<PAGE>
 
                                   FORM 10-Q

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                        
      (Mark One)

      ( X )  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
             THE SECURITIES EXCHANGE ACT OF 1934
             For the quarterly period ended:  June 30, 1998

                                       OR

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

                        Commission file number:  0-21395

                        ALLIN COMMUNICATIONS CORPORATION
             (Exact name of registrant as specified in its charter)

                 Delaware                                  25-1795265
      (STATE OR OTHER JURISDICTION OF                  (I. R. S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                  IDENTIFICATION NO.)

                  400 GREENTREE COMMONS, 381 MANSFIELD AVENUE,
                      PITTSBURGH, PENNSYLVANIA  15220-2751
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

                                 (412) 928-8800
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

                       (  X  )  Yes        (    )  No

              Shares Outstanding of the Registrant's Common Stock

                              As of July 29, 1998

                        Common Stock,  5,182,267 Shares

                                      -1-
<PAGE>
 
                        Allin Communications Corporation

                                   Form 10-Q

                                     Index
<TABLE>
<CAPTION>
 
 
Part I  -  Financial Information
<S>                                                                    <C>   
 
      Item 1.  Financial Statements                                    Page  3
 
      Item 2.  Management's Discussion and Analysis of Financial       Page  10
               Condition and Results of Operations
 
      Item 3.  Quantitative and Qualitative Disclosure about Market    Page  26
               Sensitive Instruments
 
 
Part II -  Other Information
 
      Item 4.  Submission of Matters to a Vote of Security Holders     Page  27
 
      Item 5.  Other Information                                       Page  28
 
      Item 6.  Exhibits and Reports on Form 8-K                        Page  29
 
Signatures                                                             Page  30
</TABLE>

                                      -2-
<PAGE>
 
Part I - Financial Information

ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

                   (Dollars in thousands)
                        (Unaudited)
<TABLE>
<CAPTION>
                                                                   December 31,            June 30,
                                                                       1997                  1998
                                                                ------------------    ------------------
<S>                                                             <C>                   <C>
ASSETS

Current assets:
     Cash and cash equivalents                                  $           6,802     $           5,111
     Accounts receivable, net of allowance for
          doubtful accounts of $84 and $112                                 1,805                 2,594
     Inventory                                                                687                 1,858
     Prepaid expenses                                                         555                   337
                                                                ------------------    ------------------
          Total current assets                                              9,849                 9,900

Property and equipment, at cost:
Leasehold improvements                                                        398                   426
Furniture and equipment                                                     2,126                 2,197
On-board equipment                                                          6,704                 5,013
                                                                ------------------    ------------------
                                                                            9,228                 7,636
Less--accumulated depreciation                                             (2,597)               (3,001)
                                                                ------------------    ------------------
                                                                            6,631                 4,635

Assets held for resale                                                       ---                     68
Notes receivable from employees                                                45                    48
Software development costs, net of accumulated
     amortization of $680 and $815                                            212                    76
Other assets, net of accumulated amortization of
     $2,051 and $2,919                                                      4,916                 4,111
                                                                ------------------    ------------------

Total assets                                                    $          21,653      $         18,838
                                                                ==================     =================
</TABLE>

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

                                      -3-
<PAGE>
 
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

                   (Dollars in thousands)
                        (Unaudited)
<TABLE>
<CAPTION>
                                                                   December 31,            June 30,
                                                                       1997                  1998
                                                                ------------------    ------------------
<S>                                                             <C>                   <C>

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Notes payable                                              $              27     $              11
     Accounts payable                                                         668                   668
     Accrued liabilities:
          Compensation and payroll taxes                                      815                   583
          Dividends on Series A convertible,
               redeemable preferred stock                                     288                   400
          Other                                                               421                   366
     Current portion of deferred revenue                                      882                   905
                                                                ------------------    ------------------
          Total current liabilities                                         3,101                 2,933

Non-current portion of deferred revenue                                       543                   424
Commitments and contingencies

Series A convertible, redeemable preferred stock, par
     value $.01 per share - authorized 100,000 shares,
     issued and outstanding 25,000 shares                                   2,500                 2,500

Shareholders' equity:
     Common stock, par value $.01 per share - authorized
          20,000,000 shares, issued 5,184,067 shares                           52                    52
     Additional paid-in-capital                                            37,652                37,540
     Deferred compensation                                                   (228)                 (166)
     Treasury stock at cost, 1,800 shares                                      (6)                   (6)
     Retained deficit                                                     (21,961)              (24,439)
                                                                ------------------    ------------------
Total shareholders' equity                                                 15,509                12,981
                                                                ------------------    ------------------

Total liabilities and shareholders' equity                       $         21,653      $         18,838
                                                                 =================     =================
</TABLE>

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

                                      -4-
<PAGE>
 
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

          (Dollars in thousands, except per share data)
                        (Unaudited)
<TABLE>
<CAPTION>
                                                      Three Months       Three Months         Six Months            Six Months
                                                         Ended              Ended               Ended                 Ended
                                                        June 30,           June 30,            June 30,              June 30,
                                                          1997               1998                1997                  1998
                                                     ------------     -------------        ------------          ------------
<S>                                                  <C>                   <C>             <C>                   <C>
                                                                                        
Revenue                                              $     2,543      $      3,918         $     6,625           $     7,089
                                                                                                                 
Cost of sales                                              1,383             2,011               4,086                 3,603
                                                     ------------      ------------        ------------          ------------
                                                                                                                 
Gross profit                                               1,160             1,907               2,539                 3,486
                                                                                                                 
Selling, general & administrative                          4,370             2,690               8,518                 6,079
                                                     ------------      ------------        ------------          ------------
                                                                                                                 
Loss from operations                                      (3,210)             (783)             (5,979)               (2,593)
                                                                                                                 
Interest income, net                                        (106)              (51)               (283)                 (121)
                                                     ------------      ------------        ------------          ------------
                                                                                                                 
Loss before provision for income taxes                    (3,104)             (732)             (5,696)               (2,472)
                                                                                                                 
Provision for income taxes                                    48              ---                   48                     6
                                                     ------------      ------------        ------------          ------------
                                                                                                                 
Net loss                                                  (3,152)             (732)             (5,744)               (2,478)
                                                                                                                 
Accretion and dividends on preferred stock                    55                57                 119                   112
                                                     ------------      ------------        ------------          ------------
                                                                                                                 
Net loss attributable to common shareholders         $    (3,207)             (789)        $    (5,863)          $    (2,590)
                                                     ============      ============        ============          ============
                                                                                                                  
Net loss per common share - basic                    $     (0.62)            (0.15)        $     (1.14)          $     (0.50)
                                                     ============      ============        ============          ============
                                                                                                                  
Net loss per common share - diluted                  $     (0.62)            (0.15)        $     (1.14)          $     (0.50)
                                                     ============      ============        ============          ============
                                                                                                                 
Weighted average shares outstanding - basic            5,157,399         5,157,399           5,157,399             5,157,399
                                                     ------------      ------------        ------------          ------------
                                                                                                                 
Weighted average shares outstanding - diluted          5,157,399         5,157,399           5,157,399             5,157,399
                                                     ------------      ------------        ------------          ------------
</TABLE>

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

                                      -5-
<PAGE>
 
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

                     (Dollars in thousands)
                        (Unaudited)

<TABLE>
<CAPTION>
                                                                    Six Months           Six Months
                                                                      Ended                 Ended
                                                                     June 30,              June 30,
                                                                       1997                 1998
                                                                ------------------    ------------------
<S>                                                             <C>                   <C>    

Cash flows from operating activities:
     Net loss                                                              (5,744)               (2,478)
     Adjustments to reconcile net loss to net cash flows
        from operating activities:
          Depreciation and amortization                                     1,990                 1,912
          Amortization of deferred compensation                                67                    62
          Loss from disposal of assets                                         13                   257
     Changes in certain assets and liabilities:
          Accounts receivable                                              (1,771)                 (789)
          Inventory                                                            14                  (156)
          Prepaid expenses                                                   (320)                  218
          Software development costs                                         (469)                 ---
          Assets held for sale                                               ---                    (68)
          Other assets                                                        483                    (5)
          Accounts and notes payable                                       (1,373)                  (16)
          Accrued liabilities                                               1,039                  (289)
          Deferred revenues                                                   895                   (97)
          Customer deposits                                                  (695)                 ---
                                                                ------------------    ------------------
        Net cash flows from operating activities                           (5,871)               (1,449)
                                                                ------------------    ------------------

Cash flows from investing activities:
     Proceeds from sale of assets                                              31                     9
     Capital expenditures                                                  (3,223)                 (251)
                                                                ------------------    ------------------
        Net cash flows from investing activities                           (3,192)                 (242)
                                                                ------------------    ------------------

Net change in cash and cash equivalents                                    (9,063)               (1,691)
Cash and cash equivalents, beginning of period                             16,227                 6,802
                                                                ------------------    ------------------
Cash and cash equivalents, end of period                                    7,164                 5,111
                                                                 =================     =================
</TABLE>

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

                                      -6-
<PAGE>
 
               Allin Communications Corporation and Subsidiaries
                                        
                   Notes to Consolidated Financial Statements
                                        

1.  Basis of Presentation

    The information contained in these financial statements and notes for the
    three- and six-month periods ended June 30, 1997 and 1998 should be read in
    conjunction with the audited financial statements and notes for the years
    ended December 31, 1996 and 1997, contained in Allin Communications
    Corporation's (the "Company") Annual Report on Form 10-K for the year ended
    December 31, 1997. The accompanying unaudited Consolidated Financial
    Statements have been prepared in accordance with generally accepted
    accounting principles 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.

    Revenue Recognition

    Kent Consulting Group, Inc. ("KCG") charges consulting fees, typically on an
    hourly basis, to its clients for its software design and network solution
    services. Revenue is recognized as services are performed.

    Netright, Inc. ("Netright") recognizes revenue from the sale of products at
    the time the products are shipped.

    The Allin Interactive Group recognizes revenue and costs related to
    interactive television and digital photography systems when the services or
    products are performed or delivered.  Revenue from systems integration
    services is recognized upon completion of the respective projects.

    SportsWave, Inc. ("SportsWave") charges fixed fees for its event marketing
    and promotional services. Revenue is recognized when the agreed upon
    services are performed. SportsWave also licenses the usage of likenesses,
    images and autographs of certain professional athletes. Licensing agreements
    may be either on a fixed fee or earned royalty basis. Revenue for agreements
    on a fixed fee basis is recognized when services required under the
    agreement are performed. Revenue for agreements on an earned royalty basis
    is recognized as the royalties are earned. Minimum guaranteed royalties are
    recognized on a pro-rata basis over the lives of the respective agreements.

    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 includes the weighted average of the outstanding common shares of the
    Company, excluding 26,668 and 24,868 shares of outstanding restricted stock
    for the three- and six-month periods ended June 30, 1997 and 1998,
    respectively. The restricted stock, outstanding stock options, and the
    Company's Series A convertible, redeemable preferred stock, prior to
    expiration of the conversion provision in December 1997, would all be
    considered dilutive securities under SFAS No. 128; however, these securities
    have not been included in the calculation of diluted EPS, for the applicable
    periods, as their effect would be anti-dilutive. The additional shares that
    would have been included in the diluted EPS calculation, if their effect was
    not anti-dilutive, were 26,668 and 25,572 for the three-month periods ended
    June 30, 1997 and 1998, respectively, and 26,668 and 24,938 for the six-
    month periods ended June 30, 1997 and 1998, respectively.

    Inventory

    Inventory, consisting principally of computer system hardware, components
    and technical supplies, is stated at the lower of cost (determined on the
    first-in, first-out method) or market.

                                      -7-
<PAGE>
 
    Software Development Costs

    Costs of software development are capitalized subsequent to the project
    achieving technological feasibility and prior to market introduction. Prior
    to the project achieving technological feasibility and after market
    introduction, development costs are expensed as incurred. Amortization of
    capitalized software costs for internally developed software products and
    systems is computed on a product-by-product basis over a three-year period.

    Impairment of Long-Lived Assets
 
    The Company follows the guidelines set forth in Statement of Financial
    Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
    Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121). In the
    event that facts and circumstances indicate that the carrying value of an
    asset may not be recoverable, fair value, or if not readily available,
    estimated future undiscounted cash flows associated with the asset would be
    compared to the asset's carrying value to determine if a writedown to market
    value or discounted cash flow is required.

    Supplemental Disclosure Of Cash Flow Information

    Cash payments for income taxes were approximately $12,000 and $-0- during
    the three months ended June 30, 1997 and 1998, respectively. There were no
    cash payments for interest during either of the three-month periods ended
    June 30, 1997 and 1998, respectively.

    Cash payments for income taxes were approximately $56,000 and $6,000 during
    the six months ended June 30, 1997 and 1998, respectively. Cash payments for
    interest were approximately $29,000 and $-0- during the six months ended
    June 30, 1997 and 1998, respectively.

    Dividends of approximately $50,000 and $57,000 were accrued but unpaid
    during the three-month periods ended June 30, 1997 and 1998, respectively,
    on Series A convertible, redeemable preferred stock. Dividend accruals for
    the six-month periods ended June 30, 1997 and 1998 were $99,000 and
    $112,000, respectively.


2.  Preferred Stock

    The Company has authorized the issuance of 100,000 shares of preferred stock
    with par value of $.01 per share. Of the authorized shares, 40,000 have been
    designated as Series A convertible, redeemable preferred stock, while 60,000
    shares remain undesignated. All of the 25,000 issued and outstanding shares
    are Series A shares.


3.  Liability for Employee Termination Benefits

    The Company recognizes liabilities for involuntary employee termination
    benefits in the period management approves the plan of termination if during
    that period management has approved and committed to the plan of termination
    and established the benefits to be received; communicated benefit plans to
    employees; identified numbers, functions and locations of anticipated
    terminations; and the period of time for the plan of termination indicates
    significant changes are not likely.
    
    A reorganization charge of approximately $491,000 was recorded as of
    February 4, 1998 to establish a liability for separation costs associated
    with a plan for reorganization of operations, including the resignations of
    certain senior executives. Associated expenses are reflected in Selling,
    general & administrative expenses on the Consolidated Statement of
    Operations during that period. The plan included three positions including
    the Company's president, chief operating officer and an administrative
    assistant, all of whom have ceased employment with the Company. As of June
    30, 1998, approximately $312,000 of the amount accrued under the February 4,
    1998 charge had been paid. The remaining balance, approximately $179,000, is
    included in

                                      -8-
<PAGE>
 
    accrued compensation and payroll taxes on the Consolidated Balance Sheet. It
    is anticipated that payments under this plan will be completed in 1999.
    
    An accrual of approximately $300,000 was recorded as of June 30, 1997 to
    establish a liability for severance costs associated with a plan for
    involuntary employee terminations. During the quarterly period ended March
    31, 1998, additional expense of approximately $15,000 was recorded to adjust
    the severance accrual previously recorded. Associated expenses were
    reflected in Selling, general & administrative expenses on the Consolidated
    Statement of Operations during these periods. The plan included thirteen
    proposed employee terminations. Included in the plan were financial and
    marketing executive positions, marketing and administrative staff positions,
    operational management, staff, and sales positions associated with digital
    photography operations, and clerical support staff positions. Twelve of the
    thirteen positions included in the plan were eliminated. The accrual for the
    position not eliminated, approximately $2,000, was offset against the
    accrual recorded for a second plan for involuntary employee terminations as
    of September 30, 1997. As of June 30, 1998, approximately $285,000 of the
    amount accrued under the June 30, 1997 plan had been paid. The balance
    remaining, approximately $30,000 as adjusted, is included in accrued
    compensation and payroll taxes on the Consolidated Balance Sheet. It is
    anticipated that payments under this plan will be completed in 1998.


4.  Termination of Interactive Television Contract

    During March 1998, Allin Interactive Corp. and Royal Caribbean Cruises Ltd.
    mutually agreed on termination of their contract for provision by the
    Company of interactive television services aboard three cruise ships.
    Operations on these ships ceased during May and June 1998. Allin Interactive
    Corp. has lost transactional revenue, including pay-per-view movies and
    gaming, and management fee revenue related to these ships subsequent to
    cessation of operations.


5.  Equity Transactions

    A total of 117,500 and 100,000 options for common shares, exercisable at
    prices of $4.38 and $4.50 per share, respectively, were awarded under the
    Company's 1997 Stock Plan during the three months ended June 30, 1998. The
    options will vest with respect to 20% of the shares subject to each grant on
    each of the first through fifth anniversaries of the grant date. The right
    to purchase shares expires seven years from the grant date or earlier for
    certain of the options if the option holder ceases to be employed by the
    Company or a subsidiary.

    During the three months ended June 30, 1998, non-vested options to purchase
    1,100 shares of common stock previously awarded under the Company's 1997
    Stock Plan were forfeited under the terms of the Plan. Options granted under
    the 1997 Stock Plan to purchase 292,250 shares of common stock remain
    outstanding as of June 30, 1998.

    During the three months ended June 30, 1998, vested options to purchase
    11,250 shares, and non-vested options to purchase 4,520 shares,
    respectively, of common stock previously awarded under the Company's 1996
    Stock Plan were forfeited under the terms of the Plan. There were no options
    awarded under the 1996 Stock Plan during this period. Options granted under
    the 1996 Stock Plan to purchase 102,380 shares of common stock remain
    outstanding as of June 30, 1998.

                                      -9-
<PAGE>
 
Item 2.

                        Allin Communications Corporation

                    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 Company's financial condition and results of operations for
the three- and six-month periods ended June 30, 1998 and 1997.  This discussion
should be read in connection with the information in the consolidated financial
statements and the notes pertaining thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, as well as the
information discussed under "Special Note on Forward Looking Statements".
Unless the context otherwise requires, all references herein to the "Company"
refer to Allin Communications Corporation and its subsidiaries.

Overview of Organization, Products & Markets

     Allin Communications Corporation (the "Company") is a technology
development and services company that specializes in Windows NT-based software
development, engineering and network integration services, operation and
integration services focused on interactive television and digital photography
applications, and sports-related event-marketing and promotions.  The Company
operates three business units which focus on common services and technologies
where the Company has core strengths and on markets where the Company believes
its products and services can be most competitive.  The three business units are
Allin Consulting Services ("Allin Consulting"), Allin Interactive Group ("Allin
Interactive") and SportsWave.

     Allin Consulting provides varied software design and network solutions,
assisting companies in planning, building, and managing Microsoft BackOffice
solutions including NT Server, SQL Server, SNA Server, Systems Management
Server, Exchange Server and Internet Information Server.  Allin Consulting has
expertise in developing interactive television platforms, Internet applications,
groupware and e-mail applications, and networking and database applications.
Services include design of system architecture, installation and configuration
of software and hardware, custom software development, training, systems
management support and trouble-shooting. The Company believes that Allin
Consulting enables its customers to tie new applications and new technologies
into existing information systems quickly and with minimal disruption. It has
been on the leading edge in developing structures for multi-site computing to
enhance the productivity of travelers, workers in remote and field offices and
virtual office environments.  One of Allin Consulting's operating entities, Kent
Consulting Group, Inc. ("KCG"), is authorized as a Microsoft Solutions Provider
Partner and is also authorized as a service provider for Lotus, IBM and Novell.
Allin Consulting offers complete network systems solutions to its clients
including the provision of computer and communications network related hardware,
software and equipment.  Allin Consulting has developed purchasing capabilities
and agreements with vendors providing it access to a wide spectrum of computer
related hardware, software and networking equipment at competitive prices.

     Allin Consulting currently generates revenue from fees under its contracts
for software design and network solutions services for third party clients and
from hardware, software and equipment sales.  Allin Consulting also provides
technical and creative support in the development and improvement of proprietary
interactive television and digital photography software for systems sold or
operated by the Allin Interactive business unit and provides general technical
support of all of the Company's operations.

     Allin Interactive provides customized interactive television systems and
services as well as systems integration services specializing in interactive
television and digital photography applications.  Allin Interactive's
proprietary interactive television platform utilizes a Windows NT operating
system, includes a multimedia digital file server and Windows-based software
applications, and features high resolution and animated graphics, compressed
full motion video, superior quality audio and flexible input capacity.  The
resource sharing architecture of the platform can provide its interactive
services over a variety of network architectures, including the Internet,
telephone and cable television systems, and other public and private
communications networks.  Allin Interactive

                                      -10-
<PAGE>
 
has continually upgraded its interactive television capabilities, including the
1997 development of proprietary video server technology, which allows the system
to provide multiple concurrent streams of MPEG1 and MPEG2 digital video. The
centralized data processing features of Allin Interactive's interactive
television system allows for significant cost savings in end-user equipment,
offering what the Company's management believes to be a competitive advantage
over competitors' systems. The Company's interactive television operations have
historically been concentrated in the international cruise industry. The Company
believes that its technology can be readily adapted for on-demand video content
tailored to many industries. The Company's current marketing strategy is
centered on hospitals and educational institutions. Allin Interactive's strategy
for new industries, as well as for future activity in the cruise industry, is to
market systems and applications on a systems integration revenue basis, where
the customer will undertake the capital commitment for the system and Allin
Interactive will receive fees for installation and any subsequent involvement in
managing or operating systems. Allin Interactive has installed one system on a
cruise ship on this basis and is currently installing an interactive system in a
new Mayo Clinic hospital being built in Phoenix, Arizona. This system is
expected to be completed in the third quarter of 1998. There can be no assurance
that Allin Interactive will be successful in obtaining systems integration
contracts for new interactive television systems in the cruise industry or in
other industry markets it is attempting to enter, or that, if successful, such
installations will result in the desired improvements to the Company's results
of operations and financial condition.

     Allin Interactive's historical operations primarily involved operation of
owned interactive television systems installed on cruise ships from which the
Company derived transactional revenue, mainly from pay-per-view movies and
gaming.  Allin Interactive also earns management fees for operation of these
systems.  While the business unit's marketing focus has changed, the majority of
revenue recognized during the second quarter of 1998 continued to be derived
from shipboard transactional revenue and management fees.  During the second
quarter of 1998, Allin Interactive ceased providing interactive television
service aboard three Royal Caribbean Cruise Line, Ltd. ("RCCL") vessels.
Transactional revenue and management fees have been lost for these ships
following termination of services.  The Company is currently seeking alternate
deployment of the equipment removed from ships.  However, there can be no
assurance given that the Company will be successful in finding alternate usage
for these assets.  If the Company is unsuccessful in doing so, valuation of
these assets could be negatively impacted.  As of June 30, 1998, Allin
Interactive operated systems on eight ships with an annual passenger base of
approximately 739,000 operated by three cruise lines.  The various cruise line
agreements allow certain lines to discontinue services or management fees after
specified notice periods, so there can be no assurance that transactional
revenue or management fees will be earned for all ship systems expected to
continue in operation throughout 1998 and any following periods.

     Allin Interactive also offers systems integration services specializing in
digital photography systems for professional photography businesses.  Services
include provision and installation of digital photography equipment, software
and operating systems, system and software training and technical support and
sale of equipment, consumables and supplies utilized in digital photography
operations.  The second quarter of 1998 was the period during which the new
strategy for digital photography services was fully implemented.  Allin
Interactive installed nine digital photography systems during the three-month
period ended June 30, 1998.  Results under the new strategy make digital
photography operations a more significant component of Allin Interactive's
operations than under the previous strategy.  However, there can be no assurance
that projects will continue to be obtained or that any carried out will result
in the desired financial results.

     The SportsWave business unit ("SportsWave") offers a full range of sports
marketing and promotion services including promotions and premiums, corporate
incentive programs, event marketing, licensing and memorabilia.  SportsWave
creates, designs, and executes fully integrated sports promotion programs based
on the client's business objectives.  SportsWave provides concepts and creative
development of programs as well as implementation, administration and
management.  SportsWave utilizes former professional baseball, football,
basketball and hockey players as the focal point of its programs.  Programs
conducted have included sports fantasy camps, golf and fishing events, youth
sports clinics, sweepstakes prizes, appearances, and promotions utilizing
trading cards, autographed memorabilia, and image licensing for use on
customers' products.  Management believes that sports marketing enables
businesses to capitalize on the popularity of professional sports and famous
athletes to motivate and inspire customers and sales forces, strengthen brand
loyalty, establish solid trade relationships, and maximize promotional impact
for their products.  SportsWave charges fixed fees for its event marketing and
promotional services and earns licensing revenue under fixed fee or earned
royalty bases.

                                      -11-
<PAGE>
 
     SportsWave holds licenses under agreements with Major League Alumni
Marketing, Inc. ("MLAM") and National Football League Alumni, Inc. ("NFLA") to
use certain marks, logos, and the names "Major League Baseball Players Alumni
Association" and "National Football League Alumni", respectively, in connection
with its sports marketing and promotion services.  SportsWave pays royalties for
its rights under the licenses.  Licensing agreements with MLAM and NFLA expire
on December 31, 1998 and December 31, 2002, respectively.  SportsWave is
currently in negotiations with MLAM concerning a new licensing agreement to
become effective after the expiration of the current agreement, although there
can be no assurance that SportsWave will be successful in obtaining such
agreement or that any agreement obtained will be on terms as favorable to
SportsWave as the existing agreement.  SportsWave's business has traditionally
been seasonal, with the largest number of events and promotions being staged
during the Major League Baseball season.  SportsWave believes that the rights
obtained under the agreement with NFLA, which was entered in January 1998, will
lessen its seasonality, although there can be no assurance that this result will
be obtained.

     The Company was organized under the laws of the State of Delaware in July
1996 to act as a holding company for operating subsidiaries which focus on
particular aspects of the Company's business.  As of June 30, 1998, the
organizational legal structure consists of the Company, five wholly owned
operating subsidiaries organized into three business units, and one non-
operating wholly owned subsidiary.  The Allin Consulting business unit includes
the operations of KCG and Netright, Inc. ("Netright"), both California
corporations.  The Allin Interactive business unit includes the operations of
Allin Interactive Corporation, formerly SeaVision, Inc., and Allin Digital
Imaging Corp. ("Allin Digital Imaging"), formerly PhotoWave, Inc., both Delaware
corporations.  Allin Interactive Corporation continues to utilize the tradename
SeaVision in operations within the cruise industry.  The SportsWave business
unit includes the operations of SportsWave, Inc., a Pennsylvania corporation.
This company utilizes the trade name International Sports Marketing in its
sports marketing operations.  Allin Holdings Corporation, a Delaware
corporation, is a non-operating subsidiary providing treasury management
services to the Company.

Results of Operations:
--------------------- 

Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997

Revenue

     The Company's total revenue for the three months ended June 30, 1998 was
$3,918,000, an increase from total revenue of $2,543,000 for the three months
ended June 30, 1997.  The increase of $1,375,000, or 54%, between periods is
attributable to several factors, including a $401,000 increase in revenue for
Allin Consulting's software development and network solutions operations, a
$400,000 increase in revenue from Allin Interactive's digital photography
operations, a $375,000 increase in management fees for operation of interactive
television systems, and a $236,000 increase in revenue from SportsWave's sports
marketing operations.

     Allin Consulting recognized revenue, after elimination of intercompany
sales, of $1,236,000 during the three months ended June 30, 1998, including
$1,180,000 from software development, network solutions consulting and related
services and $56,000 from computer equipment and software sales.  Comparable
amounts for the three months ended June 30, 1997 were total revenue of $797,000,
including $779,000 from software development, network solutions consulting and
related services and $18,000 from computer equipment and software sales.  The
substantial increase in software development and network solutions consulting
revenue of $401,000, or 51%, is attributable to several factors.  Allin
Consulting's areas of expertise, including the development of applications
software and solutions for the desktop and distributed environments and
networking, are growing segments of the overall computer services industry.
Allin Consulting's expertise with Microsoft operating systems and software,
which have and are expected to continue to increase in dominance, has
contributed to the growth as demand has increased for consultants capable of
developing specialized applications built around Microsoft products.  Additional
factors contributing to the increase in revenue between the periods include
increased marketing efforts to obtain third-party engagements, particularly in
the Northern California area, the recruitment of additional consultants and the
obtaining of third-party engagements serviced from the Company's Pittsburgh,
Pennsylvania office, although the Pittsburgh revenue represents a small portion
of these activities.  The increase in computer equipment and software sales of
$38,000, or 211%, is attributable to the addition of sales from the Company's

                                      -12-
<PAGE>
 
Pittsburgh office between the periods and the addition of a dedicated sales and
operations employee in Oakland, California during 1998.  Since there is
typically period to period variability among clients utilizing Allin
Consulting's services as well as the size and scope of projects undertaken,
there can be no assurance given that similar revenue increases will be realized
in future periods.  The Company intends to pursue growth in consulting services
through continuing to increase marketing efforts, and the evaluation of
geographic expansion or the acquisition of existing businesses.  There can be no
assurance, however, that the Company will be successful at expanding Allin
Consulting's level of revenue or gross profit, that it will be able to generate
or obtain the capital necessary for geographic expansion or acquisitions, or
that any expansion or acquisition undertaken would result in the desired
improvements to financial results.

     Allin Interactive recorded revenue of $1,293,000 during the three months
ended June 30, 1998, including $433,000 for activities in the digital
photography market, $351,000 for pay-per-view movies and video gaming, $375,000
for interactive system management fees from cruise line clients, $88,000 for
systems integration services provided to the cruise industry and $46,000 in
other revenue, primarily advertising.  Comparable amounts for the three months
ended June 30, 1997, were total revenue of $593,000, including $33,000 for
digital photography operations, $317,000 for pay-per-view movies and video
gaming, $238,000 for systems integration services related to interactive
television applications and $5,000 for other revenue.  The substantial revenue
increase of $700,000, or 118%, between the periods is attributable to increased
revenue from the new digital photography strategy and the addition of management
fees from cruise line clientsfor operation of interactive television systems
between the periods.  Allin Interactive implemented a new strategy for digital
photography operations late in the first quarter of 1998.  Under the new
strategy, Allin Interactive is offering systems integration services for
installation of digital photography systems as well as training and technical
support and the sale of equipment, consumables and supplies utilized in digital
photography operations.  During the three months ended June 30, 1998, Allin
Interactive completed nine systems installations resulting in revenue of
$376,000.  Allin Interactive also realized $57,000 in sales of ancillary
equipment and products and technical support fees.

     The improvement in revenue realized from Allin Interactive's interactive
television operations between the second quarters of 1997 and 1998 was $450,000,
primarily attributable to the addition of management fees as a source of revenue
between the periods.  Management fees were $375,000 during the three months
ended June 30, 1998, which represented an increase of $65,000 from the first
quarter of 1998.  Management fees were terminated at various points in May and
June 1998 on three RCCL ships due to the termination of operations on those
ships.  This decrease, however, was more than offset by a fee increase realized
under Allin Interactive's agreement with Celebrity Cruises, Inc. ("Celebrity").
Management fees expected to be earned during the remainder of 1998 would not
substantially differ from those realized during the first quarter of 1998,
assuming continuation of fees on all ships where the Company currently operates
its system.  However, the various amendments and agreements allow certain of the
cruise lines to discontinue services or management fees after specified notice
periods, so there can be no assurance that transactional revenue or management
fees will be earned for all ship systems expected to continue in operation
throughout 1998 and any following periods.  Movies and gaming revenue of
$351,000 during the second quarter of 1998 was an increase of $34,000 from the
comparable 1997 period.  The number of ship systems in operation during the
quarters was similar.  Management believes the increase in revenue is primarily
attributable to price increases and changes to wager defaults and buy-in amounts
between the periods.  This increase was realized despite two months of dry dock
during the second quarter of 1998 for one of the ships on which Allin
Interactive operates a system.  The $41,000 increase in other revenue was
attributable to implementation of advertising on the ship systems under an
agreement which will conclude in September 1998.  Systems integration services
decreased by $150,000 between the second quarters of 1997 and 1998.  The
decrease is primarily attributable to the inclusion of revenue related to
certain components of a ship system installation being realized during the
second quarter of 1997 while there were no comparable projects in the second
quarter of 1998.

     SportsWave recognized revenue of $1,389,000 for its sports marketing
programs during the three months ended June 30, 1998, as compared to $1,153,000
in revenue during the three months ended June 30, 1997, an increase of 20%.
Management believes the increase is primarily attributable to the 1998 period's
inclusion of a program featuring large quantities of autographed baseball
memorabilia.  There was no program of similar scope during the second quarter of
1997.   Since there is typically period to period variability among clients
utilizing its services and specific sports themes of programs, there can be no
assurance given that similar increases will be realized in future periods.  The
Company believes that the NFLA licensing agreement entered in January 1998 will
result in an increased level of football-themed programs in the future.  The
sales cycle lead time for sports marketing

                                      -13-
<PAGE>
 
programs is such, however, that increased revenue is not expected to be realized
until to the second half of 1998 or the first half of 1999. There can be no
assurance given, however, that the NFLA agreement will result in an increased
level of football-related marketing programs, or that any increase in programs
obtained will result in the desired improvement in financial condition or
results of operations.

Cost of Sales and Gross Profit

     The Company recognized cost of sales of $2,011,000 during the three months
ended June 30, 1998 as compared to $1,383,000 during the three months ended June
30, 1997.  Reasons for the increase in cost of sales of $628,000 between the
periods include substantial increases related to digital photography systems
integration projects and ancillary sales as compared to 1997's retail
photography operation and increases in sports marketing, network solutions
consulting and computer equipment cost of sales corresponding to revenue
increases in these areas.  Gross profit of $1,907,000 was recognized during the
second quarter of 1998, as compared with $1,160,000 during the prior year
quarter.  Significant contributors to the increase in gross profit realized
include the growth in Allin Consulting's software development and network
solutions services and Allin Interactive's addition of interactive television
management fees.

     Allin Consulting recorded a total of $749,000 for cost of sales during the
three months ended June 30, 1998, including $698,000 related to software
development and network solutions consulting and $51,000 related to equipment
and software sales.  Comparable second quarter 1997 cost of sales was $486,000
in total, including $469,000 for development and consulting and $17,000 for
equipment and software.  Increases in cost of sales are also attributable to the
factors that resulted in increases in revenue for these services and products,
including enhanced marketing efforts and geographic expansion.  Gross profit for
the three months ended June 30, 1998 was $487,000, including $482,000 related to
software development and network solutions consulting and $5,000 related to
equipment and software sales.  Comparable second quarter 1997 gross profit
amounts were $311,000 in total, including $310,000 for software development and
consulting and $1,000 for equipment and software sales.  Again, the substantial
increase in consulting revenue is principally responsible for the increase in
gross profit.  The increase in gross profit was 57% for Allin Consulting in
total between the quarterly periods ended June 30, 1998 and 1997.

     Allin Interactive recorded a total of $527,000 for cost of sales during the
three months ended June 30, 1998, including $391,000 related to digital
photography operations, $69,000 related to pay-per-view movies, and $67,000 for
systems integration services.  Comparable second quarter 1997 cost of sales was
$418,000, including $27,000 for digital photography, $78,000 for movies and
$313,000 for systems integration services.  Under the changed operating strategy
for digital photography operations, cost of sales on systems integration
projects include costs of digital photography system equipment and software,
installation contractor costs, travel, shipping and sales commissions.  Digital
photography cost of sales also includes costs for equipment and photographic
supplies sold as ancillary products.  While encouraged by the improved results
in digital photography operations under the new strategy, Management expects
that additional experience with operations under this strategy will allow Allin
Interactive to achieve efficiencies which will result in increased margin
percentage, although there can be no assurance that Allin Interactive will be
able to improve its margins in this area in the future.  Cost of sales for pay-
per-view movies decreased in aggregate despite an overall revenue increase for
movies, declining as a percentage of movie revenue between the periods from 40%
to 34%.  This improvement is due to the addition of some movie content with a
fixed cost per title rather than cost as a percentage of revenue.  The
substantial decline in the level of systems integration cost of sales between
the periods was due to the inclusion of projects related to installation of
interactive television systems during the 1997 period.  There were no comparable
projects during 1998.  Gross profit recognized by Allin Interactive during the
three months ended June 30, 1998 was $766,000, including $375,000 from
interactive system management fees for which there are no associated cost of
sales, $283,000 from pay-per-view movies and gaming, $42,000 from digital
photography operations,  $21,000 from interactive television systems integration
services, and $46,000 attributable to other revenue, primarily advertising.
Comparable gross profit amounts for the second quarter of 1997 were $175,000 in
total, including $239,000 from movies and gaming, $6,000 from digital
photography operations, $4,000 from other revenue, less a negative margin of
$74,000 from systems integration.  The overall increase in gross profit between
the periods was $591,000, or 338%, while the increase in revenue was $700,000,
or 118%.  The addition of management fees for the operation of interactive
systems is the primary reason for this margin increase.

                                      -14-
<PAGE>
 
     SportsWave recorded cost of sales of $735,000 related to its sports
marketing programs for the three months ended June 30, 1998 as compared to
$480,000 during the comparable period of 1997.  Gross profit of $654,000 and
$673,000 was realized on SportsWave's programs during the three months ended
June 30, 1998 and 1997, respectively.  SportsWave's operations generated similar
margins between the quarters.  The second quarter is typically one with a high
level of activity in what has historically been a seasonal business.  The past
history of SportsWave's sports marketing programs, both before and after
acquisition by the Company in 1996, indicate substantially higher levels of
revenue and gross profit during the second and third quarters as compared to the
first.  There can be no assurance, however, that financial results realized
during  the remainder of 1998 will follow the historical pattern.

Selling, General & Administrative Expenses

     The Company recorded $2,690,000 in selling, general & administrative
expenses during the three months ended June 30, 1998, as compared with
$4,370,000 during the three months ended June 30, 1997.  The decrease of
$1,680,000, or 38% in selling, general & administrative expenses was realized
from the Company's expense reduction efforts implemented beginning in the second
quarter of 1997 and continuing through the second quarter of 1998.  The second
quarter of 1997 also included an accrual for severance costs of approximately
$300,000 related to involuntary employee terminations.

     Selling, general & administrative expenses during the second quarter of
1998 included $945,000 of depreciation and amortization expense as compared with
$1,117,000 in depreciation and amortization expense during the three months
ended June 30, 1997.  Excluding these non-cash expenses and unusual costs such
as severance accruals, remaining selling, general & administrative expenses were
$1,745,000 for the three months ended June 30, 1998, as compared with $2,953,000
for the prior period, a reduction of 41%.  The Company's cost reduction efforts
have included reductions in personnel, particularly in areas related to
prospective applications of the Company's interactive and digital imaging
technologies, in executive management, and administrative staff positions.
Other areas where the Company was able to realize significant expense savings
between the periods included generalized marketing expenses, legal and
consulting expenses, office rental costs, travel costs and shipboard operating
expenses.

     As noted previously, depreciation and amortization expenses were $945,000
in the second quarter of 1998 as compared with $1,117,000 during the second
quarter of 1997.  The 15% decrease between the periods is attributable to the
writedown of capitalized software development costs related to proprietary
digital imaging technology and reductions in on-board equipment due to writeoffs
of non-recoverable equipment from terminated ship interactive television
systems.

     Research and development expense included in selling, general &
administrative expense was $37,000 during the second quarter of 1998 as compared
to $40,000 during the second quarter of 1997.  Expense incurred during the
second quarter of 1998 related primarily to research of improvements to the
functionality of the in-cabin or end-user operating system and components of its
interactive technology applications, and continued video server technology
development.  The Company expects research and development expenses to increase
during the remainder of 1998 related to these projects and certain projects
relating to its proprietary digital photography systems.  See "Liquidity and
Capital Resources" following for additional information related to these
projects.

Loss from Operations

  The Company's loss from operations decreased from $3,210,000 for the three
months ended June 30, 1997 to $783,000 for the three months ended June 30, 1998.
The $2,427,000, or 76%, improvement resulted from the $747,000 increase in gross
profit realized between the periods due to growth in software development and
network solutions consulting and the addition of interactive television
management fees, and the $1,680,000 reduction of selling, general &
administrative expenses between the periods resulting from management's cost
reduction efforts.  The loss from operations recorded during the second quarter
of 1998 of $783,000 resulted from the inclusion of $945,000 of non-cash expenses
for depreciation and amortization.  Exclusive of these non-cash expenses,
operating income would have been $162,000.

                                      -15-
<PAGE>
 
Net Loss

  The Company's net loss for the three months ended June 30, 1998 was $732,000,
as compared to $3,152,000 for the three months ended June 30, 1997.  The
decrease in net loss between the periods resulted from the improvements to gross
profit and reductions in selling, general & administrative expenses described
above, partially offset by a $55,000 decrease in interest income on cash
balances between the quarterly periods.

Results of Operations:
--------------------- 

Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997

Revenue

     The Company's total revenue for the six months ended June 30, 1998 was
$7,089,000, as compared to revenue of $6,625,000 recognized for the six months
ended June 30, 1997.  The increase of $464,000, or 7%, between periods is
attributable to substantial increases in several types of revenue, including
Allin Consulting's software development and network solutions consulting, and
Allin Interactive's addition of interactive television system management fees
and increases in pay-per-view movies, video gaming and digital photography
services.  These revenue increases more than offset a substantial reduction in
systems integration revenue for services to the cruise industry, with the net
result of a modest revenue gain.

     Allin Consulting recognized revenue, after elimination of intercompany
sales, of $2,903,000 during the six months ended June 30, 1998, including
$2,748,000 from software development, network solutions consulting and related
services and $155,000 from computer equipment and software sales.  Comparable
amounts for the six months ended June 30, 1997 were total revenue of $1,558,000,
including $1,475,000 from software development, network solutions consulting and
related services and $83,000 from computer equipment and software sales.  The
substantial increase in software development and network solutions consulting
revenue of $1,273,000, or 86%, is attributable to the factors discussed
previously in the three month analysis, including growing demand for specialized
Microsoft consulting and increased marketing efforts.  The increase in computer
equipment and software sales of $72,000, or 87%, is attributable to the addition
of sales from the Company's Pittsburgh office between the periods and the
addition of a dedicated sales and operations employee in Oakland, California
during 1998.  The Company intends to pursue growth in consulting services
through continuing to increase marketing efforts, and the evaluation of
geographic expansion or the acquisition of existing businesses.  There can be no
assurance, however, that the Company will be successful in expanding Allin
Consulting's level of revenue or gross profit, that it will be able to generate
or obtain the capital necessary for geographic expansion or acquisitions, or
that any expansion or acquisition undertaken would result in the desired
improvements to financial results.

     Allin Interactive recorded revenue of $2,125,000 during the six months
ended June 30, 1998, including $830,000 for pay-per-view movies and video
gaming, $685,000 for interactive system management fees, $449,000 for activities
in the digital photography market, $111,000 for systems integration services
provided to the cruise industry and $50,000 in other revenue, primarily
advertising.  Comparable amounts for the six months ended June 30, 1997, were
total revenue of $3,180,000, including $596,000 for pay-per-view movies and
video gaming, $2,442,000 for systems integration services, $36,000 for digital
photography operations and $106,000 for other revenue.  The revenue decrease of
$1,055,000 between the periods is attributable substantially to the decrease in
systems integration services related to the cruise industry, which declined by
$2,331,000.  During the first half of 1997, revenue of $1,240,000 was recognized
related to a project for retrofit of the ship broadcast center aboard the Cunard
Line Limited ship Queen Elizabeth 2, and revenues were also recorded related to
the sale of significant components of several interactive television systems in
connection with interactive television installations.  There were no comparable
projects conducted during 1998.  Allin Interactive was able to offset
approximately 45% of this revenue decline through the addition of new sources of
revenue such as interactive television system management fees and by
substantially increasing revenue from digital photography operations due to the
change in strategy from a retail photography operation to a provider of
specialized digital imaging systems integration services and products to the
photography marketplace.  These areas represent revenue increases of $685,000
and $413,000 between the periods, respectively.  Management fees were terminated
at various points in May and June 1998 on three RCCL ships due to the
termination of operations on those ships.  This decrease, however, is offset by
a fee increase realized under its agreement with Celebrity.  Management fees
expected to be earned during the remainder of 1998 would

                                      -16-
<PAGE>
 
not substantially differ from those realized during the first quarter of 1998,
assuming continuation of fees on all ships where the Company currently operates
its system. The various amendments and agreements allow certain of the cruise
lines to discontinue services or management fees after specified notice periods,
so there can be no assurance that transactional revenue or management fees will
be earned for all ship systems expected to continue in operation throughout 1998
and any following periods. Allin Interactive also realized revenue growth of
$234,000 between the periods in pay-per-view movies and video gaming due to a
larger fleet size during most of the first half of 1998, movie price increases,
and changes to wagering default and buy-in amounts.

     SportsWave recognized revenue of $2,061,000 for its sports marketing
programs during the six months ended June 30, 1998, as compared to $1,887,000 in
revenue during the six months ended June 30, 1997, an increase of 10%.  The
increase is primarily attributable to the 1998 period's inclusion of a program
featuring large quantities of autographed baseball memorabilia.  There was no
program of similar scope during the first half of 1997.   Since there is
typically period to period variability among clients utilizing its services and
specific sports themes of programs, there can be no assurance given that similar
increases will be realized in future periods.

Cost of Sales and Gross Profit

     The Company recognized cost of sales of $3,603,000 during the six months
ended June 30, 1998 as compared to $4,086,000 during the six months ended June
30, 1997.  Reasons for the decrease in cost of sales of $483,000 between the
periods include a substantial decrease in cost of sales for systems integration
services partially offset by substantial increases related to digital
photography systems integration projects and ancillary sales and increases in
sports marketing, network solutions consulting and computer equipment cost of
sales corresponding to revenue increases in these areas.  Gross profit of
$3,486,000 was recognized during the first half of 1998, as compared with
$2,539,000 during the first half of 1997.  Significant contributors to the
increase in gross profit realized include the growth in Allin Consulting's
software development and network solutions services and Allin Interactive's
addition of interactive television management fees.

     Allin Consulting recorded a total of $1,770,000 for cost of sales during
the six months ended June 30, 1998, including $1,630,000 related to software
development and network solutions consulting and $140,000 related to equipment
and software sales.  Comparable first half 1997 cost of sales was $980,000 in
total, including $905,000 for development and consulting and $75,000 for
equipment and software.  Increases in cost of sales are attributable to the
factors that resulted in increases in revenue for these services and products,
including growing demand for Microsoft specialization, enhanced marketing
efforts and geographic expansion.  Gross profit for the six months ended June
30, 1998 was $1,133,000, including $1,118,000 related to software development
and network solutions consulting and $15,000 related to equipment and software
sales.  Comparable first half 1997 gross profit amounts were $578,000 in total,
including $570,000 for software development and consulting and $8,000 for
equipment and software sales.  Again, the substantial increase in consulting
revenue is principally responsible for this increase in gross profit.  The
increase in gross profit was 96% for Allin Consulting in total between the six-
month periods ended June 30, 1998 and 1997.

     Allin Interactive recorded a total of $642,000 for cost of sales during the
six months ended June 30, 1998, including $405,000 related to digital
photography operations, $158,000 related to pay-per-view movies, and $79,000 for
systems integration services.  Comparable first half 1997 cost of sales was
$2,119,000, including $27,000 for digital photography, $147,000 for movies and
$1,945,000 for systems integration services.  As noted previously in the
discussion of six month revenue, there were several large systems integration
projects carried out for cruise lines during the first half of 1997.  There were
no comparable projects in 1998, resulting in the substantial reduction in cost
of sales for systems integration.  The increase in cost of sales related to
digital photography operations corresponds to the substantial increase in
revenue under the new digital photography strategy.  Cost of sales for pay-per-
view movies increased by $11,000 between the periods, or 8%.  However, movie
revenue increased 30% between the six-month periods.  The increasing margin on
pay-per-view movies has resulted from the addition of movie content priced under
a fixed cost rather than percentage of revenue basis.  Gross profit recognized
by Allin Interactive during the six months ended June 30, 1998 was $1,483,000,
including $685,000 from interactive system management fees for which there are
no associated cost of sales, $672,000 from pay-per-view movies and gaming,
$44,000 from digital photography operations,  $32,000 from interactive
television systems integration services, and $50,000 attributable to other
revenue, primarily advertising.  Comparable gross profit amounts for the first
half of 1997 were $1,061,000 in total, including $449,000 from movies and
gaming, $9,000 from digital photography

                                      -17-
<PAGE>
 
operations, $497,000 from interactive television systems integration, and
$106,000 from other revenue. The overall increase in gross profit between the
periods was $422,000, or 40%, despite a decrease in revenue of $1,055,000, or
50%. The addition of management fees for the operation of interactive systems is
the primary reason for this margin increase.

     SportsWave recorded cost of sales of $1,191,000 related to its sports
marketing programs for the six months ended June 30, 1998 as compared to
$987,000 during the comparable period of 1997.  Gross profit of $870,000 and
$900,000 was realized on SportsWave's programs during the six months ended June
30, 1998 and 1997, respectively.  SportsWave's operations generated similar
margins between the periods.

Selling, General & Administrative Expenses

     The Company recorded $6,079,000 in selling, general & administrative
expenses during the six months ended June 30, 1998, as compared with $8,518,000
during the six months ended June 30, 1997.  The decrease of $2,439,000, or 29%
in selling, general & administrative expenses was realized from the Company's
expense reduction efforts implemented beginning in the second quarter of 1997
and continued through the second quarter of 1998.  Both periods included unusual
charges.  Severance accruals for employee terminations were recorded in both
periods, approximately $300,000 during the first half of 1997 and $491,000
during the first half of 1998.  During the six months ended June 30, 1998, the
Company also recorded losses from writedown or disposal of equipment of
approximately $257,000, primarily from writedown of the non-recoverable portions
of interactive television system equipment for the three systems formerly
operated on RCCL ships.

     Selling, general & administrative expenses during the first half of 1998
included $1,912,000 of depreciation and amortization expense as compared with
$1,990,000 in depreciation and amortization expense during the six months ended
June 30, 1997.  Excluding the unusual costs noted above and non-cash expenses,
remaining selling, general & administrative expenses were $3,419,000 for the six
months ended June 30, 1998, as compared with $6,228,000 for the prior period, a
reduction of 82%.  The Company's cost reduction efforts have included reductions
in personnel, particularly associated with prospective applications of the
Company's interactive and digital imaging technologies, in executive management,
and administrative staff positions.  The Company implemented significant
reductions in research and development of prospective rather than operational
applications of the Company's technologies between the periods.  Other areas
where the Company was able to realize significant expense savings between the
periods included generalized marketing expenses, consulting expenses, office
rental costs, travel costs and shipboard operating expenses.

     Research and development expense included in selling, general &
administrative expense was $60,000 during the first half of 1998 as compared to
$136,000 during the comparable period of 1997.  Expense incurred during the
first half of 1998 related primarily to research of improvements to the
functionality of the in-cabin or end-user operating system and components of its
interactive technology applications, and continued video server technology
development.  The Company expects research and development expenses to increase
during the remainder of 1998 related to these projects and certain projects
relating to its proprietary digital photography systems.  See "Liquidity and
Capital Resources" following for additional information related to these
projects.

Loss from Operations

  The Company's loss from operations decreased from $5,979,000 for the six
months ended June 30, 1997 to $2,593,000 for the six months ended June 30, 1998.
The $3,386,000, or 57%, improvement resulted from the $947,000 increase in gross
profit realized between the periods due to growth in software development and
network solutions consulting and the addition of interactive television
management fees, and the $2,439,000 reduction of selling, general &
administrative expenses between the periods resulting from management's cost
reduction efforts.

Net Loss

  The Company's net loss for the six months ended June 30, 1998 was $2,478,000,
as compared to $5,744,000 for the six months ended June 30, 1997.  The decrease
in net loss between the periods resulted from the improvements to gross profit
and reductions in selling, general & administrative expenses described above,
partially offset by a $162,000 decrease in interest income on cash balances
between the periods.

                                      -18-
<PAGE>
 
Liquidity and Capital Resources

  At June 30, 1998 the Company had cash and liquid cash equivalents of
$5,111,000 available to meet its working capital and operational needs.  The net
change in cash from December 31, 1997 was a decrease of $1,691,000. The net
change during the three months ended June 30, 1998 was a decrease of $147,000.

  The Company recognized a net loss for the six months ended June 30, 1998 of
$2,478,000.  Included in the operating loss were non-cash expenses of $2,231,000
including depreciation, amortization of software development costs and other
intangible assets, amortization of deferred compensation and losses from
writedown or disposal of assets.  Cash flows from operating activities during
the period resulted in an outflow of $1,449,000 during the six months ended June
30, 1998.  In addition to the $247,000 used by current operations, there were
also working capital adjustments impacting the cash flow, including an accounts
receivable increase of $789,000.  The increase is primarily attributable to
SportsWave's operational seasonality.  SportsWave's accounts receivable
increased $750,000 between December 31, 1997 and June 30, 1998.  The increase
occurs due to the substantial increase in program activity in the second quarter
of 1998 and advance billings for third quarter projects as compared to the level
of activity and advance billings as of the fourth quarter of 1997.  The Company
also experienced working capital adjustments from a decrease of $386,000 in its
current liabilities and deferred revenue, and an increase in inventory of
$156,000 during the first half of 1998 due to the purchase of equipment and
supplies to utilized by Allin Interactive for digital photography systems
integration projects and ancillary sales.  The Company does not believe working
capital adjustments will have as significant an impact on cash flow during the
remainder of 1998, although there can be no assurance of this.  The expectation
for a decreased impact from working capital adjustments is consistent with the
Company's experience during the second quarter of 1998, however, as 87% of the
net decline in cash for the six-month period occurred in the first rather than
the second quarter of 1998.

     Another significant factor affecting first half 1998 cash flow was $251,000
of capital expenditures.  Significant areas of expenditure included computer
hardware, software and communications equipment for Allin Consulting due to
periodic upgrading to state of the art technology, buildout and equipment
expenditures related to relocation of Allin Interactive's office in Fort
Lauderdale, Florida and the expansion of virtual office capabilities for the
Florida operations.

     As was noted earlier during the discussion of research and development
expenses, the Company plans to increase the scope of research and development
activities during the remainder of 1998.  The Company has undertaken a project
expected to reduce the cost of and improve the functionality and processing
speed of the in-cabin or end-user portion of the Company's interactive
television system.  Historically, Allin Interactive has utilized proprietary
interfaces with certain third party software for communication of interactive
commands and responses between the end users and centralized processing servers.
This feature of the system architecture has dictated the usage of certain
specialized end-user hardware.  The Company's research to date indicates the
feasibility of development of proprietary end-user operating and communication
systems that will enable the configuration of hardware from commonly available
standard hardware components.  Use of these systems could result in a
significant reduction in the cost of the end-user equipment for its interactive
television systems.  The Company believes that Allin Interactive's system is
currently the low cost alternative for interactive systems offering its level of
features and functionality.  Successful development of the new end-user
operating system could improve Allin Interactive's cost advantages over
competitors.  The Company's marketing efforts indicate that while Allin
Interactive's system is a lower cost solution than competitors' systems, the
current cost of systems is still significant enough to preclude a system sale in
some cases.  The Company believes that successful completion of this project
will result in a system cost reduction that will make the system cost effective
for a larger user market.  There can be no assurance, however, that the Company
will be successful in developing the new end-user systems, or that, if
developed, such systems will result in the desired cost reductions for and
increased sales of interactive systems.  In addition to opportunities for cost
reductions, if developed successfully, the new operating system will utilize
hardware configurations allowing an end user functional connections for
keyboard, mouse, printer, modem and other standard peripherals that would
utilize the system's centralized information processing capabilities,
substantially increasing the functionality of the system for Internet and other
applications, without the cost of smartboxes or processors for each end-user.
Again, there can be no assurance that the Company will successfully develop end-
user operating systems with this level of increased functionality or that any
developed will result in the desired increase

                                      -19-
<PAGE>
 
in sales of interactive systems. The Company estimates the remaining cost of
development for this project at approximately $473,000 for completion during the
first half of 1999.

     The Company is also undertaking a smaller development project related to
Allin Interactive's proprietary digital imaging technology to make its
interactivity features and Internet-based image archival and retrieval systems
compatible with the digital photography hardware and software configurations
currently offered to customers.  The Company believes that the addition of these
interactive features will represent a value-added feature to Allin Interactive's
digital photography services that will offer Allin Interactive a competitive
advantage and the opportunity for enhanced margins.  There can be no assurance,
however, that if the Company successfully completes this project, it will result
in sales of additional digital photography systems integration services, or
improvements to Allin Interactive's operating margin.  Estimated remaining
project costs are approximately $49,000 with expected project completion during
the third quarter of 1998.

     The Company believes these software development projects will constitute
the majority of its capital expenditure requirements for the remainder of 1998.
Although the combined remaining estimated cost of $522,000 is significant given
the Company's cash resources and prospects for available financing, the Company
believes both projects are prudent because, if successful, they will enhance
Allin Interactive's position as the low cost provider of interactive television
systems with its type of functionality and features, make its interactive
television system more cost effective for potential customers thereby
potentially increasing demand for the system, reinforce the advanced nature of
the technological features of the Company's systems, and create a value-added
feature for its digital photography services thereby affording a competitive
advantage.  The Company will monitor the progress of these projects and expects
to capitalize costs subsequent to the projects achieving technical feasibility
and prior to market introduction.  Costs will be expensed prior to technological
feasibility and subsequent to market introduction.  All costs recorded through
June 30, 1998 have been expensed.  Amounts noted above are the expected total
costs of the projects and include both portions that would be capitalized and
portions to be expensed.  The Company expects that capital expenditures of all
types for the remainder of 1998 will be approximately $675,000, including the
software development projects described above.  Business conditions and
management's plans may change during the remainder of 1998, so there can be no
assurance that the Company's actual amount of capital expenditures will not
exceed the planned amount.  Management will evaluate development projects on an
ongoing basis and may reduce or eliminate projects if alternate technologies or
products become available or if changing business conditions warrant.

     The Company does not currently have lines of credit or other credit
facilities in place with any banks or other lenders.  There can be no assurance
that any credit facilities will be able to be obtained in the future.

     The Company has outstanding $2,500,000 of Series A Convertible, Redeemable
Preferred Stock as of June 30, 1998.  Accrued but unpaid dividends on the
preferred stock were approximately $400,000 as of June 30, 1998.  Dividends are
payable at a rate of eight percent and are cumulative.  The Company's obligation
for dividends will remain through the maturity of the preferred stock in June
2006, unless redeemed earlier by the Company.

     The acquisition of KCG in November 1996 included terms for a contingent
payment of up to $2,800,000 based on KCG's average annual operating income (as
defined in the agreement) for the three years 1997, 1998, and 1999 (the "Average
KCG Operating Income").  At the closing of the acquisition, the former sole
shareholder of KCG, Les D. Kent, received a $2,800,000 contingent promissory
note (the "KCG Note") of KCG.  If the Average KCG Operating Income exceeds
$1.862 million, the entire $2.8 million principal amount of the KCG Note will be
payable.  If the Average KCG Operating Income is less than $1.862 million, the
principal amount of the KCG Note will be reduced according to a scale whereby
the amount of reduction increases as the Average KCG Operating Income decreases.
The entire KCG Note will be cancelled if Average KCG Operating income is less
than or equal to $1.4 million.  The principal amount of the KCG Note (as
adjusted) plus interest at a rate of 7% per annum on such principal amount (as
adjusted) will be payable in two installments, the first of which will be paid
15 days after the date of determination of the Average KCG Operating Income and
the second of which will be paid six months after such date of determination.
KCG's annual operating income for 1997 for purposes of the agreement was
approximately $1,320,000.  KCG's operating income, as defined in the agreement,
for the six months ended June 30, 1998, was approximately $695,000.

                                      -20-
<PAGE>
 
     The acquisition of SportsWave in November 1996 included terms for
contingent payments of up to $2,400,000.  An interim contingent payment must be
made in an amount (the "Interim Amount") equal to the amount by which six times
the sum of SportsWave's operating income (as defined in the agreement) for 1997
and 1998 divided by three exceeds $2,400,000.  A final payment must be made in
an amount equal to the amount by which six times the sum of SportsWave's
operating income for 1997, 1998 and 1999 divided by three exceeds the sum of
$2,400,000 plus the Interim Amount.  One-half of such contingent payments, if
any, will consist of promissory notes bearing interest at seven percent per
annum.  SportsWave's operating income for 1997 for purposes of the agreement was
approximately $579,000.  SportsWave had operating income for purposes of the
agreement of approximately $292,000 during the six months ended June 30, 1998.

     The Company believes, in light of its current operations as discussed in
the preceding paragraphs, that available funds and cash flows expected to be
generated by its 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 twenty-four months.  If currently available
funds and cash generated by operations were insufficient to satisfy the
Company's ongoing cash requirements, or if the Company identified an attractive
acquisition candidate in the consulting industry, the Company would be required
to consider other financing alternatives, such as selling additional equity or
debt securities, obtaining long or short-term credit facilities, or selling
other operating assets, although no assurance can be given that the Company
could obtain such financing.  Any sale of additional equity or convertible debt
securities would result in additional dilution to the Company's shareholders.

Year 2000 Issue
 
     The Company has undertaken a program to evaluate the impact of potential
costs, uncertainties and disruption to its business arising from the year 2000
issue.  Failures of computer programs to recognize dates beginning with the year
2000 may produce erroneous results or a cessation of operations when dates after
1999 are encountered.  As reported in its Report on Form 10-K for the year ended
December 31, 1997, the Company has conducted a comprehensive evaluation of its
internal systems, hardware and software in light of the year 2000 threats.  The
Company utilizes predominantly recent technology in its operations, which
utilize Microsoft Windows NT, Windows 95, and BackOffice operating systems.  At
this time, the Company believes that the hardware and software utilized in the
provision of the Company's services and products are substantially year 2000
compliant.  However, the Company's ongoing examination of Year 2000 issues will
offer additional information which Management will evaluate.  At this time, the
Company does not expect to incur material costs to make any of its hardware,
software, or operating systems year 2000 compliant.  Furthermore, the Company
does not expect any significant business disruption to its internal operations
to occur as a result of year 2000 issues.  The Company also believes its
accounting systems to be year 2000 compliant and does not expect any significant
costs or business disruption in this area.

     The Company is currently continuing its examination of the potential for
Year 2000 problems, including a survey of significant customers and suppliers as
to the potential for year 2000 threats related to their operating systems.
Management and consulting personnel from KCG with a high level of technological
expertise and experience have been assigned to oversee this project.  The
Company will give special emphasis to its interactive system customers because
of the direct connections of the interactive television systems with its
customers' accounting, inventory and property management systems.  Based on the
information being gathered, the Company will evaluate the threat of business
disruption posed by customers' or suppliers' year 2000 problems.

Special Note on Forward Looking Statements

     The Management's Discussion and Analysis and other sections of the Report
on Form 10-Q contain forward-looking statements that are based on current
expectations, estimates and projections about the industries in which the
Company operates, management's beliefs and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements.  Theses statements constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and are subject to the safe harbors created thereby.
These statements are based on a number of assumptions that could ultimately
prove inaccurate and, therefore, there can be no assurance that they will prove
to be accurate.  Factors that could affect performance include those listed
below, which are representative of factors which could affect the outcome of

                                      -21-
<PAGE>
 
the forward-looking statements. In addition, such statements could be affected
by general industry and market conditions and growth rates, and general domestic
and international economic conditions. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.

     Limited Operating History Under Reorganization of Operations and New
Marketing Strategies.  The Company implemented a reorganization of its
operations during February 1998 into three business units, Allin Consulting,
Allin Interactive, and SportsWave.  Furthermore, the Company fundamentally
changed the marketing strategies of Allin Interactive with respect to its
interactive television operations during mid-1997 and with respect to its
digital photography operations in February 1998.  Allin Interactive now seeks to
sell customized applications and installations of its interactive television
systems on a systems integration basis where the customer bears the capital cost
of the system.  To date, Allin Interactive has completed one system installation
on a cruise ship under this model and is currently installing a system for a
hospital.  Allin Digital Imaging has moved from a retail digital photography
strategy to providing systems integration services specializing in the
installation of digital photography systems for professional photography
businesses.  Because the Company has only a limited history of operations in the
present configuration of business units and with the current marketing
strategies for Allin Interactive, there can be no assurance that the Company
will succeed under these strategies, or that it will obtain financial returns
sufficient to justify its investment in the markets in which it participates.

     Recent Net Losses and Accumulated Deficit. The Company has sustained
substantial net losses during the years ended December 31, 1996 and 1997 and for
the six months ended June 30, 1998 and, as of June 30, 1998, had an accumulated
deficit of $24,439,000.  Allin Interactive has recognized net losses since
inception in 1994 primarily because of the limited revenue generated from its
interactive television operations.  The Company has researched, developed and
installed the only ITV system that to its knowledge is in use in the cruise
industry presently, other than one system currently being tested, and has
incurred substantial costs in doing so. The Company anticipates that it will
continue to incur net losses at least through 1998, and there can be no
assurance that it will be able to achieve revenue growth or profitability on an
ongoing basis in the future.

     Risks Inherent in Development of New Markets.  The Company's strategy
includes attempting to enter new markets for new applications for its
interactive platform and other technologies on a systems integration basis. This
strategy presents risks inherent in assessing the value of development
opportunities, in committing resources in unproven markets and in integrating
and managing new technologies and applications. Within these new markets, the
Company will encounter competition from a variety of sources.  It is also
possible that the Company will experience delays or setbacks in developing new
applications of its technology for new markets. There can be no assurance that
the Company will be successful at penetrating new markets for alternative
applications of its interactive platform, or that any contracts obtained will
generate improvements to the Company's profitability or cash flow.  During 1998,
the Company is entering a new market by offering systems integration services to
professional photography businesses.  There can be no assurance that the Company
will achieve ongoing success within this market, or that any business obtained
will generate improvements to the Company's profitability or cash flow.

     Risks Inherent in Development of New Products.  The Company is currently
proceeding with technological improvements, which it believes could result in
fundamental improvements to the functionality of the in-cabin or end-user system
components, substantial reductions in the required cost for in-cabin or end-user
hardware, and the addition of value-added capabilities for its digital imaging
systems integration services.  There can be no assurance, however, that such
projects will result in improved functionality of the interactive system, cost
reductions to end-user equipment, improved marketability of digital imaging
services, or will result in additional revenue or improved profitability for the
Company.  It is also possible that the Company will experience delays or
setbacks in the areas in which it operates. There can be no assurance that the
Company's new products and applications, if any, will generate additional
revenue or improved profitability for the Company.  There can also be no
assurance that competitors will not develop systems and products with superior
functionality or cost advantages over the Company's new products and
applications.

     Additional Interactive Television System Installations.  The Company is
currently marketing its interactive system to various cruise lines, hospitals
and educational institutions.  There can be no assurance that the Company will
be successful in obtaining contracts with these parties for system installation,
or that for any contracts obtained,

                                      -22-
<PAGE>
 
the terms will be favorable to the Company or will result in the desired
improvements to Allin Interactive revenue and operating income.

     Cruise Lines' Rights to Terminate Operations or Management Fees. Certain
cruise lines have the right to terminate the Company's operations on such cruise
lines' ships, or to discontinue payment of management fees, upon notice.  Any
such termination of operations would eliminate the Company's ability to share in
revenue produced by the affected interactive television system.  Any such
discontinuation of management fees would eliminate the Company's ability to
charge management fees for operation of the system.  The loss or elimination of
the Company's rights to any of these sources of revenue resulting from any of
the foregoing events could have a material adverse effect on the Company's
business, financial condition, and results of operations.  The second quarter
1998 termination of operations aboard three RCCL ships is expected to materially
reduce transactional revenue such as pay-per-view movies and gaming and
previously anticipated management fee revenue in 1998.  The impact may be
mitigated if the Company is successful in obtaining agreements for new system
installations, although there can be no assurance the Company will be successful
in obtaining agreements for new installations, or that any obtained will be on
terms as favorable as with RCCL.

     Dependence on Proprietary Technology; Absence of Patents.   The Company's
success is highly dependent upon its proprietary technology. The Company does
not have patents on any of its technology and relies on a combination of
copyright and trade secret laws and contractual restrictions to protect its
technology. It is the Company's policy to require employees, consultants and
clients to execute nondisclosure agreements upon commencement of a relationship
with the Company, and to limit access to and distribution of its software,
documentation and other proprietary information. Nonetheless, it may be possible
for third parties to misappropriate the Company's technology and proprietary
information or independently to develop similar or superior technology. There
can be no assurance that the legal protections afforded to the Company and the
measures taken by the Company will be adequate to protect its technology. Any
misappropriation of the Company's technology or proprietary information could
have a material adverse effect on the Company's business, financial condition
and results of operations.

     There can be no assurance that other parties will not assert technology
infringement claims against the Company, or that, if asserted, such claims will
not prevail. In such event, the Company may be required to engage in protracted
and costly litigation, regardless of the merits of such claims; discontinue the
use of certain software codes or processes; develop non-infringing technology;
or enter into license arrangements with respect to the disputed intellectual
property. There can be no assurance that the Company would be able to develop
alternative technology or that any necessary licenses would be available or
that, if available, such licenses could be obtained on commercially reasonable
terms. Responding to and defending against any of these claims could have a
material adverse effect on the Company's business, financial condition and
results of operations.

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

     Need for Management of Growth and Geographic Expansion.   The Company's
growth strategy will require its management to conduct operations and respond to
changes in technology and the market.  If the Company's management is unable to
manage growth, if any, effectively, its business, financial condition and
results of operations will be materially adversely affected.  The Company
intends to pursue continued geographic growth of its operations, particularly in
software development and network solutions consulting.  Allin Consulting has
expanded its operations to Pittsburgh, Pennsylvania and Fort Lauderdale,
Florida.  It has also experienced a growth in the geographic scope of
engagements serviced by personnel based in northern California.  Allin
Consulting is evaluating further geographic expansion of operations through
acquisition or investment.  Allin Interactive is marketing interactive
television and digital photography services nationally and will undertake
installations throughout the United State, if obtained.  If the Company's
management is unable to manage growth, if any, effectively, its business,
financial condition and results of operations will be materially adversely
affected.

                                      -23-
<PAGE>
 
     Dependence on Key Personnel.   The Company's success is dependent on a
number of key management, research and operational personnel for the management
of operations, development of new markets and products and timely installation
of its systems.  The Company's recent reorganization of operations has also
resulted in certain key executives assuming additional responsibilities for the
Company's operations, some of which duties may differ from their prior duties.
The loss of one or more of these individuals could have an adverse effect on the
Company's business and results of operations. The Company depends on its
continued ability to attract and retain highly skilled and qualified personnel
and to engage non-employee consultants. There can be no assurance that the
Company will be successful in attracting and retaining such personnel or
contracting with such non-employee consultants.

     Dependence on Major League Sports.   The Company's sports marketing and
promotion business conducted through SportsWave is dependent on the success and
continued popularity of major league sports. Factors which adversely affect
major league sports could also adversely affect the Company's business and
results of operations. For example, SportsWave's business was adversely impacted
by the players' strike and owners' lockout during the 1994 and 1995 Major League
Baseball seasons. There can be no assurance that there will be no strike,
lockout or other event with a similar adverse impact in the future involving one
or more of Major League Baseball, the National Football League, the National
Basketball Association or the National Hockey League.

     Fluctuations in Operating Results.   The Company expects to experience
significant fluctuations in its future quarterly operating results that may be
caused by many factors, including the addition or conclusion of significant
consulting engagements, and the seasonal aspects of SportsWave's business.
Accordingly, quarterly revenues and operating results will be difficult to
forecast, and the Company believes that period-to-period comparisons of its
operating results will not necessarily be meaningful and should not be relied
upon as an indication of future performance

     Potential Impact of Privacy Concerns.   One of the features of the
Company's interactive television system is the ability to develop and maintain
information regarding usage of the system by cruise ship passengers and other
parties. The perception by the users of substantial security and privacy
concerns, whether or not valid, may cause users to resist providing the personal
information that might be useful for demographic purposes and may inhibit market
acceptance and usage of the Company's video systems. In the event such concerns
are not adequately addressed, the Company's business, financial condition and
results of operations could be materially adversely affected.

     Competitive Market Conditions.   The market for interactive communications
and digital imaging is new, rapidly evolving and highly competitive. Many of the
Company's current and potential competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company and therefore may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements.  The information systems
consulting industry is very fragmented with  a large number of participants due
to growth of the overall market for services and low capital barriers to entry.
There are a few large national or multinational firms competing in this market,
although the larger firms are believed to have a better reputation in product
sales generally than in services.  There can be no assurance that the Company
will be able to compete effectively with current or future competitors or that
the competitive pressures faced by the Company will not have a material adverse
effect on the Company's business, financial condition and results of operations.

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

Effect of Recently Issued Accounting Standards

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which introduces a new
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.  SFAS
No. 131 is effective for fiscal years beginning after December 31,

                                      -24-
<PAGE>
 
1997. Management believes that its recent reorganization of operations will be
both consistent with and conducive to the new model. The Company will adopt SFAS
No. 131 as of December 31, 1998.

     In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS No. 132"), which revises certain
footnote disclosure requirements related to pension and other retiree benefits.
The new standard will not have a financial impact on the Company.  The Company
will adopt SFAS No. 132 in 1999.

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133").  The Statement establishes accounting
and reporting standards requiring reporting of all derivative instruments,
including certain derivative instruments embedded in other contracts, in the
balance sheet as either an asset or liability measured at its fair value.  SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.  SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999, although
earlier adoption as of the beginning of any fiscal quarter after issuance is
permitted.  The Company plans to adopt SFAS No. 133 during 1999.  Since the
Company does not invest excess funds in derivative financial instruments or
other market rate sensitive instruments currently, adoption of the new standard
is not anticipated to have a financial impact on the Company.

                                      -25-
<PAGE>
 
Part I  Financial Information

Item 3.  Quantitative and Qualitative Disclosure about Market Risk Sensitive
Instruments

     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.

                                      -26-
<PAGE>
 
Part II - Other Information

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

         (a) The Annual Meeting of the Stockholders of the Company was held on
             Thursday, May 8, 1998.

         (b)  Not applicable.

         (c)  The following matters were voted on by the Stockholders of the
              Company by votes submitted through proxy or in person at the
              Annual Meeting:

              (1)  Election of Directors for one year terms to hold office until
                   the next annual meeting of the Stockholders following
                   election and until their successors are duly elected and
                   qualified. Results were as follows:

<TABLE>
<CAPTION>
                         Nominee          Votes For     Votes Against   Votes Abstaining
                                                                                        
                   <S>                    <C>            <C>             <C>          
                   Richard W. Talarico       3,855,494               0             3,300
                   Brian K. Blair            3,846,694               0            12,100
                   William C. Kavan          3,855,494               0             3,300
                   Paul J. Pasquarelli       3,846,886               0            11,908
                   James C. Roddey           3,855,494               0             3,300 
</TABLE>

              (2)  Ratification of the Board of Directors' selection of Arthur
                   Andersen LLP to serve as the independent public accountants
                   to examine the financial statements of the Company and its
                   subsidiaries for the year ending December 31, 1998. Votes
                   cast were 3,852,494 for ratification, 1,700 against
                   ratification, and 4,600 abstaining.

              There were a total of 5,182,267 shares of the Company's Common 
              Stock eligible to vote at the Annual Meeting.

         (d)  Not applicable.

                                      -27-
<PAGE>
 
Part II - Other Information

Item 5.  Other Information

Appointment of Director

        On August 6, 1998, The Company's Board of Directors appointed Anthony L.
Bucci as a director of the Company to hold office until the next annual meeting
of the Stockholders following appointment and until his successor is duly
elected and qualified.  Since 1992, Mr. Bucci has served as chairman and chief
executive officer of MARC Advertising, a Pittsburgh, Pennsylvania based
marketing communications company.  Prior to 1992, Mr. Bucci served in various
capacities at MARC Advertising since 1970.

Amendment of By-laws

        On August 6, 1998, the Company's Board of Directors approved amendments
to the Company's By-laws establishing advance notice and informational
requirements for submission of nominations of candidates for election as
directors and any other new business to be voted on by stockholders at any
annual meeting of stockholders.  Notice requirements established for submission
of nominations or new business are 90 days in advance of the anniversary date of
the immediately preceding annual meeting. Therefore, any nomination or other 
proposal intended to be presented at the 1999 Annual Meeting of Stockholders 
must be received by the Company no later than February 7, 1999. Such nominations
and proposals must also meet the requirements set forth in the Company's 
By-laws. The amendments to the Company's By-laws are included in their entirety 
as Exhibit 3(ii) to this filing on Form 10-Q for the period ended June 30, 1998.
Such amendments do not change the date for submission of any proposals for 
inclusion in the Company's proxy materials for the 1999 Annual Meeting of 
Stockholders. Such proposals must be received by the Company no later than 
December 1, 1998, to be included in the proxy materials.


                                      -28-
<PAGE>
 
Part II - Other Information

Item 6.  Exhibits and Reports on Form 8-K.

         (a)  Exhibits.

Exhibit
Number                          Description of Exhibit        
------                          ---------------------- 

3(ii)         Amendment to By-laws of the Registrant
              
10            Employment Agreement dated June 15, 1998 by and between the
              Registrant and Richard W. Talarico
              
11            Computation of Earnings per Share.
              
27            Financial Data Schedule
       
         (b)  Reports on Form 8-K.

              No report on Form 8-K was filed by the Company during the quarter
              ended June 30, 1998. 

                                      -29-
<PAGE>
 
                                   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 COMMUNICATIONS CORPORATION
                             (Registrant)
                             
Date: August 6, 1998         By:  /s/   Richard W. Talarico
                                 --------------------------
                             Richard W. Talarico                              
                             Chairman and Chief Executive Officer 
                             
                             
Date: August 6, 1998         By:  /s/   Dean C. Praskach
                                 ----------------------
                             Dean C. Praskach
                             Vice President-Finance and Chief Accounting Officer

                                      -30-
<PAGE>
 
Allin Communications Corporation
Form 10-Q
June 30, 1998
Exhibit Index



Exhibit
Number                        Description of Exhibit
------                        ---------------------- 

3(ii)    Amendment to By-laws of the Registrant

10       Employment Agreement dated June 15, 1998 by and between the Registrant
         and Richard W. Talarico

11       Computation of Earnings per Share

27       Financial Data Schedule

                                      -31-