<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                        
                                   FORM 10-K
                                        
(Mark One)

( X )  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
       ACT OF 1934
 For the fiscal year ended:  December 31, 1998

                                       OR

(   )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
       EXCHANGE ACT OF 1934
 For the transition period from ________ to _________ .

                        Commission file number:  0-21395
                                        
                               ALLIN CORPORATION
             (Exact name of registrant as specified in its charter)

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


                  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)

          Securities registered pursuant to Section 12(b) of the Act:
                                      None

          Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock, $0.01 Par Value per Share
                                (Title of Class)

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

                  ( X )    YES                (   )    NO

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ( X )

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on March
12, 1999 as reported on the Nasdaq National Market tier of the Nasdaq Stock
Market, was approximately $3,200,000.  Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates.  This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

     As of March 12, 1999, the Registrant had outstanding 5,994,030 shares of
Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE
                                        
                                      NONE
                                        
<PAGE>
 
                               Allin Corporation
                                   Form 10-K
                               December 31, 1998

                                     Index
<TABLE>
<CAPTION>
 
<S>           <C>                                                                      <C>    
Forward-looking Information                                                            Page  3
                                                                                            
Part I                                                                                      
                                                                                            
Item 1  -     Business                                                                 Page  4
                                                                                            
Item 2  -     Properties                                                               Page  25
                                                                                            
Item 3  -     Legal Proceedings                                                        Page  26
                                                                                            
Item 4  -     Submission of Matters to a Vote of Security Holders                      Page  27
                                                                                            
                                                                                            
Part II                                                                                     
                                                                                            
Item 5  -     Market For Registrant's Common Equity and Related Stockholder Matters    Page  28
                                                                                            
Item 6  -     Selected Financial Data                                                  Page  29
                                                                                            
Item 7  -     Management's Discussion and Analysis of Financial Condition and Results       
              of Operations                                                            Page  31
                                                                                            
Item 7A  -    Quantitative and Qualitative Disclosures About Market Risk               Page  50
                                                                                            
Item 8  -     Financial Statements and Supplementary Data                              Page  52
                                                                                            
Item 9  -     Changes In and Disagreements With Accountants on Accounting                   
              and Financial Disclosure                                                 Page  91
                                                                                            
                                                                                            
Part III                                                                                    
                                                                                            
Item 10 -     Directors and Executive Officers of the Registrant                       Page  92
                                                                                            
Item 11 -     Executive Compensation                                                   Page  94
                                                                                            
Item 12 -     Security Ownership of Certain Beneficial Owners and Management           Page  100
                                                                                             
Item 13 -     Certain Relationships and Related Transactions                           Page  105
 

Part IV

Item 14 -  Exhibits, Financial Statement Schedules and Reports on Form 8-K             Page  107
                                                                                           
                                                                                           
Signatures                                                                             Page  112
                                                                                            
</TABLE> 

                                                                               2
<PAGE>
 
Forward-Looking Information

     Certain matters in this Form 10-K, including, without limitation, certain
matters discussed under Item 1--Business, Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations and Item 7A--
Quantitative and Qualitative Disclosures about Market Risk, constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended.  Forward-looking statements are typically identified by the words
"believes," "expects," "anticipates," "intends," "estimates," "and similar
expressions.  Readers are cautioned that any such forward-looking statements are
not guarantees of performance and that matters referred to in such forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements of Allin
Corporation to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.  Such
factors include, among other things, risks and uncertainties discussed
throughout Item 1--Business, and under the caption "Forward-Looking Statements,"
and in Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations and Item 7A--Quantitative and Qualitative Disclosures
about Market Risk.  Allin Corporation undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.

                                                                               3
<PAGE>
 
Part I

Item 1 - Business

(a)  General Development of Business

     Allin Corporation (the "Company"), formerly Allin Communications
Corporation, is a provider of technology consulting and systems integration
services oriented around practices meeting customer needs for infrastructure,
business operations, and electronic business services.  The Company offers
Microsoft-focused technology services and development specializing in Windows
NT-based software development, consulting and network integration services.  The
Company also provides consulting and custom development for mainframe systems,
specialized technology consulting services for the banking industry, and
consulting and integration services focused on the interactive television and
digital photography industries.  The Company also intends to develop a
technology consulting practice oriented around knowledge management services in
1999.

     On December 31, 1998, the Company's stockholders approved the change of the
corporate name to Allin Corporation.  The Company's Board of Directors
recommended this change to stockholders to reflect the Company's changed
strategy to be a provider of consulting and integration services.  Management
also implemented changes to subsidiary names during 1998 to incorporate the
Allin name in all subsidiary names.  Management believes that these actions will
help to promote a brand identity for the Allin name for all of the Company's
services.

     The Company was organized under the laws of the State of Delaware in July
1996 to act as a holding Company for operating subsidiaries.  The Company
currently owns five operating subsidiaries organized into two business units.
The Allin Consulting business unit includes Allin Corporation of California
("Allin Consulting-California") and Allin Consulting of Pennsylvania, Inc.
("Allin Consulting-Pennsylvania").  Prior to the name changes previously noted,
these corporations were named Kent Consulting Group, Inc. and KCS Computer
Services, Inc., respectively.  The Allin Systems business unit includes Allin
Interactive Corporation, the Company's predecessor formed in 1994 ("Allin
Interactive"), Allin Digital Imaging Corp. ("Allin Digital") and Allin Network
Products, Inc. ("Allin Network").  Prior to the name changes previously noted,
these corporations were named SeaVision, Inc., PhotoWave, Inc. and Netright,
Inc., respectively. The five subsidiaries listed above, as well as Allin
Holdings Corporation ("Allin Holdings"), a non-operating subsidiary, are wholly
owned by the Company.  Allin Interactive, Allin Digital and Allin Holdings are
Delaware corporations.  Allin Consulting-California and Allin Network are
California corporations.  Allin Consulting-Pennsylvania is a Pennsylvania
corporation.  Unless the context otherwise requires, all references herein to
the "Company" mean Allin Corporation and its subsidiaries.
 
     During 1998, the Company continued to move from primarily being an owner
and operator of transactional based interactive television and digital
photography systems to a provider of technology consulting and systems
integration services.  Technology consulting and systems integration services
have evolved as the Company's predominant products due to Management's strategy
to focus the Company's core technological expertise on markets with demonstrated
demand and to avoid significant capital commitments for speculative
technological applications.  Allin Consulting's technology consulting and
software development operations experienced significant growth in financial
results, the breadth of services offered and geographic scope during 1998.  A
significant event contributing to this growth was the acquisition of Pittsburgh,
Pennsylvania-based Allin Consulting-Pennsylvania in August 1998, which more than
tripled immediately preceding monthly revenue from technology consulting
services.  There can be no assurance, however, that revenue will continue to be
realized at triple or greater than the preexisting rate.  Allin Consulting-
Pennsylvania is a Microsoft Solutions Provider Partner providing technology
consulting and software development services for client/server and mainframe
applications and specialized technology consulting services for the banking
industry.  Allin Consulting also acquired MEGAbase, Inc. ("MEGAbase"), a
client/server software development specialist based in Mountain View, California
in November 1998, substantially enhancing its development expertise and
capabilities.  The operations of MEGAbase were merged with Allin Consulting-
California following acquisition.  Allin Consulting-California continued to
experience growth in demand for its client/server-oriented network integration
services and consulting and development services during 1998.

                                                                               4
<PAGE>
 
     During 1998, Allin Systems continued to follow the strategic changes
implemented for its interactive television business in 1997.  It is now focused
on providing systems integration and consulting services for interactive
television applications.  Allin Systems continues to own and operate interactive
television systems which it had previously installed only if transactional
revenue and management fees provided by the Company's customers are sufficient
to provide positive cash flow.  During early 1998, Allin Systems implemented a
change in strategy for its digital photography operations, moving from a retail
photographic operation to a provider of systems integration services for the
professional and commercial photography industry.  The new strategy was fully
implemented during 1998 and has resulted in substantial revenue growth as
compared to the previous retail strategy.

     Consistent with its evolving strategy focusing on technology consulting and
systems integration services, the Company sold SportsWave, Inc., its sports
marketing subsidiary, in September 1998.

     Although the Company has undergone fundamental changes in strategy in the
types of products and services offered over the last two years, it has continued
to realize significant revenue growth since the inception of the Company's
operations.  Revenue growth has been realized both through increases in revenue
from businesses originally started by the Company or its predecessor and through
strategic acquisitions, primarily in the technology consulting area.  The
Company was cited by the Pittsburgh Technology Council in October 1998 as having
had the highest rate of revenue growth from 1995 to 1997 of any technology-based
business in the Pittsburgh region.  The Company was named one of the Pittsburgh
Technology 50 award recipients for this accomplishment.  The Company continued
its pattern of significant revenue growth in 1998, primarily in technology
consulting services.  The Company's revenue increased 59% in 1998 in comparison
to the prior year.  See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations and Item 8 - Financial Statements
and Supplementary Data for detailed information concerning the Company's revenue
growth and results of operations.

    The Operating Business Units.

    Allin Consulting Business Unit

    Allin Consulting provides technology consulting services for a diverse group
of corporate clients.  Allin Consulting's operations are oriented around
practices intended to meet customer needs for infrastructure, business
operations, and electronic business services.  Allin Consulting  also intends to
develop a knowledge management based practice in 1999.  Allin Consulting's
operating entities are certified as Microsoft Solutions Provider Partners, an
elite group of organizations providing support for Microsoft products that have
met Microsoft's stringent training and marketing requirements.  In March 1999,
Allin Consulting was among four firms nominated for Microsoft Solutions Provider
Partner of the Year in Northern California from among approximately seventy
eligible firms.  The Partner of the Year award honors those firms whose work and
achievements have demonstrated excellence in Microsoft oriented consulting
services.  The regional award winner will be chosen in April 1999.

     Allin Consulting provides expertise in Windows NT and Microsoft BackOffice
technology, as well as a variety of other technologies for the client/server and
mainframe environments.  Allin Consulting assists clients with the design,
implementation and administration of enterprise network solutions, custom
software applications development, and Internet and Intranet infrastructure.
Allin Consulting also offers technological expertise in groupware, e-mail,
networking and database applications.  Services for the mainframe environment
include custom development and support for IBM proprietary technology and
related applications.  Allin Consulting also offers specialized technology
consulting services to the banking industry, including conversions for mergers
and acquisitions, and software product implementation.  With its 1998
acquisitions, Allin Consulting has moved from being predominantly a regional
supplier of services in Northern California to a national focus.

     The Allin Consulting business unit consists of the operations of Allin
Consulting-California and Allin Consulting-Pennsylvania.  Kent Consulting Group,
Inc. was acquired under an agreement closed coincident with the Company's
initial public offering on November 6, 1996 and was merged into a wholly owned
subsidiary of the Company, Kent Acquisition Corporation, which was the surviving
entity and changed its name to Kent Consulting Group, Inc.  The acquired
business had been in operation since 1994 and conducted business through a
predecessor corporation since 1983.  The surviving entity subsequently carried
forth the business operations of the acquired entity.  In 1998, the surviving
entity changed its name to Allin Corporation of California ("Allin Consulting-

                                                                               5
<PAGE>
 
California").  In this Report on Form 10-K, the term Allin Consulting-California
refers to both the acquired and surviving legal entities, as is appropriate for
the context.   MEGAbase, acquired in November 1998 and subsequently merged into
Allin Consulting-California, had been in operation since 1985.  Allin
Consulting-Pennsylvania, acquired by the Company in August 1998, has been in
operation since 1985.  See "Allin Consulting--Technology Consulting Services."

     Allin Systems Business Unit

     Allin Systems provides specialized systems integration, consulting and
other services for interactive television and digital photography applications.
Allin Systems currently focuses its marketing efforts for interactive television
toward system sales, and systems integration and consulting services to the
healthcare, education and cruise industries.  Allin Systems continues to operate
interactive television systems installed on cruise ships between 1995 and 1997
on an owner-operator model from which it derives transactional revenue and
management fees.  Allin Systems has not marketed additional systems on this
basis since early 1997.  During 1998, Allin Systems implemented a new strategy
for its digital photography operations, providing system integration services
related to digital photography systems for professional and commercial
photography businesses.  Allin Systems also provides technical support and
ancillary product sales for digital photography.  Allin Systems also sells
computer hardware and software and network equipment.  See "Allin Systems -
Interactive Television, Digital Imaging and Computer Hardware and Software
Sales".

     The Allin Systems business unit consists of the operations of Allin
Interactive, Allin Digital and Allin Network.  Allin Interactive was formed in
June 1994 as the original corporation in the Allin organization and became a
subsidiary of the Company in August 1996 through a merger.  Allin Digital was
formed as a subsidiary of the Company in August 1996.  Allin Network, acquired
by the Company in November 1996, began operations in 1995.

(b) Financial Information About Industry Segments

     Financial information concerning the industry segments in which the Company
operates is included in Note 23 of the Notes to the Company's Consolidated
Financial Statements included herein in Item 8--Financial Statements and
Supplementary Data.

(c)  Narrative Description of Business

     Allin Consulting  Technology Consulting Services

     Revenue from Allin Consulting's technology consulting services
substantially increased as a proportion of the Company's consolidated revenue in
1998.  Percentage of revenue (excluding intercompany revenue) derived from
technology consulting services over the three years ended December 31, 1998 is
as follows:

<TABLE>
<CAPTION>
                                          Year Ended December 31
                                          ----------------------
Percentage of Consolidated Revenue        1996     1997     1998
                                          ----     ----    -----   
<S>                                      <C>       <C>      <C>
Technology Consulting:                                   
     Infrastructure                        30%      33%     28%
     Business Operations                    8%       5%     40%
     Electronic Business                   --       --       1%
                                          ----------------------
                                                             
Total                                      38%      38%     69%
                                          ======================
</TABLE>

     Industry Overview.  The market for technology consulting, software design
and network solutions services has experienced rapid growth throughout the
1990's and this trend is expected to continue into the future.  The Standard &
Poor's Industry Survey for Computers: Commercial Services of June 25, 1998 cites
a 15% growth rate for information technology consulting in 1997 with annual
growth rates of 14.7% projected through 2001.  Similarly, Business Week, in its
January 11, 1999 issue, notes market researcher Dataquest, Inc.'s projection of
18%

                                                                               6
<PAGE>
 
growth in software-related consulting from 1998 to 1999.  The Standard &
Poor's survey notes several significant factors spurring market growth,
including increased business focus on automating front and back office
operations, difficulties in integrating hardware and increasingly complex
software from different vendors, implementation of complex information and
communications network configurations and difficulties and inefficiencies
experienced by companies in maintaining in-house technical services staffs due
to shortages of skilled labor in the technology area,  all of which have
resulted in increased demand for technology consulting services.  The Company
believes Allin Consulting is positioned to benefit from the industry growth
trend, although there can be no assurance given that  recent industry trends
will continue or that Allin Consulting will realize growth in revenue or
improvement in results from operations due to overall industry trends.

     The Standard & Poor's Industry Survey for Computers: Commercial Services of
June 25, 1998 notes increased demand for network implementation and integration
services has resulted from several broad industrial trends.  Larger companies
have increasingly downsized from mainframe to client/server networks due to
equipment cost considerations, the proliferation of available software and the
enhanced communications capabilities offered in the client/server environment.
The increasing incidence of mergers and acquisitions has also resulted in the
need to develop communications and networking capabilities for different types
of computer systems and hardware and software from different vendors.  These
complex network configurations and integration demands are commonly beyond the
capabilities of in-house technical services staff.  The Year 2000 problem has
also accelerated movement from older mainframe systems less likely to be Year
2000 compliant to newer client/server network configurations.  Year 2000
consulting and remediation have also contributed to significant growth in demand
for technology consulting services during the late 1990's.  While Year 2000
consulting and remediation will decline rapidly after this year and the pace of
network implementation is expected to slow in the future, growth in demand for
services related to newer technologies is expected to more than offset these
declines.

     New technological developments are expected to significantly contribute to
future growth in demand for technology consulting, software design and network
solutions.  Demand for internet and intranet consulting services is projected to
grow at 54% annual rates from 1997 to 2000, according to The Standard & Poor's
Industry Survey for Computers: Commercial Services of June 25, 1998. Intranet
development is expected to grow rapidly over the next few years as businesses
develop communications networks for employees, clients and suppliers that
utilize Internet technology and communication protocols.  These networks give
organizations the ability to distribute and share information on a worldwide
basis quickly and inexpensively.  The Standard & Poor's survey also projects
consulting revenue for development and implementation of client electronic
commerce capabilities will grow from $8 billion in 1997 to several hundred
billion by 2001.  The Standard & Poor's survey forecasts growth in demand for
services related to emerging groupware and knowledge management technologies and
due to increased use of enterprise resource planning technology as companies
continue to automate back office functions such as manufacturing, distribution,
accounting and human resources and move to automate front office functions such
as sales and customer service..  The Forrester Report: Sizing Technology
Services of June 1997 also foresees rapid growth in demand for distributed
infrastructure services such as end user support, wide area network management
and Internet hosting.

     A labor shortage for computer programmers and system designers has
contributed to increased demand for technology services firms. The Standard &
Poor's Industry Survey for Computers: Commercial Services of June 25, 1998 cites
a 42% decline in the number of computer science and mathematics graduates
entering the workforce since 1986 and indicates the shortage is expected to
worsen in the next few years.  The labor shortage has resulted in increased
labor cost and mobility for skilled technical personnel making it difficult for
companies to retain technical staff and control costs.  The proliferation of
software and increasingly complex computer networks have also increased the
difficulty of maintaining diverse and up-to-date technical capabilities within
many companies.  The result has been increased demand for technical services
firms to obtain specialized expertise relevant to specific systems integration
and software application development projects and to control costs by enabling
companies to maintain smaller technical support staffs with less technological
expertise.  Management believes that technology consulting firms allow for
greater efficiencies in allocating scarce skilled technical resources to areas
of highest demand than does the maintenance of in-house technical support staff.

     Allin Consulting maintains a strong Microsoft focus in its client/server
operations, with emphasis on Windows NT-based software development, engineering
and network integration services.  Microsoft is a dominant force in the
information technology industry, particularly in software for personal computer
operating systems.  The

                                                                               7
<PAGE>
 
Gartner Group Strategic Analysis Report of May 26, 1998 notes that Microsoft
Windows operating systems run approximately ninety percent of the world's
personal computers. Microsoft's dominance to date has been in mass-market
oriented products engineered to meet the most common information processing
needs of individuals and small to medium sized businesses. The Gartner Group
report projects Microsoft's strategic focus and dominant product mix to change
over the next five years. In the short term over the next three years, server
and infrastructure software products including Windows NT and the BackOffice
suite of products such as SQL Server, Exchange and Internet Information Server
are expected to experience significant growth and displace productivity
applications and desktop operating systems as the predominant Microsoft product
lines. The Gartner Group report notes the server market is expected to continue
to grow rapidly throughout this period. The report also indicates Microsoft is
expected to focus product improvement efforts on development of enhanced
enterprise features and functionality that will result in market share growth
with larger companies. Microsoft is expected to continue to be dependent on
third parties for service and support for its products. Management believes that
short term growth in Microsoft's server and infrastructure products will lead to
increased demand for the services offered by the Company's Infrastructure
practice, although there can be no assurance that revenue growth or
profitability improvements will be realized by this practice. Beyond 2001,
interactive media is expected to be a major source of revenue growth. The
Gartner Group report foresees that Microsoft's strategy in interactive media
will be to undertake multiple development initiatives and as the market evolves,
focus on those that will enable Microsoft to be the dominant software platform
provider for all digital media access technologies.

     Computer services firms have historically been somewhat insulated from
economic cycle fluctuations as economic advances have promoted increased demand
throughout the economy while economic declines have resulted in increased
incidences of businesses looking to outsource technical services.  There can be
no assurance, however, that computer services firms will not be adversely
affected by future economic downturns.  The computer services industry includes
companies diverse in size and scope of activities and includes mainframe
hardware and software vendors with significant computer services operations as
well as firms primarily focused on technology related consulting.  The industry
has experienced significant acquisition activity in recent years as firms have
sought to broaden technological skills or geographical presence.  Management
expects this consolidation trend to continue.

     Operations.  During the latter part of 1997 and early 1998, a series of
strategic decisions by the Company's management reoriented the Company's focus
to becoming primarily a provider of technology consulting and systems
integration services.  Allin Consulting's technology consulting services have
accordingly increased in strategic importance to the Company.  At the beginning
of 1998, Allin Consulting's operations were conducted solely through Allin
Consulting-California and were largely concentrated in the San Francisco Bay
area of northern California.  Allin Consulting-California was predominantly
focused on technology services in the client/server environment, primarily with
Microsoft operating systems and applications.  The Company's strategic
orientation change demanded a heightened emphasis on growth in the Allin
Consulting business unit.  The Company's strategic plan included active steps to
promote growth in revenue, growth in geographic scope of operations and an
increased breadth of service offerings through both organic growth and growth
through acquisitions.

     Management's long-term strategy includes plans for Allin Consulting to
become a network of regional technology consulting operations specializing in
services to clients with annual revenue between $100 million and $1 billion.
The Company's search for acquisition targets initially centered around firms
with a strong Microsoft orientation that were within close geographic proximity
to one of its existing operations.  The Company's acquisition strategy and
search process ultimately led to the acquisition of Pittsburgh, Pennsylvania-
based KCS Computer Services, Inc., now Allin Consulting-Pennsylvania, in August
1998.  This acquisition brought about fundamental changes to the Allin
Consulting business unit since the acquired entity was significantly larger in
revenue size and numbers of consultants.  Business unit monthly revenue and
professional staff more than tripled with this acquisition.  There can be no
assurance, however, that revenue will continue to be realized at triple or
greater than the preexisting rate.   Allin Consulting-Pennsylvania enhanced the
business unit's Microsoft focus as it brought a second Microsoft Solutions
Provider Partner into the business unit.  The acquisition also broadened Allin
Consulting's scope of services as Allin Consulting-Pennsylvania also provides
custom development and support for IBM proprietary mainframe system technology
and related applications, and offers specialized technology consulting services
to the banking industry.  Allin Consulting-Pennsylvania's client/server and
mainframe practices are managed from its Pittsburgh base and are carried out
predominantly in the northeastern United States.  The specialized banking
industry services are managed from Allin Consulting-Pennsylvania's Cleveland,
Ohio office, but are carried out at client locations throughout the United
States.

                                                                               8
<PAGE>
 
     In November 1998, the Company acquired MEGAbase and merged its operations
into Allin Consulting-California.  MEGAbase was a Microsoft Solutions Provider
Partner based in Mountain View, California that specialized in developing custom
business software based on Microsoft's SQL Server platform and other Microsoft
BackOffice technology.  The acquisition resulted in the addition of eleven
software development specialists to the Allin Consulting business unit and
brought the overall Allin Consulting technology professional staff to
approximately 160 members as of February 28, 1999.  The specialized focus of the
former MEGAbase developers strengthens the overall scope of services for Allin
Consulting-California as it complements the group's previously existing
infrastructure specialization.  Management believes that the broader base of
services makes Allin Consulting more effective in delivering fully integrated
solutions to meet client needs.  Detailed information concerning the financial
terms of both 1998 acquisitions is included in Item 7--Management's Discussion
and Analysis of Financial Condition and Results of Operations and in the Notes
to Consolidated Financial Statements in Item 8--Financial Statements and
Supplementary Data.
 
     By the end of 1998, Allin Consulting had become a fundamentally different
operation than at the beginning of the year.  Its monthly revenue and technical
staff size had significantly increased, its geographic scope had expanded across
the nation and its technology consulting practice had assumed a predominant
position among the Company's product and service offerings.   Management has
also moved toward a customer oriented approach in its technology consulting
operations.  Management is structuring the business unit operations into
practices intended to meet customer needs for professional technology services
in four areas.  Infrastructure Services focuses on design, configuration,
implementation and support of customer operating systems, messaging, database
administration, information system security and help desk support.  Business
Operations focuses on clients' standard business operations such as sales,
finance, administration, logistics and manufacturing and involves custom
development or package implementation to improve operational efficiency or
information flow.  Electronic Business helps customers with improving
information exchange with customers, suppliers and other third parties and
includes applications and development for direct marketing, purchasing,
business-to-business and business-to-consumer systems.  The Electronic Business
practice emphasizes Internet- and Intranet-based services for customers.
Management intends to develop a Knowledge Management practice in 1999 to focus
on applications and development aimed at collecting, warehousing and sorting
data for wide accessibility within customer organizations.

     Allin Consulting follows a standard, field-proven methodology for providing
network solutions and applications development across its practice disciplines.
The Allin methodology starts with a comprehensive analysis of customer
requirements which leads to specific project plans or design specifications to
meet the customer's informational needs.  Both the requirements analysis and
design specification stages are subjected to peer review by Allin Consulting
technical specialists.  Plans and specifications are then used to construct
software applications or network configurations, which undergo Allin
Consulting's quality assurance and testing procedures and customer acceptance.
Developed applications and network solutions are then fully implemented for the
client and subjected to a review process to ascertain whether the full
functionality anticipated in the project plan or design specification has been
obtained.  Ongoing technical support of the application or network solution is
the final step in the Allin Consulting methodology.

     Allin Consulting's network solutions services for the client/server
environment maintain a focus on services related to Microsoft BackOffice
technology including NT Server, SQL Server, SNA Server, Systems Management
Server, Exchange Server and Internet Information Server.  Allin Consulting
assists clients with the design, implementation and administration of enterprise
network solutions and internet and intranet infrastructure and applications.
Allin Consulting also has expertise in developing groupware and e-mail
applications, help desk solutions and networking and database applications.
Allin Consulting can also create network solutions that integrate Unix, Lotus,
Oracle, Novell and IBM mainframe systems with Windows NT-based networks.
Services include design of system architecture, installation and configuration
of software and hardware, training, systems management support and trouble-
shooting. The Company believes that Allin Consulting enables its customers to
incorporate new applications and new technologies into existing information
systems quickly and with minimal disruption.  Management believes that Allin
Consulting has been one of the companies 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.  Allin
Consulting has extensive experience in e-mail infrastructure and migration
including computer telephony integration.  Both of Allin Consulting's operating
entities are authorized as a Microsoft Solutions Provider Partners. Allin
Consulting is also authorized as a service provider for Lotus, IBM, Novell,
Cisco Eastman, NetIQ, Bendata, Fenestrae and Citrix products.

                                                                               9
<PAGE>
 
     Allin Consulting provides custom software development services for the
client/server environment, offering a full spectrum of services including
business requirements analysis, data modeling and design, project and technical
management, programming, documentation and support.  Allin Consulting is a
Microsoft certified provider of custom application development services
utilizing Access, Visual C++, Visual Basic, Visual J++, SQL Server, Outlook,
Excel and Visual Fox Pro.  Allin Consulting also performs design and development
services for web applications using Visual InterDev and ASP with SQL Server.  In
addition to Microsoft-oriented services, Allin Consulting also provides
client/server development services for Unix and Novell operating systems.  Allin
Consulting develops and supports applications for Multimedia ToolBook, C/C++,
Oracle, Ingres, Informix and Sybase and performs web-based development services
using Java, Perl, CGI and HTML.  Allin Consulting's software application
development services have assisted clients with product definition and
specification development, technology assessment and vendor selection, and
digital video server applications.

     As noted in the Industry Overview for Technology Consulting Services,
industry analysts expect the predominant areas of growth for Microsoft over the
next five years to be server and infrastructure software products and
interactive media.  Management believes these areas match very well with the
Company's core competencies, technological expertise and historical operations,
particularly in Infrastructure Services.  In March 1999, Allin Consulting was
among four firms nominated for Microsoft Solutions Provider Partner of the Year
in Northern California from among approximately seventy eligible firms.  The
Partner of the Year award honors those firms whose work and achievements have
demonstrated excellence in Microsoft oriented consulting services. The regional
award winner will be chosen in April 1999.  Management believes Allin
Consulting's established relationship with Microsoft as a Solution Provider
Partner and the quality of its services, as recognized by Microsoft, will
position the Company to benefit from Microsoft's growth in infrastructure and
interactive media products since Microsoft has historically relied on third
parties extensively for custom development and integration services.  No
assurance can be given, however, that any growth or change in Microsoft's
product sales will result in growth in Allin Consulting revenue or improvements
to its financial condition or results of operations.  Management intends to
enhance the Microsoft  focus in Allin Consulting's operations through continued
training and certification of its consultants and through  joint marketing
efforts with Microsoft.  The customer oriented strategic model for Allin
Consulting's operations, with Infrastructure, Business Operations, Electronic
Business and Knowledge Management practices,  is intentionally similar to
Microsoft's product and service groupings.  Management believes this structural
focus will foster more focused communication and interaction with the Microsoft
organization and will promote the continued development of technological
expertise within the Company focused on products and applications that closely
correspond to particular disciplines of the Allin Consulting organization,
although there can be no assurance that the strategic model will lead to
increased revenue or profitability in the future.

     Allin Consulting provides consulting and custom development for mainframe
systems, including application development, data base development and
administration, and data communications development for IBM proprietary
technology.  Allin Consulting plans to continue to dedicate a portion of its
business practice to meeting its clients' legacy system needs for special or
deadline sensitive projects, peak and backlogged workloads, and specialized
skill applications.  The Company's management believes the growing scarcity of
labor with a high level of mainframe system expertise will result in a continued
shift in services of this type from in-house technical staffs to consulting
firms such as Allin Consulting.  Allin Consulting provides technical solutions
including custom development for IBM MVS proprietary environments and mainframe
development and support for Cobol, DB2, IMS DB/DC and CICS applications.

     Allin Consulting also provides specialized technology consulting services
for the banking industry, including conversions for mergers and acquisitions,
software product implementation, systems modification and support.  The banking
industry services are focused on development, implementation and management of
Hogan IBA software applications, which are specialized products for the banking
industry.  Allin Consulting is expanding its bank consulting services to
specialize in applications for deposits, lending, back office operations,
product/service offerings and delivery/alternate delivery.  Allin Consulting is
able to support current technology systems devoted to automatic teller machines,
call centers, interactive video kiosks, telephone and home banking operations.
Allin Consulting has also expanded its project management consulting services
for banking industry clients.

                                                                              10
<PAGE>
 
     Allin Consulting currently generates revenue from fees under its contracts
for technology consulting services for third party clients.  Services have
historically been provided on a time oriented rather than fixed price basis.
Allin Consulting also has provided 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 Systems business
unit and general technical support for all of the Company's operations.  The
scope and level of services provided to related entities declined significantly
in 1998 as compared to prior years as Allin Consulting has focused on third
party services and Allin Systems has increased the level of technical staffing
within its organization.

     Allin Consulting bases its operations in offices in Pittsburgh,
Pennsylvania, Oakland and San Jose, California and Cleveland, Ohio.  Allin
Consulting has moved its Pittsburgh consulting organization to the Company's
corporate headquarters.  Offices house management, marketing and administrative
personnel as well as providing training, development and general work space for
use by technical consultants.  Technical consultants primarily work at client
locations, although Allin Consulting also utilizes a virtual office concept,
outfitting consultants and engineers to effectively work from client locations,
their homes, its offices, and other locations.

     Allin Consulting's revenue (excluding intercompany revenue) accounted for
69% of the Company's consolidated 1998 revenue.  There were no Allin Consulting
customers individually accounting for 10% of Allin Consulting revenue

     Suppliers.   Allin Consulting's services are primarily labor intensive and
are provided by its consultants and engineers.  Allin Consulting maintains a
continual search and recruitment process through a dedicated recruiting staff,
referrals from consultants and industry contacts and through advertising and
other means as necessary.  Allin Consulting has not, to date, experienced undue
difficulty in recruiting qualified consultants, despite a general labor shortage
for technically skilled personnel.  Industry trends are resulting in a greater
level of technical services being performed by consulting firms, which
Management believes makes them more attractive for technically skilled
individuals.    Compensation for Allin Consulting's technical consulting staff
is primarily production based, resulting in a close correspondence of
compensation expense with increases or decreases in the level of services
performed.  This compensation basis minimizes, to the extent possible, the
economic risk associated with a potential downturn in Allin Consulting revenue.

     The computer hardware, software and supplies purchased to support Allin
Consulting's operations and consultants are readily available from a large
number of suppliers.

     Competition.  The technology 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.  Competitors include very large consulting
organizations such as Electronic Data Systems, Andersen Consulting, Computer
Sciences Corp., Vanstar and CompuCom.  Computer hardware and software
manufacturers and vendors also provide a significant level of computer
consulting services although these are generally oriented toward development and
support for their other products.  Companies such as IBM, Oracle, Sybase and
Ikon are in this category.  Management believes the larger competitors are
generally oriented to very large engagements.

     Management believes that Allin Consulting's strongest competition comes
from smaller regional or local consulting firms with service specialties similar
to Allin Consulting's and from smaller national organizations with strong
operations in the markets where Allin Consulting's services are concentrated.
In the Northeastern United States, competitors would include firms such as
Actium, Ciber, and Ciscorp.  In Northern California, competitors would include
firms such as Gateway Group, Servinet, Inacom Oakland, and PCS Networks. Allin
Consulting also faces competition for its specialized consulting services for
the banking industry from firms such as Moskowitz and Co. and Logica.

     Allin Consulting competes primarily on a service and performance basis.
Allin Consulting's customer-oriented approach seeks to develop long-term
relationships where Allin Consulting becomes the established consultant helping
customers solve their business problems through technology.  Management believes
Allin Consulting's competitive advantage is the quality and broad scope of
services that it can provide to customers.  Management believes the quality of
Allin Consulting's services is validated by its recent nomination as a Microsoft
Solutions Provider Partner of the Year.

                                                                              11
<PAGE>
 
     Allin Systems - Interactive Television, Digital Imaging and Computer
     Hardware and Software Sales

     Percentage of revenue (excluding intercompany revenue) derived from
interactive television and digital imaging services and computer hardware and
software sales  over the three years ended December 31, 1998 is as follows:

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31
                                                                      ---------------------------------------------
Percentage of Consolidated Revenue                                         1996            1997           1998
                                                                      --------------   -------------  -------------
<S>                                                                     <C>             <C>             <C>
Interactive Television:
     Systems Integration & Consulting                                       17%            39%             2%
     Transactional Revenue & Management Fees                                41%            20%            20%
Digital Imaging Systems Integration & Ancillary Products                     1%             1%             7%
Computer hardware & Software Sales                                           3%             2%             2%
                                                                      ---------------------------------------------

Total                                                                       62%            62%            31%
                                                                      =============================================
</TABLE>

     The three service and product offerings encompassing the Allin Systems
business unit are grouped together operationally because of their focus on
specialized integration services and products.  The three product and service
areas, however, represent distinct operations within the business unit and
provide services for different markets.  Accordingly, the services will be
discussed separately.

     Interactive Television

     Allin Systems currently focuses its marketing efforts for interactive
television toward system sales, and systems integration and consulting services
to the healthcare, education and cruise industries.  The following Industry
Overview discusses  these three industries.
 
     Industry Overview - Healthcare.  Healthcare is one of the most significant
segments of the American economy.  The Health Care Financing Administration's
Office of the Actuary projects domestic healthcare spending to grow from $1.0
trillion in 1996 to $2.1 trillion in 2007, when it is expected to account for
16.6% of gross domestic product.  Hospital services expenditures represent a
significant portion of overall healthcare spending, estimated at $383 billion
for 1998 and expected to grow to $649 billion by 2007, according to September
1998 projections by National Healthcare Expenditures.  There are approximately
6,500 acute care hospitals in the United States, according to the Standard &
Poor's Industry Survey for Healthcare: Facilities of May 7, 1998.  Over the next
three years, both private and public hospital services expenditures are
projected to grow, at average annual rates of 7.2% and 5.7%, respectively.
Hospital revenue faces continued pressure from an overall trend away from
inpatient services to ambulatory care and managed care driven both by changes in
Medicare and Medicaid and private insurers.  Controlling labor costs and
achieving more efficient labor utilization are expected to be key objectives for
hospitals.  The hospital industry has displayed interest in interactive
television with other vendors since the late 1980's, but patient objections to a
pay-per view model and technological difficulties in delivering effective
services have caused these efforts to fail.  The Company believes a market
exists for interactive television that can effectively deliver on-demand patient
and staff educational content, information about hospital services and
facilities, food service orders, patient surveys and entertainment.  Management
believes that interactive television that can effectively deliver these services
can both increase patient satisfaction and labor efficiency.  There can be no
assurance, however, that the Company will be effective at securing system orders
from the healthcare industry or that any orders received will result in the
desired improvements to financial condition or results of operations.

     Industry Overview - Education.  The U. S. Department of Education estimates
that there are approximately 16,500 school districts and dioceses with 103,000
public and private school buildings in the United States.  The U. S. Census
Bureau, Economic & Statistics Administration estimates primary and secondary
enrollment at approximately fifty million students as of 1996 and projects
enrollment growth for the next decade.  Technology in

                                                                              12
<PAGE>
 
educational settings has often been viewed as a peripheral subject to be studied
rather than a tool to be utilized to increase learning effectiveness in all
subjects. Technology in education has also been held back by a lack of universal
technology skills among faculty and relatively low priority for technology
expenditures to date. The Goals 2000: Educate America Act is expected to
substantially change the use of technology in education in the near future. The
Goals 2000 Act mandates that states develop plans for using technology to
support systemic reform and help students achieve high standards. In applying
this legislation, the U. S. Office of Educational Technology has mandated that
state plans provide access to modern computers and learning devices to all
students, electronic connection of classrooms to one another and to the outside
world, that educational software be an integral part of the curriculum and that
teachers be ready to use and teach with technology. T. H. E. Journal, an
educational industry publication, estimates that the Goals 2000 Act will result
in 48% increases in educational technology spending from 1998 to 2002, when
spending is forecast to be $3.7 billion annually. The Company believes new
technology spending will focus on wide area networks placing computer
availability in the classrooms and providing Internet and Intranet accessibility
and on-demand educational video content. Management believes the Company's
interactive applications can be readily adapted to an educational environment
and can be effective in helping education providers meet the requirements of the
Goals 2000 legislation. There can be no assurance, however, that the Company
will be effective in penetrating the education market, or that any sales in this
market will result in the desired improvements to financial condition or results
of operations.

     Industry Overview - Cruise Lines.  The cruise industry was the initial
market for the Company's interactive television system, with operations in this
industry since 1995.  The cruise industry is one the fastest growing segments of
the worldwide travel business.  The New York Times' Directory of Cruises
Worldwide (January 31, 1999 issue) cites industry analyst Bear, Stearns & Co.'s
projection of 10-11% growth in passengers during 1999 to approximately six
million. The New York Times article also notes The Cruise Lines Industry
Association, a cruise trade group, has projected cruise passenger levels of
seven million for 2000.  There can be no assurance, however, that the cruise
industry will experience continued growth and recent well publicized events
including a cruise ship fire and a reef accident may adversely affect industry
growth.   The cruise industry has responded to growing demand by building new
ships to increase their capacity.  The newer ships typically are significantly
larger than most of the ships in operation today and offer more passenger
amenities.  Allin Systems' management believes that the newer, larger ships that
are being developed within the cruise industry will require a heightened level
of automation to effectively service the larger number of cruise passengers.
Services such as shore excursion ticketing and room service ordering can be
effectively handled through interactive television, in addition to a wide range
of entertainment and informational options.  The Company's historical operations
within the cruise industry have resulted in the development of many applications
that could be readily implemented on new ships. The Company was the first
organization to successfully operate fully-installed digital interactive
television systems on cruise ships.  There can be no assurance, however, that
the Company will receive contracts for future interactive television
installations in the cruise industry, or that any sales will result in the
desired improvements to financial condition or results of operations.

     Operations. Late 1997 and the beginning of 1998 was a period of transition
for Allin Systems' interactive television operations.  Early 1998 also marked a
period of retrenchment for the operation of interactive systems  previously
installed on cruise ships on an owner-operator model dependent primarily on
transactional revenue.  During 1998, marketing efforts were fully oriented
toward the sale of interactive systems and systems integration services.  Late
in 1998, Allin Systems also began to offer consulting services specializing in
interactive media design and applications.  Target markets for these efforts
included new markets in the healthcare and education industries and continued
efforts with the cruise industry, where the majority of the Company's historical
interactive television operations have occurred.

     The Company believes demand for interactive services will increase in the
healthcare industry as private sector hospitals are driven to market better
services and state of the art systems, and that both private and public sector
hospitals will need to invest in labor saving tools such as interactive systems
to improve the efficiency of reduced staffs by facilitating more efficient flow
of information and order processing and a more flexible training process.  The
Company believes a market exists for an interactive television system that can
effectively deliver on-demand patient and staff educational content, information
about hospital services and facilities, food service orders, patient surveys and
entertainment.  Management believes that interactive television that can
effectively deliver these services can both increase patient satisfaction and
labor efficiency.  During 1998, Allin Systems sold its first healthcare-based
interactive system.  The installation was for a new Mayo Clinic hospital in
Phoenix, Arizona and

                                                                              13
<PAGE>
 
was completed in October 1998. Interactive features implemented with this system
include on-demand viewing of digitally stored video content related to medical
conditions and treatments, training and continuing education video content for
hospital staff, multiple language capability and forwarding and playback
capabilities.

     The Company believes that an education industry market is emerging for
interactive systems that can facilitate wide area networking connections,
Internet and Intranet accessibility and that utilize on-demand educational video
content that is both digital and analog based.  The Company believes that the
interactive television applications Allin Systems has developed and implemented
in the cruise and healthcare markets are well suited for application to the
education industry.  The Company's interactive services can enable school
districts to create centralized multimedia libraries with teacher controlled on-
demand access, increase accessibility of educational content and on-line testing
to students and centralize administrative content distribution.  Allin Systems
began marketing to the education industry during the second half of 1998 and has
not to date installed any interactive system in an educational setting.

     In early 1999, Allin Systems engaged one independent marketing consultant
with extensive experience in the education industry to lead sales efforts to
this industry and to pursue relationships with existing educational content
system providers.  Allin Systems anticipates that it will pursue healthcare
sales efforts on multiple fronts including direct sales to individual hospitals
and large healthcare organizations operating multiple hospitals and development
of distribution relationships with other system integrators specializing in
healthcare.  Allin Systems lacks a history of recurring interactive television
sales to the healthcare and education industries, however, so there can be no
assurance that the Company will be effective at securing system orders from
customers in these industries or that any orders received will result in the
desired improvements to financial condition or results of operations.

     The majority of historical activity for Allin Systems' interactive
television and systems integration services has been concentrated in the cruise
industry.  Services provided for the cruise industry remained the dominant
operating activity during 1998 despite the reorientation of marketing efforts to
include additional target industries as described above.  Allin Systems
continued to market the sale of interactive systems to cruise lines during 1998
although no new systems were installed and no additional orders were received.
Allin Systems sold and installed a complete interactive television system on one
cruise ship in 1997. Management believes that the newer, larger ships that are
being developed within the cruise industry will require a heightened level of
automation to effectively service the larger number of cruise passengers.
Services such as shore excursion ticketing and room service ordering can be
effectively handled through interactive television, in addition to a wide range
of entertainment and informational options.  The Company's historical operations
within the cruise industry have resulted in the development of many applications
that could be readily implemented on new ships.  The Company believes that its
extensive experience with operating interactive systems on cruise ships gives it
a competitive advantage over competitors for system sales within the cruise
industry.  There can be no assurance, however, that this advantage will result
in additional system sales or that any sales made will result in the desired
improvements to the Company's financial condition or results of operations.

     In addition to interactive television system sales on a systems integration
basis, Allin Systems has undertaken the marketing of consulting services related
to interactive television technology during 1998.  In late 1998, Allin Systems
received a consulting engagement to prepare design specifications for an
interactive television system anticipated to be installed on a new cruise ship
being built in 1999.

     Revenue from interactive television operations on cruise ships during 1998
resulted primarily from transactional interactive services such as pay-per-view
movies and video gaming, and from management fees derived from cruise lines for
operation of the systems. The cruise industry interactive television system
provides cruise passengers with a variety of services, including video gaming,
on-demand pay-per-view movies, shore excursion information and ticket
purchasing, room service and wine ordering, ship information and account review.
Allin Systems began 1998 operating interactive systems on a total of eleven
cruise ships, including five Celebrity Cruises, Inc. ("Celebrity") ships, two
Carnival Cruise Lines ("Carnival") ships, one Norwegian Cruise Lines ("NCL")
ship, and three Royal Caribbean Cruise Lines, Ltd. ("RCCL") ships.  On March 20,
1998, the Company reached a mutual agreement with RCCL to terminate its contract
for interactive television services aboard the three RCCL ships on which it
operated.  Operations for these three systems ceased in the second quarter of
1998.  Allin Systems continued operation of the other eight systems throughout
1998.  Operation of the interactive television system aboard the NCL ship
Norwegian Dream is scheduled to cease in April 1999.

                                                                              14
<PAGE>
 
     Allin Systems discontinued installation of interactive television systems
on a concessionaire basis during 1997.  At that time, the Company determined
that the revenue realized from system transactions was inadequate to justify
continued operation of the systems without additional revenue sources.  In late
1997, agreements were reached providing for management fees for system operation
with Celebrity, Carnival, NCL and RCCL.  The various cruise line agreements
allow certain lines to discontinue services or management fees at certain points
in time or 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 in 1999 or any following periods.  Management
determined that Allin Systems would cease operating any systems where management
fees were terminated unless operating history for that system indicated positive
operating cash flow could be maintained without the fees.  Termination of
management fees was a central issue in ceasing operation of the RCCL interactive
systems.  Similarly, NCL was able to discontinue management fees after December
31, 1998 at its option and NCL notified the Company of its intent to do so.
Allin Systems will cease operation of its system on the Norwegian Dream in April
1999.  The Company and NCL have agreed on an interim reduced management fee for
the period January to April 1999.  Transactional revenue and management fees
have been or will be lost for the RCCL and NCL ships following termination of
services.  During the year ended December 31, 1998, transactional  and
management fee revenue and gross profit derived from operations for RCCL
represented approximately 2.3% and 4.9% of the Company's consolidated revenue
and gross profit, respectively.  During 1998, transactional and management fee
revenue and gross profit derived from operations for NCL represented
approximately 1.1% and 2.4% of the Company's consolidated revenue and gross
profit, respectively.  See Note 19 in the Notes to Consolidated Financial
Statements in Item 8 - Financial Statements and Supplementary Data for
additional information regarding the RCCL and NCL contract terminations.

     Allin Systems sought alternate productive use for equipment removed from
discontinued ship-based interactive system installations.  The Company was not
able to secure alternate deployment for most of the equipment despite extensive
efforts in this regard.  During the third quarter of 1998, the Company
accordingly recorded a loss to writedown equipment removed from ships, as well
as equipment associated with three interactive systems, including the Norwegian
Dream system, for which there are no long-term commitments for management fees
and for which the continuation of future operation is uncertain.  Detailed
information concerning the writedown of assets is included in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations and in the Notes to Consolidated Financial Statements in Item 8 -
Financial Statements and Supplementary Data.

     Under its ITV system contracts with cruise lines, Allin Systems shares with
the host cruise line a portion of the revenue the system generates from the sale
to passengers of various pay services.  Revenue sharing terms provide for the
Company to receive the majority of revenue until an amount attributed to the
Company's installation costs has been recovered, after which point the cruise
line is entitled to receive an increased share.  Based on revenue attribution
through December 31, 1998, no significant change in revenue sharing percentages
is expected during 1999 for any Carnival or Celebrity ships. NCL is not
currently sharing in transactional revenue generated by the system in place on
the Norwegian Dream and is not expected to receive any revenue sharing prior to
termination of operation of this system in April 1999.

     During 1998, Allin Systems' interactive television operations were
conducted primarily through technical and administrative personnel based in its
Ft. Lauderdale, Florida office and through system operators located onboard the
ships on which systems were in operation.  Installation of the Mayo Clinic
system was performed on site in Phoenix, Arizona.  It is anticipated that 1999
operations will be conducted in a similar manner.  It is also expected that
technical personnel based with the Florida operations will be primarily
responsible for any interactive system installations Allin Systems is successful
in obtaining during 1999 in any other industries.

     During 1998, Allin Systems' interactive television operations accounted for
22% of the Company's consolidated revenue.  Interactive television revenue is
currently dependent upon a limited number of customers.  The loss of any such
customer could have a material adverse effect on the Company's business,
financial condition and results of operations.  The April 1998 termination of
operations aboard three RCCL ships materially reduced transactional revenue such
as pay-per-view movies and gaming.  In 1998, one cruise line customer,
Celebrity, accounted for 12% of the Company's consolidated revenue.  Three
customers, Celebrity, Carnival and RCCL, accounted for 54%, 20%, and 13%,
respectively, of 1998 interactive television revenue.

                                                                              15
<PAGE>
 
     Each of the Company's interactive system contracts with Carnival and
Celebrity is subject to renewal by mutual consent of the parties at the
expiration of the initial term.  The terms of the remaining contracts range from
December 2000 to November 2002.  The Carnival contract provides for rights to
early termination under certain conditions and with notice and discontinuation
of management fees after specified notice periods.  A decision by Carnival or
Celebrity to discontinue their agreements with the Company at the contractual
expiration date or by Carnival to discontinue earlier could have a material
adverse effect on the Company.

     Technological Improvements; Research and Development.  The Company's
continued efforts to improve its interactive television capabilities during 1998
included improvements to video server operating software, development of
healthcare related interactive applications including video forwarding and
playback capabilities and improvements in advertising content display.  The
Company also undertook research to evaluate potential technological improvements
to the functionality of end user system components.  The Company evaluated
internal development and implementation of these improvements as well as
potential external sources for end user components that would offer the desired
improvements to system functionality.  During the course of this process,
research indicated that technology produced by On Command Corporation ("On
Command") could provide an advanced interactive system capable of offering end
user and head end functionality improvements in delivering the Company's
interactive applications. Consequently, in January 1999, the Company entered
into a Supplier Agreement with On Command.  See Suppliers below.  The Company
discontinued internal research and development efforts related to end user
components and systems once the potential availability of the On Command product
was ascertained.

     The Company expects interactive television research and development
activities during 1999 to focus on four areas.  Integrating On Command
technology with Allin Systems' interactive television applications will require
modifications to existing, or development of new, software interfaces.  Any new
system orders obtained will necessitate some modification of existing content
and applications or development of new interactive applications that meet the
specific needs of the client.  Module development and modification of this type
will only be conducted as system or consulting business is obtained.  Allin
Systems intends to pursue development of interactive applications based on
NetShow Theatre, an emerging Microsoft product for delivering broadcast-quality
video content to personal computer networks.  The fourth anticipated area of
development will focus on delivery of interactive content and services across
additional types of information networks, although the Company does not
anticipate significant investment in this initiative without system orders based
on alternate network types or support of research efforts by interested
technology industry parties.  Allin Interactive is currently working with Fore
Systems, Inc. on development of interactive applications for ATM networks.

     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 believes that its strategy of concentrating on integration services and
applications and content development for other suppliers' interactive technology
minimizes this risk.

     Suppliers.  The Company uses readily available hardware and software in its
systems to the extent possible to help to ensure ready availability of
components.  The Company does not manufacture the hardware components it uses
and has one or more sources of supply for all such components.  The Company
purchases components through purchase orders and does not have long term supply
contracts, except for the On Command agreement described below.

     The Company has recently entered a Supplier Agreement with On Command for
end user and other interactive television components to be used in future system
installations utilizing radio frequency based networks. Under the Supplier
Agreement, On Command has agreed to exclusively sell Allin Interactive its
proprietary components for use in certain markets and an exclusive license to
use certain software necessary to operate the On Command equipment in these
markets. Under the agreement, On Command may request a license to use any
modifications to the On Command software developed by the Company. The Company
believes the On Command product offers substantial functionality improvements
over components previously used in certain areas such as end user components.


                                                                              16
<PAGE>
 
     The Company has entered into agreements with distributors of motion
pictures for non-theatrical viewing under which the distributor licenses to the
Company the right to make pay-per-view movies available on the Company's
interactive television system.  Payment to the distributors is based on revenue
derived from the sale of such movies on the Company's interactive television
system or on a fixed price basis for certain time periods.  The distributor pays
the associated royalties to the motion picture studios and other third parties.
Although a specific title may be available from a single source, the Company
does not anticipate that it will experience difficulty in obtaining these
products.

     Competition.  The interactive services industry is in the early stages of
its development. The Company competes with numerous other companies utilizing
various technologies and marketing approaches, and the Company anticipates that
additional competition will develop in all of the markets that the Company is
targeting. A number of these competitors are larger than the Company and have
greater financial and other resources. The Company is unable to predict the
level of competition that will actually develop and the time frame in which it
will develop.

     In the healthcare market, the Company is aware of several competitors
developing interactive systems specifically for a health care environment.  The
Company believes the most prominent of these is Telehealth Services.  The
Company is not aware of competitors in the education market with fully digital
interactive systems capable of being networked over a variety of communications
systems similar to the Company's.  The Company believes the main source of
competition currently comes from analog-based media retrieval systems provided
by Dukane, Rauland-Borg, and Dynacom.  In the cruise line market, primary
competition comes from The Network Connection, which entered into an agreement
with Carnival for at least one ship system.  The Company believes that the
initial system under this agreement was recently installed at substantial
capital commitment by The Network Connection.

     The Company believes that its strategy of focusing on integration services
and applications and content development for other suppliers' interactive
technology provides it with a competitive advantage associated with a more
diverse product offering.  However, there can be no assurance that competitors,
some of which may have greater financial resources than the Company, will not
enter the field or successfully compete with the Company.  There can also be no
assurance that competition will be solely for system sales as interactive
competitors, including the Company, have at certain times been willing to make
significant capital commitments to obtain system installations.  Allin Systems
no longer competes on this level.

     Allin Systems - Digital Imaging

     Industry Overview.  Digital imaging involves the capture of images in, or
conversion of images to a digital format, the manipulation and storage of images
in a computer, the printing of images via digital printers, and the transmission
of the images over electronic networks.  Digital imaging equipment has been
developed which permits the capture of digital images instantly without the need
for film or the chemical development process. Once an image is stored in a
computer, software can be used to manipulate and enhance the image in various
ways such as changing the size, rotating it, or changing the color, saturation,
or density.  The September 1998 Standard & Poor's Monthly Investment Review
Industry Survey: Photography/Imaging foresees a long-term convergence between
photography and computer technology. Digital photography is currently utilized
by a relatively small portion of photography studios nationally, but Management
believes its use is growing and expects it to rapidly increase over the next
five to ten years as the cost of digital photography hardware and software
decreases and the benefits to photography studios and their customers become
more widely recognized.  The Company believes that digital photography's
fundamental advantages over conventional wet photography in the areas of image
manipulation and enhancement, new product creation, and image transmission and
storage are likely to become increasingly pronounced allowing for improved
consumer product and process satisfaction, improved image processing time and
reductions in processing labor.  The Company expects that within ten years, the
professional portraiture industry will have a significant migration from
conventional wet photography to digital systems.

     Operations.  The Company's expertise in the use and configuration of
digital photography systems allowed Allin Digital to establish itself as a
viable participant in the professional photography digital systems

                                                                              17
<PAGE>
 
integration market in 1998. The Company's management intends to continue its
commitment to the pursuit of systems integration opportunities in digital
photography, due to its consistency with the Company's organizational objectives
to focus on consulting and integration services and management's belief that it
is an area where the Company can be competitive. The member businesses of the
Professional Photographers of America continue to be identified as the target
market for Allin Digital. These photography operations typically represent
larger, more established businesses utilizing more master photographers than the
rest of the industry. Allin Digital initiated marketing activities in mid-1998
to address this target group of businesses, including the use of internal
marketing personnel and national trade show activity. In addition, Allin Digital
uses an exclusive commission-based referral arrangement with an individual
nationally known for his expertise in digital photography and who also operates
a digital imaging education center. Based on these marketing activities, Allin
Digital completed systems integration for seventeen digital photography systems
nationally in 1998, its first year of operations of this type. Allin Digital
previously conducted retail digital photography operations.

     Conversion to a digital system is a significant commitment for Allin
Digital's targeted customers and their system purchase represents a purchase
that will be made on a non-recurring basis.  Allin Digital thoroughly evaluates
a potential customer's needs and operational plans in preparing proposed system
configurations and quotations.  Systems integration projects have to date been
conducted on a fixed price basis.  Allin Digital's growth is dependent on
continued identification and effective marketing to new customers.  Allin
Digital attempts to maintain the relationships it establishes with secured
clients in order to be the source of digital consumable supplies and ongoing
technical support and system upgrades.  Allin Digital has been effective to date
at generating ancillary sales from the majority of customers for which it has
performed systems integration services.  Through this strategy, the Company
seeks to build a base of recurring revenue while continually focusing on
customer satisfaction and the opportunity for the development of additional
business through referrals, although there can be no assurance that increases in
revenue will be realized.

     The hardware and software configurations Allin Digital provided for systems
integration customers in 1998 utilized, for the most part, readily available
"off the shelf" components purchased from third parties.  However, Allin Digital
released a proprietary portrait viewing and selling system in August, 1998 named
Portraits Online.  This product, sold as a digital system add-on, allows the
portrait studio's customers to view and order their portraits on a touchscreen
monitor immediately following their portrait session.  In addition, the system
gives the consumer the ability to access and order their images via the
Portraits Online Internet site.  The Company believes the Portraits Online
features offer it a competitive advantage over competing integration services
because of the functionality and sales opportunity advantages it presents to
potential customers.  There can be no assurance, however, that the Company will
be successful in generating increased sales because of the Portraits Online
system or that sales obtained will result in the desired improvements to the
Company's financial condition or results of operations.  There can also be no
assurance that competitors will not develop similar or superior products which
may adversely affect Allin Digital's sales efforts.

     Allin Digital Imaging's operations are managed from the Company's
Pittsburgh, Pennsylvania office while installations are performed at the
respective clients' locations.  Technical resources necessary for installations
and technical support are obtained by utilizing Allin Interactive, Allin
Consulting, and independent contractors.

     Revenue has not been dependent on a limited number of customers and no
single customer accounted for 10% of digital imaging revenue in 1998.

     Research and Development.  The Portraits Online system was developed
through modification of the Company's previous research and development efforts
in the areas of card swipe technology utilized for immediate access and viewing
of images on monitors, and database image archiving technology utilized for
image access through the Internet.  Development efforts in 1998 were focused on
adapting previously developed operating systems for differing hardware and
software configurations used in Allin Digital's customer system installations.
The Company expects that further research and development efforts in 1999 will
be focused on Portraits Online system improvements, added functionality, and
modifications necessary to integrate additional "third party" software and
hardware components necessary to expand Allin Digital's product portfolio.

     Suppliers.  The Company does not manufacture the hardware components it
uses in conjunction with its systems integration services in digital photography
and has one or more sources of supply for all such components.  Similarly, the
third party software utilized in these projects is widely marketed and readily
available from a number

                                                                              18
<PAGE>
 
of suppliers. The Company purchases and intends to continue to purchase
components through purchase orders and does not have long term supply contracts.
The Company plans to use readily available hardware and software in its
activities to the extent possible to help ensure ready availability of
components. The Company believes that reasonable alternative sources of supply
currently exist for all components.

     Competition.  The market for digital imaging systems integration services,
primarily for conversion of established businesses from use of conventional wet
photography to digital imaging technology, is small at present.  The market is
expected to grow rapidly over the next five to ten years as the pace of the
expected industry wide conversion grows.  Desktop Darkroom and Calumet
Photographic are currently the Company's major competitors.  The rest of the
competition is fragmented among small providers, typically local or regional
stockhouses specializing in marketing photographic products and services to
commercial photography businesses.  These stockhouses currently place primary
emphasis on products and services related to conventional wet photography, as
this method is still in predominant usage.  The Company believes that its
specialized focus on digital imaging systems will be advantageous in competing
with the stockhouses and will help to mitigate their advantage of having prior
established relationships with existing photography businesses.  Allin Digital
competes on the basis of quality of service and believes the Portraits Online
system currently offers it a competitive advantage.
 
     Allin Systems - Computer Hardware and Software Sales

     Industry Overview.  The market for computer hardware and software sales is
a significant component of the American and worldwide economies.  Standard &
Poor's Industry Surveys for Computers: Hardware (February 26, 1998), Networking
Equipment (August 6, 1998) and Software (September 17, 1998) estimate the
worldwide market size as exceeding $500 billion annually.  These surveys foresee
continued rapid growth in networking equipment and software, but slowing growth
in hardware sales. The hardware and software market is very diverse in the types
of organizations participating, ranging from giant manufacturers employing
direct sales, to retail stores specializing in computer products, to hardware
and software being one of multiple product lines offered by other retail or
consulting businesses.

     Operations.  Allin Systems' historical operations for computer product
sales have been predominantly in support of related companies.  Third party
business has been primarily obtained in connection with Allin Consulting
engagements for consulting services.  The Company expects this pattern to
continue in 1999, but expects that the growth in scope and size of its
consulting operations will generate opportunities for growing its business in
hardware and software sales.  The Company 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.
During 1999, the Company intends to seek to expand this supplier base to further
enhance its available products and its opportunities for attractive pricing.

     Allin Systems' product offerings include most computer-related hardware and
software available in the marketplace.  It has historically maintained very
little in inventory, relying on product availability and prompt delivery from
its suppliers.  This practice is expected to continue.  Hardware and software
sales operations are conducted from the Company's Oakland, California and
Pittsburgh, Pennsylvania offices.

     During 1998, two customers accounted for 26% and 11%, respectively of
computer hardware and software sales.

     Suppliers.  The products sold by Allin Systems are readily available from a
large number of sources.  The company has historically purchased a substantial
portion of its products from one supplier due to pricing advantages offered
through volume purchasing.  The Company is seeking to expand its supply sources
in 1999.

     Competitors.  As noted above, the numbers and types of entities selling
computer related hardware and software products are numerous and diverse.  Some
computer manufacturers, such as Gateway and Dell, sell equipment directly to
clients.  Hardware and software products are readily available at a number of
retail outlets specializing in these types of products, such as CompUSA, but can
also be obtained from retailers as diverse as department stores, bookstores, and
office supply outlets.  Additionally, there are a large number of computer
consultants that also sell hardware and software.  The Company believes that
Allin Network's relationships with

                                                                              19
<PAGE>
 
affiliates will continue to be the predominant source of customers and this
referral source is expected to serve as a competitive advantage with those
customers.

     The information following in the remainder of this Narrative Description of
Business pertains to the operations of the Company as a whole, unless otherwise
indicated.

     Research and Development; Capital Expenditures

     During 1998, the Company expensed approximately $152,000 for software
development, principally for enhancement of Allin Interactive's video server
technology, healthcare related interactive application development, preliminary
research regarding end-user interactive components and continued development of
Allin Digital's image retrieval and archival technology.  An additional $20,000
of software development was capitalized, primarily related to digital imaging
technology.

     During 1997, the Company expensed approximately $212,000 for software
development, principally for enhancement of Allin Interactive's interactive
television technology and development of Allin Digital's digital imaging
technology.  An additional $48,000 of software development was capitalized
related to certain upgrades related to Allin Interactive's interactive
television system.

     During 1996, the Company expensed approximately $949,000 and capitalized
$216,000 for software development, principally for enhancement Allin
Interactive's interactive television system, and development of Allin Digital
Imaging's digital imaging technology.  Other development was focused on software
and other product applications to be presented to participants in other business
markets.

     Employees

     As of February 28, 1999, the Company employed approximately 170 people and
utilized the services of approximately 40 independent contractors.  None of the
employees are covered by a collective bargaining agreement. The Company has
never experienced a strike or work stoppage and believes its relationship with
its employees to be good.

     Marketing and Sales

     The Company's marketing and sales efforts are directed toward several
distinct groups: customers in need of technology consulting, software
development or network solutions services, customers that will utilize the
Company's systems integration services in interactive television and digital
photography, and customers interested in purchasing computer hardware or
software.

     The Company has eight dedicated sales and marketing personnel among its
subsidiaries.  Seven focus on technology consulting, software design and network
solutions.  One currently focuses on interactive television customers.   Certain
of the Company's operational executives also devote a significant portion of
their duties to sales and marketing efforts related to the Company's interactive
television, digital imaging and specialized bank industry technology consulting
operations.  Allin Systems additionally has  sales referral arrangements in
place with two parties, one focusing on interactive television and one focusing
on digital imaging.

     Government Regulation

     The Company's interactive television systems in operation for the cruise
industry currently offer games of chance to ship passengers while operating in
international waters. However, such gaming cannot be offered while the ship is
in any United States port and it cannot be offered in any United States land
based application of the interactive television system at this time.

                                                                              20
<PAGE>
 
(d)   Financial Information About Geographic Areas

     Financial information about geographic areas in which the Company operates
is included in Note 23 of the Notes to the Company's Consolidated Financial
Statements included herein in Item 8 - Financial Statements and Supplementary
Data.

(e)    Forward Looking Statements

     Item 1 - Business, Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations, Item 7A - Quantitative and
Qualitative Disclosures about Market Risk and other sections of this Annual
Report on Form 10-K 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 Section 21E of the Securities Exchange Act of 1934,
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 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.
 
     Integration of Acquired Entities.  The Company acquired the operations of
Allin Consulting-Pennsylvania in August 1998.  The Company additionally acquired
MEGAbase in November 1998 and subsequently merged it into Allin Consulting-
California.  The Company intends to operate all of these entities in its Allin
Consulting business unit and to undertake joint marketing, recruiting and
training programs for all entities.  Additionally, the Company seeks to promote
an orientation toward common practice disciplines and methodologies across its
consulting operations.  Furthermore, the Company intends to utilize the
technical expertise of individuals in Allin Consulting-California and Allin
Consulting-Pennsylvania for the benefit of the entire business unit.  Allin
Consulting-California, Allin Consulting-Pennsylvania and the former MEGAbase
have no prior history of joint operations and there can be no assurance that the
entities will be able to effectively carry out joint efforts.  Failure to do so
may result in reduced revenues or earnings for the Allin Consulting business
unit and the Company.
 
     Need for Management of Growth and Geographic Expansion.   The Company's
growth strategy will require its management to conduct operations, evaluate
acquisitions 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 technology consulting, software development
and network solutions.  Allin Consulting has substantially expanded the
geographic scope of its operations in the Northeastern United States through the
acquisition of Allin Consulting-Pennsylvania, with offices in Pittsburgh,
Pennsylvania and Cleveland, Ohio.  Furthermore, Allin Consulting's specialized
banking industry technology consulting services operate on a national scope.
Allin Consulting has also experienced 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.  There can be no assurance, however, that Allin
Consulting will be successful at identifying or acquiring other businesses, or
that any business that may be acquired will result in the desired improvements
to financial results.  Allin Systems is marketing interactive television and
digital photography services nationally and intends to undertake installations
throughout the United States, 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.

     Dependence on Key Personnel.   The Company's success is dependent on a
number of key management, research and operational personnel for the management
of consulting operations, development of new markets and products and timely
installation of its systems.  The Company's  reorientation of marketing
strategies and operations during late 1997 and 1998 has also resulted in certain
key executives assuming different or additional

                                                                              21
<PAGE>
 
responsibilities for the Company's operations. 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.
 
     Competitive Market Conditions.  The technology 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 also large
national or multinational firms competing in this market.  Rapid rates of change
in the development and usage of computer hardware, software, Internet
applications and networking capabilities will require continuing education and
training of the Company's technical consultants and a sustained effort to
monitor developments in the technology industry to maintain services that
provide value to the Company's customers.  The Company's competitors may have
resources to develop training and industry monitoring programs that are superior
to the Company's.  There can also 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..   The market for interactive television and digital imaging systems
integration services is new and rapidly evolving.  The types of interactive
television systems and applications offered by the Company are significant
capital expenditures for potential customers and do not have proven markets.
Some 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.

     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 or systems integration engagements or the acquisition of businesses.
Accordingly, quarterly revenue and operating results will be difficult to
forecast, and the Company believes that period-to-period comparisons of its
operating results will not necessarily be meaningful and should not be relied
upon as an indication of future performance

     Recent Net Losses and Accumulated Deficit. The Company sustained
substantial net losses during the years ended December 31, 1996, 1997 and 1998
and, as of December 31, 1998, had an accumulated deficit of $27,752,000.  Allin
Interactive has recognized net losses since inception in 1994 primarily because
of the limited revenue generated from its interactive television operations.
The Company anticipates that it will continue to incur net losses at least
through all or a portion of 1999, and there can be no assurance that it will be
able to achieve revenue growth or profitability on an ongoing basis in the
future.

     Liquidity Risk.  During the fourth quarter of 1998, the Company's cash
position declined significantly due to the usage of operating working capital to
fund a portion of the retirement of a note payable associated with the
acquisition of Allin Consulting-Pennsylvania.  The cash decline has been
mitigated somewhat by the Company obtaining a line of credit facility during the
same time period.  The credit facility expires in September 1999 and no
assurance can be given that the Company will be able to renew or replace the
facility on similar terms or at all.  While the Company's management believes
the acquisition of Allin Consulting-Pennsylvania has to date improved operating
cash flow and expects this to continue, there can be no assurance that a
prolonged downturn in operations or business setbacks to Allin Consulting-
Pennsylvania or the Company's other operating entities will not result in
working capital shortages which may adversely impact the Company's operations.

     Limited Operating History Under Reorganization of Allin Systems Operations
and New Marketing Strategies.  The Company fundamentally changed the marketing
strategies of Allin Systems with respect to its interactive television
operations during mid-1997 and with respect to its digital photography
operations in February 1998.  Allin Systems 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 one system installation for a hospital.  Allin
Digital 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

                                                                              22
<PAGE>
 
strategies for Allin Systems, 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.

     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 entered 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 additional business
obtained will generate improvements to the Company's profitability or cash flow.

     Risks Inherent in Development of New Products.  The Company is currently
developing software interfaces and modifications for end-user operating systems
for the On Command end user operating components to be utilized in future
interactive system installations.  The Company believes usage of the On-Command
equipment could result in fundamental improvements to the functionality of the
end user system components.  The Company also intends to conduct research and
development activities in other areas to improve its products and systems or to
extend their availability to additional types of communication networks.  There
can be no assurance, however, that such projects will result in improved
functionality of the Company's interactive or digital imaging systems 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 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, 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 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 Company has been informed
by NCL that it plans to discontinue payment of management fees for the system
aboard the Norwegian Dream subsequent to December 31, 1998.  Operation of this
system is scheduled to terminate in April, 1999.  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 installation agreements that may be any
obtained will be on terms as favorable as present.

     Proprietary Technology; Absence of Patents. 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

                                                                              23
<PAGE>
 
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.

     Year 2000 issue.  Currently, the Company believes that the most reasonably
likely sources of risk to the Company include (1) the disruption of revenue
production from its interactive television systems aboard cruise ships, through
failures in the systems or the failure of the cruise lines' shipboard billing
systems; (2) the inability of principal product suppliers to be Year 2000 ready,
which could result in delays in deliveries from such suppliers, and; (3) the
possibility that Year 2000 issues develop in interactive systems sold by the
Company or in any future sales.   The Company's Year 2000 issues and any
potential business interruptions, costs, damages or losses related hereto are
dependent, to a significant degree, upon identification and remediation of
deficiencies and the Year 2000 compliance of third parties, both domestic and
international, such as vendors and suppliers.  If the Company is unable to
successfully identify and timely remediate Year 2000 problems or the level of
timely compliance by key suppliers and service providers is not sufficient, Year
2000 failures could have a material impact on the Company's operations
including, but not limited to, increased operating costs or other significant
business disruptions.  See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations under Year 2000 Issue.

     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.

     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.

                                                                              24
<PAGE>
 
Item 2 - Properties

     Allin Corporation's principal executive offices are located at 400
Greentree Commons, 381 Mansfield Avenue, Pittsburgh, Pennsylvania 15220 in
leased office space.  Allin Consulting's Pittsburgh-based management, marketing
and administrative personnel moved into a portion of the Greentree Commons
office space in February 1999, primarily utilizing office space vacated by
SportsWave, Inc. personnel after the sale of that subsidiary.  The Company is
attempting to sublet or negotiate a lease termination for the suburban
Pittsburgh office space previously occupied by Allin Consulting personnel. The
Company's principal executive offices are also the location of Allin Systems'
digital imaging business and the Pittsburgh-based portion of its computer
hardware and software business.

     Allin Consulting's technology consulting operations also utilize leased
office space in San Jose and Oakland, California and Cleveland, Ohio.  In early
1999, Allin Consulting relocated the personnel added with the MEGAbase
acquisition to its San Jose office.  A new tenant for the former MEGAbase leased
office space in Mountain View, California has been obtained, eliminating any
continuing obligation for the former MEGAbase office space.  The Cleveland
office houses management and administrative personnel for Allin Consulting's
specialized banking industry technology consulting services.  Allin Consulting
closed a small office located in Erie, Pennsylvania in February 1999.  The Erie
office had been leased on a month-to-month basis.

     Allin Systems' interactive television operations are located in leased
office space in Ft. Lauderdale, Florida.  Allin Systems also utilizes a portion
the Company's Oakland office space for its computer hardware and software
business.

     All of the Company's leased offices currently in use are fully utilized.
All of the leased properties are suitable and adequate to meet the
organization's needs as of December 31, 1998.  As noted previously, office space
formerly occupied by Allin Consulting in Pittsburgh is not currently being
utilized and the Company is attempting to sublet or negotiate a lease
termination.  The lease for this office space will expire in December 2000.

                                                                              25
<PAGE>
 
Item 3 - Legal Proceedings

     The Company from time to time is involved in litigation incidental to the
conduct of its business.  There are no pending legal proceedings to which the
Company or any of its subsidiaries is a party, or to which any of their
respective properties is subject, for which any material adverse judgement is
considered probable.

                                                                              26
<PAGE>
 
Item 4 - Submission of Matters to a Vote of Security Holders


   (a)  A Special Meeting of the Stockholders of the Company was held on
        Thursday, December 31, 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 Special Meeting:

          Proposal 1:  To approve the issuance of shares of the Company's Common
                       Stock upon the conversion of outstanding shares of the
                       Company's Series B Redeemable Preferred Stock.

          Proposal 2:  To approve the issuance of shares of the Company's Common
                       Stock upon the exercise of certain outstanding warrants
                       to purchase shares of common stock.

          Proposal 3:  To approve the issuance of shares of the Company's Common
                       Stock upon the conversion of a certain outstanding
                       promissory note in the principal amount of $2,000,000.

          Proposal 4:  To approve an amendment to the Company's Certificate of
                       Incorporation which would change the Company's corporate
                       name to Allin Corporation.

          Proposal 5:  To approve the 1998 Stock Plan of the Company.


          Results were as follows:

<TABLE>
<CAPTION>
                                     Votes For     Votes Against   Votes Abstaining    Shares Non-Voted
                <S>                  <C>            <C>             <C>                <C>           
                Proposal 1              4,065,265          28,789                800             647,660
                Proposal 2              3,663,674         430,380                800             647,660
                Proposal 3              3,663,624         430,430                800             647,660
                Proposal 4              4,729,314          12,400                800                   0
                Proposal 5              4,030,492          63,562                800             647,660
</TABLE>

                     There were a total of 5,987,462 shares of the Company's
                     Common Stock eligible to vote at the Special Meeting.
 
          (d)    Not applicable.
 

                                                                              27
<PAGE>
 
Part II


Item 5 - Market for Registrant's Common Equity and Related Shareholder Matters

     Allin Corporation's Common Stock began trading on the Nasdaq National
Market tier of The Nasdaq Stock Market in November 1996 under the symbol "ALLN".
During 1998, the high and low closing prices per share of the Common Stock as
reported by Nasdaq were $4 7/8 and $3 1/8, respectively.  On March 3, 1999,
there were approximately 104 record holders of the Common Stock.  Record holders
do not include owners whose shares are held only in street name by a broker or
other nominee.

     Quarterly high and low closing prices per share of the Common Stock as
reported by Nasdaq during 1997 and 1998 were as follows:

<TABLE>
<CAPTION>
High and Low Closing Prices Per Share of Common Stock           Quarterly High          Quarterly Low
             as Reported by Nasdaq                                    Price                Price
<S>                                                             <C>                     <C>
First Quarter 1997                                                    21 1/2              13 1/2
Second Quarter 1997                                                    9 1/2               2 3/8
Third Quarter 1997                                                     4 1/4               2 5/8
Fourth Quarter 1997                                                        5               3 1/2
 
First Quarter 1998                                                     4 7/8               3 5/8
Second Quarter 1998                                                    4 3/4               3 3/4
Third Quarter 1998                                                     4 5/8               3 1/4
Fourth Quarter 1998                                                    4 1/4               3 1/8
</TABLE>

     There have been no dividends declared on the Common Stock since the
inception of the Company. The Company has no intention to declare dividends on
its Common Stock in the near future.  A Loan and Security Agreement between the
Company and S&T Bank, dated as of October 1, 1998, prohibits the Company from
declaring or paying dividends on any shares of its capital stock, except for
current dividends payable in the ordinary course of business on the Company's
Series B Redeemable Preferred Stock.  The Loan and Security Agreement has an
initial term of one year.

     On November 20, 1998, the Company issued 6,568 shares of its Common Stock
to the former shareholder of MEGAbase as a portion of the consideration for the
purchase of MEGAbase.  As no public offering was involved, the issuance of these
shares of Common Stock was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended.

                                                                              28
<PAGE>
 
Item 6 - Selected Financial Data


                       ALLIN  CORPORATION & SUBSIDIARIES

                            SELECTED FINANCIAL DATA
               (Dollars in thousands, except for per share data)

     The selected financial data for each of the periods ended December 31,
1994, 1995, 1996, 1997 and 1998 presented below have been derived from the
audited consolidated financial statements of the Company. The selected financial
data should be read in conjunction with the Consolidated Financial Statements of
the Company (Item 8), and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," (Item 7) included elsewhere in this Form
10-K and in the Company's Form 10-K reports for the periods ended December 31,
1996 and 1997.

     During the periods presented, the Company's financial position and results
of operations have been materially impacted by acquisitions of businesses and
the Company's initial public stock offering in November 1996.  Acquired
businesses include Allin Consulting-California and Allin Network in November
1996, Allin Consulting-Pennsylvania in August 1998 and MEGAbase (subsequently
merged into Allin Consulting-California) in November 1998.  Results of
operations for acquired entities are included only for time periods subsequent
to the acquisitions and accordingly affect the comparability of information
among the periods presented.

     The Company's September 1998 sale of SportsWave, Inc. represents disposal
of a segment of the Company's business and results of operations for this
company have been reclassified to discontinued operations for all applicable
periods.

     Allin Interactive elected to be treated as an S Corporation through July
22, 1996 and, as a result, the taxable loss has been reflected on the federal
and state tax returns of the shareholders rather than the corporate returns
through that date.

     The selected financial data for the periods ended December 31, 1994 and
1995 reflect solely the financial position and results of operations of Allin
Interactive.  The selected financial data for the period ended December 31, 1996
includes the financial position and results of operations of Allin Corporation,
Allin Consulting-California, Allin Interactive, Allin Digital, Allin Network and
Allin Holdings for the portion of 1996 for which the company had operations or
that was subsequent to acquisition.  The selected financial data for the period
ended December 31, 1997 reflects the financial position and results of
operations of these six companies for the full year of 1997.  The selected
financial data for the period ended December 31, 1998 reflect the financial
position and results of operations of the previously noted six companies for the
full year of 1998 and Allin Consulting-Pennsylvania for the portion of 1998
subsequent to acquisition.  Operations for MEGAbase subsequent to acquisition
are reflected with Allin Consulting-California.

                                                                              29
<PAGE>
 
<TABLE>
<CAPTION>
                                                                          Period Ended December 31,
                                                  -------------------------------------------------------------------------
                                                      1994           1995           1996           1997           1998
                                                  -------------  -------------  -------------  -------------  -------------
<S>                                               <C>            <C>            <C>            <C>            <C>
Statement of Operations Data:
  Revenue.......................................    $       --     $       44     $    1,110     $    9,596     $   15,291
  Cost of sales.................................            --             10            645          5,988          8,781
                                                    ----------     ----------     ----------     ----------     ----------
  Gross profit..................................            --             34            465          3,608          6,510
  Depreciation & amortization...................             6            288          1,339          3,887          3,414
  (Gain) loss on impairment or disposal
   of assets.....................................           --             --             (1)         1,227          3,165
    
  Other selling, general & administrative.......           582          1,545          6,491          9,403          7,358
                                                    ----------     ----------     ----------     ----------     ----------
  Loss from operations..........................          (588)        (1,799)        (7,364)       (10,909)        (7,427)
  Interest expense (income), net................            24            369            800           (413)            (7)
                                                    ----------     ----------     ----------     ----------     ----------
  Loss before income tax expense................          (612)        (2,168)        (8,164)       (10,496)        (7,420)
  Income tax expense............................            --             --             22             45             --
                                                    ----------     ----------     ----------     ----------     ----------
  Loss after income tax expense.................          (612)        (2,168)        (8,186)       (10,541)        (7,420)
  Minority interest.............................            --             --             --             --             28
                                                    ----------     ----------     ----------     ----------     ----------
  Loss from continuing operations...............          (612)        (2,168)        (8,186)       (10,541)        (7,448)
  (Gain) loss from discontinued operations......            --             --            161            162         (1,657)
                                                    ----------     ----------     ----------     ----------     ----------
  Net loss......................................          (612)        (2,168)        (8,347)       (10,703)        (5,791)
    
  Accretion and dividends on preferred stock....            --             --            106            232            779
                                                    ----------     ----------     ----------     ----------     ----------
  Net loss applicable to common shareholders....    $     (612)    $   (2,168)    $   (8,453)    $  (10,935)    $   (6,570)
                                                    ==========     ==========     ==========     ==========     ==========
  Net loss per common share.....................        $(0.26)        $(0.90)        $(2.98)        $(2.12)        $(1.20)
                                                    ==========     ==========     ==========     ==========     ==========
  Weighted average number of common                  2,400,000      2,400,000      2,834,565      5,157,399      5,466,979
   shares outstanding ..........................    ==========     ==========     ==========     ==========     ==========
 
</TABLE>
                                                                                

<TABLE>
<CAPTION>
                                                                                  As of December 31,
                                                                                 -------------------
                                                   1994           1995         1996             1997         1998
                                               -------------  ------------  -----------      -----------  -----------
<S>                                            <C>            <C>           <C>              <C>          <C>
Balance Sheet Data:                                                                    
  Working capital............................         $  57       $(1,493)      $14,051          $ 6,748      $ 2,513
  Total assets...............................           146         2,353        32,677           21,653       26,312
  Total liabilities..........................           756         5,131         3,875            3,644        8,071
  Preferred stock............................            --            --         2,480            2,500        4,652
  Stockholders' equity.......................          (610)       (2,778)       26,322 (1)       15,509       13,589
</TABLE>
--------------
(1) Includes a charge of $661,000 related to the induced conversion of various
    loan balances due stockholders of the Company into 244,066 shares of the
    Company's Common Stock.

                                                                              30
<PAGE>
 
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations

     In the following Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this annual report on Form
10-K, words such as "estimates," "expects," "anticipates," "believes," and other
similar expressions, are intended to identify forward-looking information that
involves risks and uncertainties.  Actual results and outcomes could differ
materially as a result of such important factors including, among other things,
the Company's limited operating history with its recent acquisitions,
uncertainty as to the Company's future profitability; the Company's history of
net losses, accumulated deficit, liquidity, the risks inherent in development of
new products and markets,  certain customers' rights to terminate operations,
competition in the Company's existing and potential future lines of business;
risks associated with the Company's management of growth; dependence on key
personnel; rapidly changing technology and a rapidly evolving market for
interactive applications; and fluctuations in operating results, as well as
other risks and uncertainties.    See Item 1 under the caption "Forward-Looking
Statements".

Overview of Organization, Products & Markets

     Allin Corporation (the "Company"), formerly Allin Communications
Corporation, is a provider of technology consulting and systems integration
services oriented around practices meeting customer needs for infrastructure,
business operations, and electronic business services.  The Company offers
Microsoft focused technology services and development specializing in Windows
NT-based software development, consulting and network integration services.  The
Company additionally provides consulting and custom development for mainframe
systems, specialized technology consulting services for the banking industry,
and consulting and integration services focused on the interactive television
and digital photography industries.

     During 1998, the Company continued its transition from primarily being an
owner and operator of transactional based interactive television and digital
photography systems to a provider of technology consulting and systems
integration services.  Technology consulting and systems integration have
evolved as the Company's predominant services due to Management's strategy to
focus the Company's core technological expertise on markets with demonstrated
demand and to avoid significant capital commitments for speculative
technological applications.  Consistent with its evolving strategy focusing on
technology consulting and systems integration services, the Company sold
SportsWave, Inc., its sports marketing subsidiary, in September 1998.

     The Company was organized under the laws of the State of Delaware in July
1996 to act as a holding Company for operating subsidiaries.  The Company
currently owns five operating subsidiaries organized into two business units.
The Allin Consulting business unit includes Allin Corporation of California
("Allin Consulting-California") and Allin Consulting of Pennsylvania, Inc.
("Allin Consulting-Pennsylvania").  The Allin Systems business unit includes
Allin Interactive Corporation ("Allin Interactive"), Allin Digital Imaging Corp.
("Allin Digital") and Allin Network Products, Inc. ("Allin Network").  The five
subsidiaries listed above, as well as Allin Holdings Corporation ("Allin
Holdings"), a non-operating subsidiary, are wholly owned by the Company.  Allin
Interactive, Allin Digital and Allin Holdings are Delaware corporations.  Allin
Consulting-California and Allin Network are California corporations.  Allin
Consulting-Pennsylvania is a Pennsylvania corporation.  Unless the context
otherwise requires, all references herein to the "Company" mean Allin
Corporation and its subsidiaries.  The Company sold SportsWave, Inc.
("SportsWave"), a subsidiary providing sports marketing services, in September
1998.  All of the entities noted in this paragraph, except Allin Holdings and
SportsWave had corporate name changes in 1998.  See Note 1. Organization and
Nature of Operations included herein under Item 8  Financial Statements and
Supplementary Data for additional information concerning the name changes.  All
of the entities in the Company's organization now include "Allin" in their
corporate names.  Management believes this will help to build brand identity for
the Company's services.
 
     The following discussion of financial information for the period ending
December 31, 1996 includes the results of continuing operations of the Company,
Allin Consulting-California, Allin Interactive, Allin Digital, Allin Network and
AHC for the portion of 1996 for which the companies had operations or that was
subsequent to acquisition.  The financial information for the period ending
December 31, 1997 reflects the results of

                                                                              31
<PAGE>
 
continuing operations of these companies for the full year of 1997. The
financial information for the period ended December 31, 1998 reflects the
results of continuing operations of these companies for the full year of 1998
and the results of continuing operations for Allin Consulting-Pennsylvania
subsequent to acquisition. Allin Consulting-California reflects the results of
operations of the former MEGAbase business subsequent to its acquisition.
Results of SportsWave's operations in all periods and the gain realized on the
sale of SportsWave in 1998 are reflected as results of discontinued operations
and, accordingly, all financial information for continuing operations has been
restated for the periods ending December 31, 1996 and 1997.

     Allin Consulting provides technology consulting, software design and
network integration services.  Allin Consulting's operations are oriented around
practices meeting customer needs for infrastructure, business operations, and
electronic business services.  Allin Consulting provides expertise in Windows NT
and Microsoft BackOffice technology, as well as a variety of other technologies
for the client/server and mainframe environments.  Allin Consulting additionally
offers specialized technology consulting services to the banking industry.  In
August 1998, the Company acquired Allin Consulting-Pennsylvania, which more than
tripled technology consulting monthly revenue.  The Company also acquired
MEGAbase, Inc. ("MEGAbase"), a client/server software development specialist in
November 1998, substantially enhancing its development expertise and
capabilities.  The operations of MEGAbase were merged with Allin Consulting-
California following acquisition. With its 1998 acquisitions, Allin Consulting
has moved from being predominantly a regional supplier of services in Northern
California to a national focus.  The Allin Consulting business unit consists of
the operations of Allin Consulting-California and Allin Consulting-Pennsylvania.
Allin Consulting-California was acquired by the Company in November 1996, as
described in Item 1--Business under (a) General Development of Business.  Allin
Consulting-California, Allin Consulting-Pennsylvania and MEGAbase all conducted
business as independent entities approximately thirteen years prior to their
respective dates of acquisition.

     Allin Systems' 1998 marketing strategy focused on providing systems
integration and consulting services for interactive television applications for
the healthcare, education and cruise industries and providing digital imaging
systems integration services for the professional and commercial photography
industry.  Allin Systems continues to operate interactive television systems
which it had installed in prior years on an owner-operator model only if
transactional revenue and management fees provided by the Company's customers
are sufficient to allow for positive cash flow.  Allin Systems also sells
computer hardware and software and network equipment.  The Allin Systems
business unit consists of the operations of Allin Interactive, Allin Digital and
Allin Network.  Allin Interactive was formed in June 1994 as the original
corporation in the Allin organization and became a subsidiary of the Company in
August 1996 through a merger.  Allin Digital was formed as a subsidiary of the
Company in August 1996.  Allin Network was acquired by the Company in November
1996 and began operations in 1995.


Results of Operations

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Revenue

     The Company's total revenue for the year ended December 31, 1998 increased
to $15,291,000 from $9,596,000 for the year ended December 31, 1997, an increase
of 59%.  The increase in revenue of $5,695,000 is primarily attributable to the
substantial growth in the Company's technology consulting business due to the
inclusion of the operations of Allin Consulting-Pennsylvania for five months
during 1998 following acquisition.

     Total revenue for the Allin Consulting business unit for the year ended
December 31, 1998 was $10,515,000, including $6,156,000 from business operations
technology consulting services, $4,198,000 from infrastructure services,
$131,000 for electronic business services, and $30,000 for other services.
Comparable revenue for the year ended December 31, 1997 was $3,671,000 including
$474,000 from business operations, $3,182,000 from infrastructure and $15,000
from electronic business services.  The substantial increase in total revenue of
$6,844,000, or 186% resulted primarily from the acquisition of Allin Consulting-
Pennsylvania in August 1998.  Additional contributing factors included increased
sales for Allin Consulting-California's operations between the periods, the
acquisition of MEGAbase in November 1998 and overall growth in the demand for
technology consulting services.  Allin Consulting's practice areas possess
expertise in the development of applications software and network solutions,
which 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

                                                                              32
<PAGE>
 
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, and the recruitment of additional
consultants. The Company continues to seek additional opportunities for its
Allin Consulting business unit and intends to pursue growth in consulting
services through increased marketing efforts and the evaluation of geographic
expansion or additional acquisitions of existing businesses. There can be no
assurance, however, that the Company will be successful in expanding Allin
Consulting's level of revenue, that it will be able to generate or obtain the
capital necessary for geographic expansion or additional acquisitions, or that
any expansion or acquisitions undertaken would result in the desired
improvements to financial results.

     The acquisition of Allin Consulting-Pennsylvania, with its significant
business operations practice, was the primary reason for the $5,682,000, or
1,198%, increase in business operations revenue between the periods.  Organic
sales growth was another significant factor in the increase in business
operations revenue, with Allin Consulting-California more than doubling its
business operations revenue.  The MEGAbase acquisition contributed to the
business operations growth for Allin Consulting-California, although it occurred
too late in the year to be a material factor.  The Company believes the
customers and technical resources acquired with the MEGAbase transaction will
contribute more significantly to business operations growth in 1999, although
there can be no assurance that such growth will be obtained.  Infrastructure
consulting revenue grew by $1,016,000, or 32%, from 1997 to 1998.  The two key
factors leading to this growth were again the acquisition of Allin Consulting-
Pennsylvania and sales growth at Allin Consulting-California.  As discussed in
Item 1--Business, infrastructure oriented products are expected to be
Microsoft's primary area of growth over the next three years.  The Company
believes that Allin Consulting's expertise in infrastructure design and services
and its relationship as a Microsoft Solutions Provider Partner position Allin
Consulting to benefit from this industry trend, although there can be no
assurance that revenue growth will continue to be realized for infrastructure
services.  Revenue from electronic business consulting increased by $116,000, or
773%, between the periods.  Electronic business is currently small in comparison
with the other business practices because the market for these services is an
emerging one.  As discussed in Item 1 - Business, substantial growth is expected
in electronic business applications and products within the computer industry
over the next five years.  The Company believes the market for consulting
services oriented toward electronic business will follow the industry trend,
although there can be no assurance that the Company will obtain increased
revenue in this area in the future.

     Allin Systems recorded revenue of $4,776,000 during the year ended December
31, 1998, including $3,023,000 for interactive television transactional revenue
and management fees, $349,000 for interactive television systems integration and
consulting services, $1,098,000 for digital photography systems integration and
ancillary product sales and $306,000 for computer equipment and software sales.
Comparable revenue for the year ended December 31, 1997 was $5,925,000 in total,
including $1,903,000 for shipboard transactional revenue and management fees,
$3,696,000 for interactive television systems integration services, $113,000 for
digital photography services and $213,000 for computer equipment and software.
The decline between periods of $1,149,000, or 19%, is primarily attributable to
the decrease in revenue for interactive systems integration services of
$3,347,000 between the periods, as discussed following.  Allin Systems was able
to offset approximately 66% of this revenue decline through increased revenue
from interactive television transactional revenue and management fees and by
substantially increasing revenue from digital photography operations.

     The increase in interactive television transactional revenue, including
pay-per-view movies, video gaming and advertising, and management fees between
1997 and 1998 was $1,120,000, or 59%.  This increase is primarily attributable
to the inclusion of management fees as a source of revenue during the full year
of 1998, as well as an increase in video gaming revenue.  In 1997, the Company
successfully negotiated contract amendments or agreements with various cruise
lines providing for management fees for interactive system operation, but the
fees were not effective until September 1997 or later.  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 1999 and any following
periods.  Operation of interactive television systems aboard three Royal
Caribbean Cruise Lines, Ltd. ("RCCL") ships was terminated in May and June 1998
and operation of the system aboard the Norwegian Cruise Line ("NCL") ship
Norwegian Dream is scheduled to cease in April 1999 because those cruise lines
wished to discontinue management fees.  A reduced interim management fee is to
be paid by NCL

                                                                              33
<PAGE>
 
from January to April 1999. Transactional revenue and management fees have been
or will be lost for these systems. Transactional revenue and management fees for
these systems were $492,000 and $531,000, respectively, during the years ended
December 31, 1997 and 1998. This represents 5.1% and 3.5% of consolidated
revenue for those periods.

     As noted above, revenue for systems integration services declined
$3,347,000, or 91% between 1997 and 1998.  The substantial majority of this
revenue decline was attributable to changes in Allin Systems' business strategy.
During 1997, revenue of $1,240,000 was recognized relating to a project for
retrofit of the ship broadcast center aboard the Cunard Cruise Lines, Ltd.
("Cunard") ship Queen Elizabeth 2.  The Company no longer performs projects of
this type.  Revenue of $1,216,000 was also recorded in 1997 relating to the sale
of significant components of several interactive television systems installed on
an owner-operator model where the Company bore the capital commitment for the
remainder of the systems.  The Company stopped performing interactive television
installations on the owner-operator model in 1997.  Allin Systems  installed a
complete interactive television system aboard the Celebrity Cruises, Inc.
("Celebrity") ship Mercury in 1997 on a systems integration basis.  There were
no comparable projects conducted in the cruise industry during 1998, although
the Company did complete one healthcare industry installation in 1998.  The 1997
cruise ship installation carried a substantially higher contract value which is
the primary reason for the remainder of the revenue decline between 1997 and
1998.  No contracts are currently in place for 1999.

     Allin Systems realized an increase in revenue from digital imaging
operations of $985,000, or 872%, between 1997 and 1998.  This increase is
attributable to Allin Systems' change in strategy in early 1998 to become a
provider of systems integration services for the installation of digital
photography systems, technical support, and sale of ancillary products related
to the systems.  Operations under the new strategy produced substantially
greater revenue in 1998 than retail digital photography operations produced in
1997.  The Company expects revenue to continue to grow in 1999 because the
systems integration strategy will be in place for the full year, although there
can be no assurance that substantial increases in revenue levels will continue
to be realized.

     Revenue growth for Allin Systems' computer hardware and software sales was
$93,000, or 44%, from 1997 to 1998.  The growth was realized because Pittsburgh
based operations were in place for the full year in 1998 and due to changes in
Allin Systems' pricing practices for this type of sales.

Cost of Sales and Gross Profit

     The Company's total cost of sales for the year ended December 31, 1998
increased to $8,781,000 from $5,988,000 for the year ended December 31, 1997.
The primary reason for the increase in cost of sales was the significant revenue
growth in the Company's technology business due to the Allin Consulting-
Pennsylvania acquisition.  Gross profit recognized on sales was $6,510,000 for
1998 as compared with $3,608,000 during 1997.  Again, the increase in gross
profit of $2,902,000, or 80%, is primarily related to the growth in the
technology consulting business.  The 80% increase in gross profit was realized
on only a 59% increase in revenue.  Overall gross profit as a percentage of the
Company's revenue increased from 38% to 43% from 1997 to 1998.

     Total cost of sales for the Allin Consulting business unit for the year
ended December 31, 1998 was $6,940,000, including $4,307,000 from business
operations technology consulting services, $2,527,000 from infrastructure
services, $74,000 for electronic business services, and $32,000 for other
services.  Comparable cost of sales for the year ended December 31, 1997 was
$2,225,000 including $287,000 from business operations, $1,929,000 from
infrastructure and $9,000 from electronic business services.  The substantial
increase in total cost of sales of $4,715,000 resulted primarily from the
acquisition of Allin Consulting-Pennsylvania in August 1998.  Additional reasons
for the increases in cost of sales correspond to the reasons for increased
revenue discussed previously.  These include increased sales for Allin
Consulting-California's operations between the periods, the acquisition of
MEGAbase in November 1998 and overall growth in the demand for technology
consulting services.  Total gross profit for Allin Consulting for the year ended
December 31, 1998 was $3,575,000, including $1,849,000 from business operations,
$1,671,000 from infrastructure services, $57,000 for electronic business
services, and a gross loss of $2,000 for other services.  Comparable gross
profit for the year ended December 31, 1997 was $1,446,000, including $187,000
from business operations, $1,253,000 from infrastructure and $6,000 from
electronic business services.  The overall increase in gross profit for Allin
Consulting was $2,129,000.

                                                                              34
<PAGE>
 
     The acquisition of Allin Consulting-Pennsylvania, with its significant
business operations practice, was the primary reason for the $1,622,000, or
889%, increase in business operations gross profit between the periods.  Allin
Consulting-California also more than doubled its business operations gross
profit through sales growth.  Infrastructure consulting gross profit grew by
$418,000, or 33%, from 1997 to 1998.  The two key factors leading to this growth
were again the acquisition of Allin Consulting-Pennsylvania and sales growth at
Allin Consulting-California.  Gross profit from electronic business consulting
increased by $51,000, or 850%, between the periods.  Electronic business is
currently small in comparison with the other business practices because the
market for these services is only recently emerging.

     Allin Systems recorded cost of sales of $1,841,000 during the year ended
December 31, 1998, including $312,000 for interactive television transactional
revenue and management fees, $322,000 for interactive television systems
integration and consulting services, $943,000 for digital photography systems
integration and ancillary product sales and $264,000 for computer equipment and
software sales.  Comparable cost of sales for the year ended December 31, 1997
was $3,763,000 in total, including $348,000 for shipboard transactional revenue
and management fees, $3,112,000 for interactive television systems integration
services, $105,000 for digital photography services and $198,000 for computer
equipment and software.  The decline between periods of $1,922,000, or 51%, is
attributable primarily to the decrease in cost of sales of $2,790,000 for
interactive systems integration services between the periods, offset partially
by the increase in cost of sales related to digital imaging operations. Allin
Systems recorded gross profit of $2,935,000 during the year ended December 31,
1998, including $2,711,000 for interactive television transactional revenue and
management fees, $27,000 for interactive television systems integration and
consulting services, $155,000 for digital photography systems integration and
ancillary product sales and $42,000 for computer equipment and software sales.
Comparable gross profit for the year ended December 31, 1997 was $2,162,000 in
total, including $1,555,000 for shipboard transactional revenue and management
fees, $584,000 for interactive television systems integration services, $8,000
for digital photography services and $15,000 for computer equipment and
software.  Allin Systems realized a $773,000, or 36%, improvement in gross
profit between 1997 and 1998 despite a $1,149,000, or 19%, decline in revenue.
The improvement in gross profit between the periods was primarily attributable
to the inclusion of management fees for interactive television system operation
during the full year of 1998.

     Gross profit on interactive television transactional revenue and management
fees increased $1,156,000, or 74%, from 1997 to 1998.  Allin Systems earned
management fees for all systems it operated in the cruise industry in 1998.
Management fees were not recorded in 1997 until September or later.  The
inclusion of a full year of management fee revenue in 1998 was the primary
reason for the increase in gross profit.  Secondary reasons were increased video
gaming revenue and gross profit on pay-per-view movies.  As discussed under
Revenue, operation of three interactive television systems aboard RCCL ships
terminated in the second quarter of 1998 and operation of the system aboard the
NCL ship Norwegian Dream is scheduled to terminate in April 1999.  Gross profit
from transactional revenue and management fees related to the RCCL and NCL
systems represented 10.8 and 7.3% of consolidated gross profit during the years
ended December 31, 1997 and 1998, respectively.  There can be no assurance that
gross profit realized from interactive television transactional revenue and
management fees will either increase or be maintained at present levels in the
future.

     Gross profit from interactive systems integration and consulting services
declined $557,000, or 95%, from 1997 to 1998.  The decrease parallels the
revenue decrease and is attributable to several factors, such as the inclusion
of the Queen Elizabeth 2 broadcast studio retrofit system project in 1997.
Allin Systems no longer performs this type of service.  Another factor was a
higher contract value and gross margin for the 1997 systems integration basis
cruise industry installation than the healthcare system installed in 1998.
Systems integration activity in 1997 included several projects for cruise
industry clients for significant components of interactive television systems
where the Company bore the capital cost for the remainder of the systems under
its prior owner-operator model.  Cost of sales on some of these projects
exceeded revenue.  If the cruise lines had not purchased the equipment at the
agreed upon prices, the Company would have had to bear the full capital
commitment for the components.  These capital commitments by the cruise lines
had the effect of reducing the Company's overall capital cost on those ships and
the projects were undertaken for that purpose.  A gross loss of $552,000 was
recorded on projects of this type in 1997, including $404,000 related to three
installations on RCCL ships.  No contracts are currently in place for 1999.

                                                                              35
<PAGE>
 
     Allin Systems realized an increase in gross profit of $147,000, or 1,838%,
from its digital imaging operations between 1997 and 1998.  The increase is
related to the substantial increase in revenue realized in 1998 under the new
strategy of providing systems integration services for the installation of
digital photography systems.  In addition to the volume of sales, gross profit
as a percentage of revenue doubled between the periods due to the new strategy.
An increase in gross profit of $27,000, or 180%, was realized on computer
hardware and software sales.  The increase is attributable to both revenue
increases and changes in pricing policy.

Selling, General & Administrative Expenses

     The Company recorded $13,937,000 in selling, general & administrative
expenses during the year ended December 31, 1998, as compared with $14,517,000
during the year ended December 31, 1997, an overall decrease of $580,000, or 4%.
There are a number of unusual items impacting both periods, as described in the
following paragraphs, including asset impairment losses related to ship
interactive television system assets and capitalized software development costs
for proprietary digital imaging systems, writedowns for non-recoverable portions
of ship interactive systems, severance accruals, and note receivable and
tradename writeoffs.

     Allin Systems maintained an inventory of equipment removed from three RCCL
ship interactive television systems which had ceased operations during the
second quarter of 1998, as well as equipment from the Cunard ship Queen
Elizabeth 2 system which had terminated operations in December 1997 and a system
for the NCL ship Norway which had not been completed.  From the time this
equipment became available for reuse, Allin Systems sought alternative
productive use of the equipment, which included substantive discussions with
several cruise lines concerning installation of systems.  During August 1998,
the last of these substantive discussions was terminated by Carnival Cruise
Lines ("Carnival") at the time it was announced that Carnival had contracted
with a competitor for installation of an interactive television system aboard a
Carnival ship.  Discussions with Carnival at the time of these events also
caused Allin Systems' management to regard continued long-term operation of the
interactive systems aboard two Carnival vessels to be in jeopardy.  Carnival can
discontinue management fees and/or terminate services  upon thirty days' notice.
During August 1998, Allin Systems also was informed by NCL that it would
discontinue payment of management fees for the system aboard the Norwegian Dream
subsequent to December 31, 1998, in accordance with the terms of its agreement.
Termination of operations for the Norwegian Dream system has subsequently been
scheduled for April 1999.  The Company determined that the events described
represented facts and circumstances indicating that the carrying value of these
assets may not be recoverable because of the lack of short-term prospect of
reuse for the equipment maintained as inventory and because of a substantive
prospect of termination of operations or lack of adequate cash flow due to the
discontinuation of management fees for the operating systems.  The Company
determined estimated salvage values for all of the equipment and estimated
undiscounted cash flows for the operating systems and determined that the assets
were impaired.  The Company recorded a loss of $2,765,000 during 1998 to write-
down the assets to estimated fair values.  There was no comparable impairment
loss recorded in 1997.

     The capitalized costs of interactive television systems on ships include
costs related to the installation of equipment that are not recoverable and cost
for equipment that is not economically feasible to remove upon termination of
system operation.  Allin Systems recorded losses in 1997 and 1998 to writeoff
the non-recoverable portions of capitalized interactive television systems upon
termination of operations.    During 1997, a loss of approximately $522,000 was
recorded to writeoff the non-recoverable portion of the Queen Elizabeth 2
system.  During 1997, Allin Systems also recorded a loss of $415,000 for the
non-recoverable costs for the partially completed system aboard the NCL ship
Norway.  The Company elected not to complete the Norway system when the
strategic decision was made to move away from the owner-operator model for
interactive television operations.  During 1998, a loss of approximately
$232,000 was recorded for the non-recoverable portions of capitalized system
costs for the RCCL ships Enchantment of the Seas, Majesty of the Seas, and
Rhapsody of the Seas upon termination of system operations.

     The Company changed the strategy for its digital imaging operations in
early 1998 to market systems integration services for digital photography
systems.  The prior strategy had been to develop a local retail and event
digital imaging business.  Allin Digital had capitalized certain software
development costs related to proprietary systems developed for its earlier
strategy.  At the time of the change in strategy, different hardware
configurations were anticipated to be utilized in digital photography system
installations for the Company's customers than were used in the proprietary
systems developed for the earlier strategy.  Adaptations to the proprietary
system were

                                                                              36
<PAGE>
 
necessary for it to be effectively utilized with the new hardware
configurations. The Company did not immediately pursue the additional
development necessary for effective utilization of the proprietary digital
photography system in connection with its systems integration services because
the Company wished to evaluate results under the new strategy prior to making
additional capital commitments. The Company therefore believed that the change
in business strategy during the first quarter of 1998 was an event which
impaired the net realizable value of the proprietary digital photography system.
Consequently, the Company recorded a writedown of approximately $241,000, as of
December 31, 1997, for the net unamortized software development costs related to
its digital photography system. The loss was recognized as of December 31, 1997
because it represented significant new information regarding the realizability
of assets between fiscal year-end and the release of financial statements. There
were no impairment losses related to software development costs recorded in
1998.

     During 1997, the Company recorded accruals of approximately $329,000 to
establish liabilities for severance costs associated with plans for involuntary
employee terminations. Included in the plans were financial and marketing
executive positions, marketing and administrative staff positions, operational
management, technical staff, and sales positions associated with digital
photography operations, technical staff related to interactive television
operations and clerical support staff positions.  All of the positions included
in the plans were eliminated.  In 1998, a severance accrual of approximately
$491,000 was recorded in connection with certain executive management changes
undertaken in connection with the reorganization of the Company's operations
implemented in early 1998, including the Company's President, Chief Operating
Officer and an administrative assistant.  An adjustment of $15,000 was also
recorded in 1998 to reflect additional severance costs related to the 1997
plans.

     During 1997, a loan of $130,000 was made to an officer and director of the
Company, who subsequently resigned in February 1998 in conjunction with the
reorganization of the Company's operations.  Under terms of a separation
agreement, the loan was forgiven.  The loan forgiveness represented significant
information regarding the realizability of the asset as of December 31, 1997.
Accordingly, the Company recorded the writeoff of the loan as of December 31,
1997.  There was no comparable impairment loss in 1998.

     During 1998, the Company recorded a writedown of approximately $163,000 for
the net unamortized value of a tradename due to the change in corporate name of
Allin Consulting-California.  No comparable loss was recorded in 1997.

     The totals reflected in selling, general and administrative expense related
to these unusual items were $3,666,000 and $1,637,000 , respectively, for the
years ended December 31, 1998 and 1997.  Net of the unusual items, remaining
selling, general and administrative expenses were $10,271,000 and $12,880,000
and, respectively, for the 1998 and 1997 periods.  This decline of $2,609,000,
or 20%, was achieved despite the inclusion of five months of selling, general
and administrative expense related to the operations of Allin Consulting-
Pennsylvania in 1998.  The decline is attributable primarily to the Company's
cost reduction efforts, including reductions in personnel, generalized marketing
expenses, consulting expenses, office rental costs, travel costs and shipboard
operating expenses.

     Depreciation and amortization were $3,414,000 during the year ended
December 31, 1998 as compared to $3,877,000 during the year ended December 31,
1997.  The Company expects depreciation and amortization to decline further in
1999 due to writedowns in capitalized interactive televisions assets, the
majority of capitalized software development costs reaching full amortization in
1998, and a significant intangible asset value for an employment agreement
recorded in connection with the 1996 acquisition of Allin Consulting-California
reaching full amortization in 1998.

     Research and development expense included in selling, general &
administrative expenses was $152,000 during the year ended December 31, 1998, as
compared to $212,000 during the year ended December 31, 1997.  The reduction in
expense reflects the Company's continued move during 1998 to being a provider of
consulting and systems integration services and away from proprietary
technological systems.

Loss from Continuing Operations

     The Company's loss from continuing operations decreased from $10,541,000
for the year ended December 31, 1997 to $7,448,000 for the year ended December
31, 1998.  The Company's $3,093,000, or 29%, improvement

                                                                              37
<PAGE>
 
in results from continuing operations is attributable primarily to the aggregate
$2,902,000 improvement in gross profit realized during 1998 by both business
units. Allin Consulting's gross profit improved primarily due to the acquisition
of Allin Consulting-Pennsylvania and sales growth within Allin Consulting-
California, while Allin Systems experienced improvement due primarily to the
inclusion of management fees for interactive television system operation during
the full period in 1998. Selling, general and administrative expenses also
declined $580,000 between the periods, although this was largely offset by a
reduction in net interest income of $406,000 from 1997 to 1998.

Discontinued Operations

     The Company recorded income from the operation of its discontinued sports
marketing business of $220,000 during the nine months ended September 30, 1998,
the portion of 1998 prior to the sale of SportsWave, as compared with a loss of
$162,000 during the year ended December 31, 1997.  The Company recognized a gain
of $1,437,000 on the disposal of SportsWave, which was sold on September 30,
1998.  The gain was calculated by comparing sale proceeds to the Company's
investment balance in SportsWave, which consisted of the cost of acquisition,
adjusted for the Company's interest in the operations of SportsWave, the
settlement of contingent payments due to the former owners of SportsWave, and
residual intercompany balances.

Net Loss

     The Company's net loss during the year ended December 31, 1998 was
$5,791,000, as compared to $10,703,000 for the year ended December 31, 1997.
The year to year decrease in net loss of $4,912,000, or 46%, was attributable to
the improvement in gross profit as discussed under Loss from Continuing
Operations and the gain realized on the sale of SportsWave.

Results of Operations

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Revenue

     The Company's total revenue for the year ended December 31, 1997 increased
to $9,596,000 from $1,110,000 for the year ended December 31, 1996.  Revenue for
1997 included full year operations of all of the Company's operating
subsidiaries, except Allin Consulting-Pennsylvania and MEGAbase, which were not
acquired until 1998, while 1996 revenue reflected a full year of Allin
Interactive revenue, but only revenue from inception or for the portion of 1996
subsequent to acquisition for the other subsidiaries.

     Allin Consulting, after elimination of intercompany sales, recorded total
revenue of $3,671,000 during the year ended December 31, 1997, including
$3,182,000 related to infrastructure consulting services, $474,000 for business
operations consulting and $15,000 related to electronic business consulting.
During the approximate two month period from acquisition of Allin Consulting-
California to December 31, 1996, total revenue of $425,000 was recorded,
including $332,000 for infrastructure services, $90,000 for business operations
and $3,000 for electronic business.  The difference in period lengths does not
allow a meaningful comparison.  Allin Consulting-California began 1997 with a
considerable portion of its business devoted to services for related companies.
As 1997 progressed, the level of services provided for related companies
declined due to the Company's overall reduction in research and development
activities beginning in the second quarter of 1997.  This allowed Allin
Consulting to reallocate certain of its consulting resources to third-party
clients, which contributed to the overall sales growth.

     Allin Systems recorded revenue of $5,925,000 during the year ended December
31, 1997, including $1,903,000 for interactive television transactional revenue
and management fees, $3,696,000 for interactive systems integration services,
$113,000 for digital photography retail operations and $213,000 for computer
equipment and software sales.  For the year ended December 31, 1996, Allin
Systems recorded $685,000 in total revenue, including $454,000 for shipboard
transactional revenue, $195,000 for interactive television systems integration
services, $7,000 for digital photography services and $29,000 for computer
equipment and software.

                                                                              38
<PAGE>
 
     The interactive television transactional revenue and management fee
increase of $1,449,000 is attributable to an increase in the number of installed
systems during 1997, movie pricing increases and changes to gaming buy-in
amounts and wager defaults.  As of December 31, 1997, Allin Systems was
operating systems on eleven cruise ships as compared to six ships at December
31, 1996.  As noted above, the termination of services for RCCL in the second
quarter of 1998 subsequently reduced the number of systems in operation to
eight.  Another system on an NCL ship will cease operations in April 1999.
Communication with cruise line customers and perceptions developed through
experience with shipboard operations indicated that some of the non-revenue
producing interactive television system services, such as shore excursion
previews and ticketing, were valuable to certain cruise lines, offering them
operational efficiencies, potential labor savings and an amenity to increase
passenger satisfaction.  Management thereafter began negotiations with all of
its cruise line customers regarding an economic commitment to the interactive
systems to reflect the value they were deriving from non-revenue producing
services.  The negotiation process culminated in contract amendments or other
agreements with Carnival, Celebrity, NCL, and RCCL providing for management fees
to be earned for system operation and administration, effective at various dates
in September and October 1997.  Management fees represented a new revenue stream
during 1997 which contributed to the revenue increase from 1996.

     Allin Systems' 1997 systems integration revenue of $3,696,000 represented a
significant increase of $3,501,000 over comparable 1996 revenue of $195,000.
Services were provided during 1997 to primarily the same cruise line customers
for which the Company operated interactive systems.  A significant portion of
the revenue, $1,216,000 was derived from the installation of components integral
to the Company's interactive television system.  Under certain of the original
contracts, the cruise lines had agreed to contribute toward the overall capital
cost of the systems by assuming ownership of certain components integral to the
systems at agreed upon prices.  Revenue recorded in 1996 related primarily to
this type of project.  The largest systems integration project completed during
1997 was for the retrofit of a television broadcast and distribution system
aboard Cunard's Queen Elizabeth 2, which resulted in revenue of $1,240,000.
During 1997, an interactive television system was installed on Celebrity's
Mercury entirely on a systems integration basis.  The Mercury installation,
fully on a systems integration basis, reflected the Company's new strategy for
interactive television system installations.

     During 1997, Allin Systems derived revenue of $113,000 from its digital
imaging operations based on a local retail and event imaging model utilizing
digital imaging technology, as compared with revenue of $7,000 in 1996.  Digital
imaging operations started in the latter part of 1996 and were still in a
developmental stage throughout the first half of 1997.  Efforts at developing a
revenue base in digital photography operations under the original model met with
only limited success.  During early 1998, the Company's management changed the
strategy for its digital photography business to pursue opportunities for
integration services for digital photography systems.
 
     Allin Systems derived $213,000 of revenue from computer hardware and
software sales during 1997, as compared with $29,000 during the portion of 1996
from acquisition of Allin Network  to year end.
 
Cost of Sales and Gross Profit

     The Company's total cost of sales for the year ended December 31, 1997
increased to $5,988,000 from $645,000 for the year ended December 31, 1996.  The
primary reason for the increase in cost of sales was that 1997 includes full
year operations of all of the Company's operating subsidiaries except Allin
Consulting-Pennsylvania, which was not acquired until 1998, while for 1996, cost
of sales reflected a full year for Allin Interactive operations, but only cost
of sales from inception or for the portion of 1996 subsequent to acquisition for
the other subsidiaries.  Gross profit recognized on sales was $3,608,000 for
1997 as compared to $465,000 during 1996.  The increase in gross profit between
the periods was $3,143,000.

     During the year ended December 31, 1997, Allin Consulting recorded
$2,225,000 of cost of sales, including $1,929,000 related to infrastructure
services, $287,000 related to business operations and $9,000 related to
electronic business.  Allin Consulting recorded cost of sales of $332,000 for
1996, including $260,000 for infrastructure services, $70,000 for business
operations and $2,000 for electronic business.    Gross profit of $1,446,000 was
recognized during 1997, including $1,253,000 for infrastructure, $187,000 for
business operations and $6,000 for electronic business.  During the
approximately two months from acquisition of Allin Consulting-California to
December 31, 1996, gross profit of $93,000 was recognized, including $72,000 for
infrastructure,

                                                                              39
<PAGE>
 
$20,000 for business operations and $1,000 for electronic business. As with
revenue, comparison of these figures is not meaningful due to the differing time
periods.

     Allin Systems recorded cost of sales of $3,763,000 during the year ended
December 31, 1997, including $348,000 related to interactive television
transactional revenue, $3,112,000 for interactive systems integration services,
$105,000 for digital photography retail operations and $198,000 related to
computer equipment and software sales.  For the year ended December 31, 1996,
Allin Systems recorded $313,000 in total cost of sales, including $118,000
related to shipboard transactional revenue, $174,000 for interactive television
systems integration services and $21,000 for computer equipment and software.
Allin Systems realized gross profit of $2,162,000 during the year ended December
31, 1997, including $1,555,000 related to interactive television transactional
revenue, $584,000 for interactive systems integration services, $8,000 for
digital photography retail operations and $15,000 related to computer equipment
and software sales.  For the year ended December 31, 1996, Allin Systems
recorded $372,000 in gross profit, including $336,000 related to shipboard
transactional revenue, $21,000 for interactive television systems integration
services, $7,000 for digital photography operations and $8,000 for computer
equipment and software.

     The increase in gross profit related to interactive television
transactional revenue and management fees of $1,219,000 from 1996 to 1997 is
attributable to the factors discussed under Revenue, including an increase in
the number of installed systems during 1997, the addition of management fees as
a new revenue stream during 1997, movie pricing increases and changes to gaming
buy-in amounts and wager defaults. The increase in gross profit from systems
integration services of $563,000 from 1996 to 1997 can be attributed to the 1997
period including the retrofit of a television broadcast and distribution system
aboard Cunard's Queen Elizabeth 2 and the interactive television system
installation on Celebrity's Mercury entirely on a systems integration basis.
Systems integration activity during 1997 included the installation of components
integral to the Company's interactive television system where cruise lines had
agreed to contribute toward the overall capital cost of the systems by assuming
ownership of certain components.  Cost of sales exceeded revenue for certain of
these projects.  A gross loss of $552,000 was recorded on projects of this type
in 1997.

Selling, General & Administrative Expenses

     The Company recorded $14,517,000 in selling, general & administrative
expenses during the year ended December 31, 1997, as compared with $7,829,000
during the year ended December 31, 1996.  Selling, general & administrative
expenses for 1997 includes full year operations of all of the Company's
operating subsidiaries, except Allin Consulting-Pennsylvania, which was not
acquired until 1998, while 1996 expenses reflected a full year for Allin
Interactive, but only expenses from inception or from acquisition to December
31, 1996 for the other companies.  The overall increase in expense of $6,688,000
is attributable mainly to the inclusion of full year costs for most of the
operations during 1997.  Additional factors were substantial increases in
depreciation associated with additional ship installations, amortization
associated with acquired businesses and the cost of additional personnel hired
by the Company in late 1996 and early 1997.  There were certain other
significant unusual costs, as described under Results of Operations: Year Ended
December 31, 1998 to Year Ended December 31, 1997 and in following paragraphs,
incurred in 1997, including an impairment loss on capitalized software
development costs, writedown of non-recoverable costs associated with
termination of interactive television system services, severance accruals and
writeoff of a note receivable. The combination of these and other factors
resulted in the substantial increase in selling, general & administration
expenses from 1996 to 1997.

     Allin Systems recorded a loss of $522,000 in 1997 to writeoff the non-
recoverable portion of the capitalized interactive television system aboard the
Queen Elizabeth 2 upon termination of its operations.  During 1997, Allin
Systems also recorded a loss of $415,000 for the non-recoverable costs for the
partially completed system aboard the NCL ship Norway.  The Company elected not
to complete the Norway system when the strategic decision was made to move away
from the owner-operator model for interactive television systems operation.

     As discussed under Results of Operations: Year Ended December 31, 1998 to
Year Ended December 31, 1997, the Company changed the strategy for its digital
imaging operations in early 1998 to market systems integration services for
digital photography systems.  In connection with this change in strategy, the
Company recorded a writedown of approximately $241,000, as of December 31, 1997,
for the net unamortized software development costs related to its digital
photography system.  The loss was recognized as of December 31, 1997

                                                                              40
<PAGE>
 
because it represented significant new information regarding the realizability
of assets between fiscal year-end and the release of financial statements.

     During 1997, the Company recorded accruals of approximately $329,000 to
establish liabilities for severance costs associated with plans for involuntary
employee terminations. Included in the plans were financial and marketing
executive positions, marketing and administrative staff positions, operational
management, technical staff, and sales positions associated with digital
photography operations, technical staff related to interactive television
operations and clerical support staff positions.  All of the positions included
in the plans were eliminated.

     During 1997, a loan of $130,000 was made to an officer and director of the
Company, who subsequently resigned in February 1998 in conjunction with the
reorganization of the Company's operations.  Under terms of a separation
agreement, the loan was forgiven.  The loan forgiveness represented significant
information regarding the realizability of the asset as of December 31, 1997.
Accordingly, the Company recorded the writeoff of the loan as of December 31,
1997.

     The losses recorded from writedown of non-recoverable portions of
interactive television installations, on impairments of software development
costs and on loans receivable, and the severance accruals represent $1,637,000
of 1997 selling, general & administrative expense, or approximately 11% of the
1997 total.  Although there were no losses of these types during 1996, one non-
recurring charge of $661,000 was recorded related to the conversion of
stockholder loans to common stock.

     Depreciation and amortization were $3,877,000 during the year ended
December 31, 1997 as compared to $1,339,000 during the year ended December 31,
1996.  The substantial increase reflects the increase in the number of installed
ship interactive television systems, in which the Company has substantial
capital commitments, from six to ten between the periods, a full year of
amortization during 1997 on the intangible assets related to the Allin
Consulting-California acquisition, and amounts capitalized during 1997 related
to build-out and furnishings for the Company's headquarters office in
Pittsburgh, Pennsylvania.

     Research and development expense included in selling, general &
administrative expenses was $212,000 during the year ended December 31, 1997, as
compared to $949,000 during the year ended December 31, 1996.  The substantial
reduction in expense reflects the Company's curtailment of research and
development activities during 1997 for new extensions of interactive technology
and the completion of most of the basic research and development related to
interactive television system technology in 1995 and 1996.

Loss from Continuing Operations

     The Company's loss from continuing operations increased from $8,186,000 for
the year ended December 31, 1996 to $10,541,000 for the year ended December 31,
1997.  The Company's $3,143,000 increase in gross profit was offset by a larger
increase of $6,688,000 in selling, general & administrative expenses, resulting
in the larger loss from continuing operations.  During 1996, the Company
incurred net interest expense of $800,000, primarily related to stockholder
loans and a line of credit with National City Bank.  A portion of the proceeds
of the Company's initial public offering in November 1996 was utilized to repay
these loans.  During 1997, the Company recorded net interest income of $413,000,
primarily from investment earnings on cash balances.  The increase in loss from
continuing operations remains  attributable primarily to the charges for
writedown of ship ITV systems, impairment of software development costs and a
loan receivable, severance accruals, the increase in staff in late 1996 and
early 1997, and the increase in depreciation and amortization expense during
1997.

Discontinued Operations

     The Company recognized a loss on the operations of SportsWave of $162,000
during the year ended December 31, 1997 as compared to a loss of $161,000 during
the approximate two month period of 1996 subsequent to the acquisition of
SportsWave.  The fourth quarter was historically slow for the seasonal sports
marketing business, accounting for the similarity in losses for the twelve and
two month periods of operation.

                                                                              41
<PAGE>
 
Net Loss

     The Company's net loss during the year ended December 31, 1997 was
$10,703,000, as compared to $8,347,000 for the year ended December 31, 1996.
The increase in net loss is also attributable primarily to the factors noted for
the increase in loss from continuing operations.

Liquidity and Capital Resources

     At December 31, 1998 the Company had cash and liquid cash equivalents of
$2,510,000 available to meet its working capital and operational needs.  The net
change in cash from December 31, 1997 was a decrease of $4,292,000.  The net
cash outflow during 1998 is primarily attributable to two factors, an outflow of
approximately $3.2 million related to acquisition of businesses and an outflow
of approximately $1.2 million from operating activities.

     The Company recognized a net loss for the year ended December 31, 1998 of
$5,791,000.  Included in the net loss were non-cash expenses of $6,703,000
including depreciation, amortization of software development costs and other
intangible assets, amortization of deferred compensation and losses from write-
down or disposal of assets.  Cash flows from operating activities during the
period resulted in an outflow of $1,170,000 during the year ended December 31,
1998.  In addition to the $522,000 used by current operations, there were also
working capital adjustments impacting the cash flow, including net cash usage of
$588,000 from decreases of accounts payable and accrued liabilities.

     The most significant factor impacting cash flow during 1998 was the
acquisition of technology consulting businesses.  The Company's acquisition
related transactions, as described in the following paragraphs, resulted in a
net cash outflow of approximately $3.2 million during 1998.  Cash outflows
related to the acquisitions were approximately $9.3 million, including $2.4
million paid to the former shareholders of the acquired entities at closing,
$6.2 million to retire a note payable related to the Allin Consulting-
Pennsylvania acquisition and $0.7 million to retire debt of the acquired
entities.  Funds obtained for the acquisitions were approximately $6.1 million,
including approximately $2.8 million from the Series B preferred stock issuance,
$2.3 million from the sale of SportsWave (net proceeds after settlement of
contingent obligations related to the Company's acquisition of SportsWave) and
$1.0 million borrowed from S&T Bank under a revolving credit facility.

     On August 13, 1998, the Company acquired all of the issued and outstanding
stock of Allin Consulting-Pennsylvania.  The agreement for the purchase of Allin
Consulting-Pennsylvania provided for payment of up to $16.0 million by the
Company, including $14.4 million at closing and potential contingent payments of
up to $1.6 million.  Closing payment terms included a cash payment of
approximately $2.4 million, issuance of 805,195 shares of the Company's common
stock, based on a rate of $4.406 per share as specified in the acquisition
agreement, secured promissory notes in the principal amounts of $6.2 and $2.0
million, and post-closing payment by or on behalf of Allin Consulting-
Pennsylvania of an approximate $200,000 tax liability.  The Company recorded the
stock issuance based on the market price on the date of closing of the
acquisition.  Allin Consulting-Pennsylvania had two outstanding notes due to a
bank in the aggregate amount of approximately $627,000 as of the Company's
acquisition, which the Company repaid in full on the date of the acquisition.

     To provide cash for the acquisition of Allin Consulting-Pennsylvania, the
Company sold 2,750 shares of a newly designated series of preferred stock,
Series B Redeemable Preferred Stock, and related warrants to purchase shares of
common stock at the purchase price of $1,000 per Series B share.  The sale of
Series B preferred shares resulted in proceeds to the Company of $2,750,000.
These funds were utilized to pay a portion of the initial cash component of the
acquisition price and to retire Allin Consulting-Pennsylvania's notes payable
due to a bank.  The convertibility feature of the Series B shares and the
issuance of common stock upon exercise of the related warrants were subject to
approval by the holders of a majority of the Company's common stock, which was
attained by stockholder vote at a Special Meeting of the Stockholders of the
Company on December 31, 1998.  Until and including August 13, 1999, the first
anniversary of the original issuance of  the Series B preferred shares, each
share will be convertible into the number of shares of common stock determined
by (a) dividing 1,000 by $3.6125, which is 85% of the $4.25 Nasdaq price prior
to the date of closing of the acquisition of Allin Consulting-Pennsylvania or
(b) if it results in a greater number of shares of common stock, dividing 1,000
by the greater of (i) 85% of the closing price of the common stock as reported
by Nasdaq on the trading date prior to the date of conversion, or (ii)

                                                                              42
<PAGE>
 
$2.00. After the first anniversary of the original issuance of Series B
preferred shares, each share is convertible into the number of shares of common
stock determined by (a) above, or (b) if it results in a greater number of
shares of common stock, dividing 1,000 by 85% of the closing price of the common
stock as reported by Nasdaq on the trading date following the first anniversary
of the closing date. Purchasers of Series B shares received warrants to purchase
an aggregate of 647,059 shares of common stock which have an exercise price of
$4.25 per common share, the price of the common stock as of the last trading day
prior to the Allin Consulting-Pennsylvania closing. The exercise price may be
paid in cash or by delivery of a like value, including accrued but unpaid
dividends, of Series A Convertible Redeemable Preferred Stock. Series B
shareholders are entitled to receive payment of cumulative quarterly dividends
at a rate of 6% payable in arrears as of the last day of October, January, April
and July (subject to legally available funds). The Company accrued and paid
approximately $65,000 and $37,000, respectively, of dividends on Series B
preferred stock during 1998.

     The acquisition of Allin Consulting-Pennsylvania included the delivery by
the Company of two notes payable in the principal amounts of $6,200,000 and
$2,000,000 to the former majority owner of Allin Consulting-Pennsylvania, James
S. Kelly, Jr.  The $6,200,000 note bore interest at 5%.  The principal amount
and accrued interest of approximately $43,000 for this note were paid on October
2, 1998, utilizing $2,843,000 from proceeds received for the sale of SportsWave,
$1,000,000 borrowed under a loan agreement with S&T Bank entered as of October
1, 1998, as described below, and $2,400,000 from the Company's working capital.
The $2,000,000 note bears interest at the rate of 6% payable quarterly on the
first business day of each calendar quarter.  The principal amount of the note
matures August 13, 2000.  The holders of a majority of the Company's common
stock approved a convertibility feature of the $2,000,000 note on December 31,
1998.  The principal amount of the note will be convertible at maturity, if not
repaid by the Company, into the Company's common stock at a conversion rate
equal to that used for the stock issued in the Allin Consulting-Pennsylvania
acquisition of $4.406 per share or the average market price for the thirty days
preceding maturity, subject to a $2.00 minimum price.  If converted, the Company
will record any issuance of common stock based on the market price on the date
of conversion.  Additional information regarding convertibility of this note is
contained in the Company's Current Report on Form 8-K dated as of August 13,
1998.

     Proceeds from the sale of SportsWave of approximately $2,944,000 were
received by the Company on October 1, 1998.  The Company also received a
promissory note in the principal amount of $500,000 bearing interest at the rate
of 8.5% per annum.  The Company utilized the majority of the proceeds from the
sale of SportsWave to repay a portion of notes payable related to its August
1998 acquisition of Allin Consulting-Pennsylvania.  In order to facilitate the
sale of SportsWave to Lighthouse Holdings, Inc. ("Lighthouse"), the Company and
the former shareholders of SportsWave agreed to a settlement of any contingent
liability related to the earn-out provisions of the original stock purchase
agreement pursuant to which the Company acquired SportsWave.  On October 6,
1998, the Company made aggregate payments of $600,000 to the former SportsWave
shareholders in full settlement of any claims to interim or final earn-out
payments that may have been due in the future.  The settlement with the former
SportsWave shareholders was netted against the gain recognized on disposal of a
segment.  The agreement for the sale of SportsWave included an estimated
unearned revenue adjustment of approximately $56,000 related to sports marketing
programs that were in process at the time of the SportsWave sale, which was
deducted at closing.  The agreement also included a provision for finalizing the
adjustment to the purchase price.  The Company and Lighthouse reached agreement
on a final unearned revenue adjustment of $37,000 during early January 1999.
The final adjustment was netted against the principal of the promissory note,
which had been originally due and payable on December 31, 1998.  The note
principal of $463,000 and accrued interest were received from Lighthouse in
January 1999

     On October 1, 1998, the Company and S&T Bank, a Pennsylvania banking
association, entered into a Loan and Security Agreement (the "S&T Loan
Agreement"), under which S&T Bank has agreed to extend the Company a revolving
credit loan.  The maximum borrowing availability under the S&T Loan Agreement is
the lesser of $5,000,000 or eighty-five percent of the aggregate gross amount of
eligible trade accounts receivable aged sixty days or less from the date of
invoice.  Accounts receivable qualifying for inclusion in the borrowing base
will be net of any prepayments, progress payments, deposits or retention and
must not be subject to any prior assignment, claim, lien, or security interest.
As of December 31, 1998, maximum borrowing availability under the S&T Loan
Agreement was approximately $1,663,000.  The outstanding balance as of December
31, 1998 was $1,483,000. The expiration date of the S&T Loan Agreement is
September 30, 1999.

                                                                              43
<PAGE>
 
     Currently, borrowings may be made under the S&T Loan Agreement for general
working capital purposes, and initially could also be made to repay a portion of
certain indebtedness incurred by the Company in connection with its acquisition
of Allin Consulting-Pennsylvania.  On October 2, 1998, the Company borrowed
$1,000,000 under the S&T Loan Agreement, which was used to repay a portion of
the outstanding acquisition related debt.

     Loans made under the S&T Loan Agreement bear interest at the bank's prime
interest rate plus one percent.  Since the initial borrowing under the S&T Loan
Agreement on October 2, 1998, the applicable interest rate has varied from a
high of 9.25% to a low of 8.75%.  As of December 31, 1998, the applicable
interest rate was 8.75%.  The applicable interest rate shall increase or decease
from time to time as S&T Bank's prime rate changes.  Interest payments due on
any outstanding loan balances are to be made monthly on the first day of the
month.  The Company recorded approximately $24,000 in interest expense related
to this revolving credit loan in 1998.  The principal will be due at maturity,
although any outstanding principal balances may be repaid in whole or part at
any time without penalty.

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

     The S&T Loan Agreement includes various covenants relating to matters
affecting the Company including insurance coverage, financial accounting
practices, audit rights, prohibited transactions, dividends and stock purchases,
which are disclosed in their entirety in the text of the S&T Loan Agreement
attached as an exhibit to the Company's Current Report on Form 8-K dated as of
September 30, 1998.  The covenant concerning dividends and purchases of stock
prohibits the Company from declaring or paying cash dividends or redeeming,
purchasing or otherwise acquiring outstanding shares of any class of the
Company's stock, except for dividends payable in the ordinary course of business
on the Company's Series B preferred shares or such distributions made from time
to time to compensate the Company's shareholders for income taxes attributed to
them with respect to the Company's financial performance.  The covenants also
include a cash flow to interest ratio of not less than 1.0 to 1.0.  Cash flow is
defined as operating income before depreciation, amortization and interest.  The
S&T Loan Agreement also includes reporting requirements regarding annual and
monthly financial reports, accounts receivable and payable statements, weekly
borrowing base certificates and audit reports.

     The Company has a balance due on a line of credit with Wells Fargo Bank of
approximately $23,000 as of December 31, 1998.  This credit facility was
originally obtained by MEGAbase to finance equipment purchases.  The outstanding
balance was assumed by the Company upon acquisition of MEGAbase.  Outstanding
borrowings under the line of credit bear interest ranging from 9.50% to 9.85%
and mature in May 2003.  Under the line of credit, interest was fixed on the
date of each principal borrowing.  Repayment of principal and interest is over
five years for each borrowing.  No additional borrowings were permitted under
this facility after June 5, 1998.

     As of December 31, 1998, the Company has outstanding $2,500,000 of Series A
Convertible Redeemable Preferred Stock.  Accrued but unpaid dividends on the
preferred stock were approximately $518,000 as of December 31, 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 Series A
preferred stock in June 2006, unless redeemed earlier by the Company.  The S&T
Loan Agreement prohibits payment of dividends on Series A preferred stock during
the term of the agreement.

     In November 1998, the Company and Les D. Kent, the former sole shareholder
of Allin Consulting-California, reached agreement on an amendment to modify the
terms of a promissory note for contingent payments related to the acquisition of
that company.  The acquisition of Allin Consulting-California in November 1996
included terms for a contingent payment of up to $2,800,000 based on Allin
Consulting-California's average annual operating income, as defined in the
agreement, for the three years 1997, 1998, and 1999.  Under the amendment, the
amount of the payment due, which is no longer contingent, has been fixed at
$2,000,000.  The amended note provides for two principal payments of $1,000,000
each plus any accrued interest due on April 15, 2000 and October 15, 2000.  The
amendment, however, provides that the Company may defer payment of principal at
its option until April 15, 2005.  The amended note provides for interest at the
rate of 7% per annum from the acquisition date of

                                                                              44
<PAGE>
 
November 6, 1996. Since the amount of the additional purchase consideration is
now fixed, the Company has accrued interest of approximately $301,000 for the
period from the acquisition date through December 31, 1998. Accrued interest is
payable quarterly beginning on April 15, 2000. The Company believes this
amendment is beneficial because it will preclude potential increases to
contingent payments that may have resulted under the prior formula from the
merger of other businesses with Allin Consulting-California. Subsequent to the
execution of the amendment, the Company acquired MEGAbase and merged its
operations into Allin Consulting-California. The Company will consider
additional acquisitions of software development and Microsoft-specialist
consulting firms in Northern California to be merged into Allin Consulting-
California's operations. There can be no assurance, however, that the Company
will be successful at identifying and acquiring businesses, or that any acquired
will result in the desired improvements to Allin Consulting-California's
financial performance. The Company also believes that the ability to defer
principal payments will be beneficial to its liquidity over the next two years.
Fixing the amount of the contingent payments also eliminates the risk that
payments determined under the prior formula might exceed $2,000,000.

     The payments to be made under the amended promissory note were recorded as
additional cost of the acquired enterprise.  The Company recorded a liability
for these payments in November 1998.  The fixing of the contingent payment
amount resulted in $2,280,000 of additional goodwill being recorded by Allin
Consulting-California for amended note balance and interest from the date of
acquisition to the date of amendment.  This additional goodwill is being
amortized over the remaining estimated life for goodwill of five years.
Emerging Issues Task Force Issue 95-8:  Accounting for Contingent Consideration
Paid to the Shareholders of an Acquired Company in a Purchase Business
Combination ("EITF 95-8") describes five factors that must be considered in
evaluating the proper treatment of contingent consideration, including factors
involving terms of continuing employment, factors involving components of
shareholder group, factors involving reasons for contingent payment provisions,
factors involving formula for determining contingent consideration, and factors
involving other agreements and issues.  The Company's analysis of these factors
indicates payments under the amended promissory note should be accounted for as
additional cost of the acquired enterprise rather than compensation expense.
Key factors in the evaluation include the Company's ability to defer principal
payments and the lack of similarity of the payments to any prior compensation or
profit sharing model.

     On November 20, 1998, the Company acquired all of the issued and
outstanding stock of MEGAbase.  The MEGAbase operations were merged into Allin
Consulting-California following acquisition. The agreement for the purchase of
MEGAbase provides for payment of up to $840,000 by the Company, including
$40,000 at closing and potential contingent payments of up to $800,000.  Closing
payment terms included a cash payment of $12,000 and issuance of 6,568 shares of
the Company's common stock, based on a rate of $4.263 per share as specified in
the acquisition agreement.  MEGAbase had outstanding notes due to a bank and two
individuals in the aggregate amount of approximately $73,000 as of the Company's
acquisition, which the Company repaid in full on the date of the acquisition.

     The agreement for purchase of MEGAbase provides for contingent payments of
up to $800,000, to be determined on the basis of Allin Consulting-California's
Development Practice Gross Margin (as defined in the stock purchase agreement
for the acquisition) for the period beginning January 1, 1999 and ending
December 31, 1999.  The former MEGAbase sole shareholder, Mark Gerow, is
entitled to receive an aggregate contingent payment equal to $1.00 for each
dollar by which Allin Consulting-California's Development Practice Gross Margin
exceeds $500,000, subject to a maximum contingent payment of $800,000.  Any
contingent payment due may be made, at the Company's sole option, (a) all in
cash, (b) 50% in cash and 50% in the Company's common stock based on a per share
amount equal to the average of the bid and asked prices for the five trading
days preceding contingent payment, or (c) 50% in cash and 50% in the form of a
promissory note bearing interest at a rate of 8% per annum to be due one year
from the date of such note.  The contingent payment date shall be no later than
March 31, 2000, unless the Company selects (c) above, under which 50% of the
principal due shall be payable no later than March 31, 2000 and 50% due one year
later.  EITF 95-8 describes five factors that must be considered in evaluating
the proper accounting treatment of contingent consideration, as noted above. The
Company's analysis of these factors indicates that any contingent payments due
will be recorded as additional cost of the acquired enterprise. Key factors in
the evaluation include the Company's ability to control the form of principal
payments and the similarity of the development practice as defined to the pre-
acquisition MEGAbase organization.  The Company will periodically calculate
Development Practice Gross Margin during 1999 to analyze the likelihood of any
contingent payments becoming due.

                                                                              45
<PAGE>
 
     The agreement for purchase of Allin Consulting-Pennsylvania provided for
contingent payments of up to $1.2 million in cash and $400,000 in the Company's
common stock.  The amount of the contingent payments was to be determined on the
basis of Allin Consulting-Pennsylvania's Adjusted Operating Profit (as defined
in the Stock Purchase Agreement for the acquisition) for the period beginning
January 1, 1998 and ending December 31, 1998.  The former Allin Consulting-
Pennsylvania shareholders were entitled to receive aggregate contingent payments
equal to $4.67 for each dollar by which Adjusted Operating Profit exceeded
$1,671,681, subject to maximum contingent payments of $1,600,000.  Any
contingent payments due were to be made 75% in cash and 25% in the Company's
common stock.  The Company has  calculated Adjusted Operating Profit of
approximately $1,179,000 for 1998 so no contingent payments are due to the
selling shareholders.
 
     The Company expects interactive television research and development
activities during 1999 to focus on four areas.  Integrating On Command
technology with Allin Systems' interactive television applications will require
modifications to existing or development of new software interfaces.  Any new
system orders obtained will necessitate some modification of existing content
and applications or development of new interactive applications that meet the
specific needs of the client.  Module development and modification of this type
will only be conducted as systems integration or consulting business is
obtained.  Allin Systems intends to pursue development of interactive
applications based on NetShow Theatre, an emerging Microsoft product for
delivering broadcast-quality video content to personal computer networks.  The
fourth anticipated area of development will focus on delivery of interactive
content and services across additional types of information networks, although
the Company does not anticipate significant investment in this initiative
without system orders based on alternate network types or support of research
efforts by interested technology industry parties.  The Company anticipates
further research and development activities in 1999 related to Allin Digital's
Portraits Online system for on-line viewing of digital photographic images from
an Internet based database archive.  Efforts will focus on Portraits Online
system improvements, added functionality, and modifications necessary to
integrate additional "third party" software and hardware components necessary to
expand Allin Digital's product portfolio.  The Company anticipates expenditures
of approximately $60,000 during 1999 for research and development activities.
Management intends to evaluate any 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.

     Capital expenditures during 1998 totaled approximately $372,000 and related
primarily to computer hardware, software and communications equipment for the
Company's periodic upgrading of technology.  The Company anticipates capital
expenditures of approximately $360,000 during 1999 for upgrades of computer
hardware and software in all of its operations and for furniture and leasehold
improvements related to the move of Allin Consulting-Pennsylvania personnel to
the corporate headquarters office.  Business conditions and management's plans
may change during the remainder of 1999, so there can be no assurance that the
Company's actual amount of capital expenditures will not exceed the planned
amount.

     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 on terms favorable to the Company or at all.  Any
sale of additional common or convertible equity or convertible debt securities
would result in additional dilution to the Company's shareholders.

Year 2000 Issue

     The Year 2000 computer issue primarily results from the fact that
information technology hardware and software systems and other non-information
technology products containing embedded microchip processors were originally
programmed using a two digit format, as opposed to four digits, to indicate the
year.   Such programming will be unable to interpret dates beyond the year 1999,
which could cause a system or product failure or other computer errors and a
disruption in the operation of such systems and products.

                                                                              46
<PAGE>
 
State of Readiness

     The Company has established an internally staffed project team to address
Year 2000 issues.  The team is implementing a plan that focuses on Year 2000
compliance efforts for information and non-information technology systems for
the entire Company.  The systems include (1) information systems software and
hardware such as accounting systems, personal computers, servers and software,
(2) shipboard equipment including the Company's interactive systems currently
aboard eight cruise vessels and (3) certain essential non-information technology
systems such as telephones and HVAC.  The Company has identified five phases for
the project team to address for each of the Company's risk areas.  These phases
are (1) an inventory of the Company's systems described above, (2) assessment of
the systems to determine the risk and apparent extent of year 2000 problems, (3)
remediation of identified problems, (4) testing of systems and products for Year
2000 readiness and (5) contingency planning for the worst-case scenario.

     Inventories have been completed for all Company software applications,
hardware and shipboard operating systems, and the Company expects to complete an
inventory of at-risk new information technology systems by the second quarter of
1999.   The project team has substantially completed an assessment of compliance
issues related to the Company's information hardware and software.  The Company
undertook significant testing of shipboard equipment during the assessment phase
with no significant failures experienced to date.  Thus far, the task force
believes that the Company's main accounting system is Year 2000 compliant, but
it has identified a problem in certain of the Company's information hardware
programming related to the accounting system.  Remediation of this identified
problem as well as other hardware and software problems that may be identified
is expected to begin early in the second quarter of 1999 and to be completed
early in the third quarter of 1999.  The Company expects that additional testing
of all critical systems will be conducted during the third and fourth quarters
of 1999.  The Company has identified and created a list of its third party
software manufacturers and is either contacting them directly or monitoring
their products through published information concerning Year 2000 compliance.
The Company has solicited and intends to continue to solicit information
regarding its internal non-information technology systems such as telephones and
HVAC during the second quarter of 1999.  To date the Company has identified a
problem with the telephone system in its Cleveland, Ohio office which is in the
process of being remediated.  Any additional required remediation and testing of
the Company's non-information technology systems is expected to be completed
during the third quarter of 1999.  The Company is also soliciting or monitoring
information regarding the cruise lines' onboard billing systems, which interface
with the Company's interactive systems.  Any issues raised through these
solicitations will be remediated, if possible, or addressed in the Company's
contingency plans.

     Although the Company's material supply requirements can predominantly be
filled by a large number of suppliers, the Company has implemented a program to
track the Year 2000 compliance status of its material vendors and suppliers.
Material vendors and suppliers have been surveyed to ascertain their risks
associated with Year 2000 issues, their state of readiness and the potential for
disruption of business operations.  The Company's project team expects to
evaluate information obtained through this survey as well as other publicly
available information on material vendors and suppliers during the second
quarter of 1999.  Management believes that this will provide sufficient time to
find other sources of materials if it anticipates that any of its vendors will
encounter delivery problems due to Year 2000 issues.   There can be no
assurance, however, that the Company will be successful in finding alternative
Year 2000 compliant suppliers and service providers, if required.  In the event
that any of the Company's significant suppliers or service providers do not
successfully and in a timely manner achieve Year 2000 compliance and the Company
is unable to replace them, the Company's business or operations could be
adversely affected.

     The Company has also implemented a program to track the Year 2000
compliance status of its material customers.  The Company's project team expects
to evaluate information obtained through this survey as well as other publicly
available information on customers during the second quarter of 1999.  The
project team will analyze, to the extent information is available, the risk that
disruption of customers' business operations from Year 2000 issues may
negatively impact the Company.  Potential risks could arise from failure of
customers' vendor payment systems or cancellation or delay of service
engagements for the Company.  Management believes that addressing these matters
during the second quarter of 1999 will provide sufficient time to develop
alternate service plans, such as requirement for payments in advance prior to
the end of 1999 or rescheduling of engagements for customers with

                                                                              47
<PAGE>
 
high risk of business disruption due to Year 2000 issues. There can be no
assurance, however, that the Company will be successful in identifying customers
with significant Year 2000 risk. In the event that any of the Company's
significant customers do not successfully and in a timely manner achieve Year
2000 compliance and the Company is unable to replace them, the Company's
business or operations could be adversely affected.

Risks of Company's Year 2000 Issues

     The Company is in the process of determining its contingency plans, which
are expected to include the identification of the Company's most reasonably
likely worst-case scenarios.  At this time, the Company does not have sufficient
information to assess the likelihood of such worst-case scenarios.  Currently,
the Company believes that the most reasonably likely sources of risk to the
Company include one or more of the following:  (1) the disruption of revenue
production from the seven interactive television systems aboard cruise ships
that may be in operation as of January 1, 2000, through failures in the systems
or the failure of the cruise lines' shipboard billing systems; (2) the inability
of significant customers to be Year 2000 ready which could negatively impact the
Company's revenue and cash receipts or which could result in the postponement or
cancellation of major client projects due to clients' Year 2000 business
disruption: (3) the possibility that Year 2000 issues develop in interactive
systems sold by the Company or in any contemplated future sales; and (4) the
inability of principal product suppliers to be Year 2000 ready, which could
result in delays in deliveries from such suppliers.

     Based on its assessment efforts to date, the Company does not believe that
Year 2000 issues will have a material adverse effect on the Company's financial
condition or results of operations.  However, the Company's Year 2000 issues and
any potential business interruptions, costs, damages or losses related thereto,
are dependent, to a significant degree, upon completion of identification and
remediation of deficiencies and the Year 2000 compliance of third parties, both
domestic and international, such as customers, vendors and suppliers.
Consequently, the Company is unable to determine with certainty at this time
whether Year 2000 failures will materially affect the Company.  If the Company
is unable to successfully identify and remediate Year 2000 problems in a timely
manner or the level of timely compliance by key customers, suppliers and service
providers is not sufficient, Year 2000 failures could have a material impact on
the Company's operations including, but not limited to, decreased revenue and
cash flow, increased operating costs or other significant business disruptions.
The Company believes that its compliance efforts have and will continue to
reduce the impact on the Company of any such failures.

Contingency Plans

     The Company has commenced preparation of its contingency plans to identify
and determine how to handle its most reasonably likely worst-case scenarios.
Comprehensive contingency plans are expected to be completed during the second
or third quarter of 1999.  Upon Management's review, these plans are expected to
be finalized in the third quarter of 1999.

Costs

     The Company does not expect that the costs associated with its Year 2000
efforts will be material.  The Company anticipates that any work required for
assessment, remediation and testing efforts will be conducted using internal
resources.  Without any allocation from the salaries of relevant internal
personnel, the Company has not to date expended a material amount of direct
costs for efforts to address Year 2000 issues.  The Company does not expect that
material incremental labor charges will be incurred for remaining system testing
and remediation.  Given the information that the Company has been able to
ascertain to date regarding potential Year 2000 problems relating to its
information technology and non-information technology systems, management does
not believe that external remediation costs will exceed $100,000 through
December 1999.  It is anticipated that any costs associated with these
remediation efforts will be expensed.

                                                                              48
<PAGE>
 
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, 1997.  The
Company has adopted 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
adopted SFAS No. 132 in 1998.

     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.

                                                                              49
<PAGE>
 
Item 7A - Quantitative and Qualitative Disclosure about Market Risk

     Market Risk.  During the normal course of business, the Company is exposed
to several types of market risk which includes, but is not limited to, interest
rate risk, foreign currency exchange rate risk, collectability of accounts
receivable, and liquidity risk.  The Company manages these risks by assessing
their possible risks on a regular basis.  The Company does not anticipate any
material losses in any of these market risk areas.  The Company does not
purchase goods subject to commodity price risk.

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

     Contracts covering any of the Company's foreign or at sea operations are
denominated in United States dollars.  The Company believes that costs
associated with any projects or services conducted outside the United States
would also be predominantly in United States dollars.  Therefore, the Company
does not believe it is subject to material foreign exchange currency risk.

     Interest Rate Risk.  In the ordinary course of business, the Company is
exposed to risks that increases in interest rates may adversely affect funding
costs associated with $1,483,000 of variable rate debt maturing September 30,
1999.  The following table presents approximate principal cash flows and related
weighted average interest rates by expected maturity date for the Company's
variable and fixed rate debt.

<TABLE>
<CAPTION>
                                                          Interest Rate Sensitivity
                                                           Expected Maturity Date
                                                                                      2004 and                        Fair
                                  1999          2000      2001      2002     2003    Thereafter         Total        Value
<S>                        <C>           <C>           <C>       <C>       <C>      <C>             <C>              <C>
Current Debt:
Variable Rate Debt          $1,483,000           ---       ---       ---      ---             ---      $1,483,000    $1,380,000
Average Interest Rate             9.63%          ---       ---       ---      ---             ---            9.63%  
 
Long Term Debt:
Fixed Rate Debt             $    4,000    $2,005,000    $5,000    $6,000   $3,000      $2,000,000      $4,023,000    $3,127,000
Average Interest Rate             6.52%         6.63%     7.02%     7.01%    7.00%           7.00%           6.86%
</TABLE>

     Current debt relates to the outstanding balance, as of December 31, 1998,
due to S&T Bank under a revolving credit loan.  The maturity of the revolving
credit loan is September 30, 1998 and the table above assumes repayment of the
outstanding balance prior to or at maturity.  The revolving credit loan bears
interest at S&T Bank's prime interest rate plus 1%.  Since the initial borrowing
under the credit facility on October 2, 1998, the applicable interest rate has
varied from a high of 9.25% to a low of 8.75%.  The applicable rate as of
December 31, 1998 was 8.75%.  The average interest rate included in the above
table assumes an average 10% increase in interest rate during 1999.  Management
does not believe interest rate risks for its variable rate debt are material
under its current interest rate assumptions and scheduled maturity of the
revolving credit facility.

     Fixed rate debt includes two notes payable related to acquisitions with
outstanding principal balances of $2,000,000 each as of December 31, 1998.  A
note payable to a former shareholder of Allin Consulting-Pennsylvania bears
interest at a fixed rate of 6% and matures August 13, 2000.  The principal
amount of the note is convertible to the Company's common stock if not repaid
prior to maturity.   The above table assumes payment at maturity.  A second note
payable to the former shareholder of Allin Consulting-California bears interest
at a fixed rate of 7%.  The Company has the right, at its sole option, to defer
payment of note principal from the original maturity dates in 2000 until April
15, 2005.  The above table assumes deferral of principal payment until 2005.
Fixed rate debt also includes outstanding amounts of approximately $23,000 due
Wells Fargo Bank under a line of credit for equipment purchases obtained by
MEGAbase prior to the Company's acquisition of MEGAbase.  The

                                                                              50
<PAGE>
 
Company assumed outstanding obligations under this credit facility upon
acquisition of MEGAbase. Interest rates on individual borrowings under the line
of credit were fixed at the date of borrowing and range from 9.50 to 9.85%.
Repayment of principal and related interest are over five years. The average
interest rate reflects a weighted average of the fixed rates of the fixed rate
obligations for the respective periods they are assumed to be outstanding.

     See Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations under Liquidity and Capital Resources for additional
information regarding the Company's outstanding debt instruments.

     Accounts Receivable/Accounts Payable.  Accounts receivable and accounts
payable carrying amounts approximate the fair values of the accounts receivable
and accounts payable balances, respectively, at December 31, 1998.

                                                                              51
<PAGE>
 
Item 8 - Financial Statements and Supplementary Data

ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

                                           (Dollars in thousands)

<TABLE> 
<CAPTION> 
                                                                           December 31,               December 31,
                                                                               1997                       1998
                                                                       ---------------------       --------------------
<S>                                                                    <C>                         <C> 
ASSETS                                                          
                                                                
Current assets:                                                 
      Cash and cash equivalents                                          $   6,802                   $      2,510
      Accounts receivable, net of allowance for                                                       
                doubtful accounts of $84 and $316                            1,805                          2,768
      Note receivable                                                        ---                              463
      Inventory                                                                687                            396
      Prepaid expenses                                                         555                            317
                                                                        -----------                   ------------
                Total current assets                                         9,849                          6,454
                                                                                                      
      Property and equipment, at cost:                                                                
      Leasehold improvements                                                   398                            478
      Furniture and equipment                                                2,126                          2,477
      On-board equipment                                                     6,704                          3,688
                                                                        -----------                   ------------
                                                                             9,228                          6,643
      Less--accumulated depreciation                                        (2,597)                        (3,559)
                                                                        -----------                   ------------
                                                                             6,631                          3,084
                                                                                                      
      Assets held for resale                                                 ---                               15
      Notes receivable from employees                                           45                             35
      Software development costs, net of accumulated                                                  
                amortization of $680 and $877                                  212                             36
      Intangible and other assets, net of accumulated                                                 
                amortization of $2,051 and $3,629                            4,916                         16,688
                                                                        -----------                   ------------
                                                                                                      
Total assets                                                            $   21,653                    $    26,312
                                                                        ===========                   ============
</TABLE> 
The accompanying notes are an integral part of these consolidated financial
statements.

                                                                              52
<PAGE>
 
ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

                                           (Dollars in thousands)


<TABLE> 
<CAPTION> 
                                                                               December 31,                  December 31,
                                                                                   1997                          1998
                                                                           ---------------------          --------------------
<S>                                                                        <C>                            <C> 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
      Current portion of notes payable                                      $       27                        $       2
      Accounts payable                                                             668                              575
      Accrued liabilities:                                                                                    
                Compensation and payroll taxes                                     815                              475
                Dividends on Series A convertible, redeemable                                                 
                        preferred stock                                            288                              518
                Dividends on Series B redeemable preferred                                                    
                        stock                                                    ---                                 28
                Other                                                              421                              694
      Bank lines of credit                                                       ---                              1,506
      Current portion of deferred revenues                                         882                               76
      Income taxes payable                                                       ---                                 67
                                                                            -----------                       ----------
                Total current liabilities                                        3,101                            3,941
                                                                                                              
Non-current portion of deferred revenue                                            543                            ---
Non-current portion of notes payable                                             ---                              4,004
Deferred income taxes                                                            ---                                126
Commitments and contingencies                                                                                 
                                                                                                              
Preferred stock, par value $.01 per share,                                                                    
      authorized 100,000 shares:                                                                              
      Series A convertible, redeemable preferred stock,                                                       
                designated 40,000 shares, issued and                                                          
                outstanding 25,000 shares                                        2,500                            2,500
      Series B redeemable preferred stock, designated                                                         
                5,000 shares, issued and outstanding 2,750                                                    
                shares                                                           ---                              2,152
                                                                                                              
Shareholder's equity:                                                                                         
      Common stock, par value $.01 per share - authorized                                                     
                20,000,000 shares, issued 5,184,067 and                                                       
                5,995,830 shares                                                    52                               60
      Additional paid-in-capital                                                37,652                           40,793
      Warrants                                                                   ---                                598
      Deferred compensation                                                       (228)                            (104)
      Treasury stock at cost, -0- and 1,800 shares                                  (6)                              (6)
      Retained deficit                                                         (21,961)                         (27,752)
                                                                            -----------                       ----------
Total shareholders' equity                                                      15,509                           13,589
                                                                            -----------                       ----------
                                                                                                              
Total liabilities and shareholders' equity                                  $   21,653                        $  26,312
                                                                            ===========                       ==========
</TABLE> 

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

                                                                              53
<PAGE>
 
ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

                        (Dollars in thousands, except per share data)

<TABLE> 
<CAPTION> 
                                                                   Year                       Year                    Year
                                                                  Ended                       Ended                   Ended
                                                               December 31,               December 31,             December 31,
                                                                   1996                       1997                     1998
                                                           ---------------------       --------------------     --------------------

<S>                                                        <C>                         <C>                      <C> 
Revenue                                                    $       1,110                   $      9,596                  $   15,291
                                                                                                                          
Cost of sales                                                        645                          5,988                       8,781
                                                             ------------                    -----------                  ----------

                                                                                                                          
Gross profit                                                         465                          3,608                       6,510
                                                                                                                          
Selling, general & administrative                                  7,829                         14,517                      13,937
                                                             ------------                    -----------                  ----------

                                                                                                                          
Loss from operations                                              (7,364)                       (10,909)                     (7,427)

                                                                                                                          
Interest expense (income), net                                       800                           (413)                         (7)

                                                             ------------                    -----------                  ----------

                                                                                                                          
Loss before provision for income taxes                            (8,164)                       (10,496)                     (7,420)

                                                                                                                          
Provision for income taxes                                            22                             45                      ---
                                                             ------------                    -----------                  ----------

                                                                                                                          
Loss after provision for income taxes                             (8,186)                       (10,541)                     (7,420)

                                                                                                                          
Minority interest in loss of                                                                                              
       non-consolidated corporation                              ---                             ---                             28
                                                             ------------                    -----------                  ----------

                                                                                                                          
Loss from continuing operations                                   (8,186)                       (10,541)                     (7,448)

                                                                                                                          
(Income) loss of disposed segment,                                                                                        
       net of income tax                                             161                            162                        (220)

Gain on disposal of segment                                      ---                             ---                         (1,437)

                                                             ------------                    -----------                  ----------

                                                                                                                          
(Gain) loss from discontinued operations                             161                            162                      (1,657)

                                                             ------------                    -----------                  ----------

                                                                                                                          
Net loss                                                          (8,347)                       (10,703)                     (5,791)

                                                                                                                          
Accretion and dividends on preferred stock                           106                            232                         779
                                                             ------------                    -----------                 -----------
                                                                                            
                                                                                                                          
Net loss attributable to common shareholders                 $    (8,453)                   $   (10,935)                 $   (6,570)
                                                                                            
                                                             ============                   ============                 ===========
                                                                                            
                                                                                                                          
Loss per common share from continuing                                                                                     
       operations - basic and diluted                        $     (2.89)                   $     (2.04)                 $    (1.36)
                                                                                            
                                                             ============                   ============                 ===========
                                                                                            
                                                                                                                          
Income (loss) per common share from                                                                                       
       discontinued operations - basic and diluted           $     (0.06)                   $     (0.03)                  $    0.30
                                                             ============                   ============                  ==========
                                                                                           
                                                                                                                          
Net loss per common share - basic and diluted                $     (2.98)                  $      (2.12)                  $   (1.20)

                                                             ============                    ===========                  ==========

                                                                                                                          
Weighted average shares outstanding - basic and diluted        2,834,565                      5,157,399                   5,466,979
                                                             ------------                    -----------                  ----------

</TABLE> 

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

                                                                              54
<PAGE>
 
ALLIN CORPORATION & SUBSIDIARIES                   
                                                   
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY    
                                                   
          (Dollars in thousands)                   

<TABLE>
<CAPTION>
                                                                                                                            
                                                        Common             Stock        Additional                             
                                                     -------------------------------      Paid-In                      Deferred  
                                                        Shares           Par Value        Capital       Warrants     Compensation
                                                     -----------        ------------    ----------      --------     ------------ 
<S>                                                  <C>                <C>             <C>             <C>          <C>
Balance, December 31, 1995                             2,400,000          $  ---         $      2       $  ---       $    ---       
                                                                                                                                    
   Initial Capitalization                                ---                  24                1          ---            ---       
   Net proceeds from issuance of common stock in                                                                                    
         initial public offering                       2,300,000              23           30,646          ---            ---       
   Conversion of shareholder notes payable to                                                                                       
         common stock                                    244,066               3            3,658          ---            ---       
   Issuance of common stock in acquisition               213,333               2            3,198          ---            ---       
   Issuance of restricted common stock                    26,668             ---              400          ---           (400)     
   Amortization of deferred compensation                 ---                 ---             ---           ---             23      
   Accretion of Series A convertible, redeemable                                                                                   
         preferred stock                                 ---                 ---             ---           ---            ---       
   Accrual of dividends on Series A convertible,                                                                                    
         redeemable preferred stock                      ---                 ---             ---           ---            ---       
   Net loss                                              ---                 ---             ---           ---            ---       
                                                      ----------          ------         --------       --------     ----------   
Balance, December 31, 1996                             5,184,067          $   52         $ 37,905       $  ---       $   (377)     
                                                                                                                                  
                                                                                                                                   
   Forfeiture of restricted common stock                  (1,800)            ---             (21)          ---             27      
   Amortization of deferred compensation                 ---                 ---             ---           ---            122      
   Accretion of Series A convertible, redeemable                                                                                   
         preferred stock                                 ---                 ---             (20)          ---            ---       
   Accrual of dividends on Series A convertible,                                                                                    
         redeemable preferred stock                      ---                 ---            (212)          ---            ---       
   Net loss                                              ---                 ---             ---           ---            ---       
                                                      ----------          ------         --------       --------     ----------   
Balance, December 31, 1997                             5,182,267          $   52         $37,652        $  ---       $   (228)     
                                                                                                                                   
   Issuance of common stock in acquisition               811,763               8           3,424           ---            ---       
   Issuance of warrants                                                      ---             ---           598                     
   Amortization of deferred compensation                                     ---             ---           ---            124      
   Beneficial conversion feature of Series B                                                                        
         redeemable preferred stock                                          ---             485           ---            ---       
   Accretion of Series B redeemable                                                                                                
         preferred stock                                                     ---            (485)          ---            ---       
   Accrual of dividends on Series A convertible,                                                                                    
         redeemable preferred stock and                                                                                             
         Series B redeemable preferred stock                                 ---            (294)          ---            ---       
   Option issuance to non-employees                                          ---              11           ---            ---       
   Net loss                                                  ---             ---             ---           ---            ---       
                                                      ----------          ------         --------       --------     ----------   
Balance, December 31, 1998                             5,994,030          $   60         $40,793        $  598       $   (104)    
                                                      ==========          ======         ========       ========     ==========   
</TABLE>






































<TABLE>
<CAPTION>

                                                                Treasury         Stock
                                                                -----------------------         Retained      Shareholders'  
                                                                 Shares           Cost          Deficit          Equity      
                                                                --------        -------       -----------    -------------
<S>                                                            <C>            <C>             <C>           <C>     
                                                                                                
Balance, December 31, 1995                                         ---        $    ---        $  (2,780)     $  (2,778)
                                                                                                                           
   Initial Capitalization                                          ---             ---              (25)          ---       
   Net proceeds from issuance of common stock in                                                                           
         initial public offering                                   ---             ---             ---          30,669 
   Conversion of shareholder notes payable to                                                                              
         common stock                                              ---             ---             ---           3,661 
   Issuance of common stock in acquisition                         ---             ---             ---           3,200 
   Issuance of restricted common stock                             ---             ---             ---             ---          
   Amortization of deferred compensation                           ---             ---             ---              23      
   Accretion of Series A convertible, redeemable                                                                           
         preferred stock                                           ---             ---              (30)           (30)
   Accrual of dividends on Series A convertible,                                                                        
         redeemable preferred stock                                ---             ---              (76)           (76)
   Net loss                                                        ---             ---           (8,347)        (8,347)
                                                               ---------      -----------      ---------     ----------
Balance, December 31, 1996                                         ---        $    ---         $(11,258)     $  26,322      
                                                                                                                     
   Forfeiture of restricted common stock                          1,800              (6)           ---           ---            
   Amortization of deferred compensation                           ---             ---             ---             122      
   Accretion of Series A convertible, redeemable                                                                          
         preferred stock                                           ---             ---             ---             (20)
   Accrual of dividends on Series A convertible,                                                                      
         redeemable preferred stock                                ---             ---             ---            (212)
   Net loss                                                        ---             ---          (10,703)       (10,703)
                                                               ---------      -----------      ---------     ----------
Balance, December 31, 1997                                        1,800       $      (6)       $(21,961)     $   5,509      
                                                                                                            
   Issuance of common stock in acquisition                         ---             ---             ---           3,432 
   Issuance of warrants                                            ---             ---             ---             598       
   Amortization of deferred compensation                           ---             ---             ---             124      
   Beneficial conversion feature of Series B                                                                                     
         redeemable preferred stock                                ---             ---             ---             485 
   Accretion of Series B redeemable                                                                                    
         preferred stock                                           ---             ---             ---            (485)
   Accrual of dividends on Series A convertible,                                                                       
         redeemable preferred stock and                                                                                
         Series B redeemable preferred stock                       ---             ---             ---            (294)
   Option issuance to non-employees                                ---             ---             ---              11 
   Net loss                                                        ---             ---           (5,791)        (5,791)
                                                               ---------      -----------      ---------     ----------
Balance, December 31, 1998                                         1,800      $      (6)       $(27,752)        13,589     
                                                               =========      ===========      =========     ==========
</TABLE>

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

                                       55
<PAGE>
 
ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

       (Dollars in thousands)

<TABLE>
<CAPTION>

                                                                      Year             Year             Year
                                                                     Ended             Ended            Ended
                                                                  December 31,     December 31,     December 31,
                                                                      1996             1997             1998
                                                                 -------------     ------------     -------------    
<S>                                                              <C>               <C>              <C>
Cash flows from operating activities:                           
  Net loss                                                       $   (8,347)      $   (10,703)       $   (5,791)
  Adjustments to reconcile net loss to net cash flows                                                 
   from operating activities:                                                                         
      Depreciation and amortization                                   1,370             4,026             3,414
      Premium on conversion of shareholder notes payable                                              
                to common stock                                         661             ---                ---
      Amortization of deferred compensation                              23               122               124
      Loss from disposal of assets                                     ---                984               400
      Loss from impairment of assets                                   ---                241             2,765
      Minority interest in loss of                                                                    
                non-consolidated corporation                           ---               ---                 28
      Gain on disposal of segment                                      ---               ---             (1,462)
  Changes in certain assets and liabilities:                                                          
      Accounts receivable                                                88              (636)              633
      Inventory                                                         (53)              (53)             (301)
      Prepaid expenses                                                 (241)              (78)              (35)
      Software development costs                                       (216)             (327)              (20)
      Assets held for resale                                           ---               ---                (15)
      Other assets                                                     ---                383              (308)
      Accounts payable                                                1,254            (1,100)             (235)
      Accrued liabilities                                                34               462              (353)
      Deferred revenues                                                  59               916               (14)
      Customer deposits                                                 695              (695)             ---
                                                                 ----------        ----------        -----------     
  Net cash flows from operating activities                           (4,673)           (6,458)           (1,170)
                                                                 ----------        ----------        -----------     
                                                                                                      
Cash flows from investing activities:                                                                 
   Proceeds from sale of assets                                        ---                185                 9
   Capital expenditures                                              (6,610)           (3,110)             (372)
   Change in assets and liabilities of disposed segment                ---               ---                (90)
   Disposal of subsidiary                                              ---               ---              2,345
   Acquisition of subsidiaries                                       (3,921)             ---             (2,250)
                                                                 ----------        ----------        -----------     
      Net cash flows from investing activities                      (10,531)           (2,925)             (358)
                                                                 ----------        ----------        -----------     
                                                                                                      
Cash flows from financing activities:                                                                 
  Borrowings under shareholder notes payable                          3,628              ---               ---
  Payments on shareholder notes payable                              (3,621)             ---               ---
  Payments of accrued interest on shareholder notes payable            (393)             ---               ---
  Issuance of common stock                                           30,669              ---               ---
  Issuance of Series A convertible, redeemable preferred                                              
                  stock                                                 950              ---               ---
  Issuance of Series B redeemable preferred stock                                                     
                  and warrants                                         ---               ---              2,750
  Payment of dividends on Series B redeemable                                                          
                  preferred stock                                      ---               ---                (37)
  Proceeds from line of credit                                         ---               ---              1,483
  Debt acquisition costs                                               ---               ---                (54)
  Retirement of subsidiary debt                                        ---               ---               (700)
  Borrowings under notes payable                                       10                ---               ---
  Payments on notes payable                                            (5)               (42)            (6,206)
                                                                 ----------        ----------        -----------     
     Net cash flows from financing activities                      31,238                (42)            (2,764)
                                                                 ----------        ----------        -----------     
                                                                                                      
Net change in cash and cash equivalents                            16,034             (9,425)            (4,292)
Cash and cash equivalents, beginning of period                        193             16,227              6,802
                                                                 ----------        ----------        -----------     
Cash and cash equivalents, end of period                         $ 16,227          $   6,802         $    2,510
                                                                 ==========        ==========        ===========     

</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

                                                                             56
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
                                      
1. Organization and Nature of Operations:

     Allin Corporation ("the Company"), a Delaware corporation, was formed as a
wholly owned subsidiary of Allin Interactive Corporation ("Allin Interactive")
on July 23, 1996. Effective August 16, 1996, the Company consummated a
transaction pursuant to an agreement whereby Allin Interactive became a wholly
owned subsidiary of the Company. Prior to this date, the Company had no
operations.  The Company's name, originally Allin Communications Corporation,
was changed following the December 31, 1998 vote of the holders of a majority of
the Company's common shares to approve an amendment to the Company's Certificate
of Incorporation.  The Company functions as a holding company and wholly owns
the subsidiaries noted below.

     On November 6, 1996, Kent Consulting Group, Inc., a California corporation,
merged with and into a wholly owned subsidiary of the Company, Kent Acquisition
Corporation, now Allin Corporation of California ("Allin Consulting-
California"), a California corporation.  Allin Consulting-California changed its
corporate name from Kent Consulting Group, Inc. during 1998.  Allin Consulting-
California generates revenue from fees under its contracts for technology
consulting, software design and network solutions services.  In addition to
providing such services to third party clients, Allin Consulting-California has
also provided technical and creative development and support for the operations
of affiliates.  Allin Consulting-California's services have been provided at
various locations within the United States and internationally, mostly located
near its operational headquarters in northern California.  On November 20, 1998,
the Company acquired MEGAbase, Inc., a California corporation specializing in
software development services, and subsequently merged it into Allin Consulting-
California.

     On August 13, 1998, the Company acquired all of the outstanding stock of
Allin Consulting of Pennsylvania, Inc. ("Allin Consulting-Pennsylvania"), a
Pennsylvania corporation.  Allin Consulting-Pennsylvania changed its corporate
name from KCS Computer Services, Inc. during 1998.  Allin Consulting-
Pennsylvania generates revenue from fees under its contracts for technology
consulting services for client/server and mainframe computer environments.
Additionally, Allin Consulting-Pennsylvania provides specialized technology
consulting services for the banking industry.  Allin Consulting-Pennsylvania's
services are provided at various locations throughout the United States, mostly
near its operational headquarters in Pennsylvania.  The specialized banking
industry services are provided at various locations nationally.

     Allin Interactive, a Delaware corporation, was formed on June 8, 1994, for
the purpose of designing, developing, selling and installing interactive
entertainment and communications systems.  Allin Interactive currently provides
interactive television applications development, systems integration and
consulting services.  Allin Interactive also operates eight interactive
television systems previously installed on cruise ships.  Revenue is derived
from passengers aboard the cruise ships through usage of pay-per-view and gaming
interactive services.  Since late 1997, Allin Interactive has also derived
management fee revenue from its cruise line customers for operation and
administration of its interactive television  systems.  Allin Interactive has
provided systems integration and consulting services from its Ft. Lauderdale,
Florida headquarters and at various locations domestic and international.
Transactional revenue from cruise ship systems is derived at sea and at various
domestic and international ports of call on ships where Allin Interactive's
system has been installed.  Allin Interactive changed its corporate name from
SeaVision, Inc. during 1998.

     Allin Digital Imaging Corp. ("Allin Digital"), a Delaware corporation, was
formed as a wholly owned subsidiary of the Company on August 15, 1996 for the
purpose of developing and marketing digital imaging applications and services.
During 1998, Allin Digital's sales strategy changed to focusing on the provision
of systems integration services for digital imaging equipment and software,
technical support and sale of ancillary digital imaging products.  Allin
Digital's services have been provided at various locations throughout the United
States.  Allin Digital changed its corporate name from PhotoWave, Inc. during
1998.

   The Company acquired all of the outstanding stock of Allin Network Products,
Inc. ("Allin Network"), a California corporation, on November 6, 1996.  Allin
Network generates revenue from sales of computer related

                                                                             57
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

hardware and software.  Allin Network's operations have been concentrated near
Oakland, California and Pittsburgh, Pennsylvania.  Allin Network changed its
corporate name from Netright, Inc. during 1998.
 
     Allin Holdings Corporation ("Allin Holdings"), a Delaware corporation, was
formed as a wholly owned subsidiary of the Company on October 21, 1996.  AHC
provides treasury management services to the Company and its subsidiaries.

     All of the outstanding stock of SportsWave, Inc. ("SportsWave"), a
Pennsylvania corporation, was sold by the Company on September 30, 1998.  The
Company had acquired SportsWave, which performed sports marketing services, on
November 6, 1996.  See Note 10.
 
     The Company is subject to a number of risks, including its limited
operating history with its recent acquisitions, uncertainty as to future
profitability; a history of net losses, accumulated deficit, liquidity,
expiration of its line of credit in September 1999, development of new products;
cruise lines' rights to terminate operations: competition in its current and any
future lines of business; management of growth; dependence on key personnel;
rapidly changing technology; risks inherent in developing new markets; and
fluctuation in operating results.

2. Summary of Significant Accounting Policies:

     The following is a summary of the significant accounting policies affecting
the Company's consolidated financial statements.

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its subsidiaries.  The Company is the sole shareholder of all of its
subsidiaries.  It is the Company's policy to consolidate all majority-owned
subsidiaries where the Company has control.  All significant intercompany
accounts and transactions have been eliminated.

     The Consolidated Balance Sheets as of December 31, 1996 and 1997 include
the financial position of the Company, Allin Consulting-California, Allin
Interactive, Allin Digital, Allin Network, SportsWave and AHC as of those dates.
The Consolidated Balance Sheet as of December 31, 1998 includes the financial
position of the Company, Allin Consulting-California, Allin Consulting-
Pennsylvania, Allin Interactive, Allin Digital, Allin Network and AHC as of that
date.

     The Consolidated Statement of Operations for the period ended December 31,
1996 includes the results of continuing operations of the Company, Allin
Consulting-California, Allin Interactive, Allin Digital, Allin Network and AHC
for the portion of 1996 for which the companies had operations or that was
subsequent to acquisition.  The Consolidated Statement of Operations for the
period ended December 31, 1997 reflects the results of continuing operations of
these companies for the full year of 1997. The Consolidated Statement of
Operations for the period ended December 31, 1998 reflect the results of
continuing operations of these companies for the full year of 1998 and the
results of continuing operations for Allin Consulting-Pennsylvania subsequent to
acquisition.  Allin Consulting-California reflects the results of operations of
the former MEGAbase business subsequent to its acquisition.  Results of
SportsWave's operations in all periods and the gain realized on the sale of
SportsWave in 1998 are reflected as results of discontinued operations.  See
Disposal of Segment.

Disposal of Segment

     On September 30, 1998, the Company sold all of the issued and outstanding
capital stock of SportsWave.  The sale of SportsWave represents disposal of a
segment since SportsWave comprised the entirety of the Company's sports
marketing business.  Accordingly, the results of operations for SportsWave for
the periods presented in the Company's Consolidated Statements of Operations
have been reclassified to interest in income or

                                                                              58
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
loss of disposed segment, which is presented after net loss from continuing
operations.  The gain recorded on disposal of SportsWave is also presented after
net loss from continuing operations.  See Note 10-Sale of SportsWave, Inc.

Use of Estimates in the Preparation of Financial Statements

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

Related Party Transactions

     The Company derived revenue in 1997 and 1998, recorded capitalized
purchases during 1996 and 1997 and recorded expenses during the three years
1996, 1997 and 1998 from transactions with related parties for products and
services.  Such transactions are viewed as occurring in the normal course of
business and pricing for sales and purchases is believed to be representative of
market rate.

     Information concerning all related party transactions is included in Note
21.

Cash and Cash Equivalents

     The Company considers all certificates of deposit with an original maturity
of three months or less and money market funds to be cash equivalents.

Market Risk Sensitive Instruments

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

Revenue and Cost of Sales Recognition

     Allin Consulting-California and Allin Consulting-Pennsylvania charge
consulting fees, typically on an hourly basis, to their clients for their
technology consulting, software design and network solution services.  Revenue
and related cost of sales are recognized as services are performed.

     Allin Interactive recognizes revenue and cost of sales for systems
integration services upon completion of the respective projects.  Consulting
revenue and cost of sales are recognized as services are performed.  Interactive
television transactional revenue and management fees and any associated cost of
sales are recognized as the services are performed.

     Allin Digital recognizes revenue and cost of sales for systems integration
services upon completion of the respective projects.  Revenue and associated
cost for equipment and consumable sales is recognized upon shipment of the
product.

     Allin Network recognizes revenue and associated cost from the sale of
products at the time the products are shipped.

                                                                              59
<PAGE>
 
                         ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Accounts Receivable

     The Company's subsidiaries record accounts receivable based upon billing or
revenue recognition for services and products.  Allowances on accounts
receivable are recorded when circumstances indicate collection is doubtful.
Accounts receivable are written off if reasonable collection efforts prove
unsuccessful.

     As of December 31, 1998, one significant customer comprised 14% of the
Company's accounts receivable.  One significant customer accounted for 12% of
the Company's 1998 revenue.  As of December 31, 1997, two significant customers
comprised 13% and 10%, respectively, of the Company's accounts receivable.
Three significant customers accounted for 23%, 16% and 10%, respectively, of the
Company's 1997 revenue.  Four significant customers accounted for 26%, 16%, 15%,
and 11%,  respectively, of the Company's 1996 revenues.

Inventory

     Inventory, consisting principally of digital photography equipment and
software, and computer hardware, software and communications equipment, is
stated at the lower of cost (determined on the first-in, first-out method) or
market.

Property and Equipment

     Property and equipment are recorded at cost.  The Company provides for
depreciation using the straight-line method over the estimated useful lives of
the assets. In the year of acquisition, the Company takes a full year of
depreciation if the asset was purchased in the first six months of the year, and
half a year of depreciation if the asset was purchased in the last six months of
the year. The estimated useful lives of property and equipment range from three
to five years. Expenditures for ordinary maintenance and repairs which do not
extend the lives of the applicable assets are charged to expense as incurred,
while renewals and improvements that materially extend the lives of the
applicable assets are capitalized and depreciated.  Depreciation expense is
included in Selling, General, and Administrative expenses on the Consolidated
Statements of Operations.  Depreciation expense for the periods ended December
31, 1996, 1997 and 1998 was approximately $750,000, $1,847,000, and $1,495,000,
respectively.

Assets Held for Resale

     Assets held for resale consisted of equipment purchased for digital
photography system installations in-process as of December 31, 1998 that was
sold to the respective customers during the next fiscal year.

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.

Intangible Assets

     Certain expenditures related to the organization and start-up of the
Company and certain of its subsidiaries have been capitalized in the
accompanying consolidated financial statements. Organizational and start-up
costs included in this balance are being amortized over a five-year period.

     As of December 31, 1998, other intangible assets include values assigned in
recording the acquisitions of Allin Consulting-California, Allin Consulting-
Pennsylvania and MEGAbase under Accounting Principals Board Opinion No. 16,
"Accounting for Business Combinations" (APB No. 16). Portions of the purchase
price for Allin

                                                                              60
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
Consulting-California have been attributed to an employment agreement, assembled
work force, customer list and goodwill, with useful lives of two, seven, five
and seven years, respectively.  The employment agreement was fully amortized as
of December 31, 1998.  Portions of the purchase price for Allin Consulting-
Pennsylvania have been attributed to assembled work force, customer list and
goodwill, with useful lives of five, fourteen and thirty years, respectively.  A
portion of the purchase price for MEGAbase has been attributed to goodwill, with
a useful life of thirty years.

     As of December 31, 1997, other intangible assets included portions of the
purchase price for Allin Consulting-California as noted above and additionally
included a value assigned for a tradename with a useful life of forty years.
The unamortized value of the tradename was written off in 1998 due to the change
in name of Allin Consulting-California.  Also included were portions of the
purchase price for SportsWave which had been attributed to a Major League Alumni
Marketing Agreement, assembled work force, customer list, tradename and
goodwill, with useful lives of twenty, seven, five, forty and twenty years,
respectively.

     Material intangible asset balances were recorded based on appraised values
and are being amortized on a straight line basis over their respective estimated
economic useful lives.

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.  See Note 11.

Deferred Revenue

     Deferred revenue is recorded for amounts billed or received for which
services will be performed in future periods.  Such amounts are recognized as
revenue when services are performed.  As of December 31, 1997, deferred revenue
included amounts recorded by SportsWave for licensing agreements which include
minimum guaranteed royalties, which are recognized as revenue on a straight-line
basis over the lives of the respective agreements.  Current portion of deferred
revenue represents amounts expected to be recognized as revenue within one year
of the date of the financial statements, while long-term deferred revenue
represents amounts expected to be recognized as revenue thereafter.  Costs
associated with deferred revenue are recorded as prepaid expenses and recognized
as expense as the associated revenue is recognized.

Advertising and Promotions

     Expenditures for advertising and promotions were approximately $414,000,
$558,000, and $118,000, respectively, for the periods ended December 31, 1996,
1997, and 1998. Expenditures for advertising and promotions are expensed as
incurred.

Income Taxes

     The shareholders of Allin Interactive had elected to file under Subchapter
S for both state and federal income tax purposes prior to July 23, 1996.
Accordingly, no provision for income taxes has been reflected in the financial
statements through that date as the taxable income or loss is reflected on the
individual income tax returns of the shareholders.  Certain events, including
the transactions described in Note 1, automatically terminated the S corporation
status of Allin Interactive as of July 22, 1996. Income earned subsequent to the
termination of Allin Interactive's S corporation status is subject to federal
and state income taxes at the corporate level.

                                                                              61
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
     The Company records current and deferred provisions for federal and state
income tax and deferred tax assets and  liabilities, as appropriate, in
accordance with the requirements of Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes" (SFAS No. 109).   Valuation
allowances will reduce deferred tax assets recorded if there is material
uncertainty as to the ultimate realization of the deferred tax benefits.

Financial Instruments

     As of December 31, 1998, the Company's Consolidated Balance Sheet includes
two notes payable to shareholders which relate to the acquisitions of Allin
Consulting-California and Allin Consulting-Pennsylvania.  The notes payable are
recorded at the face value of the instruments.  The Company accrues interest at
fixed rates and makes interest payments in accordance with the terms of the
notes.  See Note 9.  All other financial instruments are classified as current
and will be utilized within the next operating cycle.

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".  See Note 8.

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, 1997.  The
Company has adopted 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
adopted SFAS No. 132 in 1998.

     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.

Supplemental Disclosure of Cash Flow Information

     Cash payments for income taxes were approximately $-0-, $131,000, and
$85,000 during the years ended December 31, 1996, 1997, and 1998, respectively.
Cash payments for interest were approximately $1,123,000, $29,000, and $81,000
during the years ended December 31, 1996, 1997, and 1998, respectively.

                                                                             62
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     The non-cash investing and financing activities for the year ended December
31, 1996 were as follows:

<TABLE>
<S>                                                                         <C>
  Issuance of common stock in connection with acquisition                    $3,200,000
  Conversion of shareholder notes payable to common stock                     3,000,000
  Conversion of shareholder notes payable to Series A Preferred Stock         1,500,000
  Grant of restricted common shares                                             400,000
</TABLE>                                                                     
                                                                             
     The non-cash investing and financing activities for the year ended      
December 31, 1998 are as follows:                                            
                                                                             
<TABLE>                                                                      
<S>                                                                         <C>
  Issuance of common stock in connection with acquisitions                   $3,450,000
  Grant of non-employee options                                                  11,000
</TABLE>


     Dividends of approximately $212,000 and $230,000 were accrued but unpaid
during the years ended December 31, 1997 and 1998, respectively, on outstanding
shares of Series A Convertible Redeemable Preferred Stock.  Dividends of
approximately $28,000 were accrued but unpaid as of December 31, 1998 on
outstanding shares of Series B Redeemable Preferred Stock.

3. Initial Public Offering

     On November 6, 1996, the Company closed its initial public offering of
2,000,000 shares of common stock at a price of $15 per share.  The Company
received total net proceeds, after deduction of expenses payable and
underwriting discounts, of approximately $27 million.  On the closing date, the
Company used a portion of the proceeds to repay outstanding borrowings under a
line of credit, to pay accrued interest under the shareholder notes payable, and
for the acquisitions described in Note 9.

     Coincident with the closing of the initial public offering, $3,000,000 of
shareholder notes payable were converted into 244,066 shares of common stock at
a conversion rate of $12.29 per share.  A charge of approximately $661,000 was
reflected in the financial statements during the period ended December 31, 1996
for the difference between the conversion rate and the initial public offering
price.

     On December 4, 1996, the underwriters of the initial public offering closed
on their exercise of their over-allotment option and purchased 300,000
additional shares of common stock under the same terms as the initial public
offering.  Net proceeds received were approximately $4.2 million.

4. Series A Convertible, Redeemable Preferred Stock

     On August 16, 1996, the Company issued 25,000 shares of Series A
Convertible Redeemable Preferred Stock having a liquidation value of $100 per
share.  As of December 31, 1997 and 1998, all of the issued Series A shares
remain outstanding. The 25,000 Series A shares issued were convertible into an
aggregate of 203,385 common shares, an approximate $12.29 per common share
conversion rate, at the option of the holder, during the period from May 6, 1997
through December 6, 1997.  The conversion price reflected an illiquidity
discount from the subsequent initial public offering price and was
representative of fair value of the common shares as of the date of issuance.
None of the Series A preferred shares were converted to common shares during
this period.  Series A preferred shares may not be converted into common shares
thereafter.  Series A preferred stock is redeemable by the Company at any time
after the conversion period but prior to maturity.  Series A preferred stock
will mature June 30, 2006, unless redeemed earlier.

     The aggregate value of the Series A preferred shares issued, $2,500,000,
was recorded net of $50,000 to reflect transaction costs related to the
preferred stock issuance.  During the years ended December 31, 1996 and 1997,
$30,000 and  $20,000, respectively, of accretion was recorded.

                                                                              63
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
     The holders of the Series A preferred shares are entitled to receive
cumulative quarterly dividends, when and as declared by the Board of Directors,
at the rate of 8% of the liquidation value thereof per annum.  As of December
31, 1997 and 1998, approximately $288,000 and $518,000, respectively, of
dividends had been accrued for Series A Convertible Redeemable Preferred Stock.
The Company entered a Loan and Security Agreement with S&T Bank in October 1998
which prohibits the Company from declaring or paying dividends on Series A
preferred shares during the one-year term of the agreement.  No dividends have
been paid to date on Series A preferred shares.

     Dividends on Series A preferred shares of $76,000, $212,000 and $230,000
have been accrued during the fiscal years ended December 31, 1996, 1997 and
1998, respectively.  This represents $3.04, $8.48 and $9.20 per issued Series A
preferred share for the respective periods.

5. Series B Redeemable Preferred Stock

     During 1998, the Company designated 5,000 authorized preferred shares as
Series B Redeemable Preferred Stock.  The Company issued 2,750 Series B
preferred shares on August 13, 1998, all of which remain outstanding as of
December 31, 1998.  The liquidation value of Series B shares is $1,000 per
share.  The Series B preferred shares issued include a conversion feature
whereby each share is convertible into the number of shares of common stock
determined by (a) dividing 1,000 by $3.6125, which is 85% of the $4.25 Nasdaq
price prior to the date of closing of the acquisition of Allin Consulting-
Pennsylvania, or (b) if it results in a greater number of shares of common
stock, dividing 1,000 by the greater of (i) 85% of the closing price of the
common stock as reported by Nasdaq on the trading date prior to the date of
conversion, or (ii) $2.00.  After the first anniversary of the original issuance
of Series B preferred shares, each share is convertible into the number of
shares of common stock determined by (a) above, or (b) if it results in a
greater number of shares of common stock, dividing 1,000 by 85% of the closing
price of the common stock as reported by Nasdaq on August 14, 1999, the trading
date following the first anniversary of the issuance.  The convertibility
provision of the Series B preferred shares was approved on December 31, 1998 by
the holders of a majority of outstanding common shares.  Series B preferred
shares earn dividends at the rate of 6% per annum payable on the final day of
each January, April, July and October.  As of December 31, 1998, approximately
$28,000 of Series B preferred dividends were accrued but unpaid.

     Shareholder approval of the convertibility feature of the Series B
preferred shares resulted in the issuance of preferred stock with a non-
detachable conversion feature that is "in the money" at the date of approval.
Therefore, a beneficial conversion feature was recognized by allocating a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid-in-capital during 1998, the fiscal year in which the conversion
feature was approved.  The value of the beneficial conversion feature,
approximately $485,000, was calculated by determining the number of common
shares that would be issued assuming conversion at the market price at the date
of shareholder approval and the number to be issued at the conversion price and
multiplying the difference in number of common shares by the market price.
 
     The beneficial conversion feature was treated as an immediate dividend to
the Series B preferred shareholders since the Series B preferred shareholders
had rights for immediate conversion upon common stockholder approval.
Consequently, the value of the beneficial conversion feature represented a
dividend that would accrete immediately upon approval.  Since the Company had an
accumulated deficit as of the  approval date, the accretion was netted against
additional paid-in-capital rather than accumulated deficit, resulting in no net
change to shareholders' equity.

     The beneficial conversion feature results in additional accretion of
preferred stock in determining net loss available to common shareholders during
1998, which resulted in lower earnings per share.  The beneficial conversion
feature will not otherwise impact the earnings per share calculations during
periods in which the Company has net losses as the effect would be anti-
dilutive.

     Dividends on Series B preferred shares of $65,000 have been recorded during
the fiscal year ended December 31, 1998.  This represents $23.64 per issued
preferred share for 1998.
     

                                                                              64
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
     The Company allocated the proceeds of $2,750,000 from the issuance of
Series B preferred stock and accompanying warrants for common stock between the
relative fair values of the preferred stock and warrants.  The Series B
Redeemable Preferred Stock has been recorded at approximately $2,152,000.

6.  Warrants for Common Stock

     Series B preferred shareholders also received warrants to purchase an
aggregate of 647,059 shares of common stock at $4.25 per share.  Issuance of
common stock upon exercise of the warrants was approved on December 31, 1998 by
the holders of a majority of the Company's common shares.  The Company allocated
the proceeds of $2,750,000 from the issuance of Series B preferred stock and
warrants between the relative fair values of the preferred stock and warrants.
The value allocated to warrants, approximately $598,000 is reflected as a
component of shareholders' equity.  The warrants will not impact earnings per
share during periods in which the Company has net losses attributable to common
shareholders since the effect would be anti-dilutive.
 
7.   Stock Based Compensation and Restricted Stock Award

     On October 25, 1996, the Company adopted the "1996 Stock Plan" ("the 1996
Plan") for executive management, non-employee directors, employees and
consultants of the Company and its subsidiaries.  The 1996 Plan provided for the
issuance of up to 266,000 shares of common stock to be awarded as stock options,
stock appreciation rights, restricted shares and restricted units.  During 1998,
the Company's Board of Directors approved the reissuance of forfeited stock
options.  As of December 31, 1998, 5,932 shares remained available for future
grants under the 1996 Plan.

     Stock options awarded under the 1996 Plan are exercisable based on prices
established at the grant dates and vest at 20% of the award per year for five
years on the anniversaries of the grant date, except for 31,000 options which
vested on grant date and 14,760 options awarded to former SportsWave employees
which vested upon sale of that company.  The right to purchase shares expires
seven years from the date of grant or earlier if an option holder ceases to be
employed by or ceases to provide consulting services to the Company or a
subsidiary for any reason, except for the 45,760 shares noted above, which do
not include an early expiration provision.

     The Company granted 26,668 restricted shares under the 1996 Plan to
employees of Allin Consulting-California on November 6, 1996.  The restricted
shares will vest three years after grant date.  Allin Consulting-California has
recorded deferred compensation for the restricted shares based on market value
of the shares at date of grant and will record amortization over three years on
a straight line basis.  The Company has recognized approximately $23,000,
$95,000 and $124,000 of compensation expense related to the restricted stock
during the periods ended December 31, 1996, 1997 and 1998, respectively.  During
1997, 1,800 of the restricted shares were forfeited and reverted to treasury
stock.  Forfeiture was due to termination of the employees' association with
Allin Consulting-California.  As of December 31, 1998, 24,868 of the restricted
shares remained outstanding.

     On May 8, 1997, the Company's stockholders approved the Company's "1997
Stock Plan" ("the 1997 Plan") which reserved an aggregate of 300,000 shares of
the Company's Common Stock to be awarded as stock options, stock appreciation
rights, restricted shares and restricted units to officers and other employees
of the Company and its subsidiaries and to consultants and advisors (including
non-employee directors) of the Company and its subsidiaries.  The options are
exercisable based on prices established at the grant dates and vest at 20% of
the award per year for five years on the anniversaries of the grant date except
for 17,500 options which vested on grant date, 11,650 options awarded to former
SportsWave employees which vested upon sale of that company and 100,000 options
which will vest on the earlier to occur of May 15, 2001 or the date of a change
in control of the Company, as defined in a certain employment agreement.  For
grants made to date, the right to purchase shares expires seven years from the
date of grant or earlier if an option holder ceases to be employed by or ceases
to provide consulting services to the Company or a subsidiary for any reason.
During 1998, the Company's Board of Directors approved the reissuance of
forfeited stock options.  As of December 31, 1998, 9,000 shares remained

                                                                              65
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
available for future grants under the 1997 Plan.  The Company recognized
approximately $11,000 of expense during the year ended December 31, 1998 for
options awarded to non-employees under the 1997 Plan.

     On December 31, 1998, the Company's stockholders approved the Company's
"1998 Stock Plan" ("the 1998 Plan") which reserved an aggregate of 375,000
shares of the Company's Common Stock to be awarded as stock options, stock
appreciation rights, restricted shares and restricted units to officers and
other employees of the Company and its subsidiaries and to consultants and
advisors (including non-employee directors) of the Company and its subsidiaries.
Options to be awarded under the 1998 Plan will be exercisable based on prices
established at the grant dates and are expected to vest at 20% of the award per
year for five years on the anniversaries of the grant date, other than the
annual awards to outside directors that may be made under this plan, which are
expected to vest on grant date.  The right to purchase shares for any award made
under the 1998 Plan is expected to expire seven years from the date of grant or
earlier if an option holder ceases to be employed by or ceases to provide
consulting services to the Company or a subsidiary for any reason.  As of
December 31, 1998, no grants had been made under the 1998 Plan.

Summary of Stock Option Activity from 1996 through 1998:
--------------------------------------------------------

<TABLE>
<CAPTION>
                                                    1996 Plan                            1997 Plan
                                       -----------------------------------  -----------------------------------
                                                             Weighted-                            Weighted-
                                          Number of      Average Exercise      Number of      Average Exercise
                                           Options             Price            Options             Price
<S>                                    <C>               <C>                <C>               <C>
Outstanding at December 31, 1995                    ---                ---               ---                ---
Granted                                         202,550             $15.03               ---                ---
Forfeitures                                         ---                ---               ---                ---
Exercised                                           ---                ---               ---                ---
Expired                                             ---                ---               ---                ---
                                     --------------------------------------------------------------------------
 
Outstanding at December 31, 1996                202,550             $15.03               ---                ---
Exercisable at December 31, 1996                 21,000             $15.00               ---                ---
 
Granted                                          27,500             $18.23            70,050              $6.19
Forfeitures                                      58,400             $14.91               500              $4.50
Exercised                                           ---                ---               ---                ---
Expired                                             ---                ---               ---                ---
                                     --------------------------------------------------------------------------
 
Outstanding at December 31, 1997                171,650             $15.58            69,550              $6.25
Exercisable at December 31, 1997                 51,130             $15.39            10,000              $4.50
 
Granted                                         132,500             $ 4.49           229,200              $4.42
Forfeitures                                      70,750             $16.33             7,750              $5.74
Exercised                                           ---                ---               ---                ---
Expired                                             ---                ---               ---                ---
                                     --------------------------------------------------------------------------
 
Outstanding at December 31, 1998                233,400             $ 9.06           291,000              $4.82
Exercisable at December 31, 1998                 74,030             $13.58            38,040              $5.56
</TABLE>

                                                                              66
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
  The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for grants under the 1996 and 1997 Plans.
 
<TABLE>
<CAPTION>
                                              1996 Plan                1997 Plan
                                       -----------------------  -----------------------
<S>                                    <C>                      <C>
Risk free interest rate                                  4.7 %                    5.4 %
Expected dividend yield                                  0.0 %                    0.0 %
Expected life of options                               7 yrs.                   7 yrs.
Expected volatility rate                                46.0 %                   46.0 %
</TABLE>

<TABLE>
<CAPTION>
                                                        1996 Plan           1997 Plan
                                                    ------------------  -----------------
<S>                                                 <C>                 <C>
Options originally issued at market:
Exercisable at December 31, 1998                                74,030             23,940
Weighted average fair value of options granted
 during 1996                                                   $  8.19                ---
Weighted average fair value of options granted
 during 1997                                                   $ 10.03            $  3.20
Weighted average fair value of options granted
 during 1998                                                   $  2.20            $  2.48
 
 
Options originally issued in excess of market:
Exercisable at December 31, 1998                                   ---             14,100
Weighted average fair value of options granted
 during 1997                                                       ---            $  2.12
Weighted average fair value of options granted
 during 1998                                                   $  2.02                ---
</TABLE>

Summary of Information for Stock Options Outstanding or Exercisable at December
-------------------------------------------------------------------------------
31, 1998:
-------- 

<TABLE>
<CAPTION>
                                                    1996 Plan                            1997 Plan
                                       -----------------------------------  -----------------------------------
                                                             Weighted-                            Weighted-
                                          Number of      Average Exercise      Number of      Average Exercise
                                           Options             Price            Options             Price
<S>                                    <C>               <C>                <C>               <C>
Information for options outstanding
 at December 31, 1998:
Exercise Price:
Less than $4.00                                   5,000             $ 3.25             2,000              $3.25
From $4.00 to $5.00                             127,500             $ 4.54           251,700              $4.43
From $5.00 to $7.50                                 ---                ---            37,300              $7.50
From $15.00 to $16.25                           100,900             $15.06               ---                ---
                                     --------------------------------------------------------------------------
                                                233,400             $ 9.06           291,000              $4.82
 
Information for options exercisable
 at December 31, 1998:
Exercise Price:
Less than $4.00                                     ---                ---               ---                ---
From $4.00 to $5.00                              10,000             $ 4.25            23,940              $4.42
From $5.00 to $7.50                                 ---                ---            14,100              $7.50
From $15.00 to $16.25                            64,030             $15.04               ---                ---
                                     --------------------------------------------------------------------------
                                                 74,030             $13.58            38,040              $5.56
</TABLE>

                                                                              67
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        

Summary of Information for Stock Options Outstanding or Exercisable at December
-------------------------------------------------------------------------------
31, 1998 (cont.):
---------------- 


<TABLE>
<CAPTION>
                                                    1996 Plan                            1997 Plan
                                       -----------------------------------  -----------------------------------
                                                             Weighted-                            Weighted-
                                                              Average                              Average
                                          Number of      Contractual Life      Number of      Contractual Life
                                           Options                              Options
<S>                                    <C>               <C>                <C>               <C>
Information for options outstanding
 at December 31, 1998:
Exercise Price:
Less than $4.00                                   5,000          6.9 years             2,000          6.8 years
From $4.00 to $5.00                             127,500          6.8 years           251,700          6.4 years
From $5.00 to $7.50                                 ---                ---            37,300          5.8 years
From $15.00 to $16.25                           100,900          4.8 years               ---                ---
                                     --------------------------------------------------------------------------
                                                233,400          5.9 years           291,000          6.3 years
</TABLE>

     Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") establishes a ''fair value based
method'' of financial accounting and related reporting standards for stock-based
employee compensation plans.  SFAS No. 123 provides for adoption in the income
statement or through footnote disclosure. The Company has elected to account for
stock-based compensation plans under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), as permitted by SFAS
No. 123.

     Had compensation costs for the Company's Plans been determined consistent
with SFAS No. 123, pro forma net loss and EPS would have been as follows:

<TABLE>
<CAPTION>
          Year ended December 31                      1996                   1997                  1998
                                             ----------------------  ---------------------  -------------------
 
<S>                                          <C>                     <C>                    <C>
Pro forma net loss (dollars in thousands)                  $(8,393)              $(11,026)             $(6,369)
Pro forma loss per share                                   $ (3.00)              $  (2.18)             $ (1.31)
</TABLE>
                                                                                
     See Note 22 for information regarding 1998 Plan options awarded subsequent
to December 31, 1998.


8.  Earnings Per Share

     Earnings per share ("EPS") of common stock have been computed in accordance
with Financial Accounting Standards Board Statement No. 128, "Earnings Per
Share" ("SFAS No. 128").  The shares used in calculating basic and diluted EPS
include the weighted average of the outstanding common shares of the Company,
excluding 4,445, 26,218 and 24,868 shares of outstanding restricted stock for
1996, 1997 and 1998, respectively.  Prior to the expiration of their
convertibility period, if any, the restricted stock, outstanding stock options,
warrants, and the conversion of the $2 million secured promissory note (See Note
9) and Series A and B preferred stock would all be considered dilutive
securities under SFAS No. 128; however, these securities have not been included
in the calculation of diluted EPS as their effect would be anti-dilutive.  The
additional shares that would have been included in the diluted EPS calculation
related to the restricted stock, stock options and warrants, if their effect was
not anti-dilutive, were 43,028, 26,218 and 702,451 for the years ended December
31, 1996, 1997 and 1998, respectively.

                                                                              68
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  The following schedule summarizes the calculation of basic and diluted
earnings per share under SFAS No. 128:

<TABLE>
<CAPTION>
  Calculation of Basic and Diluted Net Loss per Common   
                        Share                                                       Year Ended December 31
       Dollars in thousands, except per share data                  1996                     1997                     1998
<S>                                                        <C>                      <C>                      <C>
Net loss                                                               $   (8,347)              $  (10,703)              $   (5,791)

Accretion and dividends on preferred stock                                    106                      232                      779
                                                                       ----------               ----------               ----------
Net loss applicable to common shareholders                             $   (8,453)              $  (10,935)              $   (6,570)

 
Basic and diluted net loss per common share                            $    (2.98)              $    (2.12)              $    (1.20)

                                                                       ----------               ----------               ----------
 
Shares used in calculating basic and diluted net loss
 per common share                                                       2,834,565                5,157,399                5,466,979
                                                                       ----------               ----------               ----------
</TABLE>


9.  Acquisitions

     Emerging Issues Task Force Issue 95-8:  "Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Company in a Purchase
Business Combination" ("EITF 95-8") describes five factors that must be
considered in evaluating the proper treatment of contingent consideration,
including factors involving terms of continuing employment, factors involving
components of shareholder group, factors involving reasons for contingent
payment provisions, factors involving formula for determining contingent
consideration, and factors involving other agreements and issues.  The Company
follows the EITF 95-8 guidelines in determining the accounting treatment for any
contingent consideration related to acquisitions.

Allin Consulting-Pennsylvania

     On August 13, 1998, the Company acquired all of the issued and outstanding
stock of Allin Consulting-Pennsylvania.  The agreement for the purchase of Allin
Consulting-Pennsylvania provided for payment of up to $16.0 million by the
Company, including $14.4 million at closing and potential contingent payments of
up to $1.6 million.  Closing payment terms included a cash payment of
approximately $2.4 million, issuance of 805,195 shares of the Company's common
stock, based on a rate of $4.406 per share as specified in the acquisition
agreement, secured promissory notes in the principal amounts of $6.2 and $2.0
million, and post-closing payment by or on behalf of Allin Consulting-
Pennsylvania of an approximate $200,000 tax liability.  The Company recorded the
stock issuance based on the market price on the date of closing of the
acquisition.  Allin Consulting-Pennsylvania had two outstanding notes due to a
bank in the aggregate amount of approximately $627,000 as of the Company's
acquisition, which the Company repaid in full on the date of the acquisition.
The acquisition was effective for accounting purposes as of August 1, 1998.
Five months of Allin Consulting-Pennsylvania's results of operations are
included in the Company's Consolidated Statement of Operations for 1998.

     The acquisition of Allin Consulting-Pennsylvania has been accounted for
using the purchase method.  The acquisition price has been allocated among the
net assets of the acquired entity, assembled workforce, customer base, and
goodwill.  Estimated remaining economic lives for assembled workforce, customer
base and goodwill are five, fourteen and thirty years, respectively.  The
acquisition of the purchase price to assets acquired and liabilities assumed of
Allin Consulting-Pennsylvania is as follows (dollars in thousands):

                                                                              69
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
<TABLE>
<S>                                                      <C>
  Cash                                                                   $   325
Working capital, other than cash                                           1,279
Furniture, equipment and leasehold improvements                              183
Notes payable to bank                                                       (627)
Other liabilities                                                            (51)
Assembled work force                                                         257
Customer base                                                              2,230
Goodwill                                                                  10,825
                                                       -------------------------
Net purchase price recorded                                              $14,421
                                                       =========================
</TABLE>

     The secured promissory note for $6.2 million bore interest at 5% per annum
payable at maturity.  Payment of principal of $3,000,000 was due at the earlier
to occur of the sale by the Company of a wholly-owned subsidiary or the
substantial portion of assets of the same or December 31, 1998.  Payment of
principal of $3,200,000 was due at the earlier to occur of the receipt of
financing from a third party lender sufficient to refinance such portion of the
note or December 31, 1998.  The full amount of principal and accrued interest on
this note was paid in October 1998 utilizing proceeds from the sale of
SportsWave (See Note 10), funds borrowed under a credit agreement with S&T Bank
(see Note 15), and operating funds of the Company.

     The secured promissory note for $2.0 bears interest at 6% per annum payable
on the first business day of each calendar quarter.  The principal balance of
the note matures August 13, 2000.  The $2.0 million secured promissory note will
be convertible into shares of the Company's common stock if not repaid on or
before maturity.  If not repaid, the note will convert into the number of shares
of common stock equal to (a)the amount obtained by dividing the outstanding
indebtedness by $4.406, or (b) at the holder's option, the amount obtained by
dividing the outstanding indebtedness by the average of the bid and asked prices
of the Company's common stock for the thirty days preceding maturity, subject to
a $2.00 minimum per share price.  On December 31, 1998, the holders of a
majority of the Company's common stock approved the issuance of common stock
upon conversion of the note payable.

     The agreement for purchase of Allin Consulting-Pennsylvania provided for
contingent payments of up to $1.2 million in cash and $400,000 in the Company's
common stock.  The amount of the contingent payments was to be determined on the
basis of Allin Consulting-Pennsylvania's Adjusted Operating Profit (as defined
in the Stock Purchase Agreement for the acquisition) for the period beginning
January 1, 1998 and ending December 31, 1998.  The former Allin Consulting-
Pennsylvania shareholders were entitled to receive aggregate contingent payments
equal to $4.67 for each dollar by which Adjusted Operating Profit exceeded
$1,671,681, subject to maximum contingent payments of $1,600,000.  Any
contingent payments due were to be made 75% in cash and 25% in the Company's
common stock.  The Company has calculated Adjusted Operating Profit of
approximately $1,179,000 for 1998 so no contingent payments are due to the
selling shareholders.

     Pro forma results of operations for the acquisition of Allin Consulting-
Pennsylvania are based on the historical financial statements of the Company and
Allin Consulting-Pennsylvania, adjusted to give effect to the acquisition of
Allin Consulting-Pennsylvania.  The pro forma results of operations assume that
the acquisition of Allin Consulting-Pennsylvania occurred as of January 1, 1997.
Pro forma information is as follows:

<TABLE>
<CAPTION>
                                                           Year Ended December     Year Ended December
(Dollars in thousands, except per share data)                    31, 1997                31, 1998
                                                        -----------------------------------------------
<S>                                                       <C>                     <C>
  Revenue                                                              $ 22,439                 $23,567
  Loss from continuing operations                                       (10,962)                 (7,792)
  Net loss                                                              (10,055)                 (6,134)
  Net loss attributable to common shareholders                          (10,452)                 (7,014)
  Net loss per common share--basic and diluted                         $  (1.75)                $ (1.18)
</TABLE>

                                                                              70
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
     The pro forma information presented above reflects the assumed effects of
certain pro forma adjustments, including assumed additional amortization expense
on intangible assets recorded in connection with the acquisition, assumed
adjustments to interest income for foregone investment income on cash balances
assumed to have been utilized in connection with the acquisition, assumed
adjustments to interest expense for notes payable related to the acquisitions,
credit line financing, and assumed repayment of Allin Consulting-Pennsylvania
debt balances.  The pro forma information also assumes adjustment for dividends
on Series B Redeemable Preferred Stock as if the preferred stock had been issued
as of January 1, 1997.

     The pro forma financial information does not purport to present what the
Company's results of operations would have been if the acquisition of Allin
Consulting-Pennsylvania had occurred on the assumed date, as specified above, or
to project the Company's financial condition or results of operations for any
future period.

MEGAbase

     On November 20, 1998, the Company acquired all of the issued and
outstanding stock of MEGAbase.  The MEGAbase operations were merged into Allin
Consulting-California following acquisition.  The Company anticipates that the
customers and employees acquired with the MEGAbase transaction will comprise the
core of Allin Consulting-California's post-acquisition software development
practice.  The agreement for the purchase of MEGAbase provides for payment of up
to $840,000 by the Company, including $40,000 at closing and potential
contingent payments of up to $800,000.  Closing payment terms included a cash
payment of $12,000 and the issuance of 6,568 shares of the Company's common
stock, based on a rate of $4.263 per share as specified in the acquisition
agreement.  MEGAbase had outstanding notes due to a bank and two individuals in
the aggregate amount of approximately $73,000 as of the Company's acquisition,
which the Company repaid in full on the date of the acquisition.

     The acquisition of MEGAbase has been accounted for using the purchase
method.  The acquisition price has been allocated among the net assets of the
acquired entity and goodwill.  Estimated remaining economic life for goodwill is
thirty years.

     The agreement for purchase of MEGAbase provides for contingent payments of
up to $800,000. The amount of the contingent payments is to be determined on the
basis of Allin Consulting-California's Development Practice Gross Margin (as
defined in the stock purchase agreement for the acquisition) for the period
beginning January 1, 1999 and ending December 31, 1999.  The former MEGAbase
sole shareholder is entitled to receive an aggregate contingent payment equal to
$1.00 for each dollar by which Allin Consulting-California's Development
Practice Gross Margin exceeds $500,000, subject to a maximum contingent payment
of $800,000.  Any contingent payment due may be made, at the Company's sole
option, (a) all in cash, (b) 50% in cash and 50% in the Company's Common Stock
based on a per share amount equal to the average of the bid and asked prices for
the five trading days preceding contingent payment, or (c) 50% in cash and 50%
in the form of a promissory note bearing interest at a rate of 8% per annum to
be due one year from the date of such note.  The contingent payment date shall
be no later than March 31, 2000, unless the Company selects (c) above, under
which 50% of the principal due shall be payable no later than March 31, 2000 and
50% due one year later.  The Company has determined any contingent payments due
will be recorded as additional cost of the acquired enterprise.

Allin Consulting-California

     Kent Consulting Group, Inc. was acquired under an agreement closed
coincident with the Company's initial public offering on November 6, 1996.
Under the agreement, Kent Consulting Group, Inc. was merged into a wholly owned
subsidiary of the Company, Kent Acquisition Corporation, which was the surviving
entity and changed its name to Kent Consulting Group, Inc.  The surviving entity
subsequently carried forth the business operations of the acquired entity.  In
1998, the surviving entity changed its name to Allin Corporation of California
("Allin Consulting-California").  In the following paragraphs, the term Allin
Consulting-California refers to both the acquired and surviving legal entities,
as is appropriate for the context.

                                                                              71
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
     The consideration included $2.0 million in cash and $3.2 million in the
Company's common stock, valued at the initial public offering price of $15 per
share.  The agreement also provided for contingent payments up to $2.8 million
based upon future operating income.  The acquisition was accounted for using the
purchase method.  The acquisition price was been allocated to an employment
agreement, assembled work force, customer list, tradename, goodwill and other
net assets of Allin Consulting-California.

     In November 1998, the Company and the former sole shareholder of Allin
Consulting-California, reached agreement on an amendment to modify the terms of
a promissory note for contingent payments related to the acquisition of Allin
Consulting-California.  The acquisition of Allin Consulting-California in
November 1996 included terms for a contingent payment of up to $2,800,000 based
on Allin Consulting-California's average annual operating income (as defined in
the agreement) for the three years 1997, 1998, and 1999.  Under the amendment,
the amount of the payment due (which is no longer contingent) has been fixed at
$2,000,000.  The amended note provides for principal payments of $1,000,000 plus
any accrued interest due on April 15, 2000 and October 15, 2000.  The amendment,
however, provides that the Company may defer payment of principal at its option
until April 15, 2005.  The amended note provides for interest at the rate of 7%
per annum from the acquisition date of November 6, 1996.  Accrued interest is
payable quarterly beginning on April 15, 2000.

     The contingent payments to be made under the amended promissory note were
recorded as additional cost of the acquired enterprise.  The Company recorded a
liability for these payments in November 1998.  The fixing of the contingent
payment amount and the recording of interest payable for the period from
acquisition to amendment resulted in additional goodwill being recorded by Allin
Consulting-California, which will be amortized over the remaining estimated life
for goodwill of five years.

Allin Network
 
     The Company acquired all of the issued and outstanding shares of Allin
Network, as of the initial public offering date, November 6, 1996, for a nominal
price of $1.  Allin Network had previously been owned by the same individual as
Allin Consulting-California.

10.  Sale of SportsWave

     On September 30, 1998, the Company sold all of the issued and outstanding
capital stock of SportsWave to Lighthouse Holdings, Inc. ("Lighthouse"). The
SportsWave Stock Purchase Agreement provided for the payment by Lighthouse to
the Company of $3,443,512, subject to a final unearned revenue adjustment.  The
sale proceeds are based on a purchase price of $3,500,000, less an estimated
unearned revenue adjustment of $56,488 related to certain sports marketing
programs completed subsequent to the sale of SportsWave.  Sale proceeds included
$2,943,512 in cash upon closing of the sale and a promissory note in the
principal amount of $500,000 which bore interest at the rate of 8.5% per annum.

     The Company and Lighthouse subsequently agreed to a reduction in the amount
of the promissory note of $37,000, primarily to reflect the final unearned
revenue adjustment.  Payment of the adjusted principal amount of the promissory
note and accrued interest was received from Lighthouse in January 1999.
 
     The Company acquired all of the issued and outstanding shares of capital
stock of SportsWave on November 6, 1996.  The acquisition was accounted for
using the purchase method.  In addition to a cash payment at the time of
acquisition of $2,400,000, the agreement for the Company's acquisition of
SportsWave included provisions for contingent earn-out payments up to a maximum
of an additional $2,400,000 based on SportsWave operating income, as defined in
the purchase agreement, for 1997, 1998 and 1999.  In order to facilitate the
sale of SportsWave to Lighthouse, the Company and the former shareholders of
SportsWave agreed to a settlement of any contingent liability related to the
earn-out provisions of the original stock purchase agreement.  On October 6,
1998, the Company made aggregate payments of $600,000 to the former SportsWave
shareholders in full settlement of any

                                                                              72
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
claims to interim or final earn-out payments that may have been due in the
future.  The amount of the contingent payment was added to the Company's
investment balance in SportsWave in calculating gain on disposal.

     The sale of SportsWave represents disposal of a segment since SportsWave
comprised the entirety of the Company's sports marketing business.  Accordingly,
the results of operations for SportsWave for the periods presented in the
Company's Consolidated Statements of Operations have been reclassified to equity
basis interest in income or loss of disposed segment, which is presented after
net loss from continuing operations.

     The Company recognized a gain on disposal of SportsWave of approximately
$1,437,000 in the period ended December 31, 1998.  The gain is also presented
after net loss from continuing operations.

11.  Impairment of Long-Lived Assets

     Allin Interactive maintained an inventory of equipment removed from three
Royal Caribbean Cruise Line ("RCCL") ship interactive television systems which
had ceased operations during the second quarter of 1998, equipment from the
Cunard Line Ltd. ("Cunard") ship Queen Elizabeth 2 system which had terminated
operations in December 1997 and a system for the Norwegian Cruise Line ("NCL")
ship Norway which had not been completed.  From the time the equipment became
available for reuse, Allin Interactive sought alternative productive use of the
equipment, which included substantive discussions with several cruise lines
concerning installation of systems.  During August 1998, the last of these
substantive discussions was terminated by Carnival Cruise Lines ("Carnival") at
the time it was announced that Carnival had contracted with a competitor for
installation of an interactive television system aboard a Carnival ship.
Discussions with Carnival at the time of these events also caused Allin
Interactive's management to regard continued long-term operation of the
interactive systems aboard two Carnival vessels to be in jeopardy.  Under the
terms of the Company's agreement with Carnival, discontinuation of management
fees and/or termination of services may be made upon thirty days' notice.
During August 1998, Allin Interactive also was informed by NCL that it wished to
discontinue payment of management fees for the system aboard the Norwegian Dream
subsequent to December 31, 1998, in accordance with the terms of its agreement.
Operation of the Norwegian Dream system will be terminated and the equipment
removed in April, 1999.  Allin Interactive will receive a reduced interim
management fee from January to April 1999.  The Company determined that the
events described represented facts and circumstances indicating that the
carrying value of these assets may not be recoverable because of the lack of
short-term prospect of reuse for the equipment maintained as inventory and
because of a substantive prospect of termination of operations or lack of
adequate cash flow due to the discontinuation of management fees for the
operating systems.  The Company  determined estimated salvage values for all of
the equipment and estimated undiscounted cash flows for the operating systems
and determined that the assets were impaired.  The Company recorded a loss of
$2,765,000 during August 1998 to write-down the assets to estimated fair values.

     The Company reorganized its digital photography operations in early 1998.
While the Company continues to own the proprietary digital imaging systems that
have been developed, their usage was less closely related to the systems
integration services offered beginning in early 1998 as the primary product in
the digital photography market. The underlying hardware configuration utilized
by the Company's customers in Allin Digital's early operations under the new
strategy was different than that originally used in developing the Company's
proprietary digital imaging technology.  Adaptations to the proprietary system
were necessary for it to be effectively utilized with the new hardware
configurations.  The Company did not immediately pursue the additional
development necessary for effective immediate utilization of the proprietary
digital photography system in connection with its systems integration services
because the Company wished to evaluate results under the new strategy prior to
making additional capital commitments.  The Company therefore believed that the
change in business strategy during the first quarter of 1998 was an event which
impaired the net realizable value of the proprietary digital photography system.
Because use of the proprietary system in connection with systems integration
services required additional development which the Company did not plan to
pursue at that time, and due to the uncertainty of results of the new business
strategy at that time, the Company believed the net realizable value of the
system to be $-0- due to the impact of the events described above.
Consequently, the Company recorded a writedown of approximately

                                                                              73
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

$241,000, as of December 31, 1997, to reduce the net unamortized software
development costs related to its digital photography system to $-0-.  The loss
was recognized as of December 31, 1997 because it represented significant new
information regarding the realizability of assets between fiscal year-end and
the release of financial statements.  If the Company had not recorded the
writeoff as of December 31, 1997, it would have been required to record a
reserve on the assets, which would have resulted in a similar income statement
effect.

     A note receivable from the former President of the Company in the amount of
$130,000 and interest receivable of approximately $10,000 was forgiven during
the first quarter of 1998 in connection with a severance agreement with that
individual.  Impairment of these assets was reflected as of December 31, 1997
because it represented significant new information regarding the realizability
of assets between fiscal year-end and the release of financial statements.

12.  Software Development Costs

     Software development costs capitalized were approximately $216,000,
$48,000, and $21,000 during the years ended December 31, 1996, 1997, and 1998,
respectively, relating primarily to the Company's interactive television system.
Amortization expense related to these and previously capitalized costs was
approximately $311,000, $410,000, and $196,000 during the years ended December
31, 1996, 1997, and 1998, respectively.  See Note 11 for additional information
related to the Company's digital imaging system.

     Research and development expense was approximately $949,000, $212,000, and
$152,000 for the years ended December 31, 1996, 1997, and 1998, respectively.

13.  Intangible and Other Assets

     Intangible and other assets consist of the following:

<TABLE>
<CAPTION>
                           (Dollars in thousands)                                     December 31,
                                                                               --------------------------
                                                                                   1997          1998
                                                                               ------------  ------------
<S>                                                                            <C>           <C>
    Organizational and start-up costs, net of accumulated amortization of
    $35 and $45  (amortized over five years).................................            15             5
    Employment agreement, net of accumulated amortization of  $1,563
    and $2,680...............................................................         1,116           ---
    
 
    Major League Alumni Marketing Agreement, net of accumulated
    amortization of  $7 and $-0-.............................................           118           ---
 
    Assembled work force of acquired entities, net of accumulated
    amortization of $19 and $49..............................................            94           296
 
    Customer lists of acquired entities, net of accumulated amortization of
    $46 and $118.............................................................           149         2,231
     
    Tradenames of acquired entities, net of accumulated amortization of
    $7 and $-0-..............................................................           249           ---
    
 
    Goodwill, net of accumulated amortization of $372 and $722...                     3,031        14,039
    Long-term portion of prepaid expenses....................................           139           ---
    Debt acquisition cost, net of accumulated amortization of  $-0-
    and $13 (amortized over one year)..........................................         ---            41
    
 
    Minority interest in non-consolidated corporation........................           ---            72
    Other assets, net of accumulated amortization of $1 and $2......                      5             4
                                                                                     ------       -------
                                                                                     $4,916       $16,688
                                                                                     ======       =======
</TABLE>

                                                                              74
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
     Long-term portion of prepaid expenses represents the costs associated with
long-term portion of deferred revenues.  The unamortized value of the tradename
was written off in 1998 due the change in name of Allin Consulting-California.
See Note 14 for additional information regarding the minority interest in a non-
consolidated corporation.

14.  Minority Interest in Non-Consolidated Corporation

     Allin Digital has an ownership interest of approximately 10.8% in
PhotoWave, Inc., formerly named Rhino Communications Corporation ("RCC").  The
initial investment was made in March 1998 through the contribution of certain
assets previously used in its digital photography business and the rights to the
name PhotoWave.  An initial value of $100,000 was recorded for the investment,
based on Allin Digital's initial stock ownership percentage of 20% in comparison
to the initial cash capitalization of RCC for the remaining equity.  The book
value of the assets contributed approximated the value placed on the investment.
Allin Digital's ownership percentage has been reduced as a result of additional
capital contributions by third parties.

     The Company recognized a loss of $28,000 during the period ended December
31, 1998 for its equity basis interest in the results of operations of
PhotoWave, Inc., which is presented as a minority interest loss in the Company's
Consolidated Statements of Operations.  Equity basis losses will reduce the
carrying value of the Company's investment.  The investment balance of $72,000
is included with Other Assets on the Company's Consolidated Balance Sheets.

15.  Line of Credit and Notes Payable:

     On October 1, 1998, the Company and S&T Bank, a Pennsylvania banking
association, entered into a Loan and Security Agreement (the "S&T Loan
Agreement"), under which S&T Bank has agreed to extend the Company a revolving
credit loan.  The maximum borrowing availability under the S&T Loan Agreement is
the lesser of $5,000,000 or eighty-five percent of the aggregate gross amount of
trade accounts receivable aged sixty days or less from the date of invoice.
Accounts receivable qualifying for inclusion in the borrowing base will be net
of any prepayments, progress payments, deposits or retention and must not be
subject to any prior assignment, claim, lien, or security interest.  As of
December 31, 1998, maximum borrowing availability was approximately $1,663,000.
The expiration date of the S&T Loan Agreement is September 30, 1999.

     Borrowings may be made under the S&T Loan Agreement for general working
capital purposes, and to repay a portion of certain indebtedness incurred by the
Company in connection with its acquisition of Allin Consulting-Pennsylvania.  On
October 2, 1998, the Company borrowed $1,000,000 under the S&T Loan Agreement,
which was used to repay a portion of the outstanding acquisition-related debt.
The Company has from time to time borrowed and subsequently repaid amounts under
the revolving credit loan.  As of December 31, 1998, the balance outstanding on
the line of credit was $1,483,000.

     Loans made under the S&T Loan Agreement bear interest at the bank's prime
interest rate plus one percent.  Since the initial borrowing under the credit
facility on October 2, 1998, the applicable interest rate has varied from a high
of 9.25% to a low of 8.75%.  The applicable rate as of December 31, 1998 was
8.75%.  Interest payments due on any outstanding loan balances are to be made
monthly on the first day of the month.  Interest expense of approximately
$24,000 related to the line of credit borrowings was recorded during the period
ended December 31, 1998.  The principal will be due at maturity, although any
outstanding principal balances may be repaid in whole or part at any time
without penalty.

     The S&T Loan Agreement includes various covenants relating to matters
affecting the Company including insurance coverage, financial accounting
practices, audit rights, prohibited transactions, dividends and stock purchases.
The Company is in compliance with all covenants under the S&T Loan Agreement.

                                                                              75
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
     The Company has a balance due on a line of credit with Wells Fargo Bank of
approximately $23,000 as of December 31, 1998.  This credit facility was
originally obtained by MEGAbase to finance equipment purchases.  The outstanding
balance was assumed by the Company upon acquisition of MEGAbase.  Outstanding
borrowings under the line of credit bear interest ranging from 9.50% to 9.85%
and mature in May 2003.

     Non-current portion of notes payable on the Consolidated Balance Sheet as
of December 31, 1998 includes two notes payable of $2,000,000 each related to
the acquisitions of Allin Consulting-Pennsylvania and Allin Consulting-
California.  See Note 9  Acquisitions for additional information on these notes.

     Allin Consulting-Pennsylvania acquired certain office equipment under a
capital lease.  As of December 31, 1998, current and non-current principal
obligations under the lease are approximately $2,000 and $4,000, respectively.
Principal payments due under the capital lease are reflected as current and non-
current portions of notes payable on the Consolidated Balance Sheet.  The lease
matures in October 2001.

     Allin Network had a note payable to a shareholder of the Company.  Balances
outstanding on the note were approximately $27,000 and $-0- at December 31, 1997
and 1998, respectively.

16.   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 December 31, 1998, approximately $463,000 of
the amount accrued under the February 4, 1998 charge had been paid.  The
remaining balance, approximately $28,000, 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 January 1999.

     An accrual of approximately $298,000 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 eleven 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.  All of the positions included in the plan were
eliminated.  As of December 31, 1997, approximately $172,000 of the amount
accrued under the June 30, 1997 plan had been paid.  The balance remaining,
approximately $126,000 was included in accrued compensation and payroll taxes on
the Consolidated Balance Sheet as of December 31, 1997.  As of December 31,
1998, all of the amount accrued under the June 30, 1997 plan had been paid.

     An accrual of approximately $31,000 was recorded as of September 30, 1997
to establish a liability for severance costs associated with a plan for
involuntary employee terminations.  Associated expenses are reflected in
Selling, general & administrative expenses on the Consolidated Statement of
Operations as of that date.  The plan included four proposed employee
terminations.  Included in the plan were technical support positions associated

                                                                              76
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

with digital photography and shipboard ITV operations, and administrative
support staff positions.  All of the four positions included in the plan were
eliminated.  As of December 31, 1997, all of the amount accrued under the
September 30, 1997 plan had been paid.

17.  Lease Commitments

     The Company leases office space and equipment under operating leases that
expire at various times through 2002.  Minimum future annual rental commitments
for all non-cancellable operating leases as of December 31, 1998 are as follows:

<TABLE>
<CAPTION>
Minimum Future Lease Payments
 
<S>                                              <C>
1999                                                      $  524,000
2000                                                         510,000
2001                                                         306,000
2002                                                          23,000
                                                 -------------------
 
Total                                                     $1,363,000
                                                 ===================
</TABLE>
                                                                                
18.   License and Royalty Agreements:

License Agreements

     Allin Interactive has an agreement with a vendor that provides for a
software license fee of $25,000 per interactive television installation and
includes specified prices for various hardware components. This agreement
expires in October 1999, and payments for license fees under this arrangement
were $75,000, $125,000 and $-0- for the periods ended December 31, 1996, 1997
and 1998, respectively. These fees were included with on-board equipment upon
installation of the interactive systems.  Allin Interactive does not anticipate
any further usage of software licenses under this agreement.

Royalty Agreements

     Allin Interactive's contracts with certain cruise lines provide for
specified royalty payments based upon adjusted gross revenue, as defined in the
respective agreements. These royalty payments are adjusted upon reaching
specified milestones for cumulative revenue generated by the interactive systems
installations. Royalty expenses of approximately $16,000, $42,000, and $55,000
are included with selling, general and administrative expenses in the
accompanying consolidated statements of operations for the years ended December
31, 1996, 1997, and 1998, respectively.


19.    Termination of Interactive Television Contracts

     During March 1998, Allin Interactive and RCCL 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 has lost transactional revenue,
including pay-per-view movies and gaming, and management fee revenue related to
these ships subsequent to cessation of operations.

     During August 1998, Allin Interactive received notice from NCL that it
intended to discontinue management fees subsequent to December 31, 1998 in
accordance with the terms of their agreement.  Operation of the interactive
television system aboard the Norwegian Dream is scheduled to cease in April
1999.  NCL subsequently agreed to a significantly reduced management fee for the
interim period from January 1, 1999 until

                                                                              77
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
cessation of operations.  Allin Interactive will lose transactional revenue,
including pay-per-view movies and gaming, and management fee revenue related to
this ship subsequent to cessation of operations.

     Revenue and gross profit derived from interactive television and systems
integration services for RCCL and NCL were:

<TABLE>
<CAPTION>
                                      Royal Caribbean Cruise Lines    Norwegian Cruise Line
                                      ------------------------------------------------------------
                                       Year Ended      Year Ended      Year Ended      Year Ended 
                                      December 31,    December 31,    December 31,    December 31,
        (Dollars in thousands)            1997            1998            1997            1998
                                      ------------------------------------------------------------
<S>                                   <C>             <C>             <C>             <C>
Shipboard Transactional Revenue &     
 Management Fees                      $   322         $ 356           $ 170           $ 175
                                                                                      
Gross Profit                              268           322             122             154
                                                                                      
Systems Integration Revenue           $   663         $  50           $   9           $  44
Gross Profit (Loss)                      (405)           21               1               7
                                                                                      
% of Consolidated Revenue                10.3%          2.7%            1.2%            1.4%
% of Consolidated Gross Profit           (3.8)%         5.3%            3.4%            2.5%
</TABLE>


20.  Income Taxes

     The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109. As discussed in Note 2, Allin Interactive elected Subchapter S
corporation status for income tax purposes prior to July 23, 1996.  Accordingly,
the income of Allin Interactive was reported on the individual income tax
returns of its shareholders prior to this date.  The financial statements,
therefore, do not include a provision for income taxes prior to the change in
status.

     The components of the deferred tax assets and liabilities, as of December
31, 1997 and 1998, are as follows:

<TABLE>
<CAPTION>
          Assets (liabilities)                December 31, 1997         December 31, 1998
                                           ------------------------  ------------------------
         (Dollars in thousands)
<S>                                        <C>                       <C>
Net operating loss carryforward                            $ 5,127                   $ 7,553
Deferred revenue                                               217                       ---
Intangible asset differences                                   490                       872
Restricted stock grant                                          58                       108
Fixed assets                                                    32                      (460)
Research and development                                       ---                      (234)
Miscellaneous reserves                                         260                        65
 
Valuation allowance                                         (6,184)                   (7,904)
                                         ---------------------------------------------------
 
Net deferred income taxes                  $                  ---    $                  ---
                                         ===================================================
</TABLE>

                                                                              78
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
     As of December 31, 1997, the Company had available for federal and state
income tax purposes, net operating loss carryforwards of approximately
$13,600,000 and $8,600,000, respectively, which are scheduled to expire at
various times from 1999 through 2012.  As of December 31, 1998, the Company had
available for federal and state income tax purposes, net operating loss carry
forwards of approximately $19,600,000 and $14,800,000 which are scheduled to
expire at various times from 2000 through 2013.

     The realization of the above tax benefits depends on the Company's ability
to generate future taxable income.  The Company has established valuation
allowances as of December 31, 1997 and 1998 to offset these deferred tax
benefits.

     The fiscal 1996 and 1997 income tax provisions of approximately $22,000 and
$45,000, respectively, consist of currently payable state income taxes of
certain subsidiaries.  No income tax provision was recorded in fiscal 1998.

21.  Related Party Transactions:

Shareholder Notes Payable

     The acquisition of Allin Consulting-Pennsylvania in August 1998 included
two promissory notes issued by the Company in the amounts of $6.2 and $2.0
million, respectively, to a former shareholder of Allin Consulting-Pennsylvania
who is currently a shareholder and director of the Company.  The secured
promissory note for $6.2 million bore interest at 5% per annum and was paid in
full in October 1998.  The secured promissory note for $2.0 million bears
interest at 6% per annum and matures August 13, 2000.  The $2.0 million secured
promissory note will be convertible into shares of the Company's common stock if
not repaid on or before maturity.  See Note 9 for additional information
concerning these notes.  The Company recorded interest expense of approximately
$89,000 and made interest payments of approximately $59,000 during 1998 related
to these notes.

     In November 1998, the Company and the former sole shareholder of Allin
Consulting-California, who is currently a shareholder and formerly President of
the Company, reached agreement on an amendment to modify the terms of a
promissory note for contingent payments related to the acquisition of Allin
Consulting-California.  Under the amendment, the amount of the payment due has
been fixed at $2,000,000.  The amended note provides for principal payments of
$1,000,000 plus any accrued interest due on April 15, 2000 and October 15, 2000.
The Company may, however, defer payment of principal at its option until April
15, 2005.  The amended note provides for interest at the rate of 7% per annum
from the acquisition date of November 6, 1996.  During 1998, the Company
recorded $280,000 as additional purchase consideration for the interest due from
acquisition to amendment of the note.  Approximately $21,000 of interest expense
was also accrued related to this note in 1998.  Accrued interest is payable
quarterly beginning on April 15, 2000.  See Note 9 for additional information
concerning this note.

     Allin Interactive recorded several notes payable due to certain
shareholders in 1994 and 1995, each with an original three-year maturity. These
notes bore interest at 15%, payable at maturity, and had scheduled original
maturity at various dates from July 1997 through December 1998. Repayment of a
portion of the notes of approximately $3.6 million was made in connection with
Allin Interactive's initial draw on a line of credit entered into on May 31,
1996.   Borrowings under this line of credit were guaranteed by certain
shareholders for which they have received a guarantee fee equal to the
difference between the 15% accrued under the shareholder notes payable and the
rate accrued on borrowings under this line of credit.

     During August 1996, notes due to two shareholders, one of whom is a
director of the Company, in the aggregate amount of $1.5 million were converted
to Series A Convertible Redeemable Preferred Stock.  See Note 4.

     Shareholder notes payable in the aggregate amount of $3.0 million were
converted into 244,066 shares of Common Stock, effective in November 1996 upon
the closing of the Company's initial public offering.

                                                                              79
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
     Allin Network had a note payable due to a shareholder and former President
of the Company of approximately $64,000, $27,000 and $-0- at December 31, 1996,
1997 and 1998, respectively.

Loan to Director and Officer

     During 1997, the Company made a $130,000 loan to a director and officer of
the Company.  This loan, including approximately $10,000 of unpaid interest, was
forgiven in connection with the resignation of this director and officer.  The
write-off of this loan balance was recorded as of December 31, 1997.  See Note
11.

Notes Receivable from Employees

     At December 31, 1997 and 1998, respectively, the Company had two long term
notes due from employees.  Outstanding balances on these notes were
approximately $45,000 and $35,000 at December 31, 1997 and 1998, respectively.
Both notes bear interest at fixed rates of 7%.

Services and Products Sold to Related Parties

     During 1997 and 1998, Allin Consulting-California provided computer network
consulting services to three entities in which certain shareholders, directors
and an officer of the Company own interests.  Fees charged were approximately
$34,000 and $22,000 in 1997 and 1998, respectively.

     During 1997 and 1998, Allin Network sold computer hardware and components
to two entities in which certain shareholders, directors and an officer of the
Company own interests.  Revenue from these sales was approximately $23,000 and
$30,000 in 1997 and 1998, respectively.

Management Services and Lease Arrangements

     Certain shareholders, directors, former officers and an officer of the
Company own interests in three separate entities that performed installation,
marketing, consulting and administrative services and made purchases for the
Company and its subsidiaries. Fees related to these services and reimbursements
for expenditures incurred on behalf of the Company and its subsidiaries were
approximately as follows:

<TABLE>
<CAPTION>
           Period Ended                 Fees      Reimbursements
----------------------------------  ------------  ---------------
<S>                                 <C>           <C>
December 31, 1996                       $232,000         $419,000
December 31, 1997                            ---          123,000
December 31, 1998                            ---              ---
</TABLE>

     During 1996, the Company hired a management team that reduced its need for
the services provided by these entities. Accordingly, the fees and
reimbursements paid under these arrangements have declined. Management
agreements with two of the entities were terminated in July 1996. The third
management agreement was converted into a lease agreement effective August 1,
1996.  The lease agreement included the rental of office space and certain
administrative services to be provided to Allin Interactive.  This agreement
provided for monthly fees of $3,700 and was terminable by either party upon 30
days notification.  Rental expense under this agreement was approximately
$15,000 in 1996 and $3,700 in 1997.  The agreement was terminated effective
January 31, 1997.

     The Company leases office space from an entity in which certain
shareholders have an ownership interest. Rental expense under this arrangement
was approximately $78,000, $258,000 and $295,000 for the years ended December
31, 1996, 1997 and 1998, respectively.  The initial office lease expired on
December 31, 1996.  A new lease was negotiated effective as of February 1, 1997
with a term of five years to expire on January 31, 2002.  In late 1997, an
agreement was reached among the Company, the lessor and a third party for sublet
of a portion of the office space, terminating any liability of the Company for
the sublet space for the term of the lease.  The Company

                                                                              80
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

assumed responsibility for design and build-out costs associated with the sublet
agreement, which approximated $61,000 and were recorded in 1997.  This amount
includes approximately $13,000 in fees for an entity in which certain
shareholders of the Company have an interest.  The Company, the lessor and the
same third party agreed on sublet of an additional portion of the office space
in 1998 under similar terms. The Company also assumed responsibility for design
and build-out costs associated with the second sublet agreement, which
approximated $52,000 and were recorded in 1998.  This amount includes
approximately $13,000 in fees for an entity in which certain shareholders of the
Company have an interest. As of December 31, 1998, minimum lease commitments
under the lease were approximately $843,000.

     The Company provided office space on a month to month basis during 1997 and
1998 to an entity in which a director has an interest.  Rental charges were
approximately $1,000 and $2,000 during 1997 and 1998.

     Allin Digital sublet office space from an entity in which certain
shareholders have an ownership interest.  Rental expense under this arrangement
was approximately $12,000 and $12,000 during the years ended December 31, 1996
and 1997, respectively.  The term of the sublet arrangement was on a month by
month basis and was terminated in March 1997.

     Allin Consulting-California leases office space from a shareholder and
former President of the Company.  Rental expense under this agreement was
approximately $11,000 for the period of 1996 subsequent to acquisition.  Rental
expense was approximately $65,000 for each of the years ended December 31, 1997
and 1998.  The lease is on a month to month basis.

     SportsWave received consulting and administrative services under an
arrangement with an entity in which certain of the Company's shareholders,
directors and an officer maintain ownership interests.  Fees related to these
services totaled $10,000 during the period of 1996 subsequent to acquisition of
SportsWave.  This arrangement was terminated in December 1996.

     SportsWave leased office space from an entity in which certain shareholders
have an ownership interest.  Rental expense under this arrangement was
approximately $13,000 during the period from acquisition to December 31, 1996
and approximately $35,000 during 1997.  The office lease expired on June 30,
1997.

Professional Services

     A shareholder of the Company is a member in an entity that performs legal
services for the Company and its subsidiaries. Fees for these services were
approximately $749,000, $113,000 and $203,000 for the periods ended December 31,
1996, 1997, and 1998, respectively.

Other Services

     Certain shareholders, directors and an officer of the Company have an
equity interest in an entity which performs services for the Company and its
subsidiaries related to visual media. Charges for these services were
approximately $147,000, $61,000 and $13,000 for the periods ended December 31,
1996, 1997 and 1998, respectively.

     Another entity in which a director and former officers of the Company have
an equity interest performed commercial printing services for the Company and
its subsidiaries. Charges for these services were approximately $143,000,
$51,000 and $8,000 for the periods ended December 31, 1996, 1997 and 1998,
respectively.

     Additional services including consulting, maintenance, and data storage
services were received from entities in which certain shareholders of the
Company have an equity interest.  Charges for these services were approximately
$22,000 for the year ended December 31, 1997.  Data storage services of
approximately $3,000 were also received from one of these entities in 1998.

                                                                              81
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
Equipment Purchase

     During the year ended December 31, 1997, Allin Interactive purchased
$49,000 of video production and broadcast equipment from an entity in which a
director and former officers of the Company have an equity interest.

Sale of SportsWave

     In order to facilitate the sale of SportsWave in September 1998, the
Company and the former shareholders of SportsWave agreed to a settlement of any
contingent liability related to the earn-out provisions of the original stock
purchase agreement for the Company's acquisition of SportsWave in 1996.  The
former shareholders of SportsWave include a director, an officer and two
shareholders of the Company, who in October 1998, received payments of $30,000,
$12,000, $318,000 and $198,000, respectively, related to this liability
settlement.
 
22.  Subsequent Events:

(a.) Changes in Executive Management

     The employment contract for the Company's former President was terminated
during January 1999.  Consequently, the Company will record an accrual for
employee termination benefits of approximately $208,000 during the first quarter
of 1999.  It is expected that a majority of this balance will be paid during
1999 and the remainder during the first quarter of 2000.

(b.) Issuance of Options for Common Stock

     During the first quarter of 1999, the Company awarded options to purchase
340,998 common shares under the 1998 Plan.

23.  Industry Segment Information

     The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" as of December 31, 1998.  SFAS No. 131
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.

Basis for Determining Segments

     The Company has determined segments to be reported based on the types of
services and products offered.  This is consistent with management's method of
evaluating the financial performance of segments and with the Company's
operational organization into two business units, Allin Consulting and Allin
Systems.

     Allin Consulting provides technology consulting, software design and
network integration services.  Allin Consulting's operations and management's
evaluations are primarily oriented around practices meeting customer needs for
infrastructure, business operations, and electronic business technology
services.  The Allin Consulting business unit consists of the operations of
Allin Consulting-California and Allin Consulting-Pennsylvania.  The reportable
segments reflect aggregated Allin Consulting business unit activity due to the
similarity in nature of products and services, production processes, types of
customers and distribution methods for services of the business unit's
underlying operating entities.  Segments related to Allin Consulting's
operations include Infrastructure, Business Operations, Electronic Business and
Other, for all technology consulting and related activity not included in the
three identified practices.

                                                                              82
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     Allin Systems provides specialized systems integration, consulting and
other services related to interactive television and digital photography
applications.  Allin Systems includes the operations of Allin Interactive, Allin
Digital and Allin Network.  Allin Interactive currently focuses on interactive
television  systems integration and consulting services.  Allin Interactive
continues to operate interactive television systems installed on cruise ships
between 1995 and 1997 on an owner-operator model from which it derives
transactional revenue and management fees.  Allin Digital provides system
integration services and ancillary product sales related to digital photography
systems for professional photography businesses. Allin Network sells computer
hardware and software and network equipment.  Segments related to Allin Systems'
operations include Interactive Television Systems Integration & Consulting,
Interactive Television Transactional Revenue & Management Fees, Digital Imaging
Systems Integration & Ancillary Products and Computer Hardware and Software
Sales.

     The Company also conducted a sports marketing business from 1996 until the
sale of its subsidiary SportsWave in September 1998.  Results of SportsWave
operations are reflected as discontinued operations on the Company's
Consolidated Statements of Operations and accordingly, sports marketing is not
included in segment revenue or gross profit information.  Sports Marketing is
included as a segment for asset information as of December 31, 1996 and 1997.

Measurement Method

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

Revenue

     Revenue from external customers during 1997 includes one unusual item.
Interactive television systems integration revenue included approximately $1.2
million related to a project for retrofit of the ship broadcast center aboard
the Cunard ship Queen Elizabeth 2.  The Company no longer offers services for
retrofit of broadcast centers and this was the only significant project of this
type undertaken by the Company.  Information on revenue derived from external
customers is as follows:

<TABLE>
<CAPTION>
(Dollars in thousands)                                                 Revenue from External Customers
Periods ended December 31                                           1996             1997            1998
                                                             --------------------------------------------------
<S>                                                            <C>              <C>             <C>
Technology Consulting:
    Infrastructure                                                      $  332          $3,182          $ 4,198
    Business Operations                                                     90             474            6,156
    Electronic Business                                                      3              15              131
    Other                                                                  ---             ---               30
                                                             --------------------------------------------------
Total Allin Consulting                                                  $  425          $3,671          $10,515
 
Interactive Television:
    Systems Integration & Consulting                                    $  195          $3,696          $   349
    Transactional Revenue & Management Fees                                454           1,903            3,023
Digital Imaging Systems Integration & Ancillary Products                     7             113            1,098
Computer Hardware & Software Sales                                          29             213              306
                                                             --------------------------------------------------
Total Allin Systems                                                     $  685          $5,925          $ 4,776
                                                             --------------------------------------------------
 
 
Consolidated Revenue from External Customers                            $1,110          $9,596          $15,291
                                                             ==================================================
</TABLE>

                                                                              83
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     Certain of the Company's segments have also performed services for related
entities in other segments.  All revenue recorded for these services is
eliminated in consolidation.  The Company does not break down technology
consulting services performed for related entities into further segments, as it
does with revenue from external customers.  Information on revenue derived from
services for related entities in other segments is as follows:

<TABLE>
<CAPTION>
(Dollars in thousands)                                                  Revenue from Related Entities
Periods ended December 31                                           1996             1997            1998
                                                             --------------------------------------------------
 
<S>                                                            <C>              <C>             <C>
Technology Consulting                                                    $ 634          $2,401           $  802
Interactive Television Systems Integration & Consulting                    ---             ---                4
Computer Hardware & Software Sales                                         268             309              406
                                                             --------------------------------------------------
 
Total Revenue from Related Entities in Other Segments                    $ 902          $2,710           $1,212
                                                             ==================================================
</TABLE>

Gross Profit

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

<TABLE>
<CAPTION>
(Dollars in thousands)                                                             Gross Profit
Periods ended December 31                                            1996             1997              1998
                                                             -----------------------------------------------------
<S>                                                            <C>               <C>              <C>
Technology Consulting:
    Infrastructure                                                        $  72           $1,253            $1,671
    Business Operations                                                      20              187             1,849
    Electronic Business                                                       1                6                57
    Other                                                                   ---              ---                (2)
                                                             -----------------------------------------------------
Total Allin Consulting                                                    $  93           $1,446            $3,575
 
Interactive Television:
    Systems Integration & Consulting                                      $  21           $  584            $   27
    Transactional Revenue & Management Fees                                 336            1,555             2,711
Digital Imaging Systems Integration & Ancillary Products                      7                8               155
Computer Hardware & Software Sales                                            8               15                42
                                                             -----------------------------------------------------
Total Allin Systems                                                       $ 372           $2,162            $2,935
                                                             -----------------------------------------------------
 
Consolidated Gross Profit                                                 $ 465           $3,608            $6,510
                                                             =====================================================
</TABLE>

                                                                              84
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Assets

     Information on total assets attributable to segments is as follows:

<TABLE>
<CAPTION>
(Dollars in thousands)                                                           Total Assets
As of December 31                                                   1996             1997            1998
                                                             --------------------------------------------------
<S>                                                            <C>              <C>             <C>
Technology Consulting:
    Infrastructure                                                     $ 4,195         $ 4,436          $ 8,285
    Business Operations                                                  1,141             662           12,149
    Electronic Business                                                     32              21              259
    Other                                                                  ---             ---               59
                                                             --------------------------------------------------
Total Allin Consulting                                                 $ 5,368         $ 5,119          $20,752
 
Interactive Television:
    Systems Integration & Consulting                                   $   351         $ 1,186          $   424
    Transactional Revenue & Management Fees                              8,105           6,001            2,124
Digital Imaging Systems Integration & Ancillary Products                   238             226              602
Computer Hardware & Software Sales                                         163             117               57
                                                             --------------------------------------------------
Total Allin Systems                                                    $ 8,857         $ 7,530          $ 3,207
 
Sports Marketing                                                         2,793           3,621              ---
Corporate & Other                                                       15,659           5,383            2,353
                                                             --------------------------------------------------
 
Consolidated Total Assets                                              $32,677         $21,653          $26,312
                                                             ==================================================
</TABLE>


     Information on net property and equipment attributable to segments is as
follows:

<TABLE>
<CAPTION>
(Dollars in thousands)                                                    Property & Equipment (net)
As of December 31                                                   1996             1997             1998
                                                             ---------------------------------------------------
<S>                                                            <C>              <C>              <C>
Technology Consulting:
    Infrastructure                                                      $  219           $  351           $  289
    Business Operations                                                     59               73              424
    Electronic Business                                                    ---               12               11
    Other                                                                  ---              ---              ---
                                                             ---------------------------------------------------
Total Allin Consulting                                                  $  278           $  436           $  724
 
Interactive Television:
    Systems Integration & Consulting                                    $  351           $  199           $  180
    Transactional Revenue & Management Fees                              6,021            4,943            1,410
Digital Imaging Systems Integration & Ancillary Products                   182              207              175
Computer Hardware & Software Sales                                         ---              ---                3
                                                             ---------------------------------------------------
Total Allin Systems                                                     $6,554           $5,349           $1,768
 
Sports Marketing                                                            97              104              ---
Corporate & Other                                                           76              742              592
                                                             ---------------------------------------------------
 
Consolidated Property & Equipment (net)                                 $7,005           $6,631           $3,084
                                                             ===================================================
</TABLE>

                                                                              85
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     Information on property and equipment additions attributable to segments is
as follows:

<TABLE>
<CAPTION>
(Dollars in thousands)                                                    Property & Equipment Additions
As of December 31                                                    1996              1997              1998
                                                             -------------------------------------------------------
<S>                                                            <C>               <C>               <C>
Technology Consulting:
    Infrastructure                                                       $   24            $  197  $             ---
    Business Operations                                                       3                31                290
    Electronic Business                                                     ---                13                ---
    Other                                                                   ---               ---                ---
                                                             -------------------------------------------------------
Total Allin Consulting                                                   $   27            $  241              $ 290
 
Interactive Television:
    Systems Integration & Consulting                                     $  393            $   14              $   8
    Transactional Revenue & Management Fees                               5,893             2,023                  3
Digital Imaging Systems Integration & Ancillary Products                    211                52                  3
Computer Hardware & Software Sales                                          ---               ---                  3
                                                             -------------------------------------------------------
Total Allin Systems                                                      $6,497            $2,089              $  17
 
Sports Marketing                                                            ---                32                ---
Corporate & Other                                                            86               748                 65
                                                             -------------------------------------------------------
 
Consolidated Property & Equipment Additions                              $6,610            $3,110              $ 372
                                                             =======================================================
</TABLE>


Geographic Information

     Domestic revenue is attributed to geographic areas based on the location of
services performed or the location from which products are shipped to customers.
International revenue is attributable to the location where technology
consulting or interactive television systems integration services are performed
for all services performed on land or in port for extended periods.  For
interactive television systems integration, transactional revenue and management
fees generated on sailing ships, revenue is attributed to domestic and
international ports and at sea based on the proportion of time of the ships'
itineraries spent in the various locations and at sea.  Information on
consolidated revenue attribution to geographic areas is as follows:

                                                                              86
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
(Dollars in thousands)                                                  Revenue from External Customers
Period ended December 31                                             1996             1997             1998
                                                             ----------------------------------------------------
<S>                                                            <C>               <C>              <C>
Domestic Revenue:
    Northeastern United States                                           $   12           $  418          $ 3,626
    Midwestern United States                                                ---               18            1,639
    Southern United States                                                   60              382              897
    Western United States                                                   480            4,010            6,389
                                                             ----------------------------------------------------
Total Domestic Revenue                                                   $  552           $4,828          $12,551
 
International & At Sea Revenue:
    Caribbean Islands                                                    $   72           $  355          $   440
    Mexico                                                                   49              145              134
    Bermuda                                                                  21              160              141
    Germany                                                                 ---              791              ---
    France                                                                  ---              173              ---
    Finland                                                                 ---              170              ---
    Other International                                                      12              254              131
    At Sea                                                                  404            2,720            1,894
                                                             ----------------------------------------------------
Total International & At Sea Revenue                                     $  558           $4,768          $ 2,740
                                                             ----------------------------------------------------
 
Consolidated Revenue from External Customers                             $1,110           $9,596          $15,291
                                                             ====================================================
</TABLE>


     Long-lived assets are attributed based on physical locations of the
property and equipment.  Property and equipment is located primarily where the
Company maintains offices for its operations, including Pittsburgh,
Pennsylvania, Cleveland, Ohio, Oakland and San Jose, California and Ft.
Lauderdale, Florida.  Shipboard interactive television system equipment owned by
the Company is reflected as "At Sea" equipment.  The Company does not maintain
any foreign offices or facilities and will maintain any of its property and
equipment at foreign locations only for the duration of a consulting engagement
or systems integration project.

<TABLE>
<CAPTION>
(Dollars in thousands)                                                    Property & Equipment (net)
As of December 31                                                   1996             1997             1998
                                                             ---------------------------------------------------
<S>                                                            <C>              <C>              <C>
Domestic Locations:
    California                                                          $  313           $  498           $  575
    Florida                                                                 69              193              375
    Ohio                                                                   227              ---               18
    Pennsylvania                                                           469            1,253              926
                                                             ---------------------------------------------------
Total Domestic Locations                                                $1,078           $1,944           $1,894
 
At Sea                                                                  $5,927           $4,687           $1,190
                                                             ---------------------------------------------------
 
Consolidated Property & Equipment (net)                                 $7,005           $6,631           $3,084
                                                             ===================================================
</TABLE>

                                                                              87
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Information about Major Customers

<TABLE>
<CAPTION>
                                      %
            Revenue  (Dollars   Consolidated
              in thousands)        Revenue                    Segments Included
            ------------------  -------------  -----------------------------------------------
<S>                             <C>            <C>
Period Ended December 31, 1996
------------------------------
                           290           26%   Interactive Television: Systems Integration &
                                               Consulting, Transactional Revenue & Management
                                               Fees
                           176           16%   Interactive Television Transactional Revenue &
                                               Management Fees
                           170           15%   Interactive Television Transactional Revenue &
                                               Management Fees
                           127           11%   Technology Consulting: Infrastructure,
                                               Business Operations
 
Period Ended December 31, 1997
------------------------------
                         2,245           23%   Interactive Television: Systems Integration &
                                               Consulting, Transactional Revenue & Management
                                               Fees
                         1,500           16%   Interactive Television: Systems Integration &
                                               Consulting, Transactional Revenue & Management
                                               Fees
                           985           10%   Interactive Television: Systems Integration &
                                               Consulting, Transactional Revenue & Management
                                               Fees
 
Period Ended December 31, 1998
------------------------------
                         1,834           12%   Interactive Television: Systems Integration &
                                               Consulting, Transactional Revenue & Management
                                               Fees
</TABLE>

                                                                              88
<PAGE>
 
                        ALLIN CORPORATION & SUBSIDIARIES
                                        
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
24.  Unaudited Quarterly Financial Information

     The unaudited quarterly financial information presented for the quarterly
periods ended June 30, 1998 and prior have been restated from data previously
presented in the Company's applicable filings on Form 10-Q to reflect the
results of SportsWave operations as discontinued operations.  The data for the
quarterly period ended September 30, 1998 reflects the data presented in the
Company's filing on Form 10-Q for that period.  Comparable data is presented for
the three month periods ended December 31, 1997 and 1998.

<TABLE>
<CAPTION>
         Dollars in thousands except                          Three Months Ended
               per share data                --------------------------------------------------
                                                                     1997
                                             --------------------------------------------------
                                               March 31    June 30   September 30   December 31
                                             --------------------------------------------------
<S>                                            <C>        <C>        <C>            <C>
Revenue                                         $ 3,349    $ 1,390        $ 2,183       $ 2,674
Gross Profit                                      1,153        487            780         1,188
Loss from operations                             (2,652)    (3,360)        (1,884)       (3,013)
Loss from continuing operations                  (2,477)    (3,304)        (1,897)       (2,863)
(Gain) loss from discontinued operations            115       (152)            95           104
 
Net loss                                        $(2,592)   $(3,152)       $(1,992)      $(2,967)
                                             ==================================================
Net loss applicable to common shares            $(2,656)   $(3,207)       $(2,042)      $(3,030)
                                             ==================================================
 
 
Net loss per common share from continuing
 operations                                     $(0.48)    $ (0.64)       $ (0.37)      $ (0.56)
 
                                             ==================================================
Net loss per common share from discontinued
 operations                                     $(0.02)    $  0.03        $ (0.02)      $(0.02)
 
                                             ==================================================
Net loss per common share  basic and diluted
                                                $(0.51)    $ (0.62)       $ (0.40)      $ (0.59)
                                             ==================================================
</TABLE>

<TABLE>
<CAPTION>
         Dollars in thousands except                          Three Months Ended
               per share data                -------------------------------------------------
                                                                     1998
                                             -------------------------------------------------
                                               March 31   June 30   September 30   December 31
                                             -------------------------------------------------
<S>                                            <C>        <C>       <C>            <C>
Revenue                                         $ 2,499   $ 2,529        $ 4,540       $ 5,723
Gross Profit                                      1,362     1,254          1,864         2,030
Loss from operations                             (1,742)   (1,126)        (3,588)         (971)
Loss from continuing operations                  (1,684)   (1,078)        (3,653)       (1,033)
(Gain) loss from discontinued operations             62      (346)        (1,435)           62
 
Net loss                                        $(1,746)  $  (732)       $(2,218)      $(1,095)
                                             =================================================
Net loss applicable to common shares            $(1,801)  $  (789)       $(2,300)      $(1,680)
                                             ==================================================
 
 
Net loss per common share from continuing
 operations                                     $(0.33)   $ (0.21)       $ (0.65)      $ (0.17)
 
                                             =================================================
Net loss per common share from discontinued
 operations                                     $(0.01)   $  0.07        $  0.26       $ (0.01)
 
                                             =================================================
Net loss per common share  basic and diluted
                                                $(0.35)   $ (0.15)       $ (0.41)      $ (0.28)
                                             =================================================
</TABLE>

                                                                              89
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders of Allin Corporation:

We have audited the accompanying consolidated balance sheets of Allin
Corporation (formerly Allin Communications Corporation and a Delaware
corporation) and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allin Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years ended December 31,
1998, in conformity with generally accepted accounting principles.



                                                         /s/ ARTHUR ANDERSEN LLP

Pittsburgh, Pennsylvania
February 19, 1999

                                                                              90
<PAGE>
 
Item 9 - Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure


     None.

                                                                              91
<PAGE>
 
Part III


Item 10 - Directors and Executive Officers of the Registrant

     The following table sets forth certain information concerning each of the
directors and executive officers of the Company. Ages are given as of March 12,
1999.

<TABLE>
<CAPTION>
Name                                    Age       Position with the Company
----                                   ---- -------------------------------------
<S>                                    <C>    <C>
Richard W. Talarico................     43  Chairman of the Board and Chief
                                            Executive Officer
Timothy P. O'Shea..................     35  President
Dean C. Praskach...................     41  Vice President-Finance, Treasurer and
                                            Secretary
Brian K.  Blair(2).................     36  Director
Anthony L. Bucci(1)................     50  Director
William C. Kavan(1)................     48  Director
James S. Kelly,                         48  Director
 Jr.(2)............................  
James C. Roddey....................     66  Director
</TABLE>

(1)  Member of Compensation Committee.

(2)    Member of Audit Committee.


     Richard W. Talarico became Chairman of the Board and Chief Executive
Officer of the Company in July 1996. He has served as a director of Allin
Interactive  since October 1994 and as Chairman of the Board and Chief Executive
Officer of Allin Interactive  since June 1996. Mr. Talarico has served Allin
Interactive  in various other capacities, including Vice President of Finance
from October 1994 to October 1995, President from October 1995 to June 1996 and
Chief Financial Officer, Secretary and Treasurer from October 1994 to June 1996.
Mr. Talarico has served as an officer and director of the Company's other
subsidiaries since their inception or acquisition by the Company.  Since 1991,
Mr. Talarico has been a partner in The Hawthorne Group ("THG"), where he has
been involved in numerous business ventures and has served in various financial
and operating capacities. THG is a private investment and management company
which invests through affiliates primarily in media and communications
companies.

     Timothy P. O'Shea became President of the Company in January 1999.  Prior
to joining the Company, Mr. O'Shea was employed by Actium, a modis solutions
company providing technology consulting services, from 1991 to 1998.  Mr. O'Shea
served Actium in various capacities, including Team Director from 1991 to 1992,
Regional Manager from 1993 to 1996, and Vice President, Regional Development
from 1997 to 1998, where Mr. O'Shea was involved in all aspects of new regional
development including the development of regional best practices and standard
regional reporting.  Mr. O'Shea was instrumental in developing the technology
consulting practices of four regional offices including establishing key
business partners, developing comprehensive business plans, developing and
mentoring of regional teams, transitioning of previous business practices to the
Actium advanced technology business model and promoting sales growth.

     Dean C. Praskach has held the positions of Vice President-Finance and
Treasurer of the Company since July 1997, was named Secretary of the Company in
March 1998 and is its principal financial and accounting officer.  Mr. Praskach
joined the Company as Director of Financial Planning in November 1996.  Mr.
Praskach served both the Company and THG in a consulting capacity from February
1995 until joining the Company.  From September 1989 through July 1994, he was
employed at First Westinghouse Capital Corporation in various positions, where
he was involved in equity and mezzanine financing of leveraged acquisitions.
Mr. Praskach has held the positions of Vice President-Finance and Treasurer of
all of the Company's subsidiaries since July 1997 or upon acquisition, if later,
and was named Secretary of all of the Company's subsidiaries in March 1998 or
upon acquisition, if later.

                                                                              92
<PAGE>
 
     Brian K. Blair became a director of the Company in July 1996.  Mr. Blair
also served as Chief Operating Officer and Secretary of the Company from July
1996 until his resignation from these positions in February 1998.  Mr. Blair has
served as a director of Allin Interactive  since October 1994 and as a director
of the Company's other subsidiaries since their inception or acquisition by the
Company.  Mr. Blair also served as Vice President of Administration and
Operations of Allin Interactive  from October 1994 until June 1996 and as its
President from June 1996 until February 1998.  Mr. Blair served as a Vice
President of certain of the Company's other subsidiaries from their inception or
acquisition until February 1998.  Since May 1989, Mr. Blair has been President
of Blair Haven Entertainment, Inc., doing business as Commercial Downlink, a
provider of cable and closed-circuit television services, where he is
responsible for the day-to-day activity of such company. Mr. Blair also serves
as Secretary and Treasurer of Digital Media Corp., a video production company.

     Anthony L. Bucci became a director of the Company in August 1998.  Mr.
Bucci is Chairman and Chief Executive Officer of MARC Advertising,
Pennsylvania's largest full-service marketing communications company.  Mr. Bucci
has served MARC Advertising in various capacities since 1970, including as
President from September 1988 to February 1997, as Chief Executive Officer since
March 1992 and as chairman since February 1997.  Mr. Bucci has supervised
advertising and marketing for a range of clients, including specialty retailing,
financial services, automotive, fashion, fast food, home centers, general
merchandise and amusement parks.

     William C. Kavan became a director of the Company in July 1996 and has
served as a director of Allin Interactive  since October 1994.  Mr. Kavan has
also served as a director of certain of the Company's other subsidiaries since
their inception or acquisition by the Company.  Since 1980, Mr. Kavan has been
president of Berkely-Arm, Inc. ("Berkely"), the largest provider of revenue-
generating passenger insurance programs for the cruise industry. Berkely serves
25 cruise line clients, including Carnival, Costa, Cunard, Epirotiki, NCL, P&O,
Princess, Radisson and RCCL.

     James S. Kelly, Jr. became a director of the Company in August 1998.  Mr.
Kelly founded KCS Computer Services, Inc. ("KCS") in 1985 and served as its
President and Chief Executive Officer prior to its acquisition by the Company in
August 1998.  In connection with the acquisition of KCS, the Company had agreed
to appoint Mr. Kelly as a director of the Company upon completion of the
acquisition.  Mr. Kelly was responsible for setting strategic direction for KCS,
oversight of all KCS operations and direction of its finance and administration
function.  Mr. Kelly has been involved in the information technology field for
over 25 years.

     James C. Roddey became a director of the Company in July 1996 and has
served as a director of Allin Interactive Corp since October 1994.  Mr. Roddey
has also served as a director of certain of the Company's other subsidiaries
since their inception or acquisition by the Company.  Mr. Roddey served as
President of International Sports Marketing, Inc. (now SportsWave) from 1992 to
1996. He has served as Chairman or as President of various other entities
affiliated with THG, including President of Star Cable Associates, a cable
television operator in various states, since 1991. He served as President of
Turner Communications Corporation from 1968 to 1971, and as President of Rollins
Communications Corporation from 1971 to 1979. Mr. Roddey currently serves as a
Trustee of the University of Pittsburgh.

     There are no family relationships among the directors and executive
officers. All directors hold office until the next annual meeting of
stockholders and until their successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors.

                                                                              93
<PAGE>
 
Item 11 - Executive Compensation


Summary Compensation Table

     The following table sets forth information concerning 1996, 1997 and 1998
compensation of the Chief Executive Officer and the other executive officers of
the Company whose 1998 salary exceeded $100,000 (collectively the "Named
Executives").  Information with respect to 1996 and 1997 compensation is not
given for Mr. Kent as he did not begin service as an executive officer of the
Company until 1998.  Information with respect to 1996 compensation is not given
for Mr. Praskach as he did not begin service as an executive officer of the
Company until 1997.

<TABLE>
<CAPTION>
                                                                                        Long Term
                                                     Annual Compensation              Compensation
                                                     -------------------              ------------
                                                                           
                                                                                       Securities
                                                                                   Underlying Options
   Name and Principal Position          Year           Salary ($)                          (#)
   ---------------------------          ----           ----------                  ----------------
<S>                                    <C>          <C>                            <C>

Richard W. Talarico                      1998           $164,583                         100,000
   Chief Executive Officer               1997            150,000                             ---
                                         1996             75,000                          21,000
                                                                           
Les D. Kent (1)                          1998           $160,000                          60,000
   President                                                               
                                                                           
Dean C. Praskach                         1998           $102,917                          23,500
   Vice President-Finance,               1997             91,217                           9,500
   Treasurer and Secretary
</TABLE>

(1)  Mr. Kent's employment was terminated by the Company in January 1999.  The
     compensation information provided for Mr. Kent does not include a bonus
     earned in 1997 but paid in 1998.

Employment Agreements

     During 1998, the Company entered into a new employment agreement with Mr.
Talarico, the term of which commenced May 15, 1998 and will continue through May
15, 2001.  The annual salary as set forth in the employment agreement is
$175,000, subject to annual merit increases.  In the event that the Company
achieves certain performance criteria, the annual base salary is to be increased
to $225,000. Mr. Talarico is eligible to receive a discretionary bonus with any
annual bonus program to be established by the Compensation Committee and
approved by the Board of Directors.  Any bonus awarded shall not exceed Mr.
Talarico's annual base salary for 1998 or 1999 and one and one-half times annual
base salary for 2000.

     The employment agreement contains restrictive covenants prohibiting Mr.
Talarico from competing with the Company or soliciting the Company's employees
or customers for another business during the term of the agreement and for a
period of two years after termination or the end of the employment term.

     In June 1998, Mr. Talarico was granted options to purchase 100,000 shares
of the Company's common stock in accordance with the terms of the new employment
agreement.  The exercise price of $4.50 per share was based on market price at
date of grant.  The employment agreement provides for additional option grants
to purchase an additional 100,000 shares of the Company's common stock on each
of January 1, 1999 and January 1, 2000, if shares are then available under the
Company's Stock Plans.  Mr. Talarico was awarded options to purchase 60,000
shares of the Company's common stock on March 1, 1999.  The Company's management
determined that an award in excess of 60,000 shares would not allow an adequate
number of available shares for planned option awards to the Company's senior
managers and other employees.

                                                                              94
<PAGE>
 
     Options to acquire shares of Common Stock granted to Mr. Talarico pursuant
to the agreement under the Company's Stock Plans will vest on the earlier to
occur of May 15, 2001 or, if earlier, on the date of termination without cause
or a change in control of the Company, defined as a sale of all or substantially
all of the Company's assets, a merger in which the Company is not the surviving
corporation or when a person or group, other than the stockholders of the
Company as of June 1, 1998, owns 50% or more of the outstanding Common Stock.
The employment agreement also provides that Mr. Talarico will be entitled to
receive following termination of employment by the Company without cause or
contemporaneously with or within ninety days prior to the occurrence of a change
in control of the Company, semi-monthly severance payments equal to the semi-
monthly base salary payment which he was receiving immediately prior to such
termination until the later of the later of the first anniversary of the
termination or May 15, 2001.

     The Company entered into an employment agreement with Mr. Praskach, the
term of which commenced November 1, 1997 and will continue through October 31,
2000.  Mr. Praskach's current annual salary is $125,000. The employment
agreement permits annual merit increases to salary.  Mr. Praskach is also
eligible to receive a discretionary bonus for any annual period subject to
approval by the Board of Directors.

     The employment agreement contains restrictive covenants prohibiting Mr.
Praskach from competing with the Company or soliciting the Company's employees
or customers for another business during the term of the agreement and for a
period of eighteen months after termination or the end of the employment term.

     Mr. Praskach is eligible to receive stock options as may be awarded from
time to time and under terms similar to options awarded to other employees under
the Company's stock plans.  The employment agreement with Mr. Praskach does not,
however, specify any minimum number of options to be awarded during the term of
the agreement.  Options granted to date to Mr. Praskach will vest, except as
noted below, at a rate of 20% of each award on each of the first five
anniversary dates of any award.

     Pursuant to the employment agreement, the options to acquire shares of
Common Stock granted to Mr. Praskach under the Company's 1996 and 1997 Stock
Plans will, if not already vested, vest on the date of a change in control of
the Company, defined as a sale of all or substantially all of the Company's
assets, a merger in which the Company is not the surviving corporation or when a
person or group, other than the stockholders of the Company as of November 1,
1997, owns 40% or more of the outstanding Common Stock.  The employment
agreement also provides that Mr. Praskach will be entitled to receive for up to
one year following termination of employment by the Company without cause or
contemporaneously with the occurrence of a change in control of the Company,
semi-monthly severance payments equal to the semi-monthly base salary payment
which he was receiving immediately prior to such termination until the earlier
of the first anniversary of the termination or the date on which Mr. Praskach
obtains other full-time employment.

Termination of Services Under Employment Agreement

     The Company elected to terminate the services of Les D. Kent, its former
President, on January 12, 1999.  Under the terms of the Company's employment
agreement with Mr. Kent, which became effective as of August 15, 1998, severance
payments of $200,000 will be made in equal monthly installments of $16,667 over
a one year period ending in January 2000.  In 1998, Mr. Kent received options to
purchase 60,000 shares of the Company's common stock under the terms of the
Company's 1996 Stock Plan.  Such award was made with an exercise price in excess
of market price as of the date of the option grant.  The options awarded were to
have vested at a rate of 20% on each of the first five anniversaries of the
effective date of the employment agreement or on December 31, 2001 if the
employment agreement was not renewed.  However, under the terms of the
employment agreement, the options vested immediately upon termination.

     The employment agreement contains restrictive covenants which prohibit Mr.
Kent from competing with the Company or soliciting the Company's employees or
customers for another business for a period of two years after termination.

                                                                              95
<PAGE>
 
Stock Plans

     In October 1996, the Board of Directors adopted the 1996 Stock Plan, and in
April 1997 the Board of Directors adopted the 1997 Stock Plan which was approved
by the Company's stockholders in May 1997.  The Board of Directors subsequently
approved re-issuance of forfeited shares under the 1996 and 1997 Plans.  In
September 1998, the Board of Directors adopted the 1998 Stock Plan, which was
approved the Company's stockholders in December 1998.  All of the plans provide
for awards of stock options, stock appreciation rights, restricted shares and
restricted units to officers and other employees of the Company and its
subsidiaries and to consultants and advisors (including non-employee directors)
of the Company and its subsidiaries.  The plans are administered by the Board of
Directors which has broad discretion to determine the individuals entitled to
participate in the plans and to prescribe conditions (such as the completion of
a period of employment with the Company following an award).  The Compensation
Committee is responsible for making recommendations to the Board of Directors
concerning executive compensation, including the award of stock options.

     At December 31, 1998, 5,392 and 9,000 shares remained available for future
grants under the 1996 Plan and the 1997 Plan, respectively.  No awards were made
under the 1998 Stock Plan in 1998, therefore, at December 31, 1998, all 375,000
shares approved for issuance under the 1998 Stock Plan remained available for
future grants.

Option Grants in Last Fiscal Year

     The following table provides information concerning stock options granted
to the Named Executives during 1998.

<TABLE>
<CAPTION>
                                                               Individual Grants                    Grant Date Value
                                              ---------------------------------------------------  ------------------
                              Number of           % of Total
                              Securities       Options Granted     Exercise or                         Grant Date    
                              Underlying       to Employees in     Base Price                       Present Value $   
          Name             Options Granted       Fiscal Year         ($/sh)      Expiration Date          (1)         
          ----             ---------------    -----------------    -----------   ---------------    ---------------
<S>                       <C>                 <C>                 <C>            <C>               <C>

Richard W. Talarico           100,000 (2)            27.8 %            $4.50          6/1/05            $253,000
Les D. Kent                    60,000 (3)            16.7 %            $4.63         11/6/05            $134,400
Dean C. Praskach               23,500 (4)             6.5 %            $4.38         6/25/05            $ 57,575
</TABLE>

(1) The fair value of each option is estimated on the date of grant using the
    Black-Scholes option pricing model with the following assumptions for 1998
    grants to Named Executives.
 
<TABLE>
<CAPTION>
Risk-free interest rate:
<S>                                                <C>
    Options granted to Richard W. Talarico             5.6 %
    Options granted to Les D. Kent                     4.9 %
    Options granted to Dean C. Praskach                5.5 %
Expected dividend yield                                0.0 %
Expected life of options                              7 yrs.
Expected volatility rate                              46.0 %
</TABLE>

     No adjustments were made for non-transferability or risk of forfeiture.

(2)  These options to acquire shares of Common Stock granted to Mr. Talarico
     will vest on the earlier to occur of May 15, 2001 or on the date of
     termination of Mr. Talarico's employment without cause or a change in
     control of the Company, defined as a sale of all or substantially all of
     the Company's assets, a merger in which the Company is not the surviving
     corporation or when a person or group, other than the stockholders of the
     Company as of June 1, 1998, owns 50% or more of the outstanding Common
     Stock.

                                                                              96
<PAGE>
 
(3) These options vested January 12, 1999 upon termination of services in
    accordance with terms of the Company's employment agreement with Mr. Kent.
    The options awarded were originally to have vested at a rate of 20% on each
    of the first five anniversaries of the effective date of the employment
    agreement or on December 31, 2001, if the employment agreement was not
    renewed.


(4) These options granted to Mr. Praskach will vest at a rate of 20%
    on each of the first five anniversary dates of the award, or earlier
    if not already vested, on the date of a change in control of the Company,
    defined as a sale of all or substantially all of the Company's assets, a
    merger in which the Company is not the surviving corporation or when a
    person or group, other than the stockholders of the Company as of November
    1, 1997, owns 40% or more of the outstanding Common Stock.
    

Fiscal Year End Option Values

     The following table provides information concerning stock options held by
the Named Executives at December 31, 1998.  No options were exercised in 1998.

<TABLE>
<CAPTION>
                                                          Number of Securities            Value of Unexercised
                                                         Underlying Unexercised         In-the-Money Options at
                                                       Options at Fiscal Year End         Fiscal Year End (1)
                                                       --------------------------       -----------------------
                          Shares
                       Acquired on       Value
          Name           Exercise      Realized     Exercisable    Unexercisable    Exercisable    Unexercisable
          ----         -----------     --------     -----------    -------------    -----------    -------------
                     
                    
                    
<S>                    <C>           <C>          <C>            <C>              <C>             <C>
Richard W. Talarico            ---          ---          8,400          112,600             ---             ---
Les D. Kent (2)                ---          ---            ---           60,000             ---             ---
Dean C. Praskach               ---          ---          3,900           34,100             ---             ---
</TABLE>


  (1) Based on the December 31, 1998 closing price per share of Common Stock of
  $3.88, as reported by the Nasdaq National Market tier of the Nasdaq Stock
  Market, and the various option exercise prices per share, the options were not
  in-the-money at December 31, 1998.

    (2) The Company terminated Mr. Kent's services on January 12, 1999 in
  accordance with the terms of its employment agreement with Mr. Kent.  Options
  previously awarded Mr. Kent vested immediately upon termination.

Long-Term Incentive and Defined Benefit Plans

     The Company does not have any long-term incentive or defined benefit plans.

Compensation of Directors

     The non-employee directors of the Company are entitled to receive at the
conclusion of each year of service, an automatic grant of an immediately
exercisable option to acquire 5,000 shares of Common Stock at an exercise price
per share equal to the closing price of the Common Stock as reported by the
Nasdaq Stock Market for the date on which the option is granted.  Messrs. Kavan
and Roddey each received grants to acquire 5,000 shares of Common Stock at the
exercise price of $4.25 per share on November 10, 1998.  Paul J. Pasquarelli, a
former director, received a grant to acquire 5,000 shares of Common Stock at the
exercise price of $4.25 per share on February 6, 1998.

     Non-employee directors of the Company receive $2,500 for each Board of
Directors meeting attended and $500 for each separate committee meeting attended
on a date on which no full board meeting is held. Directors of the Company who
are also employees do not receive additional compensation for attendance at
Board and committee meetings, except that all directors are reimbursed for out-
of-pocket expenses in connection with attendance at Board and committee
meetings.

                                                                              97
<PAGE>
 
Compensation Committee Interlocks and Insider Participation

     The Compensation Committee consists of William C. Kavan and Anthony L.
Bucci.  James C. Roddey also served on the Compensation Committee during a
portion of 1998. Mr. Richard W. Talarico, Chairman and Chief Executive Officer
of the Company and a director and executive officer of each of the Company's
subsidiaries, is a partner in The Hawthorne Group ("THG") and an officer of The
Hawthorne Group, Inc. ("Hawthorne"), and, as such, he and Mr. Roddey are
shareholders and/or partners in common in certain investments and companies.
During 1998, Mr. Talarico was a shareholder and director of The Bantry Group,
Inc. and its affiliates Wexford Health Services, Inc. ("WHS"), Longford Health
Sources, Inc. and Galway Technologies, Inc. (collectively "Bantry") of which Mr.
Roddey was a shareholder, director and an executive officer.  Mr. Talarico and
Mr. Roddey were each partners in MA Associates II and shareholders in Hawthorne
Group Productions, Inc. and Production Masters, Inc. ("PMI"), of which Mr.
Roddey is an executive officer and director.  Mr. Talarico is neither an officer
or director of these companies.  Mr. Talarico and Mr. Roddey were each
shareholders of DirecTeam Merchandising, LLC, of which Mr. Talarico is an
officer.  None of these companies has a compensation committee of its board of
directors.  Mr. Roddey has indicated an intention to excuse himself from any
vote of the Board of Directors concerning Mr. Talarico's compensation.

     In respect of the fiscal year ended December 31, 1998, the Company made
payments to PMI in the amount of approximately $13,000, for the production of
videos and other visual media for use with the Company's interactive television
system.  Messrs. Henry Posner Jr., Thomas D. Wright, Roddey and Talarico are
shareholders of PMI.  Messrs. Posner and Wright are each beneficial owners of
greater than five percent of the Company's outstanding Common Stock.  The
Company believes that such transactions between it and PMI were on terms as
favorable to the Company as could have been obtained from an unaffiliated party.
The Company expects to continue to conduct business with PMI in the future.

     The Company acquired all of the issued and outstanding shares of capital
stock of International Sports Marketing, Inc., now SportsWave, in November 1996.
The purchase price paid at the closing of the sale was $2.4 million in cash.  In
addition, the stock purchase agreement governing the sale provided for up to
$2.4 million in contingent payments.  Messrs. Posner, Wright, Talarico and
Roddey were SportsWave stockholders prior to the Company's acquisition.  At the
closing of the acquisition of SportsWave, Messrs. Posner, Wright, Talarico and
Roddey received cash payments in the amounts of approximately $1,273,000,
$791,000, $48,000 and $120,000, respectively, and would have been entitled to
receive contingent payments up to the same approximate amounts (not including
interest payable on any promissory note delivered in respect of the contingent
payments).  In connection with the Company's sale of SportsWave, on October 6,
1998, the Company paid $318,200, $197,800, $12,000 and $30,000 to Messrs.
Posner, Wright, Talarico and Roddey, respectively, and $42,000 to the other
former SportsWave stockholders in full settlement of any claims to contingent
earn-out payments that may have been due in the future.

     During the fiscal year ended December 31, 1998, Allin Consulting-California
provided computer network consulting services to Hawthorne, Allegheny Media
("AM"), and WHS.  Fees charged Hawthorne, AM and WHS were approximately $9,000,
$1,000 and $12,000, respectively, for the fiscal year ended December 31, 1998.
Mr. Posner, Mr. Wright and two of Mr. Posner's sons are shareholders of
Hawthorne.  Mr. Roddey and Mr. Wright have ownership interests in AM.  Mr.
Posner has an ownership interest in a company which is a shareholder of AM.  Mr.
Roddey is a shareholder, director and executive officer of WHS' parent company,
The Bantry Group, Inc.  Mr. Talarico is a shareholder and was a director of
Bantry during 1998.  Messrs. Posner and Wright also have ownership interests in
Bantry.  The Company believes its fees are on terms substantially similar to
those offered non-affiliated parties.

     During the fiscal year ended December 31, 1998, Allin Network, a subsidiary
of the Company, sold computer hardware and components to THG and WHS. Amounts
charged THG and WHS for the fiscal year ended December 31, 1998 were
approximately $2,000 and $29,000, respectively.  The Company believes its
charges are on terms substantially similar to those offered non-affiliated
parties.

     During the fiscal year ended December 31, 1998, AM utilized a portion of
the Company's office space under a short-term occupancy arrangement.  Occupancy
charges were approximately $2,000.

                                                                              98
<PAGE>
 
     Certain stockholders of the Company, including Messrs. Posner, Wright,
Roddey, Talarico, and Brian K. Blair, a director and former officer of the
Company, have certain rights under a registration rights agreement (the
"Registration Rights Agreement") to require the Company, subject to certain
limitations, to register under the Securities Act of 1933, as amended ("the
"Securities Act"), certain of their shares of Common Stock for public offering
and sale.

     Each of Messrs. Talarico, Kavan, Roddey, Posner and Wright purchased shares
of Series B Preferred Stock and related warrants.  Messrs. Talarico, Kavan,
Roddey, Posner and Wright purchased 300, 750, 100, 1,400 and 200 shares of
Series B Preferred Stock, respectively.  In August 1998, the Company received
$300,000, $750,000, $100,000, $1,400,000 and $200,000 from Messrs. Talarico,
Kavan, Roddey, Posner and Wright, respectively for the Series B Preferred Stock
and related warrants.  If the Company does issue any shares of common stock upon
conversion of the Series B Preferred Stock or upon exercise of the warrants, the
holders of such shares, including Messrs. Talarico, Kavan, Roddey, Posner and
Wright will have certain rights to require the Company to register the
shares for resale under the Securities Act. See Item 12 - Security Ownership of
Certain Beneficial Owners and Management.

                                                                              99
<PAGE>
 
Item 12 - Security Ownership of Certain Beneficial Owners and Management

(a)   Security Ownership of Certain Beneficial Owners

     The following table presents certain information as of March 12, 1999 as to
the beneficial ownership of the Common Stock of the Company by each person or
entity who is known to the Company to beneficially own more than five percent of
the outstanding common stock of the Company.  Except as indicated, the persons
named have sole voting and investment power with respect to all shares shown as
being beneficially owned by them.  The percentages in the table are rounded to
the nearest tenth of a percent.

<TABLE>
<CAPTION>
                                                                                   
                                            Amount and Nature of         
Name and Address of Stockholder            Beneficial Ownership (1)      Percent of Class (1) 
-------------------------------            ------------------------      --------------------
<S>                                        <C>                           <C>
                                           
Henry Posner, Jr. (2)                               2,001,211                 29.2 %
500 Greentree Commons                     
381 Mansfield Avenue                      
Pittsburgh, PA  15220                     
                                          
Emanuel J. Friedman (3)                             1,122,554                 18.7 %
1001 19th Street North                    
Arlington, VA  22209                      
                                          
James S. Kelly, Jr. (4)                               724,675                 12.1 %
100 Trotwood Drive                        
Monroeville, PA  15146                    
                                          
William C. Kavan (5)                                  569,624                  8.8 %
100 Garden City Plaza                     
Garden City, NY 11530                     
                                          
Friedman, Billings, Ramsey Group, Inc. and            521,554                  8.7 %
 Orkney Holdings, Inc. (6)                
1001 19th Street North                    
Arlington, VA  22209                      
                                          
Dimensional Fund Advisors (7)                         396,300                  6.6 %
1299 Ocean Avenue, 11th Floor             
Santa Monica, CA  90401                   
                                          
Continental Casualty Company (8)                      340,000                  5.7 %
CNA Plaza                                 
Chicago, IL  60685                        
                                          
Kindy French (9)                                      325,000                  5.4 %
1001 19th Street North                    
Arlington, VA  22209                      
                                          
Les D. Kent (10)                                      323,333                  5.3 %
60 98th Avenue
Oakland, CA  94603
</TABLE>

                                                                             100
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                   
                                            Amount and Nature of         
Name and Address of Stockholder            Beneficial Ownership (1)      Percent of Class (1) 
-------------------------------            ------------------------      --------------------
<S>                                        <C>                           <C>
Thomas D. Wright (11)                               298,813                     4.9 %
500 Greentree Commons
381 Mansfield Avenue
Pittsburgh, PA  15220
</TABLE>

(1)  The number of shares and the percent of the class in the table and these
     notes to the table have been calculated in accordance with Rule 13d-3 under
     the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
     assume, on a stockholder by stockholder basis, that each stockholder has
     converted all securities owned by such stockholder that are convertible
     into common stock at the option of the holder currently or within 60 days
     of March 12, 1999, and that no other stockholder so converts. The number of
     shares of Common Stock that may be acquired upon conversion of the Series B
     Preferred Stock and exercise of the related warrants are also included in
     the table.  Series B Preferred Stock is convertible into the Company's
     Common Stock at a rate of 85% of the closing market price on the date prior
     to conversion, subject to a minimum conversion rate of $2.00 per common
     share and a maximum conversion rate of $3.6125 per common share.  The
     number of shares included for conversion of the Series B Preferred Stock is
     calculated based on a conversion rate of $2.62625 per common share, which
     equals 85% of the closing sale price of the Company's Common Stock on March
     12, 1999 as reported on the Nasdaq National Market tier of the Nasdaq Stock
     Market.  Information is provided in the footnotes below for each holder of
     Series B Preferred Stock as to the number of shares included in the table
     for conversion of Series B Preferred Stock and the minimum and maximum
     number of shares of Common Stock that could be acquired upon conversion.

(2)  Includes 102,000 shares held in various trusts and a family foundation of
     which Mr. Posner and his wife are trustees and with respect to which shares
     Mr. Posner shares voting and investment power.  Does not include 1,000
     shares owned by Mr. Posner's wife and 2,000 shares held by trusts of which
     Mr. Posner's wife is a trustee.  Includes 329,412 shares of Common Stock
     which may be acquired by exercise of warrants.  Mr. Posner owns 1,400
     shares of Series B Preferred Stock.  The table includes 527,059 shares of
     Common Stock for conversion of Series B Preferred Stock.  The Series B
     Preferred Stock is convertible into at least 387,543, but no more than
     700,000, shares of Common Stock.  Assuming that the Series B Preferred
     Stock became exercisable for the maximum 700,000 shares of Common Stock,
     Mr. Posner would be deemed to beneficially own an aggregate of 2,174,152
     shares of Common Stock representing approximately 31.0% of the Common Stock
     outstanding.

(3)  As reported on Schedule 13G filed with the Securities and Exchange
     Commission (the "SEC") on February 17, 1999, 601,000 of the shares
     indicated are beneficially owned by Mr. Friedman, certain of his family
     members and a private family foundation for which Mr. Friedman serves as
     trustee.  Mr. Friedman has sole voting and dispositive power for these
     shares.  Mr. Friedman may be deemed to indirectly beneficially own and
     share voting and dispositive power with respect to 521,554 shares directly
     owned by Friedman, Billings, Ramsey Group, Inc. ("FBRG") by virtue of his
     control position as Chairman and Chief Executive Officer of FBRG.  Mr.
     Friedman disclaims beneficial ownership of such shares.  Mr. Friedman is
     the husband of Kindy French, a beneficial owner of more than five percent
     of the outstanding Common Stock of the Company.  The number of shares shown
     assumes there has been no change in the number of shares beneficially owned
     from the number of shares reported as being beneficially owned in the
     Schedule 13G.

(4)  Does not include shares which may be issued upon conversion of a note
     payable of the Company to Mr. Kelly in the principal amount of $2,000,000
     because the note is not convertible within sixty days of March 12, 1999.

(5)  Includes 10,000 shares of  Common Stock which may be acquired by exercise
     of options and 176,471 shares of Common Stock which may be acquired by
     exercise of warrants.  Mr. Kavan owns 750 shares of Series B Preferred
     Stock.  The table includes 282,353 shares of Common Stock for conversion of
     Series B Preferred Stock.  The Series B Preferred Stock is convertible into
     at least 207,612, but no more than 375,000, shares of Common Stock.
     Assuming that the Series B Preferred Stock became exercisable for the
     maximum 375,000

                                                                             101
<PAGE>
 
     shares of Common Stock, Mr. Kavan would be deemed to beneficially own an
     aggregate of 662,271 shares of Common Stock representing approximately
     10.1% of the Common Stock outstanding.

(6)  As reported on Schedule 13G filed with the SEC on February 17, 1999, each
     of Friedman, Billings, Ramsey Group, Inc. and Orkney Holdings, Inc., a
     wholly owned subsidiary of FBRG have sole voting and dispositive power with
     respect to the shares indicated.  The Schedule 13G reports that each of
     Eric F. Billings, Emanuel J. Friedman, and W. Russell Ramsey share voting
     and dispositive power with respect to the shares.  The number of shares
     shown assumes that there has been no change in the number of shares
     beneficially owned from the number os shares reported as being beneficially
     owned in the Schedule 13G.

(7)  As reported on Schedule 13G filed with the SEC on February 11, 1999,
     Dimensional Fund Advisors, Inc., an investment advisor registered under
     Section 203 of the Investment Advisors Act of 1940, has sole voting and
     investment power over the shares indicated, but Dimensional Fund Advisors,
     Inc. disclaims beneficial ownership of the shares.  The number of shares
     assumes that there has been no change in the number of shares beneficially
     owned from the number os shares reported as being beneficially owned in the
     Schedule 13G.

(8)  The shares indicated are under shared voting power and shared dispositive
     power among Continental Casualty Company, CNA Financial Corporation and
     Loews Corporation as reported on Schedule 13G filed by such entities with
     the SEC on February 13, 1998.  The report states that, under Illinois law,
     assets owned by Continental Casualty Company, an Illinois insurance
     company, are solely under the control of the board of directors of the
     insurer and that the characterization of shared dispositive power with the
     parent holding company is made solely as a consequence of SEC
     interpretations regarding control of the subsidiary.  CNA Financial
     Corporation and Loews Corporation specifically disclaim beneficial
     ownership of the shares.  As reported by Nasdaq-Online on March 12, 1999
     there has been no change in the number of shares owned since the date of
     the report on Schedule 13G.  The number of shares shown assumes that there
     has been no change in the number of shares owned since this date.

(9)  Information as to the number of shares owned by Ms. French has been
     obtained from the Schedule 13G filed with the SEC by Ms. French on February
     16, 1999.  The number of shares shown assumes there has been no change in
     the number of shares beneficially owned from the number of shares reported
     as being beneficially owned in the Schedule 13G.  Ms. French is the wife of
     Emanuel J. Friedman, the Chairman of FBRG.  Both Mr. Friedman and FBRG are
     beneficial owners of more than five percent of the outstanding Common Stock
     of the Company.  See Notes (3) and (6) above.

(10) Includes currently exercisable options to acquire 60,000 shares of the
     Company's Common Stock.

(11) Does not include 45,000 shares held by Mr. Wright's spouse, 5,000 shares in
     her own name and 40,000 shares as trustee for various trusts.  Includes
     47,059 shares of Common Stock which may be acquired by exercise of
     warrants.  Mr. Wright owns 200 shares of Series B Preferred Stock.  The
     table includes 75,294 shares of Common Stock for conversion of Series B
     Preferred Stock.  The Series B Preferred Stock is convertible into at least
     55,363, but no more than 100,000, shares of Common Stock.  Assuming that
     the Series B Preferred Stock became exercisable for the maximum 100,000
     shares of Common Stock, Mr. Wright would be deemed to beneficially own an
     aggregate of 323,519 shares of Common Stock representing approximately 5.3%
     of the Common Stock outstanding.

                                                                             102
<PAGE>
 
(b)   Security Ownership of Management

  The following table presents certain information as of March 12, 1999 as to
the beneficial ownership of the Common Stock of the Company by (i) each director
and Named Executive and (ii) all directors and executive officers as a group.
Except as indicated, the persons named have sole voting and investment power
with respect to all shares shown as being beneficially owned by them.  The
percentages in the table are rounded to the nearest tenth of a percent.

<TABLE>
<CAPTION>
                                                                                              
                                                    Amount and Nature 
                                                    -----------------
                                                      of Beneficial  
                                                      -------------
               Name of Stockholder                    Ownership (1)     Percent of Class (1)  
               -------------------                    -------------     --------------------- 
<S>                                                <C>                  <C>
Richard W. Talarico (2)                                        287,032                  4.6 %
Les D. Kent (6)                                                323,333                  5.3 %
Dean C. Praskach                                                 3,900                    *
Brian K. Blair                                                 177,200                  3.0 %
Anthony L. Bucci                                                   ---                    *
William C. Kavan (3)                                           569,624                  8.8 %
James S. Kelly, Jr. (4)                                        724,675                 12.1 %
James C. Roddey (5)                                            163,779                  2.7 %
 
All directors and executive officers, as a group
 (8 persons) (6)                                             1,926,210                 28.6 %
</TABLE>

*    Less than one percent

(1)  The number of shares and the percent of the class in the table and these
     notes to the table have been calculated in accordance with Rule 13d-3 under
     the Exchange Act, and assume, on a stockholder by stockholder basis, that
     each stockholder has converted all securities owned by such stockholder
     that are convertible into common stock at the option of the holder
     currently or within 60 days of March 12, 1999, and that no other
     stockholder so converts.  The numbers and percentages of shares owned
     assume that options that are currently exercisable or  exercisable within
     sixty days of March 12, 1999 had been exercised, as follows:  Mr. Talarico
     8,400 shares; Mr. Kent  60,000 shares; Mr. Praskach  3,900 shares, Messrs.
     Kavan and Roddey  10,000 shares each; and all directors and executive
     officers as a group  32,300 shares (not including the options held by Mr.
     Kent).  The number of shares of Common Stock that may be acquired upon
     conversion of the Series B Preferred Stock and exercise of the related
     warrants are also included in the table.  Series B Preferred Stock is
     convertible into the Company's Common Stock at a rate of 85% of the closing
     market price on the date prior to conversion, subject to a minimum
     conversion rate of $2.00 per common share and a maximum conversion rate of
     $3.6125 per common share.  The number of shares included for conversion of
     the Series B Preferred Stock is calculated based on a conversion rate of
     $2.62625 per common share, which equals 85% of the closing sale price of
     the Company's Common Stock on March 12, 1999 as reported on the Nasdaq
     National Market tier of the Nasdaq Stock Market.  Information is provided
     in the footnotes below for each holder of Series B Preferred Stock as to
     the number of shares included in the table for conversion of Series B
     Preferred Stock and the minimum and maximum number of shares of Common
     Stock that could be acquired upon conversion.

(2)  Includes 70,588 shares of Common Stock which may be acquired by exercise of
     warrants.  Mr.Talarico owns 300 shares of Series B Preferred Stock,
     representing 10.9% of the Series B Preferred Stock outstanding.  The table
     includes 112,941 shares of Common Stock for conversion of Series B
     Preferred Stock.  The Series B Preferred Stock is convertible into at least
     83,044, but no more than 150,000, shares of Common Stock.  Assuming that
     the Series B Preferred Stock became exercisable for the maximum 150,000
     shares of Common Stock, Mr. Talarico would be deemed to beneficially own an
     aggregate of 324,091 shares of Common Stock representing approximately 5.2%
     of the Common Stock outstanding.  Mr. Talarico also owns 588 shares of the
     Company's Series A Preferred Stock, representing 2.4% of the Series A
     Preferred Stock outstanding.

                                                                             103
<PAGE>
 
(3)  Includes 176,471 shares of Common Stock which may be acquired by exercise
     of warrants.  Mr. Kavan owns 750 shares of Series B Preferred Stock,
     representing 27.3% of the Series B Preferred Stock outstanding.  The table
     includes 282,353 shares of Common Stock for conversion of Series B
     Preferred Stock.  The Series B Preferred Stock is convertible into at least
     207,612, but no more than 375,000, shares of Common Stock.  Assuming that
     the Series B Preferred Stock became exercisable for the maximum 375,000
     shares of Common Stock, Mr. Kavan would be deemed to beneficially own an
     aggregate of 662,271 shares of Common Stock representing approximately
     10.1% of the Common Stock outstanding.  Mr. Kavan also owns 10,000 shares
     of the Company's Series A Preferred Stock, representing 40.0% of the Series
     A Preferred Stock outstanding.

(4)  Does not include shares which may be issued upon conversion of a note
     payable of the Company to Mr. Kelly in the principal amount of $2,000,000
     because the note is not convertible within sixty days of March 12, 1999.

(5)  Includes 2,000 shares owned by Mr. Roddey's wife and 23,529 shares of
     Common Stock which may be acquired by exercise of warrants.  Mr. Roddey
     owns 100 shares of Series B Preferred Stock, representing 3.6% of the
     Series B Preferred Stock outstanding.  The table includes 37,647 shares of
     Common Stock for conversion of Series B Preferred Stock.  The Series B
     Preferred Stock is convertible into at least 27,681, but no more than
     50,000, shares of Common Stock.  Assuming that the Series B Preferred Stock
     became exercisable for the maximum 50,000 shares of Common Stock, Mr.
     Roddey would be deemed to beneficially own an aggregate of 176,132 shares
     of Common Stock representing approximately 2.90% of the Common Stock
     outstanding.  Mr. Roddey also owns 588 shares of the Company's Series A
     Preferred Stock, representing 2.4% of the Series A Preferred Stock
     outstanding.

(6)  Mr. Kent  is no longer an executive officer of the Company.

                                                                             104
<PAGE>
 
Item 13 - Certain Relationships and Related Transactions


Arrangements Involving Allin Consulting-Pennsylvania

     The acquisition of Allin Consulting-Pennsylvania in August 1998 included
two promissory notes issued by the Company in the amounts of $6.2 and $2.0
million, respectively, to James S. Kelly, Jr., the former majority shareholder
of Allin Consulting-Pennsylvania.  Mr. Kelly is a holder of greater than five
percent of the Company's outstanding common stock and a director of the Company.
The secured promissory note for $6.2 million bore interest at 5% per annum and
was paid in its entirety in October 1998.  The secured promissory note for $2.0
million bears interest at 6% per annum and matures August 13, 2000.  The $2.0
million secured promissory note will be convertible into shares of the Company's
common stock if not repaid on or before maturity.  See Item 7- Management's
Discussion of Financial Condition and Results of Operations  Liquidity and
Capital Resources.

Arrangements Involving Allin Consulting-California and Allin Network

     In November 1996, the Company acquired Allin Consulting-California.  The
consideration included $2.0 million in cash and $3.2 million in the Company's
Common Stock.  In addition, the agreement governing the acquisition provided for
up to $2.8 million in contingent payments.  In November 1998, the Company and
Les D. Kent, a holder of greater than five percent of the Company's outstanding
Common Stock and a former President of the Company, reached agreement on an
amendment to modify the terms of a promissory note for the contingent payments.
Under the amendment, the amount of the payment due has been fixed at $2,000,000.
The amended note provides for principal payments of $1,000,000 plus any accrued
interest due on April 15, 2000 and October 15, 2000.  The Company may, however,
defer payment of principal at its option until April 15, 2005.  The amended note
provides for interest at the rate of 7% per annum from the acquisition date of
November 6, 1996. Mr. Kent was the sole stockholder of Allin Consulting-
California prior to the acquisition. See Item 7- Management's Discussion of
Financial Condition and Results of Operations  Liquidity and Capital Resources.

     Allin Network made payments of approximately $27,000 under a note payable
due Les D. Kent during the fiscal year ended December 31, 1998.

Leases

     Effective February 1, 1997, the Company entered into a five-year lease for
office space with Executive Office Associates ("EOA").  The aggregate rental
payment under this lease was approximately $295,000 during the fiscal year ended
December 31, 1998.  Henry Posner, Jr., Thomas D. Wright and two of Mr. Posner's
sons and his spouse each own an indirect equity interest in EOA.  Messrs. Posner
and Wright are beneficial holders of greater than five percent of the Company's
outstanding Common Stock.  In late 1997 and early 1998, agreements were reached
among the Company, EOA, and a non-affiliated party for sublet of a portion of
the space that would end the Company's obligations with respect to that portion
for the remainder of the lease term.  As of December 31, 1998, minimum lease
commitments were approximately $843,000 for the period from January 1, 1998 to
January 31, 2002.  The Company believes that rental payments under the long-term
lease were on terms as favorable to the Company as could have been obtained from
an unaffiliated party.

     During the fiscal year ended December 31, 1998, Allin Consulting-California
made payments of approximately $65,000 to Les D. Kent for the lease of office
space under a month-to-month lease arrangement.  The Company believes that
rental payments under the lease were on terms as favorable to the Company as
could have been obtained from an unaffiliated party.

Loan to Officer and Director

     During March 1997, the Company made a loan in the amount of $130,000 to R.
Daniel Foreman, then the President and a director of the Company.  The loan bore
interest at prime plus one percent from origination to December 1, 1997, its
original due date, and prime plus three percent thereafter.  Mr. Foreman
resigned as a director and officer of the Company in February, 1998.  Under
terms of a separation agreement, the loan and approximately $10,000 of accrued
interest were forgiven.

                                                                             105
<PAGE>
 
Minority Investment in Corporation

     In March 1998, the Company contributed certain assets, including rights to
the name PhotoWave, formerly used in its operations in the retail digital
photography market for a minority, non-controlling equity interest in a new
corporation, Rhino Communications Corporation ("RCC"), which thereafter began
operations in this market.  Mr. Foreman, a former officer and director of the
Company, is a minority owner of RCC.  Henry Posner, Jr.  and William C. Kavan, a
holder of greater than five percent of the Company's outstanding Common Stock
and a director of the Company, also have an equity interest in RCC.  The value
placed on the Company's initial equity interest, $100,000, approximated the
value of the assets contributed.
 
Separation Agreement

     In connection with his resignation as an executive officer of the Company
in February 1998, the Company entered into a separation agreement with Brian K.
Blair.  Under the separation agreement, the Company was obligated to make
aggregate payments to Mr. Blair in the amount of $225,000 plus accrued vacation
pay, and to provide certain consulting services to Mr. Blair.  Mr. Blair remains
subject to restrictive covenants prohibiting him from competing with the Company
for a period of two years following his resignation.  Mr. Blair has continued as
a director of the Company.  During 1998, the Company paid approximately $212,000
of the amounts due Mr. Blair under the separation agreement.

                                                                             106
<PAGE>
 
Part IV


Item 14 -  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)   1.  Financial Statements - See Part II, Item 8 hereof on page 52.

      2.  Financial Statement Schedule and Auditor's Report

          Schedule I - Condensed financial information of registrant
 
               This schedule is not applicable.

          Schedule II - Valuation and qualifying accounts

               See Schedule II on page Sch. II-A.

          The auditors' report of Arthur Andersen LLP with respect to the
          Financial Statement Schedule is located at page Sch. II-B.

3.   Exhibits

     Exhibit
     Number             Description of Exhibit (1)

     2.1      Stock Purchase Agreement dated August 14, 1996 by and among
              International Sports Marketing, Inc., Henry Posner, Jr., Thomas D.
              Wright, Michael J. Fetchko, James C. Roddey, Richard W. Talarico,
              John F. Hensler and Allin Communications Corporation (incorporated
              by reference to Exhibit 2.1 to Allin Communications Corporation's
              Registration Statement No. 333-10447 on Form S-1).

     2.2      Agreement and Plan of Merger dated August 16, 1996 by and among
              Kent Consulting Group, Inc., Les Kent and Allin Communications
              Corporation (incorporated by reference to Exhibit 2.2 to Allin
              Communications Corporation's Registration Statement No. 333-10447
              on Form S-1).

     2.3      Stock Purchase Agreement dated August 13, 1998 among the
              Registrant, KCS Computer Services, Inc. and the stockholders of
              KCS Computer Services, Inc. (incorporated by reference to Exhibit
              2.1 to Allin Communications Corporation's Report on Form 8-K as of
              August 13, 1998).

     2.4      Stock Purchase Agreement dated as of September 30, 1998 by and
              between Allin Communications Corporations and Lighthouse Holdings,
              Inc. (incorporated by reference to Exhibit 2.1 to Allin
              Communications Corporation's Report on Form 8-K as of September
              30, 1998).

     2.5      Amendment to Agreement and Plan of Merger dated as of November 6,
              1998 by and between the Registrant, Kent Consulting Group, Inc.
              and Les Kent (incorporated by reference to Exhibit 2.3 to Allin
              Communications Corporation's Report on Form 10-Q for the period
              ended September 30, 1998).

     3(i)(a)  Certificate of Incorporation of the Registrant, as amended
              (incorporated by reference to Exhibit 3(i)(a) to Allin
              Communications Corporation's Registration Statement No. 333-10447
              on Form S-1).

                                                                             107
<PAGE>
 
     Exhibit
     Number             Description of Exhibit


     3(i)(b)  Certificate of Designation of the Registrant relating to the
              Series A Convertible Redeemable Preferred Stock (incorporated by
              reference to Exhibit 3(i)(b) to Allin Communications Corporation's
              Registration Statement No. 333-10447 on Form S-1).

     3(i)(c)  Certificate of Amendment to Certificate of Designation of the
              Registrant relating to the Series A Convertible Redeemable
              Preferred Stock (incorporated by reference to Exhibit 3(i)(c) to
              Allin Communications Corporation's Registration Statement No. 333-
              10447 on Form S-1).

     3(i)(d)  Certificate of Designation for Series B Redeemable Preferred Stock
              of the Registrant (incorporated by reference to Exhibit 3(i)(a) to
              Allin Communications Corporation's Report on Form 8-K as of August
              13, 1998).

     3(i)(e)  Certificate of Correction Relating to the Series B Redeemable
              Preferred Stock of the Registrant (incorporated by reference to
              Exhibit 3(i)(b) to Allin Communications Corporation's Report on
              Form 8-K as of August 13, 1998).

     3(ii)(a) Amended and Restated By-laws of the Registrant (incorporated by
              reference to Exhibit 3(ii) to Allin Communications Corporation's
              Registration Statement No. 333-10447 on Form S-1).

     3(ii)(b) Amendment to By-laws of the Registrant (incorporated by reference
              to Exhibit 3(ii) to Allin Communications Corporation's Report on
              Form 10-Q for the period ended June 30, 1998)

     4.1      Certificate of Designation of Registrant relating to Series A
              Convertible Redeemable Preferred Stock and Certificate of
              Amendment relating thereto (incorporated by reference to Exhibits
              3(i)(b) and 3(i)(c) to Allin Communications Corporation's
              Registration Statement No. 333-10447 on Form S-1).

     4.2      Certificate of Designation for Series B Redeemable Preferred stock
              of the Registrant and Certificate of Correction Relating to the
              Series B Redeemable Convertible Preferred Stock of the Registrant
              (incorporated by reference to Exhibits 3(i)(a) and 3(i)(b) to
              Allin Communications Corporation's Report on Form 8-K as of August
              13, 1998).

     4.3      Preemptive Rights Agreement dated August 13, 1998 among the
              Registrant and certain stockholders of the Registrant
              (incorporated by reference to Exhibit 4.1 to Allin Communications
              Corporation's Report on Form 8-K as of August 13, 1998).

     4.4      Form of Warrant for purchasers of Series B Redeemable Preferred
              Stock (incorporated by reference to Exhibit 4.2 to Allin
              Communications Corporation's Report on Form 8-K as of August 13,
              1998).

     4.5      Promissory Note dated August 13, 1998 in the principal amount of
              $2,000,000 (incorporated by reference to Exhibit 4.3 to Allin
              Communications Corporation's Report on Form 8-K as of August 13,
              1998).

     4.6      Loan and Security Agreement dated as of October 1, 1998 by and
              between Allin Communications Corporation and S&T Bank, a
              Pennsylvania banking association (incorporated by reference to
              Exhibit 4 to Allin Communications Corporation's Report on Form 8-K
              as of September 30, 1998).

                                                                             108
<PAGE>
 
     Exhibit
     Number             Description of Exhibit


     4.7      Amended and Restated Promissory Note dated as of November 6, 1998
              by and between Registrant, Kent Consulting Group, Inc. and Les
              Kent (incorporated by reference to Exhibit 4.6 to Allin
              Communications Corporation's Report on Form 10-Q for the period
              ended September 30, 1998).

     10.1     Registration Rights Agreement dated July 23, 1996 by and among the
              Registrant and certain of its stockholders (incorporated by
              reference to Exhibit 10.4 to Allin Communications Corporation's
              Registration Statement No. 333-10447 on Form S-1).

     10.2*    1996 Stock Plan of the Registrant (incorporated by reference to
              Exhibit 10.8 to Allin Communications Corporation's Registration
              Statement No. 333-10447 on Form S-1).

     10.3*    1997 Stock Plan of the Registrant (incorporated by reference to
              Annex A to Allin Communications Corporation's Proxy Statement for
              the Annual Meeting of Stockholders held on May 8, 1997).

     10.4*    1998 Stock Plan of the Registrant (incorporated by reference to
              Annex A to Allin Communications Corporation's Proxy Statement for
              the Special Meeting of Stockholders held on December 31, 1998).

     10.5     First Amended and Restated Agreement dated June 1, 1996 between
              SeaVision, Inc. and Celebrity Cruises, Inc. (subject to
              confidential treatment) (incorporated by reference to Exhibit
              10.12 to Allin Communications Corporation's Registration Statement
              No. 333-10447 on Form S-1).

     10.6     Agreement dated February 6, 1996 between SeaVision, Inc. and
              Carnival Corporation (subject to confidential treatment)
              (incorporated by reference to Exhibit 10.13 to Allin
              Communications Corporation's Registration Statement No. 333-10447
              on Form S-1).

     10.7     Agreement dated August 8, 1996 by and between SeaVision, Inc. and
              Norwegian Cruise Line Limited (subject to confidential treatment)
              (incorporated by reference to Exhibit 10.14 to Allin
              Communications Corporation's Registration Statement No. 333-10447
              on Form S-1).

     10.8     Concession Agreement dated September 17, 1996 by and between
              SeaVision, Inc. and Royal Caribbean Cruise Line (subject to
              confidential treatment) (incorporated by reference to Exhibit
              10.16 to Allin Communications Corporation's Registration Statement
              No. 333-10447 on Form S-1).

     10.9     Amendment to First Amended and Restated Agreement dated as of
              September 19, 1997 by and between SeaVision, Inc. and Celebrity
              Cruises, Inc. (subject to confidential treatment) (incorporated by
              reference to Exhibit 10.1 to Allin Communications Corporation's
              Report on Form 10-Q for the period ended September 30, 1997).

     10.10    Amendment to Concession Agreement dated as of October 16, 1997 by
              and between SeaVision, Inc. and Royal Caribbean Cruises, Ltd.
              (subject to confidential treatment) (incorporated by reference to
              Exhibit 10.2 to Allin Communications Corporation's Report on Form
              10-Q for the period ended September 30, 1997).

     10.11    First Addendum to Agreement dated as of January 29, 1998 by and
              between SeaVision, Inc. and Norwegian Cruise Line Limited (subject
              to request for confidential treatment) (incorporated by reference
              to Exhibit 10.25 to Allin Communications Corporation's Report on
              Form 10-K for the period ended December 31, 1997).

                                                                             109
<PAGE>
 
     Exhibit
     Number             Description of Exhibit


     10.12    Separation Agreement dated February 4, 1998 by and between Allin
              Communications Corporation and R. Daniel Foreman (incorporated by
              reference to Exhibit 10.26 to Allin Communications Corporation's
              Report on Form 10-K for the period ended December 31, 1997).

     10.13    Separation Agreement dated February 4, 1998 by and between Allin
              Communications Corporation and Brian K. Blair (incorporated by
              reference to Exhibit 10.27 to Allin Communications Corporation's
              Report on Form 10-K for the period ended December 31, 1997).

     10.14*   Employment Agreement dated June 15, 1998 by and between the
              Registrant and Richard W. Talarico (incorporated by reference to
              Exhibit 10 to Allin Communications Corporation's Report on Form
              10-Q for the period ended June 30, 1998).

     10.15    Registration Rights Agreement dated August 13, 1998 among the
              Registrant and certain stockholders of the Registrant
              (incorporated by reference to Exhibit 10.1 to Allin Communications
              Corporation's Report on Form 8-K as of August 13, 1998).

     10.16    Promissory Note dated August 13, 1998 in the principal amount of
              $6,200,000 (incorporated by reference to Exhibit 10.2 to Allin
              Communications Corporation's Report on Form 8-K as of August 13,
              1998).

     10.17    Transition Services Agreement dated as of September 30, 1998 by
              and between Allin Communications Corporation and SportsWave, Inc.
              (incorporated by reference to Exhibit 10.1 to Allin Communications
              Corporation's Report on Form 8-K as of September 30, 1998).

     10.18*   Employment Agreement dated November 6, 1998 by and between the
              Registrant and Les Kent (incorporated by reference to Exhibit 10.2
              to Allin Communications Corporation's Report on Form 10-Q for the
              period ended September 30, 1998).

     10.19*   Employment Agreement dated November 1, 1997 by and between the
              Registrant and Dean C. Praskach

     10.20*   Employment Agreement dated January 25, 1999 by and between the
              Registrant and Timothy P. O'Shea

     11       Computation of Earnings Per Share

     21       Subsidiaries of the Registrant.

     27       Financial Data Schedule.
____________

*    Management contract or management compensatory plan or arrangement.

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

                                                                             110
<PAGE>
 
4.   Reports on Form 8-K
 
     The following Reports on Form 8-K/A were filed in the fourth quarter of
1998:
 
          Report on Form 8-K/A (Amendment No. 2) amending the report on Form 8-K
          of August 13, 1998 to update certain financial information filed with
          Amendment No. 1 related to the acquisition of  KCS Computer Services,
          Inc.

          Report on Form 8-K/A (Amendment No. 3) amending the report on Form 8-K
          of August 13, 1998 to withdraw certain financial information filed
          with Amendment No. 2 related to the acquisition of  KCS Computer
          Services, Inc.

          Report on Form 8-K/A (Amendment No. 1) amending the report on Form 8-K
          of September 30, 1998 to update certain pro forma financial
          information related to the sale of SportsWave, Inc.

                                                                             111
<PAGE>
 
Signatures

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Allin  Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

March 19, 1999

                           ALLIN CORPORATION

                           By:  /s/ Richard W. Talarico
                               -------------------------------------
                               Richard W. Talarico
                               Chairman of the Board and Chief Executive Officer



  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Allin
Corporation and in the capacities and on the dates indicated:


<TABLE>
<CAPTION>
                    Signature                                           Title                             Date
                    ---------                                           -----                             ----
<S>                                                 <C>                                            <C>
/s/ Richard W. Talarico                               Chairman of the Board and Chief Executive
--------------------------------------------------      Officer (Principal Executive Officer)        March 19, 1999
Richard W. Talarico

/s/ Dean C. Praskach                                  Vice President-Finance (Principal Financial
--------------------------------------------------      and Accounting Officer)                      March 19, 1999
Dean C. Praskach

/s/ Brian K. Blair
--------------------------------------------------    Director                                       March 19, 1999 
Brian K. Blair

/s/ Anthony L. Bucci
--------------------------------------------------    Director                                       March 19, 1999 
Anthony L. Bucci

/s/ William C. Kavan
--------------------------------------------------    Director                                       March 19, 1999 
William C. Kavan

/s/ James S. Kelly, Jr.
--------------------------------------------------    Director                                       March 19, 1999 
James S. Kelly, Jr.

/s/ James C. Roddey
--------------------------------------------------    Director                                       March 19, 1999 
James C. Roddey
</TABLE>

                                                                             112
<PAGE>
 
                                                                     Schedule II


                               ALLIN CORPORATION

                       VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                                  Balance at        Additions
                                                  ----------        ---------
                                                 Beginning of       Charged to                                   Balance at End
                                                 ------------       ----------                                   --------------
           (Dollars in thousands)                   Period           Expense       Other Additions  Deductions     of Period
                                                    ------           -------       ---------------  ----------     ---------
 <S>                                            <C>               <C>               <C>              <C>         <C>
Valuation allowance on deferred tax asset                   ---             2,500              ---         ---             2,500
                                             -----------------------------------------------------------------------------------
Year ended December 31, 1996                   $            ---            $2,500  $           ---  $      ---            $2,500
 
Valuation allowance on deferred tax asset                 2,500             3,684              ---         ---             6,184
Allowance for doubtful accounts receivable                  ---                84              ---         ---                84
Severance accrual for employee terminations                 ---               329              ---         203               126
                                             -----------------------------------------------------------------------------------
Year ended December 31, 1997                             $2,500            $4,097  $           ---        $203            $6,394
 
Valuation allowance on deferred tax asset                 6,184             1,720              ---         ---             7,904
Allowance for doubtful accounts receivable                   84               102              130         ---               316
Severance accrual for employee terminations                 126               506              ---         604                28
                                             -----------------------------------------------------------------------------------
Year ended December 31, 1998                             $6,394            $2,328              130        $604            $8,248
                                             ===================================================================================
</TABLE>



                                                                   Schedule II-A

                                                                             113
<PAGE>

 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of Allin Corporation:

We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in this Form 10-K, and have issued
our report thereon dated February 19, 1999.  Our audit was made for the purpose
of forming an opinion on the basic consolidated financial statements taken as a
whole.  The schedule listed in the index in Item 14 (a) 2 of this Form 10-K is
the responsibility of the Company's management and is presented for the purpose
of complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements.  This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth in relation to the
basic consolidated financial statements taken as a whole.



                                                         /s/ ARTHUR ANDERSEN LLP



Pittsburgh, Pennsylvania,
February 19, 1999



                                                                   Schedule II-B

                                                                             114
<PAGE>
 
                                 Exhibit Index
                                 -------------

Exhibit
Number            Description of Exhibit (1)

2.1       Stock Purchase Agreement dated August 14, 1996 by and among
          International Sports Marketing, Inc., Henry Posner, Jr., Thomas D.
          Wright, Michael J. Fetchko, James C. Roddey, Richard W. Talarico, John
          F. Hensler and Allin Communications Corporation (incorporated by
          reference to Exhibit 2.1 to Allin Communications Corporation's
          Registration Statement No. 333-10447 on Form S-1).

2.2       Agreement and Plan of Merger dated August 16, 1996 by and among Kent
          Consulting Group, Inc., Les Kent and Allin Communications Corporation
          (incorporated by reference to Exhibit 2.2 to Allin Communications
          Corporation's Registration Statement No. 333-10447 on Form S-1).

2.3       Stock Purchase Agreement dated August 13, 1998 among the Registrant,
          KCS Computer Services, Inc. and the stockholders of KCS Computer
          Services, Inc. (incorporated by reference to Exhibit 2.1 to Allin
          Communications Corporation's Report on Form 8-K as of August 13,
          1998).

2.4       Stock Purchase Agreement dated as of September 30, 1998 by and between
          Allin Communications Corporations and Lighthouse Holdings, Inc.
          (incorporated by reference to Exhibit 2.1 to Allin Communications
          Corporation's Report on Form 8-K as of September 30, 1998).

2.5       Amendment to Agreement and Plan of Merger dated as of November 6, 1998
          by and between the Registrant, Kent Consulting Group, Inc. and Les
          Kent (incorporated by reference to Exhibit 2.3 to Allin Communications
          Corporation's Report on Form 10-Q for the period ended September 30,
          1998).

3(i)(a)   Certificate of Incorporation of the Registrant, as amended
          (incorporated by reference to Exhibit 3(i)(a) to Allin Communications
          Corporation's Registration Statement No. 333-10447 on Form S-1).

3(i)(b)   Certificate of Designation of the Registrant relating to the Series A
          Convertible Redeemable Preferred Stock (incorporated by reference to
          Exhibit 3(i)(b) to Allin Communications Corporation's Registration
          Statement No. 333-10447 on Form S-1).

3(i)(c)   Certificate of Amendment to Certificate of Designation of the
          Registrant relating to the Series A Convertible Redeemable Preferred
          Stock (incorporated by reference to Exhibit 3(i)(c) to Allin
          Communications Corporation's Registration Statement No. 333-10447 on
          Form S-1).


3(i)(d)   Certificate of Designation for Series B Redeemable Preferred Stock of
          the Registrant (incorporated by reference to Exhibit 3(i)(a) to Allin
          Communications Corporation's Report on Form 8-K as of August 13,
          1998).


3(i)(e)   Certificate of Correction Relating to the Series B Redeemable
          Preferred Stock of the Registrant (incorporated by reference to
          Exhibit 3(i)(b) to Allin Communications Corporation's Report on 
          Form 8-K as of August 13, 1998).


3(ii)(a)  Amended and Restated By-laws of the Registrant (incorporated by
          reference to Exhibit 3(ii) to Allin Communications Corporation's
          Registration Statement No. 333-10447 on Form S-1).

3(ii)(b)  Amendment to By-laws of the Registrant (incorporated by reference to
          Exhibit 3(ii) to Allin Communications Corporation's Report on Form 10-
          Q for the period ended June 30, 1998)



<PAGE>
 
                             Exhibit Index (cont.)
                             ---------------------

Exhibit
Number            Description of Exhibit

4.1         Certificate of Designation of Registrant relating to Series A
            Convertible Redeemable Preferred Stock and Certificate of Amendment
            relating thereto (incorporated by reference to Exhibits 3(i)(b) and
            3(i)(c) to Allin Communications Corporation's Registration Statement
            No. 333-10447 on Form S-1).

4.2         Certificate of Designation for Series B Redeemable Preferred stock
            of the Registrant and Certificate of Correction Relating to the
            Series B Redeemable Convertible Preferred Stock of the Registrant
            (incorporated by reference to Exhibits 3(i)(a) and 3(i)(b) to Allin
            Communications Corporation's Report on Form 8-K as of August 13,
            1998).

4.3         Preemptive Rights Agreement dated August 13, 1998 among the
            Registrant and certain stockholders of the Registrant (incorporated
            by reference to Exhibit 4.1 to Allin Communications Corporation's
            Report on Form 8-K as of August 13, 1998).

4.4         Form of Warrant for purchasers of Series B Redeemable Preferred
            Stock (incorporated by reference to Exhibit 4.2 to Allin
            Communications Corporation's Report on Form 8-K as of August 13,
            1998).

4.5         Promissory Note dated August 13, 1998 in the principal amount of
            $2,000,000 (incorporated by reference to Exhibit 4.3 to Allin
            Communications Corporation's Report on Form 8-K as of August 13,
            1998).

4.6         Loan and Security Agreement dated as of October 1, 1998 by and
            between Allin Communications Corporation and S&T Bank, a
            Pennsylvania banking association (incorporated by reference to
            Exhibit 4 to Allin Communications Corporation's Report on Form 8-K
            as of September 30, 1998).

4.7         Amended and Restated Promissory Note dated as of November 6, 1998 by
            and between Registrant, Kent Consulting Group, Inc. and Les Kent
            (incorporated by reference to Exhibit 4.6 to Allin Communications
            Corporation's Report on Form 10-Q for the period ended September 30,
            1998).

10.1        Registration Rights Agreement dated July 23, 1996 by and among the
            Registrant and certain of its stockholders (incorporated by
            reference to Exhibit 10.4 to Allin Communications Corporation's
            Registration Statement No. 333-10447 on Form S-1).


10.2*       1996 Stock Plan of the Registrant (incorporated by reference to
            Exhibit 10.8 to Allin Communications Corporation's Registration
            Statement No. 333-10447 on Form S-1).

10.3*       1997 Stock Plan of the Registrant (incorporated by reference to
            Annex A to Allin Communications Corporation's Proxy Statement for
            the Annual Meeting of Stockholders held on May 8, 1997).

10.4*       1998 Stock Plan of the Registrant (incorporated by reference to
            Annex A to Allin Communications Corporation's Proxy Statement for
            the Special Meeting of Stockholders held on December 31, 1998).

10.5        First Amended and Restated Agreement dated June 1, 1996 between
            SeaVision, Inc. and Celebrity Cruises, Inc. (subject to confidential
            treatment) (incorporated by reference to Exhibit 10.12 to Allin
            Communications Corporation's Registration Statement No. 333-10447 on
            Form S-1).
<PAGE>
 
                             Exhibit Index (cont.)
                             --------------------- 



Exhibit
Number              Description of Exhibit

10.6     Agreement dated February 6, 1996 between SeaVision, Inc. and Carnival
         Corporation (subject to confidential treatment) (incorporated by
         reference to Exhibit 10.13 to Allin Communications Corporation's
         Registration Statement No. 333-10447 on Form S-1).

10.7     Agreement dated August 8, 1996 by and between SeaVision, Inc. and
         Norwegian Cruise Line Limited (subject to confidential treatment)
         (incorporated by reference to Exhibit 10.14 to Allin Communications
         Corporation's Registration Statement No. 333-10447 on Form S-1).


10.8     Concession Agreement dated September 17, 1996 by and between SeaVision,
         Inc. and Royal Caribbean Cruise Line (subject to confidential
         treatment) (incorporated by reference to Exhibit 10.16 to Allin
         Communications Corporation's Registration Statement No. 333-10447 on
         Form S-1).


10.9     Amendment to First Amended and Restated Agreement dated as of
         September 19, 1997 by and between SeaVision, Inc. and Celebrity
         Cruises, Inc. (subject to confidential treatment) (incorporated by
         reference to Exhibit 10.1 to Allin Communications Corporation's Report
         on Form 10-Q for the period ended September 30, 1997).


10.10    Amendment to Concession Agreement dated as of October 16, 1997 by and 
         between SeaVision, Inc. and Royal Caribbean Cruises, Ltd. (subject to
         confidential treatment) (incorporated by reference to Exhibit 10.2 to
         Allin Communications Corporation's Report on Form 10-Q for the period
         ended September 30, 1997).

10.11    First Amendment to Agreement dated as of January 29, 1998 by and 
         between SeaVision, Inc. and Norwegian Cruise Line Limited (subject to
         request for confidential treatment) (incorporated by reference to
         Exhibit 10.25 to Allin Communications Corporation's Report on Form 10-K
         for the period ended December 31, 1997).


10.12    Separation Agreement dated February 4, 1998 by and between Allin 
         Communications Corporation and R. Daniel Foreman (incorporated by
         reference to Exhibit 10.26 to Allin Communications Corporation's Report
         on Form 10-K for the period ended December 31, 1997).


10.13    Separation Agreement dated February 4, 1998 by and between Allin 
         Communications Corporation and Brian K. Blair (incorporated by
         reference to Exhibit 10.27 to Allin Communications Corporation's Report
         on Form 10-K for the period ended December 31, 1997).


10.14*   Employment Agreement dated June 15, 1998 by and between the Registrant 
         and Richard W. Talarico (incorporated by reference to Exhibit 10 to
         Allin Communications Corporation's Report on Form 10-Q for the period
         ended June 30, 1998).


10.15    Registration Rights Agreement dated August 13, 1998 among the
         Registrant and certain stockholders of the Registrant (incorporated by
         reference to Exhibit 10.1 to Allin Communications Corporation's Report
         on Form 8-K as of August 13, 1998).


10.16    Promissory Note dated August 13, 1998 in the principal amount of 
         $6,200,000 (incorporated by reference to Exhibit 10.2 to Allin
         Communications Corporation's Report on Form 8-K as of August 13, 1998).


<PAGE>
 
                             Exhibit Index (cont.)
                             ---------------------

Exhibit
Number               Description

10.17         Transition Services Agreement dated as of September 30, 1998 by
              and between Allin Communications Corporation and SportsWave, Inc.
              (incorporated by reference to Exhibit 10.1 to Allin Communications
              Corporation's Report on Form 8-K as of September 30, 1998).

10.18*        Employment Agreement dated November 6, 1998 by and between the
              Registrant and Les Kent (incorporated by reference to Exhibit 10.2
              to Allin Communications Corporation's Report on Form 10-Q for the
              period ended September 30, 1998).

10.19*        Employment Agreement dated November 1, 1997 by and between
              the Registrant and Dean C. Praskach

10.20*        Employment Agreement dated January 25, 1999 by and between the 
              Registrant and Timothy P. O'Shea

11            Computation of Earnings Per Share

21            Subsidiaries of the Registrant

27            Financial Data Schedule


----------------

* Management contract or management compensatory plan or arrangement.

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