gross profit for Information System Product Sales of $6,000, comparing the first nine
months of 2007 and 2006, was consistent with the change in revenue. Other Services gross profit decreased by $141,000, when comparing the nine-month periods ended September 30, 2007 and 2006, primarily due to the inclusion of a significant
placement fee with no associated cost of sales in the first nine months of 2006.

Selling, General & Administrative Expenses

The Company recorded $8,493,000 in selling, general and administrative expenses during the nine months ended September 30, 2007, including $448,000
for depreciation and amortization and $8,046,000 for other selling, general and administrative expenses, net of a $1,000 gain from disposal of assets. Selling, general and administrative expenses were $7,121,000 during the nine months ended
September 30, 2006, including $302,000 for depreciation and amortization, a $3,000 loss from disposal of assets and $6,816,000 for other selling, general and administrative expenses. The period-to-period increase in aggregate selling, general
and administrative expense was $1,372,000, or 19%.

The period-to-period increase in other selling, general and administrative expenses was
$1,330,000, or 20%. Period-to-period increases were realized in compensation due to increased size of the Companys technical consulting staffs, associated recruitment costs, occupancy costs and the inclusion of research and development expense
during the first nine months of 2007.

The increase in depreciation and amortization, comparing the first nine months of 2007 and 2006, was
primarily attributable to the commencement of amortization of capitalized software development costs following the commercial introduction of the developed applications during May 2007. Depreciation also experienced a period-to-period increase as a
result of capital expenditures exceeding the cost of assets reaching the end of their depreciation periods over the second half of 2006 and the first half of 2007.

Provision for (Benefit from) Income Taxes

The Company recorded a significant reduction in the valuation allowance
associated with deferred tax assets during the nine-month period ended September 30, 2007, which was the primary factor resulting in the recognition of a benefit from income taxes of $964,000 during this period. No significant change was made
to net deferred tax assets during the nine-month period ended September 30, 2006, when a provision for income taxes of $15,000 was recognized.

Net
Income

The Company recorded net income of $2,398,000 for the nine months ended September 30, 2007, as compared to net income of
$1,174,000 for the nine months ended September 30, 2006. The $1,224,000 period-to-period increase in profitability resulted from the $1,679,000 increase in gross profit from operations and the increase of $979,000 in benefit from income taxes,
partially offset by the $1,372,000 increase in selling, general and administrative expenses. The factors resulting in the changes in gross profit and selling, general and administrative expenses are discussed above.

Off-Balance Sheet Arrangements

As of
September 30, 2007, the Company had 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, revenues or expenses, results
of operations, liquidity, capital expenditures or capital resources that is material to investors.

Liquidity and Capital Resources

At September 30, 2007, the Company had cash and liquid cash equivalents of $402,000 available to meet its working capital and operational needs. The
net change in cash from December 31, 2006 was an increase of $33,000. For the nine months ended September 30, 2007, net cash flows used by operating activities were $836,000. The Company recognized net income of $2,398,000 for the same
nine month period. During this period, the Company recorded non-cash expenses of $556,000 for depreciation of property and equipment, amortization of capitalized software development and intangible assets, a provision for uncollectible accounts
receivable, and expense recognition for the fair value of outstanding stock options, net of a $1,000 gain on disposal of assets and a $991,000 benefit related to a change in the valuation allowance related to deferred tax assets, resulting in net
cash provided of $1,962,000 related to the Consolidated Statement of Operations. Changes in working capital resulted in net cash used of $2,798,000 for the nine months ended September 30, 2007. Major working capital adjustments resulting in
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unbilled services, costs and estimated gross margins in excess of billings and software development costs in the amounts of $1,630,000, $217,000, $475,000
and $232,000, respectively, and decreases in accounts payable and billings in excess of costs and estimated gross margins of $156,000 and $803,000, respectively. Major working capital adjustments resulting in cash provided included increases in
deferred revenue and accrued compensation and payroll taxes of $305,000 each. Management attributes the increase in accounts receivable to (i) the 24% growth in revenue comparing the first three quarters of 2007 to the comparable period of the
prior year and (ii) large accounts receivable related to significant Business Process projects undertaken during 2007, including one in which the customer is utilizing government funding which has slowed the normal payment cycle. Significant
progress on collection of accounts receivable balances has been made during October 2007.

Investing activities resulted in a net cash use
of $368,000 for the nine months ended September 30, 2007. Investing activities also included payment of $29,000 of contingent consideration related to the 2004 acquisition of Jimary Business Systems and $179,000 of cash used for capital
expenditures for computer hardware for new employees and the periodic upgrading of technology, software, furniture and equipment. Financing activities resulted in cash provided of $1,237,000 for the nine months ended September 30, 2007. The
Company recorded a net borrowing of $1,770,000 on its line of credit facility during the first nine months of 2007 as a result of the working capital adjustments discussed above. Collection of significant accounts receivable subsequent to
September 30, 2007 has resulted in a net repayment of $855,000 on the line of credit balance as of November 7, 2007. Financing activities also included the payment of preferred stock dividends of $535,000.

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 line of credit. The S&T Loan Agreement has subsequently been renewed in each of the nine succeeding years. The current expiration date of the S&T Loan
Agreement is September 30, 2008. Borrowings may be made under the S&T Loan Agreement for general working capital purposes. 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 ninety 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. For two of the Companys customers, trade accounts receivable aged one hundred twenty days or less from the date of invoice are eligible for inclusion in the
borrowing availability. During July 2007, the S&T Loan Agreement was amended such that a large advance invoice for a customer was eligible for inclusion in the maximum borrowing availability through July 31, 2007 despite being aged greater
than one hundred twenty days. The balance of the advance invoice was collected in July 2007. As of September 30, 2007, maximum borrowing availability under the S&T Loan Agreement was $3,448,000. As discussed above, the outstanding loan
balance was $1,770,000 as of September 30, 2007, and has subsequently been reduced to $915,000 as of November 7, 2007.

Effective
with the recent renewal of the credit facility, loans under the S&T Loan Agreement bear interest at the banks prime interest rate plus one-half percent. During the first nine months of 2007, the interest rate under the S&T Loan
Agreement ranged from 8.25% to 9.25%. The interest rate was 8.25% as of September 30, 2007 and has subsequently been reduced to 8.00%. Interest payments on any outstanding loan balances are due monthly on the first day of the month. The Company
recorded interest expense of $27,000 and $72,000 related to this revolving credit loan during the three- and nine-month periods ended September 30, 2007, respectively. The principal balance of any borrowings will be due at maturity, although
any outstanding principal balances may be repaid in whole or part at any time without penalty.

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 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, the Fourth and Fifth Amendments to the Loan and Security Agreement filed as Exhibits 10.1 and 10.2 to the
Companys Report on Form 8-K filed on September 30, 2005, the Sixth Amendment to the Loan and Security Agreement and Change in Terms Agreement filed as Exhibits 10.1 and 10.2 to the Companys Report on Form 8-K filed on



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September 19, 2006, the Seventh Amendment to Loan and Security Agreement filed as Exhibit 10.1 to the Companys Report on Form 8-k filed on
July 9, 2007, and the Change in Terms Agreement filed as Exhibit 10.1 to the Companys Report on Form 8-K filed on October 3, 2007. 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, G and H preferred stock.
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.
The Company was in compliance with the cash flow covenant for the first three fiscal quarters of 2007. The Company was also in compliance with all other covenants as of this date 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.

On October 5, 2007, the Company executed a Promissory Note in the principal amount of $700,000 payable to David Ritchie, the chief executive officer
of CodeLab, and a beneficial owner of more than five percent of the outstanding common stock of the Company. The maturity date of the Promissory Note between the Company and Mr. Ritchie is July 31, 2008. The Company may pre-pay the
outstanding principal balance of the Promissory Note at any time in whole or in part prior to maturity. The Promissory Note bears interest at a rate of 12% per annum, with interest due and payable quarterly on December 31,
2007, March 31, 2008, June 30, 2008 and at maturity. The interest rate will increase by 2% in the event any scheduled payment of interest is not made, with the increased rate remaining in effect until the scheduled interest
payment is made. The Promissory Note is subordinated to and junior in right of payment to all currently existing or future obligations, indebtedness or other liabilities of the Company to any commercial banks or other financial institutions
providing financing to the Company. With regard to the Promissory Note, S&T Bank waived the terms prohibiting the Company from incurring additional debt included in the S&T Loan Agreement, as amended. The Promissory Note was included as
Exhibit 10.1 to the Companys Report on Form 8-K filed on October 10, 2007. The principal balance of the Promissory Note represents a portion of the accrued purchase consideration due to Mr. Ritchie pursuant to the terms of the Stock
Purchase Agreement (the Purchase Agreement) entered into on July 26, 2005 by and among the Company, CodeLab, and the holders of equity interests in CodeLab. See below for additional information related to the Purchase Agreement.

As of September 30, 2007, the Company had outstanding 25,000 shares of 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. As of July 1, 2006, Series C preferred stock earns dividends at the rate of 12% of the liquidation value thereof per annum, compounded quarterly, an increase of 4% from the rate previously in effect. Dividends on the Series C
preferred stock accrued as of June 30, 2006 compound thereafter at an annual rate of 12% of the liquidation value. Accrued and unpaid dividends 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
December 31, 2007. Accrued but unpaid dividends on the Series C preferred stock were $3,840,000 as of September 30, 2007 and $3,933,000 as of November 14, 2007.

Payment of dividends accrued on Series C preferred stock was originally scheduled to occur within ten days of June 30, 2006. Thereafter, dividends
on the Series C preferred stock were scheduled for quarterly payment. However, the Companys management determined that meeting the scheduled payments was inadvisable due to liquidity considerations and the restrictive covenant in the S&T
Bank Loan Agreement prohibiting payment of dividends related to Series C preferred stock. Accordingly, the Company has indefinitely deferred payment of dividends on Series C preferred stock. If at a future time the Company determines that payment
would be advisable, it will seek elimination of the prohibition of payment under the S&T Loan Agreement if it is still in effect. Any future payment of dividends on Series C preferred stock will also be subject to legally available funds for the
payment of dividends as prescribed by the Delaware General Corporation Law.

As of September 30, 2007, the Company had outstanding
2,750 shares of 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
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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 $28,000 as of September 30, 2007 and $6,000 as of November 14, 2007.

As of September 30, 2007, the Company had outstanding 1,000 shares of 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 $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 $59,000 as of September 30, 2007 and $50,000 as of November 14, 2007.

As of September 30, 2007,
the Company had outstanding 150 shares of 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
shares of Series G preferred stock at any time. 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. As of September 30, 2007, the Company estimated the amount of the liquidation premium to be $3,799,000. The
Company has not recorded a liability for the liquidation premium as the likelihood of redemption of the Series G preferred stock and payment of the premium are considered remote. 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. Series G preferred stock earns cumulative
quarterly dividends at the rate of 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 $45,000 as of September 30, 2007 and $22,000 as of November 14,
2007. 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.

As of September 30, 2007, the Company had outstanding 250 shares of Series H Redeemable Preferred Stock having a liquidation preference of $10,000
per share. There is no mandatory redemption date for the Series H preferred stock. However, the Company may redeem shares of the Series H preferred stock at any time. There are no sinking fund provisions applicable to the Series H preferred stock.
Series H preferred stock earns dividends at the rate of 12% of the liquidation value thereof per annum. Dividends are payable quarterly in arrears on each January 31, April 30, July 31 and October 31 subject to legally
available funds. Dividends not paid at scheduled dates will compound on a quarterly basis thereafter. Accrued but unpaid dividends on Series H preferred stock were $50,000 as of September 30, 2007 and $12,000 as of November 14, 2007.

The order of liquidation preference of the Companys outstanding preferred stock, from senior to junior, is Series H, 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, G
and H preferred stock. Each of the Certificates of Designation governing the Series C, D, F, G and H 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 of the Series G preferred stock 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,



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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. Any of the rights and preferences of the holders of any of the Companys series of preferred stock may be waived by the affirmative vote of the holders
of a majority of the shares of that series.

The Company expects to continue to accrue dividends for the Series C, D, F, G and H preferred
stock in a manner similar to its current practice. The Company has, to date, made all scheduled dividend payments for Series D, F, G and H 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 and that the Company continues deferral of payment of dividends on Series C preferred stock, aggregate scheduled dividend payments for
Series D, F, G and H preferred stock will be $180,000 for the final quarter of 2007 and $717,000 for 2008. Since none of the outstanding series of the Companys preferred stock are mandatorily redeemable, dividend payments could extend for an
indefinite period beyond 2008. Future dividend requirements could also be substantially larger if the Company determines at any point in time that payment of dividends on Series C preferred stock is advisable based on business conditions and
liquidity considerations and S&T Bank eliminates the prohibition of payment of dividends.

In connection with the Companys
July 26, 2005 sale of Series H preferred stock, the purchasers of Series H preferred stock also received warrants to purchase an aggregate of 2,500,000 shares of common stock which have an exercise price of $1.00 per share. The number of shares
for which the Series H warrants may be exercised and the exercise price will be adjusted on a weighted average basis in the event of a dilutive issuance as described in the Form of Common Stock Warrant, which was filed as Exhibit 4.3 to the
Companys Report on Form 8-K filed on July 28, 2005. The exercise price may be paid in cash or by delivery of a like value, including liquidation value and any accrued but unpaid dividends, of Series C, D, F or G preferred stock. The
warrants will expire July 26, 2020, unless exercised earlier.

The Purchase Agreement for the July 2005 acquisition of CodeLab
provides for annual payments of contingent consideration to be paid to the former holders of equity interests in CodeLab for each of the three annual periods ending July 31, 2006, 2007 and 2008, consisting of a combination of cash and shares of
the Companys common stock. The Purchase Agreement provides, however, that the Company may at its sole option elect to pay the annual contingent payments in all cash. The annual contingent payments due, if any, for the three annual periods will
be calculated pursuant to a negotiated formula, as specifically set forth in the Purchase Agreement, that is based upon an agreed to multiple of the net operating profit of CodeLabs business, determined on an accrual basis before deductions
for income taxes, interest, depreciation and amortization, in the relevant annual period, and subject to further adjustments as set forth in the Purchase Agreement, including potential setoffs by the Company for certain indemnification claims. The
total of the annual contingent payments shall not exceed an aggregate of $5,600,000. Any payment becoming due shall be made by the Company no later than 120 days following the end of such annual period.

In October 2006, in consideration of the first annual period ended July 31, 2006, the Company delivered to the former holders of equity interests in
CodeLab purchase consideration consisting of a cash payment of $1,085,000 and 361,642 shares of the Companys common stock. The stock issuance was recorded based on the market value of the Companys common stock on the date of issuance of
$0.55 per share, resulting in the recording of $4,000 to common stock and $195,000 to additional paid-in-capital. A total of $112,000 of the contingent consideration for the annual period ended July 31, 2006 was recorded as expense for
compensatory elements, of which $47,000 was included in selling, general and administrative expenses for the year ended December 31, 2005 and the remaining $65,000 was recorded as expense in 2006. The remainder of the contingent consideration
for the first annual period was regarded as additional purchase price and was recorded as goodwill.

In October 2007, in consideration of
the second annual period ended July 31, 2007, the Company delivered to the former holders of equity interests in CodeLab purchase consideration consisting of a cash payment of $545,000 and 424,838 shares of the Companys common stock. The
stock issuance was recorded based on the market value of the Companys common stock on the date of issuance of $0.61 per share, resulting in the recording of $4,000 to common stock and $255,000 to additional paid-in-capital. Additionally, as
discussed above, the Company executed a Promissory Note in the principal amount of $700,000 to David Ritchie, one of the former holders of equity interests in CodeLab, for a portion of the accrued purchase consideration due Mr. Ritchie for the
annual period ended July 31, 2007. See above in this section for additional information related to the Promissory Note. A total of $96,000 of the contingent consideration for the annual period ended July 31, 2007 was recorded as expense
for compensatory elements, of which $48,000 was



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included in selling, general and administrative expenses for the year ended December 31, 2006 and the remaining $48,000 was recorded as expense in 2006.
The remainder of the contingent consideration for the second annual period was regarded as additional purchase price and was recorded as goodwill.

Following the October 2007 transactions described above, the Companys accrued acquisition consideration balance related to CodeLab was $180,000. A balance of $30,000 related to the second annual period following acquisition remains by
agreement of the parties pending resolution of a potential indemnification offset. Estimated accrued acquisition consideration of $150,000 has also been recorded related to the third annual period following acquisition, which will end July 31,
2008. Management will monitor the results of CodeLabs operations during the remainder of the third annual period and will adjust the liability for additional purchase consideration when estimates can be reasonably determined and management
believes payment of additional consideration is highly likely. The allocation of any contingent consideration due under the Purchase Agreement between purchase consideration and expense will be determined when such estimates are recorded.

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. No contingent consideration was due for the
first annual period. Contingent consideration of $29,000 for the second annual period ended November 30, 2006 was reflected as accrued purchase consideration on the Companys Consolidated Balance Sheet as of December 31, 2006, and was
subsequently paid in cash in January 2007. A total of $192,000 is reflected as accrued acquisition consideration on the Consolidated Balance Sheet as of September 30, 2007 related to the Jimary Business Systems acquisition. The significant
increase in contingent consideration for the third annual period, as compared with the preceding periods, is attributable to growth in the Companys Business Process operations realized since the beginning of the third annual period and
anticipated by management to continue throughout the period. Management will make a final determination of the contingent consideration due for the third annual period following the conclusion of the period on November 30, 2007. Contingent
purchase consideration due for the third annual period is to be remitted within sixty days of the end of the period.

Capital expenditures
during the nine months ended September 30, 2007 were $340,000 and included purchases of computer hardware for new employees and the Companys periodic upgrading of technology, software for the Companys operations, furniture and
leasehold improvements for the Ft. Lauderdale office. Management forecasts that capital expenditures during the remainder of 2007 will not exceed $120,000 and that capital expenditures during 2008 will not exceed $500,000. Management expects future
capital expenditures will include purchases for the Companys periodic upgrading of technology hardware, software, furniture and necessary leasehold improvements related to expansion of the Companys Boston office. Business conditions and
managements plans may change during the remainder of 2007 and during 2008 so there can be no assurance that the Companys actual amount of capital expenditures will not exceed the planned amount.

During the years ended December 31, 2005 and 2006 and the nine months ended September 30, 2007, respectively, capitalized software development
costs of $50,000, $476,000 and $232,000 were recorded by the Company related to enhanced applications for the Companys DigiMix interactive television solutions. Software development costs included purchased software development tools,
testing equipment, consulting services and the cost of internal labor. The capitalized costs were incurred subsequent to the Companys determination that technical feasibility had been achieved for the developed software applications and prior
the introduction of the developed applications on customer projects in May 2007. Following commercial introduction, capitalized software development costs are being amortized over a three-year period. Additional development costs associated with the
software applications incurred will be expensed. The Company expects to undertake additional software development activities during 2008.

The Companys cash balances may be diminished over the remainder of 2007 and during 2008 due to many factors, including the use of cash for operations, changes in working capital, capital expenditures, dividends on preferred stock, the
payment of additional purchase consideration related to the recent business acquisitions, additional acquisitions of businesses and other factors. 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.



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As part of its general business strategy, the Company may from time-to-time seek strategic alternatives.
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 the Companys inability to renew or replace the current credit facility after its expiration in September 2008. 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 it, 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.

Recently
Issued Accounting Standards

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
 an Interpretation of FASB Statement No. 109 (FIN No. 48), which prescribes measurement attributes and a recognition threshold, as well as criteria for subsequently recognizing, derecognizing and measuring uncertain
tax positions for financial reporting purposes. FIN No. 48 also requires additional disclosure concerning uncertainty related to deferred income tax assets and liabilities. Any adjustments resulting from implementation of FIN No. 48 are
required to be recognized as changes in accounting principles with a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. Implementation of FIN No. 48 is required for the first annual period beginning
after December 15, 2006. The Company adopted FIN No. 48 beginning January 1, 2007. The Company reviewed its previously recognized tax benefits and determined that no material uncertainty was indicated as of the implementation of the
new standard. There have been no subsequent changes to the Companys determination regarding its previously recognized tax benefits. In 2007, the FASB issued Financial Interpretation No. 48-1, Definition of Settlement in
FASB Interpretation No. 48(FIN No. 48-1), which provides clarification regarding the effective settlement of tax positions upon examination by a taxing authority. FIN No. 48-1 has not to date impacted the
Companys application of FIN No. 48.

In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (SFAS No. 157), which provides guidance for using fair value to measure assets and liabilities and expands required information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that market participants would
use when pricing the asset or liability. Implementation of SFAS No. 157 is required for the fiscal years beginning after November 15, 2007. The Company plans to adopt SFAS No. 157 beginning January 1, 2008. The Company is
currently evaluating the potential impact of adoption of SFAS No. 157.

In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115 (SFAS No. 159), which permits entities to choose fair value
measurement for many financial instruments and certain other items as of specified election dates. Business entities will thereafter report in earnings the unrealized gains and losses on items for which the fair value option has been chosen. The
fair value option may be applied instrument by instrument, may not be applied to portions of instruments and is irrevocable unless a new election date occurs. SFAS No. 159 is effective for an entitys first fiscal year beginning after
November 15, 2007. The Company plans to adopt SFAS No. 159 beginning January 1, 2008. The Company is currently evaluating the potential impact of adoption of SFAS No. 159.



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|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. The
Companys credit facility with S&T Bank bears interest at a variable rate, which potentially exposes the Company to the risk that interest rate increases may adversely affect the Companys results of operations and financial condition.
The Company does not currently believe this risk is likely to result in a material adverse impact. During the nine-month period ended September 30, 2007, a change of one percent in the interest rate on the line of credit with S&T Bank would
have impacted the Companys results of operations by $8,000.



|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 the end of the period covered by this Report on Form 10-Q, 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 and is accumulated and communicated to the Companys management, as appropriate, to allow timely decisions regarding required disclosure. During the fiscal quarter ended September 30, 2007, there
were no significant changes in the Companys internal control procedures with respect to financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial
reporting.

Part II



|Item 1A. | Risk Factors
|-------- | ------------

In addition to the other
information included in this Report, you should carefully review and consider the factors discussed in Part I, Item 1A  Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006, certain of which have been
updated below. These factors could materially affect our business, financial condition or future results of operations. The risks, uncertainties and other factors described in our Annual Report on Form 10-K are not the only ones facing our company.
Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial may also impair our business operations, financial condition or operating results. Any of the risks, uncertainties and other factors
could cause the trading price of our common stock to decline substantially.

We need to continually identify and obtain new
engagements from existing and prospective customers to maintain the level of committed backlog necessary to sustain our ongoing consulting services and systems integration operations. If we fail to continually obtain new engagements, our business
may be materially adversely affected.

As of September 30, 2007, our total committed backlog for consulting services and
systems integration was $12,947,000. We expect $4,208,000, $6,275,000, $1,552,000 and $912,000, respectively, of the backlog will be realized as revenue during the remainder of 2007, 2008, 2009 and the period 2010 through 2012. Consulting and
systems integration revenue realized during the first nine months of 2007 plus backlog expected to be earned during the final quarter of 2007 represents 128% of 2006 consulting and systems integration revenue. Backlog includes unrealized revenue
related to:



| |  |  | fixed-price projects,
| | - |  | ---------------------



| |  |  | service arrangements under which fixed amounts are billed for specified time periods, and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | managements estimate of future fees for projects billed on an hourly basis.
| | - |  | ----------------------------------------------------------------------------



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The actual revenue that we realize from the projects included in backlog is subject to variability in timing due to
project schedule delays or acceleration and to variability in the amount due to many factors, including the actual hours required for hourly-based projects and additions or reductions in project scope.

As of September 30, 2007, our committed backlog for the Collaborative Solutions Practice Area was $6,614,000, of which we expect to earn $1,930,000
during the fourth quarter of 2007 and $2,358,000, $1,482,000 and $844,000, respectively, of which we expect to earn during 2008, 2009 and the period 2010 through 2012. Collaborative Solutions revenue realized during the first three quarters of 2007
plus backlog expected to be earned during the fourth quarter of 2007 represents 127% of 2006 Collaborative Solutions revenue. The projects for our Pittsburgh and Northern California operations and some of the projects for CodeLab included in the
committed backlog for the Collaborative Solutions Practice Area are expected to be performed over a relatively short time period, primarily in the fourth quarter of 2007. CodeLab also has several engagements for maintenance, analysis and support
related to customers customized software applications which are covered by long-term agreements. During 2007, the Collaborative Solutions backlog increased significantly due to (i) an extension of the term of CodeLabs agreement with
Citigroup for a three-year period and (ii) commitments for two large engagements obtained by Allin Consulting-California, one with a new customer and one for a new project with a previously existing customer.

Committed backlog for the Technology Infrastructure Practice Area was $736,000 as of September 30, 2007, of which $383,000 is expected to be earned
during the remainder of 2007, $215,000 during 2008, $70,000 during 2009 and $68,000 during the period 2010 through 2012. Technology Infrastructure revenue realized during the first three quarters of 2007 plus backlog expected to be earned during the
fourth quarter of 2007 represents 66% of 2006 Technology Infrastructure revenue. We expect that the majority of the projects included in the committed backlog for the Technology Infrastructure Practice Area will be performed over a relatively short
time period, primarily in the fourth quarter of 2007. The backlog for future years relates to several long-term agreements with customers of CodeLab.

Committed backlog for the Business Process Practice Area was $1,033,000 as of September 30, 2007, of which $662,000 is expected to be earned during the remainder of 2007 and $371,000 during 2008. Business Process
revenue realized during the first three quarters of 2007 plus backlog expected to be earned during the fourth quarter of 2007 represents 143% of 2006 Business Process revenue. The projects included in the committed backlog for the Business Process
Practice Area include a mix of projects that will be performed over a relatively short time period, primarily in the fourth quarter of 2007, and longer-term fixed-price support arrangements performed over specified time periods, typically annual
periods. Starting and ending dates for these arrangements vary so remaining project terms as of September 30, 2007 range from days to almost a full year.

There can be no assurance that we will be able to continue to sustain or improve the backlog levels for the Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas. We depend on the
ability of our sales and marketing personnel to continually identify and obtain new engagements from existing and prospective customers so that we can generate the ongoing revenue necessary to sustain the operation of these practice areas beyond the
short time period during which significant portions of our present backlog will be realized. General economic conditions and other risk factors such as geopolitical considerations may harm our ability to obtain future business, which would
negatively impact our business, results of operations and financial condition.

As of September 30, 2007, committed backlog for
Interactive Media consulting services was $1,444,000, of which we expect to realize $434,000 during the remainder of 2007 and $1,010,000 during 2008. Interactive Media revenue realized during the first three quarters of 2007 plus the backlog
expected to be earned during the final quarter of 2007 represents 204% of 2006 Interactive Media consulting revenue. To date, most of the significant Interactive Media consulting projects have involved architecture design and configuration of
interactive television systems for cruise ships. The Interactive Media backlog includes remaining work on systems for the Azamara Quest, Costa Serena, Fred. Olsen Balmoral, NCL Gem and Regent Navigatorand
Voyager, as well as projects expected to start during the fourth quarter of 2007 or early 2008, including systems for the Celebrity Mercury and Galaxy, Regent Mariner and Royal Caribbean Independence of the Seas.
Backlog also includes development and technical support projects. During October 2007, Interactive Media backlog increased significantly as we received orders for shipboard interactive television systems for the MSC Musica and Poesia
and the P&O Ventura. We expect that the majority of revenue associated with the new orders will be earned during 2008.

To date,
most of the significant Systems Integration projects have involved implementing interactive television systems on cruise ships in connection with the Interactive Media consulting services described above. As of September 30, 2007, committed
backlog for Systems Integration was $3,120,000, of which we expect to realize $799,000 during the remainder of 2007 and $2,321,000 during 2008. Systems Integration revenue realized during the first three quarters of



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2007 plus the backlog expected to be earned during the fourth quarter of 2007 represents 167% of 2006 Systems Integration revenue. Backlog for the Systems
Integration segment includes interactive television system implementation projects for the ships listed above with related Interactive Media projects, as well as a hardware replacement project for a financial services specialized technology
platform.The ship system orders for the MSC Musica and Poesia and the P&O Ventura received during October 2007 also significantly increased Systems Integration backlog.

We will continue to seek additional consulting and systems integration projects with existing customers in the cruise industry and their affiliates and
with other cruise lines for which we do not presently provide services. However, there can be no assurance that we will be successful in obtaining additional orders beyond those already received. Unforeseen events, such as schedule delays by our
customers, could result in our realization of the backlog expected to be earned during the fourth quarter of 2007 as revenue in 2008 or later.

In recent periods, our Interactive Media and Systems Integration operating segments have generated revenue primarily from a small number of large projects for a small number of customers concentrated in the cruise industry. Other
operating segments have also had certain customers account for significant portions of their revenue. We also expect continuing concentration of revenue in a small number of CodeLab customers in the financial services sector. The loss of any number
of these customers or a material reduction in business we receive from any of these customers could adversely affect our business, financial condition and results of operations.

The Interactive Media and Systems Integration segments collectively accounted for 20% and 22% of our revenue and gross profit for the year ended
December 31, 2006, and 29% of our revenue and gross profit for the nine months ended September 30, 2007. Historically, Interactive Media and Systems Integration revenue has been highly concentrated among a few customers in the cruise
industry. Our success over the last year in obtaining new cruise lines as customers has lessened our dependence on any individual customer, but has not changed the concentration of these segments operations in one industry. The cruise industry
is subject to various risks from geopolitical and economic considerations, future potential increases in passenger fares necessitated by rising fuel costs, security regulations, new or increased taxes and other factors. Any factors which negatively
impact the cruise industry could decrease demand for Interactive Media and Systems Integration services.

We also expect continued
concentration of revenue among significant customers in the financial services vertical market as a result of our 2005 acquisition of CodeLab, as a small number of customers represent significant portions of CodeLabs revenue. Any factors which
negatively impact the financial services industry could decrease demand for the services offered by CodeLab.

During the year ended
December 31, 2006 and the nine months ended September 30, 2007, there were no customers accounting for 10% or greater of our consolidated revenue. However, during both periods, a number of customers accounted for 10% or greater of the
revenue of individual segments. The loss of any of these customers could negatively impact the Companys results of operations and financial condition.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

The Companys disclosures regarding its issuance of unregistered securities on or about October 5, 2007, which are set forth in the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on
October 10, 2007, are incorporated by reference herein.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Each of the
Certificates of Designation for the Series C, D, F, G and H 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. The order of liquidation preference of the Companys outstanding series of preferred stock, from senior to junior, is Series H, 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, G and H preferred stock. 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.



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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 D, F, G and H preferred stock. A significant arrearage of dividends accrued on Series C preferred stock because dividends were not initially scheduled to be paid
until within ten days of June 30, 2006. The Companys management determined that meeting the scheduled payment was inadvisable due to liquidity considerations and a restrictive covenant in the S&T Loan Agreement which prohibits payment
of dividends on Series C preferred stock during the term of the agreement, which expires on September 30, 2008. The Company has indefinitely deferred payment of dividends on Series C preferred stock.

As of September 30, 2007, the Company had outstanding 25,000 shares of Series C Redeemable Preferred Stock, having a liquidation preference of $100
per share. Accrued but unpaid dividends on the Series C preferred stock were $3,840,000 as of September 30, 2007 and $3,933,000 as of November 14, 2007. Payment of dividends on Series C preferred stock at any future date is subject to
elimination of the restrictive covenant in the S&T Bank Loan Agreement and legally available funds for the payment of dividends as prescribed by the Delaware General Corporation Law. Series C preferred stock earns dividends at the rate of 12% of
the liquidation value thereof per annum, compounded quarterly, an increase of 4% from the rate in effect through June 30, 2006. Accrued dividends as of June 30, 2006 compound thereafter at a rate of 12% of the liquidation value thereof per
annum. Dividends on the Series C preferred stock accrued after June 30, 2006 were originally scheduled for quarterly payments. The Company also indefinitely deferred payment of the scheduled quarterly dividends until such time as the
restrictive bank covenant is eliminated, legally available funds are present and management determines that payment is advisable given the liquidity considerations of the Company.

As of September 30, 2007, the Company had outstanding 2,750 shares of 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 $28,000 as of September 30, 2007 and $6,000 as of November 14, 2007.

As of September 30, 2007, the Company had outstanding 1,000 shares of 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 $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 $59,000 as of September 30, 2007 and $50,000 as of November 14, 2007.

As of September 30, 2007, the Company had outstanding 150 shares of Series G Convertible Redeemable Preferred Stock having a liquidation preference of $10,000 per share. Series G preferred stock earns cumulative
quarterly dividends at the rate of 12% of the liquidation value thereof per annum 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 $45,000 as of September 30, 2007 and $22,000 as of November 14, 2007.

As of September 30, 2007, the Company had outstanding 250 shares of Series H Redeemable Preferred Stock having a liquidation preference of $10,000
per share. Series H preferred stock earns cumulative quarterly dividends at the rate of 12% of the liquidation value thereof per annum until redemption, if any. Dividends not paid at scheduled dates will compound quarterly thereafter. To date, all
required payments of dividends on Series H preferred stock have been made. Accrued but unpaid dividends on the Series H preferred stock were $50,000 as of September 30, 2007 and $12,000 as of November 14, 2007.

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.



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|Item 6. | Exhibits
|------- | --------



|              |  |                                                                                                                                                                                                                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit (1)                                                                                                                                                                                                                                                                                                                                           
|3(i)(a)       |  | Restated Certificate of Incorporation of Allin Corporation, as amended (incorporated by reference to Exhibit 3(I)(a) to Allin Corporations Report on Form 10-Q for the quarterly period
ended June 30, 2005)                                                                                                                                                        
|              | 
|3(ii)(a)      |  | Amended and Restated By-laws of Allin Corporation (incorporated by reference to Exhibit 3(ii) to Allin 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 Corporations Report on Form 10-Q for the quarterly 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           |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series H
Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 3(i) to Allin Corporations Report on Form 8-K filed on July 28, 2005)             
|              | 
|4.6           |  | Registration Rights Agreement, dated July 26, 2005, by and among Allin Corporation and the Series H Preferred Stockholders (incorporated by reference to Exhibit 4.2 to Allin Corporations
Report on Form 8-K filed on July 28, 2005)                                                                                                                               
|              | 
|4.7           |  | Form of Common Stock Warrant issued to the Purchasers of the Series H Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.3 to Allin Corporations Report
on Form 8-K filed on July 28, 2005)                                                                                                                                    



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|              |  |                                                                                                                                                                                                                                                      
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit (1)                                                                                                                                                                                                                           
|10.1          |  | Option Agreement entered into between Allin Corporation and Dean C. Praskach, dated as of July 10, 2007 (incorporated by reference to Exhibit 10.1 to the Allin Corporations Report on Form
10-Q for the quarterly period ended June 30, 2007)      
|              | 
|10.2          |  | Seventh Amendment to Loan and Security Agreement (Asset Based) between Allin Corporation and S&T Bank, a Pennsylvania banking association (incorporated by reference to Exhibit 10.1 to Allin
Corporations Report on Form 8-K filed on July 9, 2007)
|              | 
|10.3          |  | Change in Terms Agreement between Allin Corporation and S&T Bank (incorporated by reference to Exhibit 10.1 to Allin Corporations Report on Form 8-K filed on October 3,
2007)                                                                      
|              | 
|10.4          |  | Promissory Note between Allin Corporation and David Ritchie Bank (incorporated by reference to Exhibit 10.1 to Allin Corporations Report on Form 8-K filed on October 10,
2007)                                                                     
|              | 
|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                                                                                                                                                                             

---

|(1) | In the case of incorporation by reference to documents filed by the Registrant under the Exchange Act, the Registrants file number under the Exchange Act is 0-21395.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Copies of the exhibits filed or furnished as part of this Report on Form 10-Q are available at the cost of $3.00 per exhibit
to any shareholder upon written request to the Secretary, Allin Corporation, 381 Mansfield Avenue, Suite 400, Pittsburgh, Pennsylvania 15220-2751.



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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: November 14, 2007 |  | By:               |  | /s/ Richard W. Talarico                             
|                        |  |                   |  | Richard W. Talarico                                 
|                        |  |                   |  | Chairman, President and Chief Executive Officer     
|                        |  |                  
|Date: November 14, 2007 |  | By:               |  | /s/ Dean C. Praskach                                
|                        |  |                   |  | Dean C. Praskach                                    
|                        |  |                   |  | Chief Financial Officer and Chief Accounting Officer



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##### Table of Contents

Allin Corporation

Form 10-Q

September 30, 2007

Exhibit Index



|              |  |                                                                                                                                                                                                                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                               
|3(i)(a)       |  | Restated Certificate of Incorporation of Allin Corporation, as amended (incorporated by reference to Exhibit 3(I)(a) to Allin Corporations Report on Form 10-Q for the quarterly period
ended June 30, 2005)                                                                                                                                                        
|              | 
|3(ii)(a)      |  | Amended and Restated By-laws of Allin Corporation (incorporated by reference to Exhibit 3(ii) to Allin 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 Corporations Report on Form 10-Q for the quarterly 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           |  | Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of the Series H
Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 3(i) to Allin Corporations Report on Form 8-K filed on July 28, 2005)             
|              | 
|4.6           |  | Registration Rights Agreement, dated July 26, 2005, by and among Allin Corporation and the Series H Preferred Stockholders (incorporated by reference to Exhibit 4.2 to Allin Corporations
Report on Form 8-K filed on July 28, 2005)                                                                                                                               



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                      
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit (1)                                                                                                                                                                                                                           
|4.7           |  | Form of Common Stock Warrant issued to the Purchasers of the Series H Redeemable Preferred Stock of Allin Corporation (incorporated by reference to Exhibit 4.3 to Allin Corporations Report
on Form 8-K filed on July 28, 2005)                    
|              | 
|10.1          |  | Option Agreement entered into between Allin Corporation and Dean C. Praskach, dated as of July 10, 2007 (incorporated by reference to Exhibit 10.1 to the Allin Corporations Report on Form
10-Q for the quarterly period ended June 30, 2007)      
|              | 
|10.2          |  | Seventh Amendment to Loan and Security Agreement (Asset Based) between Allin Corporation and S&T Bank, a Pennsylvania banking association (incorporated by reference to Exhibit 10.1 to Allin
Corporations Report on Form 8-K filed on July 9, 2007)
|              | 
|10.3          |  | Change in Terms Agreement between Allin Corporation and S&T Bank (incorporated by reference to Exhibit 10.1 to Allin Corporations Report on Form 8-K filed on October 3,
2007)                                                                      
|              | 
|10.4          |  | Promissory Note between Allin Corporation and David Ritchie Bank (incorporated by reference to Exhibit 10.1 to Allin Corporations Report on Form 8-K filed on October 10,
2007)                                                                     
|              | 
|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                                                                                                                                                                             

---

|(1) | In the case of incorporation by reference to documents filed by the Registrant under the Exchange Act, the Registrants file number under the Exchange Act is 0-21395.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Copies of the exhibits filed or furnished as part of this Report on Form 10-Q are available at the cost of $3.00 per exhibit
to any shareholder upon written request to the Secretary, Allin Corporation, 381 Mansfield Avenue, Suite 400, Pittsburgh, Pennsylvania 15220-2751.



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