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

FORM 10-K

(Mark One)

Commission file number:  0-21395

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.

          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

          Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

          The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing bid price of the common stock on March 14, 2003 as quoted on the OTC Bulletin Board, was approximately $381,000.  Shares of Common Stock held by each officer and director and by each person who beneficially owns 5% or more of the 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 14, 2003, the Registrant had outstanding 6,967,339 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

None

Table of Contents

Allin Corporation
Form 10-K
December 31, 2002

Index

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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,” “will” and similar expressions.  In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements.  Readers are cautioned that any such forward-looking statements are not guarantees of performance and that matters referred to in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause 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 “Risk Factors,” 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.

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Part I

Item 1 - Business

(a)  General Development of Business

          Allin Corporation (the “Company”) is a leading provider of solutions-oriented applications development, technology infrastructure consulting and systems integration services.  The Company specializes in solutions based on interactive media and technology from Microsoft Corporation (“Microsoft”).  The Company’s operations center on three solution areas:  Interactive Media, Technology Infrastructure and E-Business.  The Company leverages its experience in these areas through a disciplined project framework to deliver technology solutions that address customer needs on time and on budget.  The Company is headquartered in Pittsburgh, Pennsylvania with additional offices located in Ft. Lauderdale, Florida and San Jose and Walnut Creek, California. 

          The Company was organized under the laws of the State of Delaware in July 1996 to act as a holding company for operating subsidiaries which focus on particular aspects of the Company’s business.  As of December 31, 2002, the organizational legal structure consists of Allin Corporation and five subsidiaries.  Allin Interactive Corporation (“Allin Interactive”), formed in June 1994, Allin Corporation of California (“Allin Consulting-California”), acquired by the Company in November 1996, Allin Consulting of Pennsylvania, Inc. (“Allin Consulting-Pennsylvania”), acquired by the Company in August 1998, and Allin Network Products, Inc. (“Allin Network”), acquired by the Company in November 1996, are operating subsidiaries focusing on different aspects of the applications development, technology infrastructure consulting and systems integration services provided by the Company.  Allin Consulting-Pennsylvania also performs outsourced technology-based services.  Allin Holdings Corporation (“Allin Holdings”), which was formed in October 1996, is a non-operating subsidiary that provides treasury management services to the Company.  Allin Interactive and Allin Holdings are Delaware corporations, Allin Consulting-California and Allin Network are California corporations and Allin Consulting-Pennsylvania is a Pennsylvania corporation.  The Company utilizes the trade-names Allin Interactive, Allin Consulting and Allin Corporation in its operations.  All trade- and brand-names included in this Report on Form 10-K are the property of their respective owners.  In June 2001, the Company decided to discontinue the digital imaging technology-based operations of Allin Digital Imaging Corp. (“Allin Digital”), which was formed in August 1996.  Allin Digital ceased performing services for customers in the second quarter of 2002.  Wrap-up of residual matters related to Allin Digital was completed in 2002.  Allin Digital was merged into Allin Interactive on December 31, 2002.  Information in this Item 1 - Business concerning revenue or the proportions of operating segment revenue to solution area or total revenue for the annual periods ended December 31, 2000, 2001 and 2002 excludes the results of Allin Digital’s operations. 

          The Company’s 2002 operations resulted in net income of $1,009,000, the highest level of profitability in the Company’s history.  This result was achieved despite a very difficult business environment for providers of technology-based services, which contributed to a significant decline in Company revenue.  The Company’s 2002 revenue of $13,333,000 was $4,748,000, or 26%, less than 2001 revenue of $18,081,000.  The Company experienced declines in revenue in all of its solution areas in 2002 as compared to 2001.  Management believes the domestic economic downturn resulted in a softening of demand for technology consulting services beginning in early 2001 and continuing throughout 2002.  Management believes the economic downturn particularly negatively impacted the demand for Technology Infrastructure services since these projects frequently require significant upgrades in customers’ hardware, software and networking equipment.  The Interactive Media Solution Area also experienced a decline in revenue due to a schedule delay that resulted in the majority of an interactive television system installation project anticipated for 2002 being deferred until 2003, the introduction of a new generation hardware platform for interactive television solutions that significantly reduced the price of system installations and the inclusion in 2001 of an unusually large software development project.  Management believes that in 2002, the Company derived the full benefit of significant expense reduction efforts initiated in 2001 and continued thereafter.  The period-to-period reduction in operating expenses from 2001 to 2002 more than offset the reduction in 2002 gross profit from the decline in revenue, resulting in the highest level of profitability in the Company’s history.  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 and results of operations.

          The Company’s solution area-based organizational structure is designed to complement the customer-oriented focus of the Company’s marketing strategy.  Solution area sales and operational personnel must understand a customer’s business issues to provide a solution designed to meet the customer’s particular needs.  The Interactive Media Solution Area focuses on interactive media application development and integration services and its customers have historically been

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concentrated in the cruise industry.  Interactive Media’s customers include some of the world’s largest cruise lines, Carnival Corporation (“Carnival”), its affiliate, Costa Crociere S.p.A. (“Costa”), Royal Caribbean Cruise Lines, Ltd. (“Royal Caribbean”) and its affiliate, Celebrity Cruises (“Celebrity”).  Interactive Media operational and marketing personnel have extensive experience in the cruise industry.  Interactive Media activities are located in Ft. Lauderdale near the most active concentration of cruise line operations in the United States.  The Technology Infrastructure and E-Business Solution Areas focus on developing Microsoft-based technology solutions for customers diverse in size and across a broad array of industries.  Technology Infrastructure and E-Business consultants focus on a customer’s use of information.  The ability of businesses to manage information has become a prerequisite for their success and has become increasingly critical in allowing them to react more quickly to customer needs, bring products to market with greater speed and respond more completely and competitively to changing business conditions.  The growing influence of the Internet in the business arena has also fundamentally changed how businesses interact with customers and suppliers.  Technology Infrastructure and E-Business consultants have extensive experience in designing, developing and deploying solutions that enhance accessing, communicating and protecting information.  Technology Infrastructure and E-Business consulting services are provided from the Company’s Northern California and Pittsburgh offices.  The Company believes the customer-based focus of its solution area organizational structure and marketing strategy promote the effective delivery of customer-oriented technology solutions and foster the growth of long-term customer relationships with ongoing service opportunities.  There can be no assurance, however, that the Company will realize revenue at current or increased levels in future periods as a result of its current strategy.  Management believes that the customer-oriented focus that is the fundamental principal of its marketing strategy is firmly established throughout the Company. 

          A brief description of the Company’s solution areas follows:

          The Company has established operating relationships with some of the leading suppliers of information technology products to complement its solution area services.  Foremost among these are the operating relationships with On Command Corporation (“On Command”) and Microsoft.  On Command’s end-user components and computer hardware platforms and configurations are utilized by the Company for its interactive television systems integration projects.  On Command is one of the world’s largest providers of interactive television services to the lodging industry.  Through extensive research and development efforts, On Command has developed specifications and configurations for computer

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hardware and end-user components that facilitate efficient and reliable interactive television operations.  The Company has designed and developed unique application software which maximizes the capabilities of the On Command hardware platform for the Company’s customers.  The Company has a Supplier Agreement with On Command that grants it exclusivity in purchasing hardware and end-user components for interactive television systems for the cruise line market.  See Equipment Supply Considerations under Interactive Media Systems Integration below in this Item 1 – Business.

          The Company’s Allin Consulting subsidiaries are designated as Microsoft Gold Certified Partners, Allin Consulting-California for Enterprise Systems and Allin Consulting-Pennsylvania for both Enterprise Systems and Security Solutions. The Microsoft Gold Certified Partner program recognizes the attainment of rigorous certification criteria and demonstrated technical competency in providing complex business solutions.  Allin Consulting-Pennsylvania was the first partner in the Pittsburgh area awarded gold status in either of Microsoft’s designated disciplines and was also the first partner in the Pittsburgh area to receive dual designations.  Allin Consulting-Pennsylvania is also designated under the Microsoft Project Partner Program for demonstrated capabilities in developing and deploying project management solutions.  Allin Consulting-California is a member of Microsoft’s Technical Infrastructure and Business Intelligence Partner Advisory Councils.  Council members are a select group of Microsoft Solution Providers with a successful history of implementing Microsoft information technology who work closely with Microsoft to provide guidance on key issues that ultimately shape Microsoft’s channel-based strategy for delivering customer solutions and services.  Allin Consulting-California’s role as a member of these Advisory Councils has positioned it to quickly develop solutions expertise in new Microsoft technologies.  In 2002, Allin Consulting-California was named to the Northern California .NET Blitz team which is a select group of partners that give custom workshops on behalf of Microsoft to extend .NET awareness and encourage development on the Microsoft .NET platform.  Additionally, Allin Consulting-Calfornia, Allin Consulting-Pennsylvania and Allin Interactive are certified as Microsoft Solutions Provider Partners.  The Company intends to continue its specialization in Microsoft-based technology.

          The Company has been a recipient of Pittsburgh Technology 50 awards annually from 1998 through 2002.  The award recognizes demonstrated growth and advancement in product or sales success, financial strength, corporate citizenship, job growth and retention and innovative products or technology.  The Company was also a recipient of the Deloitte & Touche Technology Fast 500 award in 2001. 

(b)  Financial Information About Industry Segments

          Financial information concerning the industry segments in which the Company operates is included in Note 19 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

          Operating segments to be discussed fall under two groups, Solution Area Services and Ancillary Services & Product Sales.  Solution area services comprise the substantial majority of the Company’s current activities and are most closely associated with its strategic focus.  Grouping the solution area services for discussion in this report emphasizes their commonality of purpose in meeting the core strategic objectives of the Company.  Under the heading “Solution Area Services” below, discussion includes an overview of the Company’s solutions framework and delivery methods applicable to the Interactive Media, Technology Infrastructure and E-Business Solution Areas, industry overviews for the cruise industry, which accounts for the substantial majority of the Interactive Media Solution Area’s current business, and the technology consulting services industry, in which the Technology Infrastructure and E-Business Solutions Areas compete, and reviews of operations for each solution area, including discussion of solution area marketing objectives, backlog, supply considerations and sources of competition. 

          The Company’s Outsourced Services operating segment is also included under “Solution Area Services.”  Outsourced Services provides resources with varied technical skill sets that customers utilize to complement and assist internal staff in the execution of customer-managed projects.  Outsourced Services was identified as Legacy Technology Consulting in the Company’s financial reports prior to the Report on Form 10-Q for the quarterly period ended June 30, 2002.  Current developments regarding this segment, including a substantial transition in technology focus during 2002, are discussed below, as well as marketing objectives, delivery methods, backlog and pricing, supply considerations and competition.  Outsourced Services is grouped with Solution Area Services because the services are overseen by executive management and support personnel in the Company’s Pittsburgh office with responsibility for all of the Pittsburgh-based solution area operations. 

          The Company also provides certain ancillary services and information system product sales, which are those revenue producing activities that, unlike the solution area services previously described, are not viewed as key to, or completely aligned with, the Company’s overall strategic objectives and marketing plans.  In connection with its solutions-oriented

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services, customers will occasionally request that the Company also provide technology-related products necessary for implementation or ongoing use of technology solutions recommended and implemented by the solution areas.  To ensure customer satisfaction, the Company maintains an ancillary capability to provide information system products, including interactive television equipment and computer hardware, software and supplies.  The Company also occasionally performs ancillary services resulting in revenue such as website hosting and archival fees, referral commissions or placement fees.  Until December 2001, the Company also operated two interactive television systems under a discontinued operating model.  These operations are discussed below under the heading Ancillary  Services & Product Sales.

          During 2002, two significant customers, Carnival and Royal Caribbean, accounted for 29% and 22%, respectively, of the Company’s consolidated revenue.  Another customer, Celebrity, which is affiliated with Royal Caribbean, accounted for another 9% of the Company’s consolidated revenue in 2002.  Interactive Media revenue represented 58% of the Company’s consolidated revenue in 2002 and is highly concentrated among a few customers in the cruise industry.

Solution Area Services

          The percentages of total revenue represented by the Company’s solution areas for the three years ended December 31, 2002 are as follows:

          During 2002, two significant customers, Carnival and Royal Caribbean, accounted for 29% and 22%, respectively, of solution area revenue.  Celebrity, an affiliate of Royal Caribbean, also accounted for 9% of solution area revenue.  Ancillary services and information system product sales for these customers are excluded when calculating percentages of solution area revenue and, consequently, it is coincidental that the customers’ percentages of solution area revenue are identical to their percentages of total revenue.

Solutions Framework and Delivery Methods

          The Company has developed a solutions framework, the Allin Solutions Framework, for guiding the planning and conduct of the solutions-oriented projects performed by the Interactive Media, Technology Infrastructure and E-Business Solution Areas.  The Allin Solutions Framework also assists customers in aligning their business and technology objectives thereby maximizing the effectiveness of the recommended solutions.  The Allin Solutions Framework allows solution planning to draw upon a knowledge base of resources developed through past projects.  It also provides a solution development discipline focused on team and process models used for organizing effective project teams and managing project lifecycles.  The Allin Solutions Framework provides a foundation for planning and controlling results-oriented projects based on scope, schedule and resources.  The adaptable process includes four phases:

          The Company’s Interactive Media, Technology Infrastructure and E-Business Media Solution Areas primarily deliver consulting services that are either Allin-managed or co-managed with the customer.  With the Allin-managed delivery method, solution area managers and consultants fully control the planning, development and implementation of turnkey solutions.  Client personnel function as sources of information concerning the business need for which a solution is sought.  With the co-managed delivery method, solution area managers and consultants and customer technical staff members work on a collaborative basis in planning, developing and implementing solutions.  The Company is fully or partially responsible for the development and implementation of technology-based solutions under the Allin-managed or

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co-managed delivery methods.  Services delivered under the Allin-managed or co-managed methods are viewed by management as being solutions-oriented due to the Company’s performance of high level managerial tasks.  These services are viewed as the most consistent with the Company’s marketing strategy and as offering the potential for higher billing rates and margins.  The Technology Infrastructure and E-Business Solution Areas also currently deliver services under the customer-managed delivery method, with the solution area providing technical resources with specific technical skill sets that the customer utilizes to complement and assist its technical staff in the execution of customer-managed tasks or projects.  Currently, the substantial majority of the services of the Interactive Media, Technology Infrastructure and E-Business Media Solution Areas are delivered on the Allin-managed or co-managed methods.  The Company seeks to continue to primarily provide solutions-oriented services.

Interactive Media

          Revenue from the Company’s Interactive Media Solution Area declined 23% from $10,071,000 in 2001 to $7,759,000 in 2002.  Management believes the most significant factors causing the decline were a schedule delay resulting in the majority of an interactive television system installation project anticipated for 2002 being deferred until 2003, the introduction of a new generation hardware platform for interactive television solutions that significantly reduced pricing on two systems integration projects in 2002, the inclusion of one fewer interactive television system installation in 2002 than in 2001 and the inclusion in 2001 of an unusually large software development project.  Despite the decline in absolute revenue, Interactive Media’s proportion of both the Company’s solution area and total revenue increased by 2% in 2002.  The percentage of solution area and total revenue for the three years ended December 31, 2002 is as follows:

Industry Overview – Cruise Industry 

          The cruise industry, where Interactive Media’s services are focused, is dominated by four large organizations:  Carnival, Royal Caribbean, P & O Princess Cruises PLC (“Princess”) and Star Cruises Group (“Star”).  According to Cruise Industry News Quarterly, in its Winter 2002/2003 edition, these four organizations control more than 90% of the North American and 75% of the worldwide markets.  The four organizations realized aggregate fiscal year 2002 revenue of $11.9 billion, per their respective recent press releases, sizing the overall cruise industry at approximately $15 billion.  Carnival, Royal Caribbean, Princess and Star were operating 108 ships as of the end of 2002, per their respective press releases or web sites.  As noted above, Carnival and Royal Caribbean have been the Company’s largest customers in recent years.  The Company has not to date performed any services for Princess and the Company does not believe Princess is currently utilizing interactive television technology on its ships.  The Company operated an interactive television system under its former owner-operator model under an agreement with Norwegian Cruise Lines (“Norwegian”), entered into prior to Star’s 2000 acquisition of Norwegian, but has not to date performed other services for Star.

          One of the most prominent industry developments during 2002 was the competition between Carnival and Royal Caribbean to acquire Princess.  In late 2001, Royal Caribbean and Princess announced plans for a merger.  Carnival subsequently made a competing offer to the Princess shareholders, which was eventually accepted.  According to the Wall Street Journal, February 10, 2003, Carnival’s planned acquisition of Princess has been approved by regulators in the United States and United Kingdom and is expected to go into effect no later than April 2003 following the anticipated approval by the Princess shareholders.  Following the merger, the combined Carnival-Princess organization will control approximately 49% of the North American and 43% of the worldwide market share in the cruise industry, according to Cruise Industry News Quarterly, Winter 2002/2003 edition.  The Company’s management believes Carnival’s acquisition of Princess could potentially benefit the Company since Princess could utilize interactive television applications previously developed for Carnival, which would decrease the overall cost of interactive television implementation on Princess ships.  There can be

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no assurance, however, that the Company will obtain future business from Princess following its pending acquisition by Carnival.

          Carnival’s acquisition of Princess will continue a long-term trend toward consolidation in the cruise industry.  In its October 21, 2002 edition, Travel Weekly attributes this trend to several factors including economies of scale for purchasing and operating costs, globalization of operations and benefits from broad-based marketing.  Consolidation is more apparent in the back-office functions of the cruise lines, however, than in public perception.  The brand names of the acquired cruise lines have often been maintained because of their traditional association with a market niche, luxury level or geographic area.  Travel Weekly notes that the trend toward cruise industry consolidation has created scale that has enabled delivery of an increasingly complex and specialized product with more choices in itineraries, activities and points of departure at a decreasing price.  One of the factors cited as resulting from the consolidation trend is the cruise lines’ increasing investment in technology.  The Company’s management believes that interactive television is one of the technologies that enables cruise lines to satisfy the compelling need for automation of shipboard programs.  The Company’s management believes the trend toward increasing technology and automation creates opportunities for additional applications development, consulting and systems integration services to be provided to the cruise industry.  There can be no assurance, however, that such opportunities will result in additional business or improvements in financial results for the Company.

          The cruise industry was one the fastest growing segments of the worldwide travel and leisure industry over the last ten years.  Travel Weekly, in its December 16, 2002 and January 6, 2003 editions, cites Cruise Lines International Association (“CLIA”) estimates of North American cruise passenger levels of 6.9 and 7.4 million for 2001 and 2002, respectively, and reports CLIA projections for 2003 at 8.0 million North American cruise passengers.  Based on this information, the average annual growth rate over the three-year period would be 8%.  This follows passenger level increases from 6% to 10% per year throughout the 1990’s, according to the International Council of Cruise Lines, another industry association.  Rolling Pin Cruise – Connecting Ship, Shore and You, in its November 26, 2002 edition, reported CLIA’s release of research indicating that the number of Americans who “definitely” or “probably” intend to take a cruise in the next three years rose to more than 44 million.  Based on the survey results, CLIA forecasts that 27 million American will take a cruise by the end of 2005.

          Continuation of the cruise industry’s positive long-term growth history and achievement of the CLIA’s future growth forecasts are subject to a number of significant risks.  The cruise industry was negatively impacted over 2001 and 2002 by geopolitical considerations, the worldwide economic downturn and other factors.  The cruise industry experienced a sudden drop in passenger levels following the September 11, 2001 incidents of terrorism in the United States.  Passenger levels recovered to previous levels by early 2002 due to the cruise industry’s short-term strategic responses, according to the New York Times, September 29, 2002, including a significant redeployment of ships from Mediterranean to North American and Caribbean itineraries, diversification to additional North American ports to reduce dependency on air travel, fare reductions and other incentives, and extensive marketing campaigns.  However, due to economic conditions, discounting of cruise pricing has continued throughout 2002.  Cruise line bookings appear to be weakening again recently.  The cruise industry experiences a period of peak activity for cruise reservations at the beginning of each year, which is referred to in the industry as the “wave period.”  The 2003 wave period resulted in bookings below expectations, prompting significant discounting that will negatively impact cruise lines’ passenger yields, at least in the short term.  Industry analysis (Wall Street Journal, January 29, 2003 and Ryan, Beck & Co. Wake Up Call, January 23, 2003) attributes the recent slump in bookings to the continuing economic downturn, a lack of consumer confidence in near-term economic recovery, recent negative publicity concerning outbreaks of the Norwalk virus on cruise ships and concern that American military action against Iraq will prompt retaliatory terrorist incidents.  Both the Wall Street Journal and Ryan Beck & Co. analyses note, however, that the cruise industry is currently faring better and is better positioned for recovery than other segments of the travel and leisure industry due to its mobility, flexibility, high customer satisfaction and delivery of an attractive value package for consumers.  There can be no assurance, however, that cruise industry passenger levels will either grow or be maintained at current levels, or that any growth realized will result in improved financial results for the cruise industry.

          The cruise industry responded to growing demand during the 1990’s by initiating programs to build a significant number of new ships to increase industry capacity.  The Fall 2002 edition of Cruise Industry News Quarterly lists firm orders for thirty-five new ships to enter service from the fourth quarter of 2002 to 2006.  Of these, twenty-nine are for cruise lines operated by Carnival, Royal Caribbean and Princess.  The new-build boom appears to be slowing, however, according to Cruise Industry News Quarterly, with the decline in new-build orders becoming more pronounced after 2004.  U.S. News & World Report, in its February 17, 2003 edition, also reports that the recent capacity growth in the industry combined with the impact of the economic downturn and world events have resulted in the need for significant discounting

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by cruise lines to maintain passenger levels.  U.S. News & World Reports notes the recent trend has raised increasing concerns about overcapacity in the cruise industry.  Capacity added to the industry from new ships will be partially offset by withdrawal of older ships from service.

          Cruise Industry News Quarterly,  Fall 2002 edition, estimates the cost of the vessels to be built between 2002 and 2006 will range from $400 to $700 million.  The sheer size and scope of new build projects require significant lead times, significant financial commitments throughout the design and build process, and leave little scheduling flexibility once projects are committed.  Cruise Industry News Quarterly notes many of the planned new ships are part of a series of ships designed with similar size and characteristics to capture economies of scale for structural components and construction labor, which typically reduces the cruise lines’ flexibility in scheduling since the entire series will be committed to one of four European ship builders utilized by the cruise lines.  These factors make the cruise lines less likely to delay ships scheduled for completion in the near term.  Delays or cancellation of new build projects are more likely for projects further out on the time horizon.  The majority of the Company’s interactive television installations have, to date, been on newly built ships rather than ships in service.  The Company’s management believes the more competitive pricing that can be offered for systems with the newest generation all-digital head-end will enhance the Company’s prospects for future retrofit installations on ships in service, since the lower system prices will increase the cruise lines’ return on investment.  There can be no assurance, however, that the Company will continue to receive contracts for future interactive television installations in the cruise industry, for either new builds or ships in service, or that any sales will result in the desired improvements to the Company’s financial condition or results of operations.

Marketing Objectives

          The Company’s expertise in designing and installing interactive systems has been recognized in the cruise industry, where its interactive television solutions are now the system of choice for the world’s two largest cruise organizations, Carnival and Royal Caribbean.  Twenty-two shipboard interactive television systems installed by the Interactive Media Solution Area since 1995 are currently in operation for Carnival, Celebrity and Royal Caribbean.  Nine additional system installations are either in process in the first quarter of 2003 or are under contract for 2003 and 2004 for Carnival, Costa and Royal Caribbean.  The Company’s management believes this represents the largest base of interactive television systems installed on cruise ships by any provider of interactive television services.  Over thirty applications have been developed by Interactive Media for the cruise industry to generate incremental revenue, promote operating efficiencies and enhance customer service.  Interactive Media’s management estimates that the revenue producing applications developed for, and implemented on, cruise ships will generate more than $200 million of revenue for the cruise lines in 2003.  Management believes that Interactive Media’s extensive tenure and unmatched experience in operations and applications development make the Company the industry leader in providing interactive television services to the cruise market.  The Company intends to emphasize this industry leadership position in marketing Interactive Media services to the cruise industry.

          Interactive Media’s extensive experience and broad based development and implementation capabilities enable solutions giving customers a degree of flexibility and control that management believes is unparalleled among cruise market service providers.  Interactive Media offers customers design control enabling the creation of unique applications and systems for individual cruise lines or ships, architectural control by enabling operations over digital, radio frequency-based and hybrid distribution systems and functionality control by allowing customers to pick from over thirty working service or entertainment applications or to design unique applications.  Management believes that Interactive Media’s systems integration solutions are cost-effective because they leverage a pooled set of advanced head-end equipment, minimizing the capital cost associated with each end user.  Interactive Media solutions can be adapted to deliver customized applications across existing or new digital networks or radio frequency distribution systems, providing extensive cost flexibility for customers.  Interactive Media also offers extensive support services which have kept systems running efficiently and cost-effectively for over seven years.  The Company intends to market Interactive Media services on the basis of the flexibility, control and cost-effectiveness factors described above as well as the availability of comprehensive support services.

          The Company is actively seeking to secure additional consulting and systems integration projects with existing clients in the cruise industry, their affiliates and cruise lines for which the Company does not presently provide services.   Management believes ongoing efforts to lower system costs and enhance incremental revenue and return on investment will be key factors in making implementation of interactive television systems on ships currently in service more attractive to the cruise industry.  To date, the majority of installations performed by Interactive Media have been on newly built ships.  The level of cruise industry new-build commitments is lower in 2003 and 2004 than in recent years, and commitments for new builds are expected to decline further in the following years, increasing the Company’s need to transition focus to ships

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currently in service.  The Company’s ability to work with its suppliers to continue to drive down the cost of future system implementations and the Company’s efforts to facilitate customer revenue enhancements will be key factors affecting the Company’s future competitiveness in providing services for the cruise industry.

          Management believes Interactive Media’s extensive experience in applications development and interactive televisions system implementation, the broad scope of developed applications, the large installed base of existing systems, and the cost effectiveness of the Company’s interactive television solutions create a competitive advantage for the Company over its competitors.  The level of Interactive Media services provided for cruise industry customers is subject to uncertainty, however, as cruise line passenger levels and revenue may be negatively impacted in 2003 by the continuation of the current economic downturn and geopolitical considerations such as the impact of war or future incidents of terrorism.  There can be no assurance that the Company will continue to receive orders for additional system sales beyond those already obtained or that any sales made will result in the desired improvements to the Company’s financial condition or results of operations.  Interactive Media’s management will evaluate opportunities for development and other consulting or systems integration services that arise with organizations outside the cruise industry, but management does not expect to aggressively pursue such opportunities in the near future.

Interactive Media Consulting

          Operations.  The Interactive Media Solution Area offers consulting services specializing in development of interactive media applications that the Company’s management believes enable customers to improve service and increase productivity and revenue.  These include, among others, shore excursion preview and ticketing, pay-per-view movies, in-cabin gaming, meal service and wine ordering, meal reservations, shipboard and destination shopping promotion, distribution of activities and ship informational content, future cruise previews and passenger amenities such as internet access, music on demand, news updates, stock quotes, cabin messaging and wake-up calls.  Arrays of these applications are currently in use on twenty-two cruise ships with nine additional ship implementations currently in process or under contract for 2003 and 2004.  Interactive Media has also developed applications in the past for healthcare and educational institutions, including on-demand viewing of information related to medical conditions and procedures and on-demand viewing of educational programs.

          Interactive Media Solution Area consultants have the expertise and experience in interactive media technology to develop solutions that integrate broadcasting and information system technology and provide for distribution of digital or analog video content over digital networks or analog television infrastructure.  Interactive Media develops applications based on the open architecture of Microsoft BackOffice products such as Windows NT, SQL Server and Internet Information Server.  The open architecture enables significant customization of application content through commonly used programming languages.  Solutions are Internet-accessible, provide multiple language capability and support highly-functional applications and high-end graphics and MPEG content. 

          In February 2001, the Company entered into a contract with Carnival for applications development for interactive television systems to be installed on six Carnival ships under a related agreement for systems integration services.  Development included applications such as on-demand access to shore excursion previews and ticketing, room service ordering, pay-per-view movies, Internet access capabilities, and ship information dissemination capabilities.  Applications development for the Carnival interactive television systems constituted the largest among Interactive Media’s consulting projects in 2001.  No development project of similar magnitude was carried out in 2002, contributing to a 29% decline in Interactive Media consulting revenue from 2001 to 2002.  Consulting services in 2002 included applications development, technical architecture design, configuration and implementation related to interactive television systems, and maintenance and support services for Interactive Media’s installed base of interactive television systems.

          During 2002, Interactive Media consulting operations were conducted primarily through technical consultants and administrative personnel based in the Company’s Ft. Lauderdale office.  Portions of larger engagements were performed at sites designated by customers.  It is anticipated that 2003 operations will be conducted in a similar manner.  During 2002, three significant clients, Carnival, Royal Caribbean and Celebrity, collectively accounted for 97% of Interactive Media consulting revenue.  Revenue is expected to remain highly concentrated in 2003.

          Labor Supply Considerations.  Interactive Media’s services are labor intensive and utilize the Company’s consultants and engineers.  The Company maintains an ongoing search and recruitment process, including solicitation of referrals from consultants and industry contacts, advertising and other means as necessary.  The Company has not, to date, experienced undue difficulty in recruiting qualified consultants, despite periods of labor shortage for technically skilled personnel.  Because the Interactive Media Solution Area offers services in specialized technology niches, extensive training

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is provided to consultants and engineers to enhance their skills.  Compensation for Interactive Media’s technical staff is primarily salary-based.

Interactive Media Systems Integration

          Operations.  During 2002, Interactive Media completed or substantially completed interactive television systems integration projects on Carnival’s Conquestand Legend, Royal Caribbean’s Brilliance of the Seas and Navigator of the Seas and Celebrity’s Constellation.  Interactive Media also recognized systems integration revenue related to the late stages of three projects begun in 2001 as well as the early stage of work on an installation where the majority of the revenue will be recognized in 2003, with the combined revenue approximating a sixth ship installation.  The latter project had been expected to be completed in 2002 prior to implementation schedule delays.  Interactive Media installed seven shipboard interactive television systems in 2001, with the difference primarily attributable for the 20% decline in Interactive Media systems integration revenue from 2001 to 2002.  Seven shipboard interactive television system installation projects are committed for 2003, including two for Carnival, three for Costa and two for Royal Caribbean.  Two additional projects have already been committed for 2004, one each for Costa and Royal Caribbean.

          Interactive Media solutions leverage a pooled set of advanced head-end equipment to deliver customized applications across digital networks or radio frequency distribution systems to end-user monitors or televisions.  The interactive television system architecture features a centralized head-end pool of Windows-based computers dynamically allocated to end users.  Solutions for radio-frequency based distribution systems utilize low cost televisions, set top boxes and remote controls for end-user access.  Solutions for digital networks also use a centralized head-end architecture but communicate with end-user monitors or high-definition televisions over Ethernet or ATM-based networks.  The open architecture of the head-end operating systems based on Microsoft BackOffice products such as Windows NT, SQL Server and Internet Information Server enables flexible delivery of video content from various sources.  The solution is Internet accessible and supports highly-functional applications and high-end graphics and MPEG content.  The essence of either type of Interactive Media solution is to bring the functional equivalent of a Windows-based personal computer to every end user without the expense of supplying and servicing an actual computer for each potential user.  The Company’s interactive television solutions can be integrated with new or previously existing cable broadcast or information system networks, thereby enhancing their cost effectiveness.  During 2002, Interactive Media began to implement the new generation all-digital head-end On Command hardware platform.  The new platform takes advantage of the increased availability of digitally-formatted movie content and offers functionality and reliability improvements with significant reductions in head-end equipment costs.  Interactive Media was therefore able to offer reduced pricing to its customers for projects that utilized the new platform, increasing their return on investment. 

          During 2002, Interactive Media systems integration operations were conducted primarily through technical consultants and administrative personnel based in the Company’s Ft. Lauderdale office.  Substantial portions of the work associated with major systems integration projects were performed onsite by Interactive Media personnel at various domestic and international locations, typically at European shipyards for installations on newly built ships or at sea for installations on ships currently in service.  It is anticipated that 2003 operations will be conducted in a similar manner.  Systems integration services were provided in 2002 exclusively to three significant customers, Carnival, Royal Caribbean and Celebrity.  Revenue is expected to remain highly concentrated in 2003.

          Equipment Supply Considerations.  Interactive Media’s interactive television solutions utilize state of the art hardware purchased from On Command.  On Command is one of the world’s largest providers of interactive television services to the lodging sector of the travel and leisure industry.  On Command presently estimates its installed lodging base as approximately 890,000 rooms in over 3,300 properties.  Allin Interactive and On Command have had a Supplier Agreement in place since 1999 under which On Command has agreed to exclusively sell Allin Interactive its proprietary hardware platforms and end-user components for use in the cruise market.  The Company believes the On Command product offers substantial functionality improvements over components previously used in interactive television systems.  On Command devotes considerable effort to researching hardware capabilities and developing specifications and configurations for hardware platforms and end-user components that optimize the speed and reliability of interactive television operations.  Allin Interactive has designed and developed unique application software which management believes maximizes the capabilities of the hardware for its end-user markets.  On Command frequently introduces improvements to its hardware platforms and end-user components which Interactive Media is able to utilize, such as the 2002 introduction of an all-digital head-end configuration.  The Company’s management believes the relationship with On Command helps maintain the technological competitiveness of Interactive Media’s services while minimizing research and development costs.  The Supplier Agreement also provides Allin Interactive with an exclusive license to use certain

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software necessary to operate the On Command equipment in the cruise market.  Under the agreement, On Command may request a license to use any modifications to the On Command software developed by the Company. 

          The Company purchased approximately $3,400,000 of product from On Command in 2002 and has purchased in excess of $11,000,000 of product since the Supplier Agreement went into effect in 1999.  The current expiration date of the Supplier Agreement is December 31, 2003.  The Company and On Command are currently negotiating the terms of a new agreement to replace the existing agreement.  The Company expects a new agreement to be completed prior to the expiration of the current agreement.  However, there can be no assurance that a new agreement will be entered into prior to the expiration of the current agreement, or that any new agreement will be on terms as favorable to the Company as the current agreement.  Failure to replace the existing agreement could necessitate the usage of different hardware components and configurations for interactive television systems integration projects, which may necessitate increased research and development costs.  The Company’s Interactive Media operations would be negatively impacted if difficulty were to be experienced in obtaining alternate components, or if any such components were more costly or did not have similar functionality as the On Command equipment currently utilized.

          Certain computer hardware and software, networking components and radio frequency-based communication equipment utilized in Interactive Media projects is purchased from other suppliers.  These components are readily available and may be purchased from a number of vendors.  The Company does not manufacture any of the hardware components utilized in systems integration projects.  The Company did not experience any problems obtaining components necessary for carrying out its 2002 systems integration projects on a timely basis and does not anticipate any such difficulties in 2003. 

          The following discussion of backlog and pricing and competition applies to both the consulting and systems integration services provided by the Interactive Media Solution Area.

          Backlog and Pricing.  As of December 31, 2002, the Company had a committed backlog of approximately $8,778,000 for Interactive Media consulting and systems integration services.  The substantial majority of the backlog, approximately $6,956,000 is expected to be earned in 2003, with the remaining $1,822,000 expected to be earned in 2004.  This compares with committed backlogs for Interactive Media consulting and systems integration services of approximately $8,760,000 as of December 31, 2001.  The backlog as of December 31, 2002 includes development, configuration and implementation labor and equipment associated with four shipboard interactive television systems under an agreement entered into with Costa in October 2002, three shipboard interactive television systems under agreements with Royal Caribbean, one new shipboard system order under a contract amendment with Carnival and remaining applications development and interactive television system commitments under the agreements entered with Carnival in February 2001. 

          Because of the significant proportion of fixed price services included in Interactive Media’s consulting and systems integration operations over the last three years, meaningful hourly rate information is not available.  Interactive Media’s gross profit percentage on consulting and systems integration services increased from 43% in 2001 to 48% in 2002.  The increase is attributable to Interactive Media’s ongoing efforts to more cost effectively purchase equipment, which resulted in higher-margin labor-based activity typically representing an increased portion of implementation revenue. 

          Competition.  The market for providing interactive media consulting and systems integration services to the cruise industry is a niche market with a small number of competing companies.  The Company competes with other companies utilizing various technologies and marketing approaches, some of which companies may be larger and may have greater financial resources than the Company. 

          In the cruise market, competition currently comes from several companies.  IDF GmbH, a German company, has installed a digital-based system on the Happag Lloyd cruise ship Europa and has contracted with the Cunard Line for a system to be installed on Cunard’s Queen Mary 2, which is expected to enter service in early 2004.  Another German company, Prodac Media AG (“Prodac”), announced in September 2002 that it will install an interactive system on the Radisson ship Seven Seas Voyager.  Prodac also operates systems on several Festival Cruises ships that Interactive Media’s management believes are primarily for pay-per-view movie operations.  Prodac is a large operator of lodging-based interactive television systems in Europe.  An American company, Insystcom, Inc., announced in February 2003 that it would install its interactive entertainment system on the four ship fleet of Silversea Cruises, Ltd.  Insystcom, Inc.’s management was formerly associated with another competitor, The Network Connection, Inc., which no longer competes in the cruise market.

          The Company believes that Interactive Media systems integration solutions are cost-effective because they can leverage a pooled set of advanced head-end equipment to deliver advanced applications across digital networks or radio

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frequency-based distribution systems to low-cost end-user components.  The Company believes the cost-effectiveness of its solutions, its wide array of developed fully-functional applications and Interactive Media’s extensive experience providing services to the cruise industry provide advantages that form the basis for its competition in this market.  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 develop innovative technologies that can successfully compete with the Company.  There can also be no assurance that competition for system implementations will be solely on a service provider basis as interactive competitors, including the Company, have at certain times been willing to make significant capital commitments to obtain system implementations.

Technology Infrastructure and E-Business

          The percentages of solution area and total revenue from the Company’s Technology Infrastructure and E-Business operations for the three years ended December 31, 2002 are as follows:

          Revenue from the Company’s Technology Infrastructure Solution Area experienced a significant decline of 38% in 2002, after having experienced a similar decline of 29% in 2001.  Management attributes the decline primarily to the general economic downturn over the last two years, which has resulted in a substantial curtailment of spending for technology-based services.  During 2002, two significant customers, the Pittsburgh Public School District and Buchanan Ingersoll PC, accounted for 22% and 13%, respectively, of Technology Infrastructure revenue.

          Revenue from the Company’s E-Business Solution Area decreased 7% in 2002, following a 16% increase in 2001.  Two significant customers, Heller Ehrman White & McAuliffe LLC and Gartner, Inc., accounted for 32% and 12%, respectively, of E-Business revenue in 2002.  In 2001, Gartner, Inc., accounted for 64% of E-Business revenue.  Many of the projects for Gartner, Inc. were completed prior to the end of 2001 and E-Business revenue derived from this customer declined substantially in 2002.  The E-Business Solution Area was able to obtain new business from a more diverse group of customers to offset the majority of the decline in business from Gartner, Inc.   

Industry Overview – Technology Consulting Services

          The information technology services industry, in which the Company’s Technology Infrastructure and E-Business Solution Areas compete, was expected to experience minimal growth of 2.8% in 2002, down from the 2001 growth rate of 4.2%, according to the November 15, 2002 Gartner, Inc. report Worldwide Forecast for IT Services:  November 2002 Update.  The industry segments in which the Company’s Technology Infrastructure and E-Business Solution Areas compete, information technology consulting and development and integration, were flat in 2002 after experiencing 2.6% growth in 2001.  The Gartner, Inc. report sizes the worldwide consulting and development and integration services market at an estimated $230 billion in 2002, with the North American market accounting for about half of the worldwide market.  Gartner forecasts modest growth in these segments of 3.8% in 2003 and an average annual growth rate of 6.9% from 2004 through 2006, when the estimated market size will be $337 billion.  Gartner’s projected 2003-2006 worldwide information technology services average annual growth rate of 7.3% is lower than Gartner’s earlier forecasts due to the continuing impact of poor economic conditions and geopolitical concerns.  Industry analyst IDC is slightly more optimistic for the domestic economy, forecasting an average annual growth rate of 8.4% for the American information technology services market over this period, according to its December 17, 2002 press release Moderate Growth Projected for U.S. IT Services Market Over the Next 18-24 Months, IDC Research Reveals.  The double-digit annual growth rates experienced throughout the 1990’s and early 2000 are not expected to reoccur in the foreseeable future.

          The Gartner, Inc. report 4Q02 Update: IT Services Forecast Scenarios 2001-2004, December 6, 2002, identifies three factors which most strongly impact spending for IT Services: the degree of decision-maker confidence, the pace at

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which services vendors create compelling innovation using already available technology and the speed at which users’ aging technological assets are seen as negatively impacting business in terms of making or saving money.  Gartner notes that continuing uncertainty in the global economy has shaken decision-maker confidence, leading buyers into a cost-cutting mode where they focus on making do with the technological assets they already have.  Gartner reports that these conditions are causing decision-makers to forgo or delay new projects due to higher standards for capital investment and return on investment.  Gartner also notes that no pervasive new technology is seen on the horizon to drive short-term demand for development and integration services.  The Lyndhurst Technology Review of January 2003 similarly reports that client management remains focused on the further integration of existing technological infrastructure and the further realization of financial return from existing technology, resulting in projects awarded to service providers tending to be relatively small. 

          As noted above, however, Gartner does forecast modest 2003 growth for technology services spending, noting in 4Q02 Update: IT Services Forecast Scenarios 2001-2004 that competitive pressures will make it difficult for companies to maintain a non-investment mode for technology indefinitely.  Gartner forecasts that the trend toward optimization of environments and cost savings initiatives such as server consolidation would generate some growth in 2003.  The Computerworld article Security and E-Business Will Dominate 2003 IT Spending, December 2, 2002, reports that a poll of Chief Information Officers identified security initiatives and business-to-business and business-to-consumer e-business initiatives as priority areas for 2003 technology spending.

          Despite the current economic difficulties for technology consulting services, many factors are identified that support long-term growth in the industry.  Trends expected to generate future growth in demand for technology consulting services are increasing security concerns, continuing growth of Internet-based business and applications and the development of more comprehensive web services architecture.  The growing adoption of Internet-based applications has resulted in both more distributed physical networks and access to systems expanding to customers, suppliers and employees through websites, portals, intranets and extranets.  Usage of alternate devices such as cell phones, personal digital assistants and wireless networks to access systems is also expected to continue to expand in the future.  IDC forecasts an average annual growth rate of 24% from 2001 to 2006 for security-oriented IT services, per its February 4, 2003 press release Total IT Security Market –Including Software, Hardware and Services – to Reach $45 Billion by 2005, According to IDC.  IDC believes demand for security-oriented services will increase as companies continue to need help developing enterprise-wide risk management strategies to mitigate potential liabilities and provide a trusted environment for stakeholders.  The Standard & Poor’s Industry Survey Computers: Commercial Services of July 25, 2002 notes that continued expansion of business-to-business commerce over the Internet remains a significant positive factor for commercial technology services companies as tying together e-commerce sites with back office systems is a complex process requiring the need for outside expertise.  The Computerworld article Investing Now for the Upturn Later, November 8, 2002, reports industry analyst Forrester, Inc.’s research advocating the adoption of web-based technologies to help companies create tighter links with customers and suppliers and run internal operations more efficiently.  Web services technology architecture represents a fundamental technological shift toward access to systems and applications through Internet-based rather than network-based interfaces.  Web services are still in an early developmental stage of evolution, but are a significant area for research and development for large technology organizations such as IBM and Microsoft that seek to develop web services standards and address security issues, according to the eWeek article, Web Services Vendors See Need for Improvement, January 29, 2003.  IDC forecasts that web services will become the dominant distributed computing architecture in the next ten years, according to Web Services Are Becoming Reality:  IT Opportunity Around Web Services Will Reach $21 Billion by 2007, According to IDC.

          The Company maintains a strong Microsoft focus in its solutions areas.  Microsoft is a dominant force in the information technology industry, particularly in software for personal computer operating systems.  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.  In November 2002, settlement of an anti-trust action eliminated the then pending possibility of a court-ordered breakup of Microsoft.  During 2003, Microsoft has indicated that it will introduce the latest version of its operating system, Windows Server 2003, a new version of the Office productivity suite and its Visual Studio .NET 2003 web services-based development environment and related products.  Microsoft’s operating strategy involves a large network of third party providers for service and support for its products.

          The Standard & Poor’s Industry Survey Computers: Commercial Services of July 25, 2002 forecasts an eventual labor shortage for qualified information technology professionals once the current economic downturn ends.  The information technology labor market could tighten again if information technology spending resumes and the business environment improves.  The Standard & Poor’s report indicates this trend could benefit technology service providers as businesses not primarily revolving around computers can be expected to have trouble attracting and recruiting the best technology professionals.  Management believes that information technology services firms will depend on the

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attractiveness of a broad mix of business and a focus on emerging technologies to compete for resources in a tighter labor market.

          The computer services industry includes companies diverse in size and scope of activities and includes hardware and software vendors with significant computer services operations and large and small entities primarily focused on technology-related consulting.  The industry experienced significant consolidation in recent years as firms seek to broaden technological skills or geographical presence and as economic conditions have driven many smaller providers from the marketplace.     

Marketing Objectives 

          Technology Infrastructure and E-Business target horizontal markets, meaning businesses across a broad spectrum of industries.  The Company’s current target market for these solution areas is mid-market to Fortune 1000 companies seeking to achieve a competitive advantage through technology.  The Company believes that businesses with annual revenue ranging from $250 million to $1 billion afford the Company the best opportunities to offer solutions creating value for the customers and to foster the development of long-term business relationships.  Management believes mid-market companies are more likely to utilize Microsoft-oriented information technology than larger organizations and typically have less sophisticated internal technical resources.  The Company will not, however, limit its marketing and sales efforts solely to customers of this size. 

          Management believes the solutions offered by the Technology Infrastructure and E-Business Solution Areas allow customers to take advantage of the latest technological capabilities, increase productivity by improving the flow and accessibility of information and empower customer personnel with business intelligence for fast and effective decision making.  Management also believes Technology Infrastructure and E-Business solutions eliminate inefficiencies and help customers to reduce costs.  Management believes these solution areas can effectively compete on the basis of the quality and broad scope of their technological capabilities and on the basis of performance in meeting customer needs.  There can be no assurance, however, that the Technology Infrastructure and E-Business Solution Areas will be able to expand or maintain their current levels of business in the future.

          The Technology Infrastructure and E-Business Solution Areas utilize dedicated sales personnel based in the Company’s Pittsburgh and Northern California offices to pursue potential sales opportunities.  The Company utilizes a variety of resources to help identify potential opportunities, including industry and community networking, existing customers and technology partner channels.  Microsoft is an important source of technology partner referrals.  Representatives of the Technology Infrastructure and E-Business Solution Areas and marketing personnel also conduct frequent seminars on new technology developments and potential business applications as an integral component of marketing efforts.  Activity of this type has increased recently with Allin Consulting-California conducting frequent workshops on Microsoft’s new .NET technology.  The objective of these workshops is to introduce the .NET framework to potential customers and to encourage them to build applications utilizing Visual Studio .NET. 

          Management intends to continue the Microsoft focus in the Company’s Technology Infrastructure and E-Business operations through ongoing training and certification of its consultants and through joint marketing efforts with Microsoft.  Management believes that the Company’s Microsoft gold-certified partner designations and participation on advisory councils and the .NET Blitz team, which are described above under General Development of Business, provide it with the ability to quickly develop solutions capabilities for new Microsoft product offerings and serve as a competitive advantage in the marketplace.  Management also believes the Company’s established relationship with Microsoft will position the Company to benefit from Microsoft’s expected growth in Internet, business intelligence and infrastructure media products since Microsoft has historically relied extensively on third parties 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 increased revenue or profitability for the Company.  There can also be no assurance that revenue growth or profitability improvements will be realized in 2003 due to the Company’s relationship with Microsoft

Technology Infrastructure

          The Company has developed a long-standing expertise in technology infrastructure and is a member of Microsoft’s Technical Infrastructure Partner Advisory Council.  The Company’s management believes, despite the setbacks experienced in 2001 and 2002 due to the economic downturn, that certain trends in technology will be favorable to future growth for Technology Infrastructure.  Among these trends are heightened security concerns arising from apprehension over terrorism, demand for increasing accessibility to information networks and the proliferation of increasingly complex

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software and operating systems.  Management believes these trends could have a beneficial impact on the Technology Infrastructure Solution Area once general economic conditions improve.  There can be no assurance, however, that these trends or improving economic conditions will result in any growth in Technology Infrastructure revenue or that any growth realized will result in improvement to the Company’s results of operations and financial condition.

          Technology Infrastructure Solution Area services focus on customers’ network and application architecture, messaging systems and security systems.  Technology infrastructure is the foundation upon which technology applications are built.  Network and application architecture deals with network design, local and remote access, Internet connectivity and operating system protocol design, policies, profiles, desktop standards, client installation/imaging and backup schemas.  Effective messaging systems are collaboration tools that enable development and decision-making teams to reach a shared vision, make sound decisions and achieve greater productivity.  Security solutions provide combinations of firewalls, virus protection and intrusion detection to protect Web servers, e-mail servers and other network components.  Technology Infrastructure solutions provide the underlying platforms and operating systems necessary to take advantage of the latest technology capabilities. 

          The Technology Infrastructure Solution Area services maintain a focus on Microsoft BackOffice technology including Windows XP and 2000, Windows NT Server, SQL Server, SNA Server, Systems Management Server, Exchange Server and Internet Information Server.  Messaging and collaboration projects focus on technologies such as Microsoft Exchange 2000, Active Directory and SharePoint and utilize both Microsoft’s Mobile Information Server and Research in Motion Blackberry devices to create mobile solutions.  Security-oriented projects often utilize Microsoft Internet Security & Acceleration Server technology as well as NetIQ products designed for network monitoring.  The Company believes that Technology Infrastructure services enable its customers to incorporate new applications and new technologies into existing information systems quickly and with minimal disruption. 

          The goal of the Technology Infrastructure Solution Area is to develop and implement enterprise-quality, scalable solutions solving business problems, thereby bringing tangible benefits to customers.  Technology Infrastructure follows the Allin Solutions Framework in planning and executing its engagements.  The framework is intended to assure proper identification of customer goals for each project and that the recommended solution provides benefits to the customer’s organization. 

          Examples of recent Technology Infrastructure projects include:

          Technology Infrastructure consulting is performed by both of the Company’s Allin Consulting subsidiaries utilizing personnel based in the Company’s Northern California and Pittsburgh locations.  Allin Network also provides limited network monitoring and consulting services in Pittsburgh.  The majority of services were billed on an hourly basis with the remainder based on fixed prices.  During 2002, projects tended to be smaller and of shorter duration than in prior years.  Management attributes this to technology spending constraints caused by the economic downturn.

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          There are common attributes to backlog and pricing, supply considerations and competition for the Technology Infrastructure and E-Business Solution Areas.  Discussion related to both solution areas is presented below under E-Business.

E-Business

          Management believes demand for E-Business consulting services has also been negatively impacted during the economic downturn of the last two years, but that the impact has been much less pronounced in E-Business than in the Technology Infrastructure Solution Area.  Management also believes the negative impact of the economic downturn started later in 2001 for E-Business.  Management expects Internet-driven growth, the complex nature of business intelligence products and the growing interfacing of electronic business with traditional business operating systems will be market forces representing an opportunity for growth in future periods for the E-Business Solution Area.  There can be no assurance, however, that the Company will realize revenue growth related to its E-Business services. 

          The E-Business Solution Area provides customized, scalable solutions that management believes enable customers to generate, organize and deliver critical data across their organizations while keeping data protected and secure.  E-Business solutions focus on application development and integration, business intelligence and information management portals.  E-Business designs and integrates customized applications that automate processes, streamline workflows and respond to a customer’s specific business needs.  E-Business creates solutions based on the latest business intelligence technologies, including customer relationship management and supply chain management applications, that organize raw data into understandable information that can provide customers with crucial competitive advantages.  E-Business also designs and implements information management portal solutions that connect to the customer’s transactional systems and provide for quick, efficient and secure access and delivery of information for customers, suppliers and employees.  The E-Business Solution Area provides solutions implementing revenue-generating customer-accessible E-commerce applications, business-to-business extranets and internally-focused intranets.  These services provide tools to empower customer personnel with the business intelligence for fast and effective decision making.  E-Business solutions are targeted at increasing customer productivity, eliminating inefficiencies and reducing costs.  The Company’s expertise in these areas of technology is demonstrated by its inclusion in Microsoft’s Business Intelligence Partner Advisory Council. 

          E-Business develops solutions based on Microsoft’s Internet Explorer which allows software systems that support many features of traditional client/server applications while reducing development and deployment costs.  E-Business utilizes the latest Microsoft Web enabling technology, such as BizTalk, Commerce Server, SQL Server and .NET to develop cost effective, scalable solutions.  Internet Information Server provides the means of delivering Web-based solutions while assuring data encryption and security through its support of digital signatures.  Using Microsoft technology such as SharePoint, Digital Dashboard, SQL Server and Exchange 2000, the E-Business Solution Area enables customers to centralize information stores, develop security schemes to regulate access to data and establish personalized points of access to all relevant business information, regardless of location or format.  E-Business performs solutions services for Web applications using Visual InterDev and ASP with SQL Server and performs Web-based development services using Java and HTML.

          E-Business follows the Allin Solutions Framework in planning and executing its engagements.  The framework is intended to assure proper identification of customer goals for each project and that the recommended solution provides the anticipated benefits to the customer’s organization. 

          Examples of recent projects completed by the E-Business Solution Area include:

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          E-Businessconsulting was performed by both of the Company’s Allin Consulting subsidiaries utilizing personnel based in the Company’s Northern California and Pittsburgh locations.  The majority of services were billed on an hourly basis with the remainder based on fixed prices.

          The following discussion of backlog and pricing, supply considerations and competition relates to both the Technology Infrastructure and the E-Business Solution Areas.

          Backlog and Pricing.  As of December 31, 2002, committed backlog totals for the Technology Infrastructure and E-Business Solution Areas were approximately $135,000 and $634,000, respectively, all of which is expected to be earned in 2003.  As of December 31, 2001, committed backlog totals for the Technology Infrastructure and E-Business Solution Areas were approximately $225,000 and $275,000, respectively.  Management believes the growth in E-Business backlog reflects the Company’s success in delivering services of the highest quality to solidify long-term customer relationships.  The majority of committed E-Business backlog is with long-term customers.  Management believes the relatively low level of committed backlog for Technology Infrastructure is reflective of market conditions and the prolonged negative impact of the economic downturn on technology spending.  Technology Infrastructure backlog as of December 31, 2002 consists mainly of small projects expected to be of short duration.

          Average billing rates for the Technology Infrastructure and E-Business Solution Areas as of December 31, 2002 were $155 per hour for Northern California-based operations and $85 for Pittsburgh-based operations.  This represents an approximate 2% increase for Northern California average billing rates and a 10% decrease in Pittsburgh average billing rates during 2002.  Average billing rates for these respective solution areas were $151 and $136 per hour for Northern California-based operations and $94 and $96 per hour for Pittsburgh-based operations as of December 31, 2001 and 2000, respectively.  Management believes the changes over the last two years are reflective of the difficult market for technology consulting services due to the economic downturn.

          Supply Considerations.  The services performed by the Technology Infrastructure and E-Business Solution Areas are primarily labor intensive and are provided by the Company’s consultants and engineers.  The Company’s Allin Consulting subsidiaries maintain an ongoing search and recruitment process, including solicitation of referrals from consultants and industry contacts, advertising and other means as necessary.  The Company has not, to date, experienced undue difficulty in recruiting qualified consultants.  The general economic downturn caused staff reductions in many companies and technology consulting firms during 2001 and 2002, diminishing alternate employment prospects for the Company’s consultants and engineers.  Compensation for the Company’s technical consulting staff is primarily salary-based, with some hourly production-based employees.  The Company’s management believes that a salary-based model helps to foster continuity in the consulting staff and long-term improvement of its technical knowledge capital while reducing the costs of employee turnover.  From time to time, these solution areas will utilize the services of independent contractors, particularly when specialized technical knowledge is needed for certain projects of limited duration.  The computer hardware, software and supplies purchased to support the operations and consultants of these solution areas 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 historic growth of the overall market for services and low capital barriers to entry.  Competitors include very large consulting organizations such as Electronic Data Systems Corporation, Ciber, Inc., Accenture, Ltd., Computer Associates International, Inc., Keane, Inc. and Sapient Corporation.  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.  Examples are International Business Machines Corporation, Oracle Corporation, Hewlett-Packard Company, Unisys and BearingPoint, Inc..  Management believes the larger competitors are generally oriented to very large engagements.

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          Management believes that the solution areas’ strongest competition comes from smaller regional or local consulting firms with service specialties similar to the Company’s and from smaller national organizations with strong operations in the markets where the Company’s services are concentrated.  In the Northeastern United States, competitors would include firms such as Stargate.net, Inc., PC Solutions and SARCOM.  In Northern California, local competitors tend toward specialization.  E-Business competitors would include firms such as Terrace Consulting, Inc., Magenic Technologies, Inc. and Vertigo Software, Inc.  Competitors for Technology Infrastructure would include firms such as Convergent Computing, PCS Networks and Coyote Creek Consulting, Inc.

          Allin Consulting competes primarily on a service and performance basis.  The Company’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 the Company’s competitive advantages include the quality and broad scope of its services and its expertise in Microsoft-based technology.

Outsourced Services

          Revenue from the Company’s Outsourced Services declined significantly as a portion of solution area and total revenue from 2000 to 2002.  The percentage of solution area and total revenue for the three years ended December 31, 2002 is as follows:

          Industry Overview.  Demand for customer-managed outsourced technical resources to provide a specialized technical skill set or to supplement the customer’s technical staff has been falling, according to The Standard & Poor’s Industry Survey for Computers: Commercial Services of July 25, 2002.  The Standard & Poor’s survey attributes the decline to the current  dominance of client/server network configurations, where the availability of pre-packaged software and software application development tools have lessened the need for custom programming.

          Marketing Objectives.  The Company places significantly greater marketing emphasis on the interactive media and Microsoft-based solutions-oriented services offered by the Interactive Media, Technology Infrastructure and E-Business Solution Areas.  While the Company is not aggressively seeking new clients for its Outsourced Services operations, renewal and expansion of services with existing clients are being solicited.

          Operations.  The Company’s Outsourced Services operations provide resources with varied technical skill sets that customers utilize to complement or assist internal staff in the execution of customer-managed projects.  All Outsourced Services engagements utilize the customer-managed delivery method.  Prior to 2002, Outsourced Services was primarily focused on legacy technologies including IBM mainframe technology and Hogan IBA software applications.  Due to a widespread transition from mainframe to client/server network configurations among domestic businesses, demand for services based on legacy technologies declined significantly from 1999 through 2001.  During 2002, in order to better preserve customer relationships that had primarily used customer-managed resources, the Company transitioned the technical resources dedicated to Outsourced Services to a broader array of technology, including services and application development based on Microsoft, Oracle and Informix software and products.  Engagements carried out in 2002 and committed for the future have been relatively long-term in nature, frequently exceeding six months’ duration.

          Outsourced Services is grouped with Solution Area Services because the services are overseen by executive management and support personnel in the Company’s Pittsburgh office with responsibility for all of the Pittsburgh-based solution area operations.  Outsourced Services operations are based in Pittsburgh and are primarily conducted in the Pittsburgh area.  During 2002, all of the services were billed on an hourly basis. 

          Outsourced Services revenue has declined significantly from 2000 to 2002, both in absolute dollars and as a proportion of the Company’s total revenue.  Management expects Outsourced Services revenue will likely continue to decline in 2003. During 2002, four significant customers, Bayer Corporation, PPG Industries, Allegheny Energy, Inc. and CDI Corporation collectively accounted for 70% of Outsourced Services revenue.  Revenue is expected to remain concentrated among a small base of customers in 2003.

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          Backlog & Pricing.  As of December 31, 2002, the Company had a committed backlog of approximately $669,000 for its Outsourced Services operations.  Approximately $491,000 of the committed backlog is expected to be earned in 2003, with the remaining $178,000 expected to be earned in 2004 and 2005.  As of December 31, 2001, committed backlog for Outsourced Services was $620,000.

          The average per hour billing rate for Outsourced Services was $58 per hour as of December 31, 2002, as compared with $57 and $55 per hour as of December 31, 2001 and 2000, respectively.

          Supply Considerations.  Outsourced Services operations are primarily labor intensive and are provided by the Company’s consultants and engineers.  Due to the declining nature of these services, the Company recruits only on an as-needed basis.  The Company’s Outsourced Services staff is a mix of salary- and hourly-based employees and one hourly-based independent contractor. 

          Competition.  Outsourced Services’ competitors in the Northeastern United States include Stargate.net, Inc., PC Solutions and  SARCOM.  The Company competes on the basis of the high quality of the services that it offers.

Ancillary Services & Product Sales

          Ancillary services and product sales are those revenue producing activities carried out by the Company that, unlike the solution area services previously described, are not viewed as key to, or completely aligned with, the Company’s overall strategic objectives and marketing plans.  Ancillary services and product sales meet client requests for products and services recommended during the performance of solution area services or associated with continued operation of previously implemented solutions.

          Revenue from the Company’s Ancillary Services & Product Sales has represented a minimal proportion of the Company’s overall revenue from 2000 to 2002.  The Company’s management believes that this is consistent with the Company’s strategic focus of being a provider of the types of technology consulting and systems integration services described under Solution Area Services above.  The percentages of total revenue represented by the Company’s Ancillary Services & Product Sales for the three years ended December 31, 2002 are as follows:

          Three customers collectively accounted for 61% of Ancillary Services & Product Sales during 2002.

Information System Product Sales

          The percentage of total revenue derived from information system product sales, excluding sales to related companies, for the three years ended December 31, 2002 is as follows:

          The Company’s cruise line customers are the primary source of information system product sales, primarily for replacement equipment for interactive television systems.  Information system product sales are also occasionally obtained in connection with technology consulting engagements carried out by the Company’s solutions areas.  The Company does not aggressively market product sales of this type.

          Information system products sold include interactive television components and computer hardware and software.  The Company has historically maintained relatively little inventory, relying on product availability and prompt delivery from its suppliers.  This practice is expected to continue.  Information system product sales operations were conducted from the Company’s Ft. Lauderdale and Pittsburgh offices in 2002.  During 2002, three customers collectively accounted for 82% of information system product sales.

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          Supply Considerations.  Most of the computer hardware and software sold by the Company is readily available from a large number of sources.  There are limited sources of supply for some of the interactive television equipment sold by the Company, which is purchased under the Supplier Agreement with On Command.  See Equipment Supply Considerations under the Interactive Media Systems Integration section of this Item 1 – Business for additional information regarding the Company’s Supplier Agreement with On Command.  The Company does not anticipate problems in obtaining necessary equipment.

Other Services

          The percentage of total revenue derived from other services for the three years ended December 31, 2002 is as follows:

          Other services include several types of revenue not included in solution area revenue due to a lack of consistency with core solution area objectives, but which derive from activities peripheral to solution area activity.  Examples of these types of revenue earned in 2002 are website hosting and archival fees, commissions from several vendors related to product referrals and commissions related to the 2000 sale of certain contracts for network monitoring services.  Other services are not expected to be significant to the Company’s future operations.

          The Company derived transactional revenue in 2000 and 2001 from interactive television operations on two cruise ships until such operations ceased in December 2001 following Carnival’s purchase of the systems.  Revenue was derived from pay-per-view movies and video gaming.  Interactive television transactional services were provided under a contract with Carnival that originated when the Company followed an owner-operator model from 1995 to 1997 and installed interactive television systems on cruise ships with the Company bearing a significant portion or all of the system capital cost.  The level of interactive television transactional services was significantly reduced in 2000 and 2001 as compared to prior years.  The Company does not anticipate any operations of this type in the future.  In prior annual reports, these operations were reported as a separate segment, Interactive Television Transactional Services.  Due to the cessation of such services and their relative immateriality in 2000 and 2001, interactive television transactional services have been grouped under Other Services.  The proportions of the Company’s revenue reflected above for Other Services for 2000 and 2001 includes revenue that had been reflected under both Interactive Television Transactional Services and Other Services in prior annual reports.

Research and Development 

          Because the Company purchases most of the key interactive television system equipment and hardware utilized for Interactive Media systems integration projects from On Command, Interactive Media’s operational and technical executives monitor On Command’s ongoing product research and development activities.  Consequently, the Interactive Media Solution Area did not undertake any significant hardware-related research and development efforts in 2002 and did not incur research and development expenses.  Software development is generally conducted by the Company’s solution areas as part of client engagements.  The Company utilizes case studies and descriptions of the engagements as a component of its education and training efforts for its consultants.  The Company does not expect to undertake extensive research and development efforts or incur substantial research and development expenses in 2003. 

Employees

          As of February 15, 2003, the Company employed 77 people and utilized the services of four 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 Interactive Media Solution Area currently targets the cruise industry as the primary source of new business.  The marketing and sales efforts of the Technology Infrastructure and E-Business Solution Areas are targeted toward

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businesses having between $250 million and $1 billion in annual revenue.  The Company’s Technology Infrastructure and E-Business Solution Areas target horizontal markets, meaning potential clients in any industry. 

          The Company has six dedicated sales and marketing personnel focused on promoting, or securing engagements for, the Company’s different solution area services.  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 solution area operations. 

(d)  Financial Information About Geographic Areas

          Financial information about geographic areas in which the Company operates is included in Note 19 of the Notes to the Company’s Consolidated Financial Statements included herein in Item 8 – Financial Statements and Supplementary Data.

(e)  Risk Factors

          Certain matters in this Annual Report on 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, Item 7A – Quantitative and Qualitative Disclosures about Market Risk and other sections of this Annual Report on Form 10-K 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,” “will” and similar expressions.  In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements.  Readers are cautioned that any such forward-looking statements are not guarantees of performance and that matters referred to in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, among other things, risks and uncertainties discussed throughout Item 1 – Business, in this “Risk Factors” section, in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 7A – Quantitative and Qualitative Disclosures about Market Risk.  Factors that could affect performance include those listed below, which are representative of factors which could affect the outcome of the forward-looking statements as well as the Company’s future overall performance.  In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions and geopolitical considerations that may negatively impact the markets where the Company competes.  The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

          General Economic Conditions.  Management attributes the declines in Technology Infrastructure revenue experienced in 2001 and 2002 and the 2002 decline in E-Business revenue to a softening of the demand for technology consulting services due to the downturn in the domestic economy beginning in late 2000.  In addition to the cost of the consulting services, Technology Infrastructure solutions will frequently recommend or require significant upgrades in customers’ hardware, software and networking equipment, which has compounded the negative impact of the economic downturn on this solution area.  A number of customers or potential customers have postponed projects or delayed consideration of new technology initiatives pending improvement to the domestic economic outlook or their financial results.  Management believes the economic uncertainty will likely negatively impact the Technology Infrastructure and E-Business Solution Areas for at least the first half of 2003.  There can be no assurance that the effects of the economic uncertainty will not worsen or extend beyond June 30, 2003, which would negatively impact the Company’s results of operations and financial condition in future periods.  To the extent that the current economic downturn is prolonged and negatively impacts the cruise industry or any other businesses that are current or potential Interactive Media customers, the Company’s future results of operations and financial condition may also be negatively impacted.

          Geopolitical Considerations.  Interactive Media consulting and systems integration services accounted for approximately 56% and 58% of the Company’s revenue for the year ended December 31, 2001 and 2002, respectively, and 51% and 57% of the Company’s gross profit for these periods, respectively.  Interactive Media projects also represent a substantial majority of the Company’s committed backlog for 2003 and 2004.  Interactive Media services are provided predominantly to customers in the cruise industry.  Following the terrorist attacks in the United States in September 2001, the cruise industry experienced declines in passenger occupancy and revenue.  Through 2002, passenger occupancy substantially recovered from this decline, but fare discounting persisted, negatively impacting cruise industry revenue.  In early 2003, cruise bookings were below cruise line expectations during a period of the year when a significant portion of reservations are made.  Industry analysts attribute the weak bookings in part to concerns over the potential impact of war

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and possible retaliatory terrorist attacks.  Should war or terrorism cause further negative economic impact to the cruise industry, customers may seek to delay or cancel projects.  Any such delays or cancellations could have a negative impact on the Company’s future results of operations.  Any events which negatively impact the cruise industry may also negatively impact the Interactive Media Solution Area’s ability to obtain additional future business.  To the extent that any future incidents of war or terrorism or other geopolitical considerations negatively impact the economy in general or any businesses that are current or potential Technology Infrastructure, E-Business or Outsourced Services customers, the Company’s future results of operations and financial condition may also be negatively impacted.

          Supplier Agreement.  The Company utilizes end-user component and computer hardware platforms and configurations developed by On Command for its interactive television systems integration projects.  The Company has developed software interfaces and modifications for the On Command components and hardware platforms.  The Company believes its application development expertise and the On Command hardware platform offer cost-effective, flexible solutions with a broad range of functionality.  There can also be no assurance, however, that competitors will not develop systems and products with superior functionality or cost advantages over the Company’s products and applications.  The Company has a Supplier Agreement with On Command that grants it exclusivity in purchasing hardware and end-user components for interactive television systems for the cruise line market.  The Supplier Agreement will expire on December 31, 2003.  The Company and On Command are currently negotiating the terms of a new agreement to replace the existing agreement.  The Company expects a new agreement to be completed prior to the expiration of the current agreement.  However, there can be no assurance that a new agreement will be entered into prior to the expiration of the current agreement, or that any new agreement will be on terms as favorable to the Company as the current agreement.  Failure to complete a new agreement could necessitate the usage of different hardware components and configurations for interactive television systems integration projects, which may necessitate increased research and development costs.  The Company’s Interactive Media operations could be negatively impacted if difficulty were to be experienced in obtaining alternate components, or if any such components were more costly or did not have similar functionality as the On Command equipment currently utilized.

          Backlog.  As of December 31, 2002, the Company’s committed backlog for services expected to be performed in 2003 and 2004 approximates 64% and 15%, respectively, of 2002 solution area revenue.  The level of committed backlog for the Interactive Media Solution Area for 2003 is approximately 90% of 2002 Interactive Media revenue.  However, the backlog principally consists of a small number of large projects.  Unexpected schedule delays or  project cancellations would likely negatively impact the Company’s results of operations and financial condition since any lost business would be difficult to replace given Interactive Media’s concentration on the cruise industry and history of long lead times associated with obtaining new engagements.  Backlog for the Company’s Technology Infrastructure and E-Business Solution Area approximates 8% and 27%, respectively, of 2002 revenue for those solution areas.  Management believes that the backlog levels reflect the impact that recent domestic economic conditions have had on technology-based spending.  Management believes obtaining increasing levels of business for these solution areas will be unlikely before economic conditions improve.  The Company’s future success is dependent on its ability to continue to identify and obtain engagements from customers for the Company’s services.  General economic conditions and other risk factors such as geopolitical considerations may make future business more difficult to obtain, which would negatively impact the Company’s future results of operations and financial condition. 

          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 scheduling, or the addition or conclusion, of significant consulting or systems integration engagements.  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.

          Historical Net Losses and Accumulated Deficit.  The Company sustained substantial net losses during the years from 1996 through 2001.  As of December 31, 2002, the Company had a retained deficit of $44,319,000.  Net income was recognized for the third and fourth quarters of 2001 and the final three quarters of 2002.  Currently, the Company’s management anticipates that net income will be recognized in 2003.  However, losses may be incurred in future periods beyond 2003 due to a variety of factors including the risk factors described herein.  There can be no assurance that the Company will be able to achieve revenue growth or improvements to profitability on an ongoing basis in the future.

          Liquidity Risk.  The Company’s cash resources and cash flow generated from operations have been adequate to meet its needs to date, but there can be no assurance that a prolonged downturn in operations or business setbacks to the Company’s operating entities will not result in working capital shortages which may adversely impact the Company’s operations.  The liquidity risk is mitigated somewhat by the Company’s current revolving credit facility, which permits

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borrowings for general working capital needs.  The Company’s revolving credit facility expires September 30, 2003.  Failure of the Company to renew its existing credit facility beyond September 30, 2003 or replace it with another facility with similar terms may adversely impact the Company’s operations in the future.

          Stock Market Requirements.   The Company’s common stock was delisted from Nasdaq’s National Market as of the opening of business on May 9, 2001.  At the time of the delisting, the common stock was not eligible for listing on Nasdaq’s SmallCap Market.  Losing the designation of the common stock as a Nasdaq listed security reduced the liquidity of the common stock and could limit the Company’s ability to raise equity capital.  Quotation of the common stock on the OTC Bulletin Board commenced on May 9, 2001.  Should quotation of the common stock on the OTC Bulletin Board cease for any reason, the liquidity of the common stock and the Company’s ability to raise equity capital would likely decrease further. 

          Public Market and Trading Issues.  Following the Company’s initial public offering in November 1996, a public market for the Company’s common stock did develop.  However, trading of the common stock has been sporadic and the trading volume has generally been low.  Since the delisting of the Company’s common stock from Nasdaq’s National Market, trading volume has been further reduced.  Even a small trading volume on a particular day or over a few days may affect the market price of the common stock.  The market price of the common stock could also be subject to fluctuations in response to variations in results of operations, changes in earnings estimates by securities analysts, announcements by competitors, general economic and market conditions and other factors.  These market fluctuations may adversely affect the market price of the common stock. 

          Competitive Market Conditions.  The technology consulting industry remains fragmented with a large number of smaller-sized participants despite a recent trend toward consolidation in the industry.  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 Company’s interactive media consulting and systems integration services are currently provided to a limited market of cruise lines.  The types of interactive television systems and applications offered by the Company are significant capital expenditures for potential customers.  Some of the Company’s current and potential competitors may have longer operating histories and significantly greater financial, technical, marketing and other resources than the Company and, therefore, may be able to respond more quickly to new or changing opportunities, technologies and customer requirements.

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

          Decline in Outsourced Services Related to Legacy Technologies.  The Company has experienced a substantial decline in demand for Outsourced Services resources for projects related to mainframe systems and specialized Hogan IBA software products for the banking industry.  The Company completed its final Hogan IBA-based project in July 2001 and does not anticipate further provision of services related to this legacy technology.  In order to preserve its customer relationships that had primarily utilized customer-managed resources, in 2002 the Company transitioned its remaining Outsourced Services consultants to a broader array of technology, including services and applications development based on Microsoft, Oracle and Informix technology.  Revenue and gross profit derived from Outsourced Services declined during 2000, 2001 and 2002.  The decline is attributable to both industry trends and the Company’s marketing focus on solutions-oriented services over that period.  Other factors such as the prolonged economic downturn continue to negatively impact demand for all types of technology-based services, including the Company’s Outsourced Services.  Management expects Outsourced Services revenue and gross profit will continue to decline in 2003. 

          Proprietary Technology; Absence of Patents.  The Company does not have patents on any of its system configurations, designs or applications and relies on a combination of copyright and trade secret laws and contractual restrictions for protection.  It is the Company’s policy to require employees, consultants and clients to execute

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nondisclosure agreements upon commencement of a relationship with the Company, and to limit access to and distribution of the Company’s or customers’ software, documentation and other proprietary information.  Nonetheless, it may be possible for third parties to misappropriate the Company’s system configurations, designs or applications and proprietary information or to independently develop similar or superior technology.  There can be no assurance that the legal protections afforded to the Company and the measures taken by the Company will be adequate to protect its system configurations, designs or applications.  Any misappropriation of the Company’s system configurations, designs or applications or proprietary information could have a material adverse effect on the Company’s business, financial condition and results of operations.  There can be no assurance that other parties will not assert technology infringement claims against the Company, or that, if asserted, such claims will not prevail.  In such event, the Company may be required to engage in protracted and costly litigation, regardless of the merits of such claims; discontinue the use of certain software codes or processes; develop non-infringing technology; or enter into license arrangements with respect to the disputed intellectual property.  There can be no assurance that the Company would be able to develop alternative technology or that any necessary licenses would be available or that, if available, such licenses could be obtained on commercially reasonable terms.  Responding to and defending against any of these claims could have a material adverse effect on the Company’s business, financial condition and results of operations.

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

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

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Item 2 - Properties

          The Company’s principal executive offices are located at 381 Mansfield Avenue, Suite 400, Pittsburgh, Pennsylvania 15220 in leased office space.  The Pittsburgh office houses the Company’s executive management, technical, administrative and financial personnel.  Management, sales, technical and administrative personnel associated with the eastern United States operations of the Technology Infrastructure and E-Business Solution Areas and the Company’s Outsourced Services operations also utilize the Pittsburgh office.  Management believed the Company’s Pittsburgh-based operations could effectively utilize a smaller space following the January 31, 2002 expiration of the lease for the Pittsburgh office.  Pursuant to negotiations, the Company’s landlord agreed to permit the Company to continue to occupy its present space on a month-to-month basis until such time as the landlord identifies an alternate tenant for the Company’s space.  At that time, the Company will likely move to smaller space within the same building more commensurate to its needs.  Such space is currently available.  The monthly rent expense for the Pittsburgh office was reduced by approximately 53% under the new arrangement reflecting both its reduced requirements for space and real estate market conditions as of the beginning of 2002.  Management believes the new arrangement is beneficial to the Company since it has currently secured a rent reduction while deferring the costs and inconvenience of moving.  The Company is now effectively paying for only a portion of its previously leased space and is fully utilizing that portion.

          The Company’s Technology Infrastructure and E-Business Solution Areas also utilize leased professional office space in San Jose and Walnut Creek, California.  These offices serve as a base of operations or an available worksite for solution area management, sales, technical or administrative personnel associated with western United States solution-area operations.  Leases for both of the Company’s Northern California offices will expire on December 31, 2003.  The Company’s management believes the one of the effects of the current economic downturn, which has particularly negatively impacted technology-related businesses, has been a lessening of demand for office space in San Jose, thereby generally lowering rental rates for currently available space.  Management believes the impact of the economic downturn on rental rates has been less significant in Walnut Creek, where commercial office space usage is not as strongly dominated by technology-related businesses as in San Jose.  During 2003, management personnel for the Northern California offices will evaluate expected office space needs for 2004 and beyond and will evaluate proposals for renewal of leases at the current locations or moving to alternate suitable locations upon the expiration of the leases currently in place.  Given current market conditions for commercial real estate, management will seek to obtain reduced rental expenses beginning in 2004 for the Company’s Northern California-based operations under any new or renewed leases.  Management expects relocation costs, if any, will not be material.  There can be no assurance, however, that market conditions will not change during 2003, or that the Company will be successful in obtaining future reductions in rental costs for the Northern California operations under any new or renewed leases.

          The Interactive Media Solution Area utilizes leased office space in Ft. Lauderdale, Florida as the primary base of operations for its consulting and systems integration operations.  Solution area management, sales, technical and administrative personnel associated with Interactive Media’s operations utilize the Ft. Lauderdale office.  The Ft. Lauderdale office is comprised of mixed-use space and includes professional office space, work areas for configuration of equipment utilized on systems integration projects and storage areas for inventory.  The Ft. Lauderdale office also houses logistical functions associated with information system product sales.  Interactive Media has utilized the present location in Ft. Lauderdale since 1998 and in both 1999 and 2001, leased adjoining space to expand its office.  The lease for the Ft. Lauderdale office will expire on July 31, 2005.  Interactive Media also leases space in offsite warehouse facilities for storage of equipment purchased for projects, but not yet shipped, and inventory.  The warehouse facilities utilized are secure facilities with limited access.

          As of December 31, 2002, the Company’s leased offices in Ft. Lauderdale, San Jose and Walnut Creek were fully utilized.

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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 judgment is considered probable.

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

          There were no matters submitted to a vote of security holders during the fourth quarter of 2002.

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Part II

Item 5 - Market for Registrant’s Common Equity and Related Stockholder Matters

          Allin Corporation’s common stock has been quoted on the OTC Bulletin Board since May 9, 2001.  The Company’s common stock is quoted under the symbol “ALLN.”  The Company’s common stock was previously listed on The Nasdaq Stock Market’s (“Nasdaq”) National Market  System from the time of the Company’s initial public offering of its common stock in November 1996 until the common stock was delisted from the National Market as of the opening of business on May 9, 2001.  The Company was unable to maintain compliance with Nasdaq’s criteria for continued designation of the common stock as a National Market security.  At the time of the delisting, the common stock was not eligible for listing on Nasdaq’s SmallCap Market.  Should quotation of the common stock on the OTC Bulletin Board cease for any reason, the liquidity of the common stock and the Company’s ability to raise equity capital would likely decrease.

          From January 1 to May 8, 2001, the high and low closing prices per share of common stock as reported by Nasdaq were $1.875 and $0.470, respectively.  From May 9, 2001 to December 31, 2002, the high and low bid prices per share of common stock as quoted on the OTC Bulletin Board were $0.300 and $0.035, respectively.  Over-the-counter quotations per the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. 

          Quarterly high and low closing prices as reported by Nasdaq or high and low bid prices per OTC Bulletin Board quotations, as applicable, per share of common stock during 2001 and 2002 were as follows:

          On March 14, 2003, there were 88 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.

          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, as amended, 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 D Convertible Redeemable Preferred Stock, Series F Convertible Redeemable Preferred Stock and Series G Convertible Redeemable Preferred Stock.  The Loan and Security Agreement expires September 30, 2003.  Each of the Certificates of Designation governing the Company’s Series C Redeemable Preferred Stock and Series D, F and G preferred stock prohibits the Company from declaring or paying dividends or any other distribution on the common stock or any other class of stock ranking junior as to dividends and upon liquidation unless all dividends on the senior series of preferred stock for the dividend payment date immediately prior to or concurrent with the dividend or distribution as to the junior securities are paid or are declared and funds are set aside for payment.

          For information about the Company’s equity compensation plans, see Part III Item 11 – Executive Compensation and Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

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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, 1998, 1999, 2000, 2001 and 2002 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 and Supplementary Data 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, 2000 and 2001.

          The Company’s September 1998 sale of SportsWave, Inc. (“SportsWave”) 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.  In June 2001, the Company decided to discontinue Allin Digital’s digital imaging technology-based operations.  Results of operations for Allin Digital have been reclassified to discontinued operations for all periods.  On December 31, 2002, Allin Digital was merged into Allin Interactive.

          The selected financial data for the period ended December 31, 1998 includes the results of continuing operations of Allin Corporation, Allin Interactive, Allin Consulting-California, Allin Network and Allin Holdings 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, into which MEGAbase was merged subsequent to its acquisition.  The Company’s results of operations were materially impacted by these acquisitions of businesses and accordingly the comparability of information among the periods presented is materially affected by the inclusion of the acquired operations for only a portion of the period ended December 31, 1998.  The selected financial data for the periods ended December 31, 1999, 2000, 2001 and 2002 reflect the results of continuing operations of Allin Corporation, Allin Interactive, Allin Consulting-California, Allin Consulting-Pennsylvania, Allin Network and Allin Holdings for the full years of 1999, 2000, 2001 and 2002.  The selected balance sheet data as of December 31, 1998, 1999, 2000 and 2001 reflects the financial position of Allin Corporation, Allin Interactive, Allin Consulting-California, Allin Consulting-Pennsylvania, Allin Network, Allin Holdings and Allin Digital as of those dates.  The selected balance sheet data as of December 31, 2002, reflects the financial position of Allin Corporation, Allin Interactive, Allin Consulting-California, Allin Consulting-Pennsylvania, Allin Network and Allin Holdings as of that date.

          Certain reclassifications have been made to the selected balance sheet data as of December 31, 1998, 1999, 2000 and 2001 to conform to the current presentation of this information.  The reclassifications impacted working capital as of each of these dates and total assets and total liabilities as of December 31, 1999, 2000 and 2001.  The reclassifications did not impact the preferred stock or shareholders’ equity balances presented as of any of the above year-end dates.  The reclassifications also did not impact the Company’s results of operations or earnings per share during any of the periods ending December 31, 1998, 1999, 2000 and 2001.  The reclassifications are described below.

          The liability for accrued dividends on preferred stock has been separated into current and non-current portions based on the Company’s expectations for payment of the dividends.  Previously, all of the accrued dividends on preferred stock had been included under current liabilities.  This reclassification increased working capital by approximately $518,000, $808,000, $1,078,000 and $1,370,000, respectively, as of December 31, 1998, 1999, 2000 and 2001.

          Allin Interactive performs systems integration services for interactive television technology under certain agreements accounted for utilizing the percentage of completion or proportional performance methods.  The current portions of costs and estimated gross margins in excess of billings and billings in excess of costs and estimated gross margins have been reclassified such that the aggregate of all projects with costs and estimated gross margins in excess of billings balances is presented under current assets while the aggregate of all projects with billings in excess of costs and estimated gross margins balances is presented under current liabilities.  Previously, the aggregate of costs and estimated gross margins in excess of billings had been offset against the aggregate of billings in excess of costs and estimated gross margins, with the net amount included under current assets or current liabilities.  The change results in increases of approximately $237,000, $25,000 and $360,000, respectively, in total assets and total liabilities as of December 31, 1999, 2000 and 2001.

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Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

          The following discussion and analysis by management provides information with respect to the Company’s financial condition and results of operations for the annual periods ended December 31, 2000, 2001 and 2002.  This discussion should be read in conjunction with the information in the Company’s consolidated financial statements and the notes pertaining thereto contained in this Annual Report on Form 10-K.  Unless the context otherwise requires, all references herein to the “Company” refer to Allin Corporation and its subsidiaries

          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,” “intends,” “will” and other similar expressions, are intended to identify forward-looking information that involves risks and uncertainties.  In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements.  Actual results and outcomes could differ materially as a result of important factors including, among other things, general economic conditions, geopolitical considerations, status of a key suppler agreement, public market and trading issues, uncertainty as to the Company’s future profitability, fluctuations in operating results, the Company’s history of net losses and accumulated deficit, liquidity, and risks associated with dependence on key personnel, competitive market conditions in the Company’s existing lines of business, risks of technological obsolescence, as well as other risks and uncertainties.    See Item 1 – Business - under the caption “Risk Factors”.

Overview of Organization, Products & Markets

          The Company is a leading provider of solutions-oriented applications development, technology infrastructure consulting and systems integration services.  The Company specializes in solutions based on interactive media and technology from Microsoft Corporation (“Microsoft”).  The Company’s operations center on three solution areas:  Interactive Media, Technology Infrastructure and E-Business.  The Company leverages its experience in these areas through a disciplined project framework to deliver technology solutions that address customer needs on time and on budget.  The Company is headquartered in Pittsburgh, Pennsylvania with additional offices located in Ft. Lauderdale, Florida and San Jose and Walnut Creek, California. 

          The Company was organized under the laws of the State of Delaware in July 1996 to act as a holding company for operating subsidiaries which focus on particular aspects of the Company’s business.  As of December 31, 2002, the organizational legal structure consists of Allin Corporation and five subsidiaries.  Allin Interactive Corporation (“Allin Interactive”), Allin Corporation of California (“Allin Consulting-California”), Allin Consulting of Pennsylvania, Inc. (“Allin Consulting-Pennsylvania”) and Allin Network Products, Inc. (“Allin Network”) are operating subsidiaries focusing on different aspects of the applications development, technology infrastructure consulting and systems integration services provided by the Company.  Allin Holdings Corporation (“Allin Holdings”) is a non-operating subsidiary that provides treasury management services to the Company.  Allin Interactive and Allin Holdings are Delaware corporations, Allin Consulting-California and Allin Network are California corporations and Allin Consulting-Pennsylvania is a Pennsylvania corporation.  The Company utilizes the trade-names Allin Interactive, Allin Consulting and Allin Corporation in its operations.  In June 2001, the Company decided to discontinue the digital imaging technology-based operations of Allin Digital Imaging Corp. (“Allin Digital”).  Allin Digital ceased performing services for customers in the second quarter of 2002 and wrap-up of residual matters related to Allin Digital was completed in 2002.  Allin Digital was merged into Allin Interactive on December 31, 2002. 

          The financial information for the periods ended December 31, 2000, 2001 and 2002 reflect the results of continuing operations of the Company, Allin Interactive, Allin Consulting-California, Allin Consulting-Pennsylvania, Allin Network and Allin Holdings.  Results of Allin Digital’s operations, including certain losses due to impairment of assets recorded at the time of discontinuation of operations, are reflected as results of discontinued operations.

          The Company’s solution area-based organizational structure is designed to complement the customer-oriented focus of the Company’s marketing strategy.  The Interactive Media Solution Area focuses on interactive media application development and integration services, and its customers have historically been concentrated in the cruise industry.  Interactive Media activities are located in Ft. Lauderdale near the most active concentration of cruise line operations in the United States.  The Technology Infrastructure and E-Business Solution Areas focus on developing Microsoft-based technology solutions for customers diverse in size and across a broad array of industries.  Technology Infrastructure and E-Business consultants have extensive experience in designing, developing and deploying solutions that enhance accessing, communicating and protecting information.  Technology Infrastructure and E-Business consulting services are provided from the Company’s Northern California and Pittsburgh offices.  The Company believes the customer-based focus of its

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solution area organizational structure and marketing strategy promote the effective delivery of customer-oriented technology solutions and foster the growth of long-term customer relationships with ongoing service opportunities.

          A brief description of the Company’s solution areas follows:

          The Company has established operating relationships with some of the leading suppliers of information technology products to complement its solution area services.  Foremost among these are the operating relationships with On Command Corporation (“On Command”) and Microsoft.  On Command’s end-user components and computer hardware platforms and configurations are utilized by the Company for its interactive television systems integration projects.  The Company has a Supplier Agreement with On Command that grants it exclusivity in purchasing hardware and end-user components for interactive television systems for the cruise line market.  The Company and On Command are currently negotiating the terms of a new agreement to replace the existing agreement.  The Company expects a new agreement to be completed prior to the expiration of the current agreement on December 31, 2003.  However, there can be no assurance that a new agreement will be entered into prior to the expiration of the current agreement, or that any new agreement will be on terms as favorable to the Company as the current agreement.  Failure to replace the existing agreement could necessitate the usage of different hardware components and configurations for interactive television systems integration projects, which may necessitate increased research and development costs.  The Company’s Interactive Media operations would be negatively impacted if difficulty were to be experienced in obtaining alternate components, or if any such components were more costly or did not have similar functionality as the On Command equipment currently utilized.  See Equipment Supply Considerations under Interactive Media Systems Integration above in Item 1 – Business.

          Both of the Company’s Allin Consulting subsidiaries are designated as Microsoft Gold Certified Partners in recognition of their attainment of rigorous certification criteria and demonstrated technical competency in providing complex business solutions.  The Company is also a member of Microsoft’s Technical Infrastructure and Business Intelligence Partner Advisory Councils.  Additionally, Allin Interactive is certified as a Microsoft Solutions Provider Partner.  The Company intends to continue its specialization in Microsoft-based technology products.

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          The Company’s Outsourced Services operating segment provides resources with varied technical skill sets that customers utilize to complement and assist internal staff in the execution of customer-managed projects.  Prior to 2002, Outsourced Services was primarily focused on legacy technologies including IBM mainframe technology and Hogan IBA software applications.  During 2002, the Company transitioned the technical resources dedicated to Outsourced Services to a broader array of technology, including services and application development based on Microsoft, Oracle and Informix software and products.  Outsourced Services was identified as Legacy Technology Consulting in the Company’s financial reports prior to the Report on Form 10-Q for the quarterly period ended June 30, 2002.  Outsourced Services is grouped with Solution Area Services because the services are overseen by executive management and support personnel in the Company’s Pittsburgh office with responsibility for all of the Pittsburgh-based solution area operations. 

          The Company also provides certain ancillary services and information system product sales, which are those revenue producing activities that, unlike the solution area services previously described, are not viewed as key to, or completely aligned with, the Company’s overall strategic objectives and marketing plans. 

Critical Accounting Policies, Estimates and Judgments

          The Company’s significant accounting policies are described in Note 2 in the Notes to Consolidated Financial Statements included in Item 8 – Financial Statements and Supplementary Data in this Report on Form 10-K.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions to apply certain of these critical accounting policies.  These estimates and assumptions affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting periods.  In applying policies requiring estimates and assumptions, management uses its judgment based on historical experience, terms of existing contracts, industry practices and trends, information available from customers, publicly available information and other factors deemed reasonable under the circumstances.  Actual results may differ from estimates.  Critical accounting policies requiring the use of estimates and assumptions include the following.

          Revenue and Cost of Sales Recognition.  The Company’s recognition method for revenue and cost of sales for the Interactive Media Solution Area’s systems integration services is based on the size and expected duration of the project and whether significant software modification is required.  For systems integration projects in excess of $250,000 of revenue and expected to be of greater than 90 days duration, the Company recognizes revenue and cost of sales based on percentage of completion, if significant software modification is required, or proportional performance.  Software modification is typically involved with these projects, including loading of proprietary applications developed by the Company for the customer, so the percentage of completion method is normally used for these significant projects.  The Company utilizes the proportion of labor incurred to expected total project labor as a quantitative factor in determining the percentage of completion when the proportion of total project costs incurred to expected total project costs is not representative of actual project completion status.  The majority of the equipment for systems integration projects is typically ordered, and associated costs are incurred, in the early stages of a project.  Consequently, the proportion of labor incurred to expected total project labor is more frequently representative of percentage of completion than the proportion of total project costs incurred to expected total project costs.  The labor factor is therefore most often used to determine the percentage of completion.  For systems integration projects of this type, management must estimate expected total labor hours and costs and expected total non-labor costs at the beginning of the project.  Management reviews the status of projects monthly, including labor hours and costs incurred to date and expected for completion of the project, project timing, and any issues impacting project performance.  Any changes to expected labor hours or expected costs for project completion are factored into the monthly estimate of project cumulative percentage of completion, which is used to determine current revenue and cost of sales recognition.  For consulting engagements performed by Allin Interactive, Allin-Consulting-California and Allin Consulting-Pennsylvania on a fixed-price basis, revenue and related cost of sales are recognized on a percentage of completion basis.  Management must estimate expected labor for project completion at the beginning of each project.  Fixed price consulting projects are reviewed monthly, with any changes to expected project labor factored into the determination of cumulative percentage of completion, which is used to determine current revenue and cost of sales recognition.  Revenue recognized on the percentage of completion or proportional performance bases was approximately 17%, 46% and 50% of the Company’s total revenue for the annual periods ended December 31, 2000, 2001 and 2002, respectively.  Usage of the percentage of completion or proportional performance methods can result in unwarranted acceleration of, or delay in, recognition of revenue and cost of sales if management’s estimates of certain critical factors such as expected total project labor or total project costs are materially less than or greater than actual project requirements.  The Company believes its monthly reviews of project status, including expected total project labor and costs, mitigate the potential for inappropriate revenue or cost of sales recognition since the reviews result in each update of revenue and cost of sales recognition being based on the latest available information.  Management’s estimates and assumptions also impact

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the Company’s assets and liabilities as revenue and cost of sales recognition for these projects may also impact the carrying value, if any, of unbilled revenue, costs and estimated gross margins in excess of billings, billings in excess of costs and estimated gross margins, accrued liabilities and deferred revenue on the Company’s Consolidated Balance Sheets.

          Goodwill and Intangible Assets.  In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations (“SFAS No. 141”), and No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), which the Company implemented January 1, 2002.  SFAS Nos. 141 and 142 included provisions related to goodwill and other intangible assets acquired in business combinations that transpired prior to June 30, 2001 which required a transitional examination of recognized intangible asset values.  As of January 1, 2002, the Company’s assets of this type included customer lists, assembled workforces and goodwill associated with the acquisitions of Allin Consulting-California in 1996 and Allin Consulting-Pennsylvania and MEGAbase, Inc. (merged into Allin-Consulting-California) in 1998.  As of January 1, 2002, recognized balances for customer lists, assembled workforces and goodwill were approximately $1,681,000, $104,000 and $712,000, respectively.  Under the new standards, assembled workforces are no longer to be recognized as a separate intangible asset and balances recognized for assembled workforces were reclassified to goodwill.  The transition provisions of the new standards required a review to determine whether additional separate intangible assets should be recorded.  Potential intangible assets to be recorded include marketing-related, customer-related, artistic-related, contract-based and technology-based assets.  The lives of these assets are to be identified as either definite, subject to a specific or estimated term, which are to be amortized over the definite life, or indefinite, which are no longer to be amortized.  Goodwill is an indefinite asset and is no longer to be amortized.  The types of potential intangible assets specified under the new standards were reviewed in relation to the above-noted acquisitions.  Management’s judgment was that no additional assets should be recorded. 

          The Company estimated the fair value of the customer list associated with the acquisition of Allin Consulting-Pennsylvania through an estimate of the undiscounted cash flows attributable to the customers included on the acquired list.  This calculation required the Company’s management to make estimates of future revenue and income from operations of Allin Consulting-Pennsylvania and period-to-period growth-rate assumptions for revenue and expenses.  Management utilized historical information related to business derived from customers on the acquired list and the operations of Allin Consulting-Pennsylvania, future projections, industry information concerning expected growth in the technology consulting industry and information relevant to the Company’s financing capabilities to develop assumptions and estimates of future cash flows applicable to the acquired customer list.  The resulting estimate of fair value exceeded the recorded value of the customer list.  This information was also utilized by management in its judgment that the customer list is an asset with a definite life.  

          The new standards also set forth guidance on testing for impairment of goodwill.  The Company attributed the recognized assets of the acquired businesses, including cash, accounts receivable, prepaid expenses, property and equipment, customer list and goodwill, net of accounts payable and accrued liabilities, to reporting units.  The reporting units utilized were the Company’s reported segments applicable to the acquired subsidiaries, Technology Infrastructure, E-Business and Outsourced Services, further broken down geographically between northern California-based and Pittsburgh-based operations.  Recognized assets were attributed to reporting units in a manner consistent with that used for segment reporting.  Management utilized multiple sources of industry information to develop assumptions for appropriate revenue multiples for estimating the fair values of the reporting units.  The estimated fair value of each reporting unit exceeded the recorded value of the recognized assets plus goodwill.  Management determined, therefore, that the completed transition testing did not indicate impairment of the recorded values for customer list or goodwill.  The calculations performed for the transition testing also were utilized for the required 2002 annual testing since the Company opted to do such testing as of January 1, 2002. 

          The Company completed annual testing for 2003 as of January 1, 2003.  Current industry analysis includes more conservative growth forecasts for technology consulting services than as of the beginning of 2002.  The Company updated its future undiscounted cash flow projections based on more conservative growth expectations and updated information concerning the proportions of future business expected to be attributable to the customer list associated with the acquisition of Allin-Consulting-Pennsylvania.  The estimated fair value of the customer list exceeds the recorded value of the customer list indicating no impairment of the customer list.  The excess of estimated fair value over the recorded value of the customer list is significantly lower as of January 1, 2003 than as of January 1, 2002, indicating increasing risk for future impairment if recovery from the current economic downturn occurs later or is weaker than industry forecasts or if the proportion of revenue attributable to customers on the acquired list decreases more rapidly than expected.  Based on analysis of these factors, the Company will implement a prospective reduction in the estimated remaining useful life for the customer list beginning in 2003.  The customer list will be amortized based on a useful life extending through 2006,

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resulting in the recognition of an additional amortization expense of $210,000 per year from 2003 to 2006 over the expense that would have been recognized under the prior estimate of remaining expected useful life. 

          The Company attributed the recognized assets of the acquired businesses as of January 1, 2003 to reporting units in a manner consistent with that described above to test for potential impairment of goodwill.  The Company used current industry valuation multiple information to estimate the fair value of each reporting unit.  The industry valuation multiple utilized in the 2003 annual test represented a decrease of over 25% from the multiple used as of January 1, 2002, reflecting lower future growth expectations in the technology consulting industry.  The estimated fair value of each reporting unit exceeded the recorded value of the recognized assets plus goodwill, except for the Pittsburgh-based Outsourced Services reporting unit, where the recorded value of recognized assets exceeded the estimated fair value by approximately $10,000.  Allin Consulting-Pennsylvania recorded a loss due to impairment of goodwill of approximately $10,000 in January 2003.  The Company anticipates additional future testing will be conducted as of the beginning of each fiscal year or more often if any changes or developments affecting the reporting units indicate any potential additional impairment of goodwill.

          Impairment of Assets.  During June 2001, the Company recorded significant losses for impairment of goodwill totaling $10,627,000, determined following the guidelines of 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”), which was the then prevailing standard.  Due to significant variances in the rate of 2001 revenue and gross profit growth from prior expectations for Allin Consulting-California and Allin Consulting-Pennsylvania and changing perceptions about market conditions for technology consulting services, the Company’s management believed that facts and circumstances indicated the carrying value of certain intangible assets related to the acquisitions of those businesses may not be recoverable.  Since information concerning fair value of these assets was not readily available from outside sources, the Company utilized estimated future cash flows to determine fair value.  This calculation required the Company’s management to make estimates of future revenue and income from operations of Allin Consulting-Pennsylvania and Allin Consulting-California and period-to-period growth-rate assumptions for revenue and expenses.  Management was also required to make assumptions regarding the appropriate number of years to include in the estimate for Allin Consulting-Pennsylvania.  Cash flow projections indicated the estimated fair values of the acquired intangible assets were less than the net unamortized values of the assets.  Once impairment had been determined, management was required to make assumptions regarding an appropriate interest rate for discounting cash flows to determine the amounts of the impairment losses.  The impairment losses of $10,627,000 associated with goodwill represent approximately 55% of 2001 selling, general & administrative expenses.  No losses of this type were recorded in 2000 or 2002. 

          Inventory.  Inventory, consisting principally of computer hardware, software and communications equipment utilized in interactive television systems, is stated at the lower of cost or market.  In June 2001, a significant portion of Allin Interactive’s inventory consisted of equipment salvaged from shipboard interactive television systems where operations under an owner-operator model had been discontinued in 1997 and 1998.  The carrying value had been based on prior estimates of salvage value.  Management determined that the quantities of this equipment exceeded the demand from its cruise line customers for replacement parts for similar systems still in operation and that the equipment was not otherwise readily marketable.  There was no readily available valuation information for this equipment due to its age and previous use.  Management was therefore required to determine new estimates of market value for the equipment remaining in inventory.  Allin Interactive recorded an inventory writedown of approximately $121,000, which was recorded as a loss due to impairment included in selling, general & administrative expenses for the year ended December 31, 2001.  The Company’s management decided to discontinue digital imaging services in 2001 and to sell Allin Digital’s remaining inventory of equipment as individual components through Internet-based auctions and to existing clients.  Management believed that this diminished the value of the remaining inventory since some components offered greater potential value as part of a complete system installation than sold as individual components.  The Company prepared new estimates of the market value for Allin Digital’s inventory based on sales of similar components on Internet-based auctions.  Inventory was written down approximately $293,000, which represents a significant portion of the loss from discontinued operations for the year ended December 31, 2001.  Due to the discontinuation of Allin Digital’s operations and Allin Interactive’s intention to purchase the majority of equipment needed for projects on an as-needed basis, the Company’s inventory levels were much lower in 2002 than was typical throughout 2000 and 2001, which should diminish the likelihood of future significant writedowns of inventory to estimated market value.

          For additional information concerning the critical accounting policies and estimates discussed above, see Note 2 – Summary of Significant Accounting Policies, Note 8 – Goodwill & Intangible Assets, Note 9 – Impairment of Long-Lived Assets, Note 10 – Discontinuation of Digital Imaging Operations and Note 21 – Subsequent Events in the Notes to Consolidated Financial Statements included in Item 8 – Financial Statements and Supplementary Data in this Report on Form 10-K.

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          Certain reclassifications have been made to the Company’s Consolidated Balance Sheet as of December 31, 2001 and the Consolidated Statements of Cash Flows for the fiscal periods ended December 31, 2000 and 2001 to conform to the current presentation of the Company’s Consolidated Balance Sheet as of December 31, 2002 and the Consolidated Statement of Cash Flows for the fiscal period ended December 31, 2002.  The reclassifications did not impact the Company’s results of operations, earnings per share or shareholders’ equity during the periods ended December 31, 2000 and 2001.  See Note 2 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements contained in Item 8 – Financial Statements and Supplementary Data for additional information concerning the reclassifications.  The reclassifications are described below.

          Costs and estimated gross margins in excess of billings and billings in excess of costs and estimated gross margins related to certain Allin Interactive systems integration projects have been reclassified on the Consolidated Balance Sheet as of December 31, 2001 such that the aggregate of all projects with costs and estimated gross margins in excess of billings balances is presented under current assets while the aggregate of all projects with billings in excess of costs and estimated gross margins balances is presented under current liabilities.  Previously, the aggregate of costs and estimated gross margins in excess of billings had been offset against the aggregate of billings in excess of costs and estimated gross margins, with the net amount included under current liabilities.  This reclassification also impacts the Consolidated Statements of Cash Flows for the periods ended December 31, 2000 and 2001.  Separate changes are reflected for costs and estimated gross margins in excess of billings and billings in excess of costs and estimated gross margins under changes in certain assets and liabilities in cash flows from operating activities.  Previously, the changes had been presented on a net basis.  The liability for accrued dividends on preferred stock on the Consolidated Balance Sheet as of December 31, 2001 has been separated into current and non-current portions based on the Company’s expectations for payment of the dividends.  Previously, all of the accrued dividends on preferred stock had been included under current liabilities.  The Company’s provisions for uncollectible accounts receivable have been reclassified on the Consolidated Statements of Cash Flows for the periods ended December 31, 2000 and 2001 to presentation as adjustments to reconcile net losses to net cash flows from operating activities under cash flows from operating activities.  Previously, the provisions had been netted against the changes in accounts receivable presented under changes in certain assets and liabilities under cash flows from operating activities. 

Certain Related Party Transactions

          During the years ended December 31, 2000, 2001 and 2002, the Company engaged in transactions with related parties, including sale of services and products, purchases of services and products and leases for office space.  Services and products sold represented less than 1% of the Company’s revenue in each of these periods.  The charges for services and products sold to related parties were comparable to charges for similar services and products sold to non-related entities.  Purchased services and products represented less than 1% of cost of sales or selling, general & administrative expenses in each of these periods.  Management believes the cost of these services and products is similar to that which could have been obtained from non-related entities.

          The Company’s office space in Pittsburgh, Pennsylvania is leased from an entity in which a beneficial holder of greater than five percent of the Company’s common stock, as well as certain of his family members, have equity interests.  Rental expense related to this lease was approximately $284,000, $290,000 and $149,000 during the years ended December 31, 2000, 2001 and 2002, respectively, which represented 3%, 2% and 3% of selling, general and administrative expenses during the respective periods.  The Company’s management believes that the lease rates were competitive with the marketplace for similar commercial real estate at the time the lease was entered into in 1997.  The lease expired on January 31, 2002.  Management believed the Company’s Pittsburgh-based operations could effectively utilize a smaller space due to staff reductions in 2001.  The Company’s landlord agreed to permit the Company to continue to occupy its present space on a month-to-month basis until such time as the landlord identifies an alternate tenant for the Company’s space.  At that time, the Company will likely move to smaller space within the same building more commensurate with its needs.  The Company’s rent expense has been reduced by approximately 51% under the new arrangement reflecting both its reduced requirements for space and real estate market conditions as of the beginning of 2002.  Management believes the new arrangement benefits both parties as the Company has benefited from a rent reduction while deferring the cost and inconvenience of moving while the landlord has deferred the costs associated with buildout of new space for the Company. 

          Throughout 2000, 2001 and 2002, the Company had an outstanding note payable, with interest fixed at 7% per annum, for $1,000,000 related to the Company’s 1996 acquisition of Allin Consulting-California.  Until March 14, 2002, the note was due to the former sole shareholder of Allin Consulting-California, who was then a beneficial holder of greater than five percent of the Company’s common stock and who was formerly the President of the Company.  On March 14, 2002,

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the holder sold the note, including accrued interest of approximately $73,000, to another person who is a beneficial holder of greater than five percent of the Company’s common stock.  On April 15, 2002, the purchaser sold portions of the note and accrued interest to other parties related to the Company.  An entity in which another beneficial holder of greater than five percent of the Company’s common stock has an ownership interest purchased a $250,000 portion of the note payable and approximately $19,000 of accrued but unpaid interest.  An entity in which a director and beneficial holder of greater than five percent of the Company’s common stock has an ownership interest purchased a $41,667 portion of the note payable and approximately $3,000 of accrued but unpaid interest.  A director, executive officer and beneficial holder of greater than five percent of the Company’s common stock purchased a $16,667 portion of the note payable and approximately $1,000 of accrued but unpaid interest.  An executive officer of the Company purchased a $16,667 portion of the note payable and approximately $1,000 of accrued but unpaid interest.  Interest expense related to this note was approximately $128,000 for the year ended December 31, 2000 and $74,000 for each of the years ended December 31, 2001 and 2002.  This represents approximately 59%, 63% and 274% of the Company’s net interest expense during  2000, 2001 and 2002, respectively. 

          On March 14, 2002, the former sole shareholder of Allin Consulting-California also sold all of the 1,000 outstanding shares of the Company’s Series F Convertible Redeemable Preferred Stock, approximately $55,000 of accrued but unpaid dividends related to the preferred stock, and 213,333 shares of the Company’s common stock to the same party that purchased the Company’s outstanding note, as described above.  On April 15, 2002, the purchaser sold portions of the purchased financial instruments to same parties related to the Company as were sold portions of the note, as described above.  An entity in which another beneficial holder of greater than five percent of the Company’s common stock has an ownership interest purchased 250 shares of Series F preferred stock, approximately $15,000 of accrued but unpaid dividends and 53,333 shares of common stock.  An entity in which a director and beneficial holder of greater than five percent of the Company’s common stock has an ownership interest purchased 41.67 shares of Series F preferred stock, approximately $2,000 of accrued but unpaid dividends and 8,889 shares of common stock.  A director, executive officer and beneficial holder of greater than five percent of the Company’s common stock purchased 16.67 shares of Series F preferred stock, approximately $1,000 of accrued but unpaid dividends and 3,556 shares of common stock.  An executive officer of the Company purchased 16.67 shares of Series F preferred stock, approximately $1,000 of accrued but unpaid dividends and 3,555 shares of common stock.

          See Liquidity and Capital Resources following in this Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, Notes 11 – Line of Credit and Note Payable and 18 – Related Party Transactions included in Item 8 – Financial Statements and Supplementary Data, Item 11 – Executive Compensation and Item 13- Certain Relationships and Related Transactions for additional information concerning these financial instruments and related party transactions.

Results of Operations

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenue

          The Company’s total revenue for the year ended December 31, 2002 was $13,333,000, a decrease of $4,748,000, or 26%, from total revenue of $18,081,000 for the year ended December 31, 2001.  All of the Company’s solution area services experienced period-to-period declines in revenue, which are discussed in the following paragraphs.  The most significant declines occurred with the Technology Infrastructure and Interactive Media Solution Areas.  Management believes the economic conditions resulting in a downturn in domestic technology spending particularly negatively impacted the demand for Technology Infrastructure services since these projects will frequently require significant upgrades in customers’ hardware, software and networking equipment.  The Interactive Media decline in revenue was due to, among other factors, one fewer major systems integration project in 2002 than in 2001 resulting from a schedule delay related to a project anticipated for completion in 2002, the introduction of a new generation hardware platform that significantly reduced the price to customers of two system installations and the inclusion of an unusually large software development project in 2001.

          The Company’s solution area revenue, after elimination of intercompany sales, was $12,836,000 for the year ended December 31, 2002, including $7,759,000 for Interactive Media, $1,665,000 for Technology Infrastructure, $2,333,000 for E-Business and $1,079,000 for Outsourced Services.  Comparable solution area revenue for the year ended December 31, 2001 was $17,280,000 in total, including $10,071,000 for Interactive Media, $2,703,000 for Technology Infrastructure, $2,508,000 for E-Business and $1,998,000 for Outsourced Services.

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          Revenue for the Interactive Media Solution Area for the year ended December 31, 2002 included $2,568,000 for interactive media consulting and $5,191,000 for interactive media systems integration.  Comparable Interactive Media revenue for the year ended December 31, 2001 included $3,612,000 for interactive media consulting and $6,459,000 for interactive media systems integration.  The decrease in revenue for the Interactive Media Solution Area from 2001 to 2002 was 23%.  The most significant factor in the 29% period-to-period decline in consulting revenue was an unusually high level of applications development in 2001 related to a major applications development project for Carnival under a contract entered into in February 2001.  This project was in later stages in 2002, with a considerably lower level of activity than in 2001.  There were no other comparably sized development projects of this type in 2002.  The level of consulting revenue derived from technical architecture design, configuration and implementation related to interactive television system installations was also lower in 2002.  The period-to-period decline in systems integration revenue of 20% was due several factors.  One fewer major installation project was carried out in 2002 than in 2001.  During 2001, the substantial majority of systems integration revenue related to seven major ship system projects was recognized.  During 2002, Interactive Media completed or substantially completed five interactive television systems integration projects.  Interactive Media also recognized systems integration revenue related to the late stages of three projects begun in 2001 as well as the early stage of work on an installation where the majority of the revenue will be recognized in 2003, with the combined revenue from these projects approximating a sixth ship installation.  The latter project had been expected to be completed in 2002 prior to implementation schedule delays.  In the second half of 2002, Interactive Media began to utilize a new On Command all-digital head-end configuration, which offers functionality improvements and substantial equipment cost reductions.  Interactive Media was able to significantly reduce customer prices on two projects because of this, substantially increasing the customer’s return on investment.

          Based on the Company’s new contract with Costa Crociere, S.p.A. (“Costa”), entered into in October 2002, and orders received from Carnival Corporation (“Carnival”) and Royal Caribbean Cruise Lines, Ltd. (“Royal Caribbean”) in October and November 2002, management believes Interactive Media revenue for 2003 will be comparable to revenue realized in 2002.  Interactive Media operations are expected to continue to be dependent on the cruise industry in 2003 and are therefore subject to risks that may negatively impact the cruise industry such as a continuation of the current economic downturn or geopolitical considerations such as war or terrorism which may make consumers reluctant to travel.  Such risks or others could cause cruise line customers to seek to delay or cancel projects currently expected to be performed in 2003.  Unanticipated project schedule changes beyond the Company’s control could also result in delays which may negatively impact revenue expected to be realized in 2003.  Accordingly, there can be no assurance that the Company’s Interactive Media Solution Area will continue to realize consulting or systems integration revenue equal to or greater than the levels realized in 2002 or that any increases realized will result in the desired improvement to the Company’s financial condition or results of operations. 

          Technology Infrastructure revenue decreased $1,038,000, or 38%, for the year ended December 31, 2002 as compared to the year ended December 31, 2001.  As noted above, management attributes the decline in period-to-period Technology Infrastructure revenue to a softening of demand for technology consulting services throughout 2001 and 2002 due to the impact of domestic economic conditions on technology spending.  Since Technology Infrastructure solutions will frequently recommend or require significant upgrades in customers’ hardware, software and networking equipment, the decline in demand for Technology Infrastructure services has been particularly pronounced.  Technology Infrastructure projects performed in 2002 tended to be smaller and of shorter duration than projects performed in 2001.  Management believes this trend is a reflection of continuing economic pressures limiting technology spending in the domestic economy.  Management believes that certain aspects of Technology Infrastructure consulting offer growth potential in 2003, such as projects focused on security solutions or network architecture consolidation and optimization.  However, management believes any significant growth in Technology Infrastructure business will be dependent on general improvement in domestic economic conditions.  Such improvement is not expected to occur before the second half of 2003 at the earliest and may not occur at all in 2003.  Consequently, management believes revenue for the Technology Infrastructure Solution Area may continue to decline in 2003 and that current economic conditions make prospects for any significant revenue growth in 2003 unlikely.

          The E-Business Solution Area realized a revenue decrease of $175,000, or 7%, for the year ended December 31, 2002 as compared to the year ended December 31, 2001.  In 2001, one customer, Gartner, Inc. (“Gartner”) accounted for 64% of E-Business revenue.  Services for this customer were reduced significantly in 2002, when the customer accounted for 12% of E-Business revenue.  The E-Business Solution Area was able to obtain new business from a more diverse group of customers, including one significant customer accounting for 32% of revenue, to offset most of this decline.  Management believes the negative impact of economic conditions on the demand for technology-based services also partially contributed to the decline in E-Business revenue, but that the continuing proliferation of internet-based commerce

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and a lower correlation of E-Business projects with significant equipment upgrades than with Technology Infrastructure projects have mitigated the decline in demand for E-Business services.  Management believes that the key E-Business service areas of application development and integration, business intelligence and information management portals have growth potential for 2003 since solutions can bring about significant improvements in customers’ operating efficiencies.  However, management expects that current economic conditions will restrain growth in the short term.  There can be no assurance that the Company will continue to realize E-Business revenue at current or increased levels in the future.

          Revenue from Outsourced Services declined $919,000, or 46%, for the year ended December 31, 2002 as compared to the year ended December 31, 2001.  The most critical factor in the decline was the Company’s cessation of services associated with Hogan IBA software, specialized products for the banking industry, in July 2001.  Hogan IBA-based services accounted for approximately 28% of the Company’s Outsourced Services revenue in 2001.  Prior to 2002, a significant portion of Outsourced Services were related to IBM mainframe legacy technology.  Demand for these services has declined steadily over the last three years, contributing to declining Outsourced Services revenue, due to a widespread business conversion to client/server-based information networks.  During 2002, the focus of the remaining Outsourced Services resources was transitioned to services based on Microsoft, Oracle and Informix technology.  However, management expects Outsourced Services revenue will continue to decline in future periods.

          The Company recognized revenue for ancillary services & product sales, after elimination of intercompany sales, of $497,000 during the year ended December 31, 2002, including $409,000 for information system product sales and $88,000 for other services.  Ancillary services & product sales revenue of $801,000 was recognized during the year ended December 31, 2001, including $253,000 for information system product sales and $548,000 for other services.  The period-to-period increase in information system product sales was due primarily to increased sales of interactive television equipment and spare parts to the Company’s cruise line customers, which management attributes to a larger base of installed interactive television systems in the cruise industry in 2002 than in 2001.  The decline in revenue for other services was due to the inclusion in 2001 of placement fee revenue of $124,000 and interactive television transactional services revenue of $296,000.  The placement fee resulted from a litigation settlement with a former customer who had hired three of the Company’s consultants contrary to agreement.  There were no similar circumstances in 2002.  Interactive television transactional services ceased in December 2001 following the Company’s sale earlier that year of two interactive television systems to Carnival which the Company had previously owned and operated.  

Cost of Sales and Gross Profit

          The Company recognized cost of sales of $6,884,000 during the year ended December 31, 2002 as compared to $9,723,000 during the year ended December 31, 2001.  The decrease in cost of sales of $2,839,000 was consistent with the declines in revenue experienced in the Company’s operations.  Gross profit of $6,449,000 was recognized for the year ended December 31, 2002 as compared to $8,358,000 for the year ended December 31, 2001, a decrease of $1,909,000, or 23%.  Gross profit as a percentage of revenue increased slightly from 46% for 2001 to 48% for 2002.

          The Company’s solution areas recorded a total of $6,633,000 for cost of sales during the year ended December 31, 2002, including $4,064,000 for Interactive Media, $736,000 for Technology Infrastructure, $1,025,000 for E-Business and $808,000 for Outsourced Services.  Comparable cost of sales for the year ended December 31, 2001 was $9,472,000 in total, including $5,789,000 for Interactive Media, $1,099,000 for Technology Infrastructure, $1,083,000 for E-Business and $1,501,000 for Outsourced Services.  Gross profit for the Company’s solution areas for the year ended December 31, 2002 was $6,203,000, including $3,695,000 for Interactive Media, $929,000 for Technology Infrastructure, $1,308,000 for E-Business and $271,000 for Outsourced Services.  Comparable gross profit for the year ended December 31, 2001 was $7,808,000 in total, including $4,282,000 for Interactive Media, $1,604,000 for Technology Infrastructure, $1,425,000 for E-Business and $497,000 for Outsourced Services. 

          Cost of sales for the Interactive Media Solution Area for the year ended December 31, 2002 included $832,000 for interactive media consulting and $3,232,000 for interactive media systems integration.  Interactive Media cost of sales for the year ended December 31, 2001 included $1,239,000 for consulting and $4,550,000 for systems integration.  Interactive Media Solution Area gross profit for the year ended December 31, 2002 included $1,736,000 for consulting and $1,959,000 for systems integration.  Interactive Media gross profit for the year ended December 31, 2001 included $2,373,000 for consulting and $1,909,000 for systems integration.  The period-to-period decreases in consulting cost of sales and gross profit are primarily attributable to a higher level of applications development in 2001 related to a major applications development project for Carnival and a period-to-period decline in the level of technical architecture, configuration and implementation services related to interactive television system installations.  The Interactive Media Solution Area experienced a slight increase in period-to-period gross profit from systems integration services despite a decline in period-to-period

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revenue.  Management attributes the improvement to enhanced operational efficiency and the reduction of incidental project costs such as shipping. 

          Technology Infrastructure gross profit decreased $675,000, or 42%, for the year ended December 31, 2002 as compared to the year ended December 31, 2001.  As discussed above, management attributes the decline to domestic economic conditions throughout 2001 and 2002, which have curtailed spending on technology products and associated services.  In percentage terms, the period-to-period decline in gross profit from 2001 to 2002 exceeded the decline in revenue, 42% to 38%.  Management attributes the margin erosion to intense competition in the marketplace for available technology infrastructure projects, which has exerted downward pressure on pricing.

          E-Business gross profit decreased $117,000, or 8%, from 2001 to 2002.  Management believes the decline in gross profit, which corresponds to the period-to-period decline in E-Business revenue, is attributable to a substantially reduced level of services for a customer who had accounted for the majority of E-Business operations in 2001 and the negative impact of the economic downturn on demand for technology-based services. 

          Gross profit realized on Outsourced Services declined $226,000, or 45%, for the year ended December 31, 2002 as compared to the year ended December 31, 2001.  Management attributes the decline to the July 2001 cessation of services related to Hogan IBA-based technology and industry trends resulting in decline in demand for services related to IBM mainframe technology.  The decline in gross profit is consistent with the decline in revenue.

          Cost of sales for the Company’s ancillary services and product sales was $251,000 for the year ended December 31, 2002 and was related to information system product sales.  Cost of sales for ancillary services and product sales was also $251,000 for the year ended December 31, 2001, including $162,000 for information system product sales and $89,000 for other services, related to the cost of pay-per-view movies associated with the operation of interactive television systems.  Gross profit on ancillary services and product sales was $246,000 for the year ended December 31, 2002, including $158,000 for information system product sales and $88,000 for other services.  Gross profit for ancillary services and product sales was $550,000 for the year ended December 31, 2001, including $91,000 from information system product sales and $459,000 from other services.  The decline in gross profit for other services was due to the inclusion of a large placement fee in 2001 and the December 2001 cessation of interactive television transactional services, which more than offset growth in gross profit from information system product sales.

Selling, General & Administrative Expenses

          The Company recorded $5,695,000 in selling, general & administrative expenses during the year ended December 31, 2002, including $537,000 for depreciation and amortization and $5,158,000 for other selling, general & administrative expenses.  Selling, general & administrative expenses were $19,498,000 during the year ended December 31, 2001, including $1,571,000 for depreciation and amortization, $10,751,000 in losses from impairment or disposal of assets and $7,176,000 for other selling, general & administrative expenses. 

          The most significant factor in the period-to-period decrease in selling, general & administrative expenses was the 2001 recording of $10,748,000 of losses from impairment of assets related to goodwill associated with the acquisitions of Allin Consulting-Pennsylvania and Allin Consulting-California and inventory held by Allin Interactive.  See Impairment of Assets above under Critical Accounting Policies, Estimates and Judgments in this Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations and Note 9 – Impairment of Long-Lived Assets – in the Notes to Consolidated Financial Statements included in Part II, Item 8 – Financial Statements and Supplementary Data of this Report on Form 10-K for additional information concerning the impairment losses.  No losses due to impairment or disposal of assets were recorded in 2002.

          The downturn in the domestic economy experienced beginning late in 2000 significantly lowered technology-based spending in the United States, which negatively impacted the demand for technology services.  Consequently, beginning late in the first quarter of 2001, management moved to reduce the cost of personnel resources in its Technology Infrastructure and E-Business Solution Areas as well as in its corporate marketing and financial departments.  As a result of these actions, the expense associated with personnel resources was substantially lower in 2002 than that incurred in 2001.  The Company has also realized period-to-period reductions in other expenses such as rent, advertising and promotion, professional services, travel and entertainment and communications costs resulting from management’s cost containment efforts.  As a result of these cost savings initiatives, other selling, general & administrative expenses declined by $2,018,000, or 28%, from 2001 to 2002.

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          During the year ended December 30, 2001, severance accruals of approximately $132,000 were recorded as a result of the termination of services of three managerial personnel associated with the Company’s Interactive Media, Technology Infrastructure and E-Business Solution Area services.  There were no similar restructuring charges recorded during 2002.

          The decrease in depreciation and amortization of $1,034,000, or 66%, is primarily due to the discontinuation of amortization of goodwill and assembled workforces in 2002, as required under new accounting standards.  During the year ended December 31, 2001, approximately $737,000 of amortization expense had been recorded related to goodwill and assembled workforces.  Another contributing factor was significant levels of fixed assets reaching full depreciation in June and December 2001 and June 2002.

Income (Loss) from Continuing Operations

          The Company recorded income from continuing operations of $999,000 for the year ended December 31, 2002, as compared to a loss from continuing operations of $11,257,000 for the year ended December 31, 2001.  The substantial improvement of $12,256,000 resulted primarily from the inclusion of losses from impairment of assets of $10,748,000 in selling, general & administrative expenses in 2001 while no comparable loss was recorded in 2002.  The Company also realized a period-to-period decrease of $3,052,000 in depreciation and amortization and other selling, general & administrative expenses, the benefit of which was partially offset by a reduction in gross profit from operations of $1,909,000.  Other factors contributing to the improvement were a period-to-period reduction in net interest expense of $90,000 because the Company did not have any outstanding borrowings on its revolving credit facility in 2002 and a net benefit from income taxes of $272,000 recognized in 2002 due to reversal of a valuation allowance on a portion of deferred tax assets related to net operating loss carryforwards, based on management’s expectation of the Company’s future ability to realize such benefits.

Income (Loss) from Discontinued Operations

          During the year ended December 31, 2002, the Company recorded income of $10,000 from its discontinued digital imaging operations as compared to a loss of $689,000 during the year ended December 31, 2001.  Income recognized in 2002 resulted primarily from a reversal of $34,000 of previously recorded provisions for uncollectible accounts receivable. The Company was able to realize collections in excess of previous estimates in 2002 related to the discontinued operations.  The loss recognized in 2001 included an impairment loss of approximately $348,000 related to Allin Digital’s inventory of digital imaging equipment and consumable supplies, assets utilized in certain photography concessionaire operations and capitalized hardware, software and equipment.  Allin Digital also recorded provisions of approximately $88,000 during the year ended December 31, 2001 to increase its allowance for doubtful accounts.  

Net Income (Loss)

          The Company recognized net income of $1,009,000 for the year ended December 31, 2002 as compared to a net loss of $11,946,000 for the year ended December 31, 2001.  The most significant factors in the profitability improvement of $12,955,000 were the inclusion of significant losses due to impairment of assets in 2001 and substantial period-to-period decreases in depreciation and amortization and other selling, general & administrative expenses, as discussed above.  The Company’s operations are subject to significant variability due to frequent increases or decreases in project activity.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenue

          The Company’s total revenue for the year ended December 30, 2001 was $18,081,000, a decrease of $2,789,000, or 13%, from total revenue of $20,870,000 for the year ended December 31, 2000.  Combined revenue from the Company’s Interactive Media, Technology Infrastructure and E-Business Solution Areas increased by $2,102,000 from 2000 to 2001, partially offsetting a decline in Outsourced Services revenue of $4,694,000.  Interactive Media’s consulting and systems integration services posted the most significant revenue gains, an aggregate increase of $2,874,000 from 2000 to 2001.

          The Company’s solution area revenue, after elimination of intercompany sales, was $17,280,000 for the year ended December 31, 2001, including $10,071,000 for Interactive Media, $2,703,000 for Technology Infrastructure, $2,508,000 for E-Business and $1,998,000 for Outsourced Services.  Comparable solution area revenue for the year ended

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December 31, 2000 was $19,872,000 in total, including $7,197,000 for Interactive Media, $3,817,000 for Technology Infrastructure, $2,166,000 for E-Business and $6,692,000 for Outsourced Services. 

          Revenue for the Interactive Media Solution Area for the year ended December 31, 2001 included $3,612,000 for interactive media consulting and $6,459,000 for interactive media systems integration.  Comparable Interactive Media revenue for the year ended December 31, 2000 included $1,283,000 for interactive media consulting and $5,914,000 for interactive media systems integration.  The increase in revenue for the Interactive Media Solution Area from 2000 to 2001 was 40%.  Interactive Media consulting revenue increased $2,329,000, or 182%, for the year ended December 31, 2001 as compared with the year ended December 31, 2000.  The increase in revenue was primarily attributable to the 2001 commencement of applications development projects for interactive television systems to be installed on six Carnival ships in 2001 and 2002, applications development, technical architecture, configuration and implementation for an increased number of ship-based interactive television systems in 2001 and maintenance and trouble-shooting services for a larger number of ship-based interactive television systems.  Revenue for Interactive Media systems integration services increased by $545,000, or 9%, in the year ended December 31, 2001 as compared to the year ended December 31, 2000.  Revenue from the installation of new interactive television systems increased in 2001 as compared to 2000 due to the commencement of installation services for Carnival.  Interactive Media systems integration revenue for 2000 included approximately $929,000 related to the 1999 sale of four interactive television systems to Celebrity.  The interactive television systems had been installed on Celebrity ships from 1995 to 1997 when Allin Interactive was following an owner-operator model for interactive television operations.  Revenue from the system sales was recognized over the minimum period of an associated maintenance obligation, which ended March 17, 2000.  The Celebrity ship system sales were unusual transactions in terms of the magnitude of revenue associated with concurrent sales of systems previously operated on an owner-operator model.   

          Technology Infrastructure revenue decreased $1,114,000, or 29%, in the year ended December 31, 2001 as compared to the year ended December 31, 2000.  Management attributes the decline in period-to-period Technology Infrastructure revenue to a softening of demand for technology consulting services due to the downturn in the domestic economy beginning late in 2000.  The economic downturn resulted in a decrease in spending on technology-related services and equipment during 2001, which negatively impacted the demand for the services offered by the Technology Infrastructure Solution Area. 

          The E-Business Solution Area recorded a revenue increase of $342,000, or 16%, for the year ended December 31, 2001 as compared with the year ended December 31, 2000.  The E-Business Solution Area performed a number of significant engagements for one customer, Gartner, in Northern California during 2001.  There were no customers for whom a comparable level of E-Business services were provided during 2000.  Services provided for Gartner more than offset declines in services for other customers, which management believes were attributable to the negative impact of the economic downturn on demand for technology-based services. 

          Revenue from Outsourced Services operations declined $4,694,000, or 70%, for the year ended December 31, 2001 as compared to the year ended December 31, 2000.  Management attributes the decline in demand for Outsourced Services to a general trend in technology away from mainframe systems toward a client/server environment and the Company placing significantly greater marketing emphasis over 2000 and 2001 on the services offered by the Interactive Media, Technology Infrastructure and E-Business Solution Areas.  Another factor in the decline was the Company’s cessation of associated with Hogan IBA software products in July 2001.  Hogan IBA-based services represented the majority of legacy technology consulting revenue for the year ended December 31, 2000.

          The Company recognized revenue for ancillary services & product sales, after elimination of intercompany sales, of $801,000 during the year ended December 31, 2001, including $253,000 for information system product sales and $548,000 for other services.  Ancillary services & product sales revenue of $998,000 was recognized during the year ended December 31, 2000, including $422,000 for information system product sales and $576,000 for other services.  Information system product sale revenue decreased by $169,000, or 40%, in 2001 as compared to 2000.  Allin Network operated Erie Computer Company (“Erie Computer”) from February to May 2000.  Erie Computer’s revenue base included a significant component of information system product sales.  Erie Computer was sold in May 2000, eliminating this revenue stream for 2001.  Revenue from other services decreased by $28,000 from 2000 to 2001.  Interactive television transactional services revenue decreased by $140,000 from 2000 to 2001.  Operations of this type ceased in December 2001 following the sale of the systems to Carnival earlier in 2001.  The majority of this decrease was offset by significant placement fee revenue of $124,000 being recognized in April 2001 following collection of litigation settlement proceeds.

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Cost of Sales and Gross Profit

          The Company recognized cost of sales of $9,723,000 during the year ended December 31, 2001 as compared to $12,455,000 during the year ended December 31, 2000.  The primary reason for the decrease in cost of sales of $2,732,000 was the decline in Outsourced Services business.  Gross profit of $8,358,000 was recognized for the year ended December 31, 2001 as compared to $8,415,000 for the year ended December 31, 2000, a decrease of $57,000.  The changing mix of the Company’s services toward a greater proportion of higher-margin solutions-oriented consulting and systems integration services and a declining proportion from the lower-margin Outsourced Services operations resulted in only a 1% decrease in gross profit despite a 13% decline in revenue from 2000 to 2001.  Gross profit as a percentage of revenue increased to 46% in 2001 from 40% in 2000. 

          The Company’s solution areas recorded a total of $9,472,000 for cost of sales during the year ended December 31, 2001, including $5,789,000 for Interactive Media, $1,099,000 for Technology Infrastructure, $1,083,000 for E-Business and $1,501,000 for Outsourced Services.  Comparable cost of sales for the year ended December 31, 2000 was $11,964,000 in total, including $4,343,000 for Interactive Media, $1,557,000 for Technology Infrastructure, $1,187,000 for E-Business and $4,877,000 for Outsourced Services.  Gross profit for the Company’s solution areas for the year ended December 31, 2001 was $7,808,000, including $4,282,000 for Interactive Media, $1,604,000 for Technology Infrastructure, $1,425,000 for E-Business and $497,000 for Outsourced Services.  Comparable gross profit for the year ended December 31, 2000 was $7,908,000 in total, including $2,854,000 for Interactive Media, $2,260,000 for Technology Infrastructure, $979,000 for E-Business and $1,815,000 for Outsourced Services.  

          Cost of sales for the Interactive Media Solution Area for the year ended December 31, 2001 included $1,239,000 for interactive media consulting and $4,550,000 for interactive media systems integration.  Interactive Media cost of sales for the year ended December 31, 2000 included $409,000 for interactive media consulting and $3,934,000 for interactive media systems integration.  Interactive Media gross profit for the year ended December 31, 2001 included $2,373,000 for interactive media consulting and $1,909,000 for interactive media systems integration.  Interactive Media gross profit for the year ended December 31, 2000 included $874,000 for interactive media consulting and $1,980,000 for interactive media systems integration.  The period-to-period increases in consulting cost of sales and gross profit were primarily attributable to the 2001 commencement of applications development projects for interactive television systems for six Carnival ships, applications development, technical architecture, configuration and implementation services for an increased number of ship-based interactive television systems and maintenance and trouble-shooting services for a larger number of ship-based interactive television systems.  With systems integration services, the period-to-period increase in cost of sales and decrease in gross profit were impacted by the recognition of a portion of the cost of sales and gross profit associated with the sale of four Celebrity ship interactive television systems in 2000.  Since the Company had operated these systems on an owner-operator model for several years prior to their sale, substantial portions of the equipment cost for the systems had been depreciated at the time of sale to Celebrity.  This resulted in the recording of unusually low cost of sales and unusually high gross profit on the system sales.  All of the significant systems integration projects active in 2001 involved the installation of new systems and the higher cost of sales associated with the purchase of new equipment for the projects.  The result is a slight period-to-period decline in gross profit despite a 9% increase in systems integration revenue. 

          Technology Infrastructure gross profit decreased $656,000, or 29%, for the year ended December 31, 2001 as compared to the year ended December 31, 2000.  Management attributes the decline in period-to-period Technology Infrastructure gross profit to the economic downturn since late 2000, which has curtailed technology spending for consulting services or the equipment and software upgrades that will frequently accompany infrastructure solutions. 

          E-Business gross profit increased $446,000, or 46%, in 2001 as compared to 2000, while the corresponding increase in revenue was 16%.  Gross profit as a percentage of revenue experienced a 12% period-to-period increase from increased average billing rates in Northern California.  The increase in E-Business gross profit is also attributable to the performance of a number of significant engagements for Gartner in Northern California during 2001.  There were no customers for whom a comparable level of E-Business services were provided during 2000. 

          Gross profit realized on Outsourced Services operations declined from $1,815,000 in 2000 to $497,000 in 2001.  The decline in gross profit is consistent with the period-to-period decline in revenue.  Management attributes the decline to both industry trends away from mainframe computer systems and the Company’s shift in marketing focus in 2000 and 2001 to developing higher-margin solutions-oriented business.

          Cost of sales for the Company’s ancillary services and product sales was $251,000 for the year ended December 31, 2001, including $162,000 for information system product sales and $89,000 for other services, primarily for pay-per-view

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movies associated with interactive television transactional services.  Cost of sales for ancillary services and product sales was $491,000 for the year ended December 31, 2000, including $316,000 for information system product sales and $175,000 for other services.  Gross profit on ancillary services and product sales was $550,000 for the year ended December 31, 2001, including $91,000 for information system product sales and $459,000 for other services.  Gross profit for ancillary services and product sales was $507,000 for the year ended December 31, 2000, including $106,000 for information system product sales and $401,000 for other services.  The largest factor in the period-to-period increase in gross profit of $43,000 was the inclusion of significant gross profit of $124,000 on a placement fee recognized in 2001 following collection of litigation settlement proceeds.  This was partially offset by declines in gross profit for interactive television transactional services due to cessation of such operations in December 2001 and gross profit for information system product sales due to four months of operating activity during 2000 for Erie Computer, which included a significant component of information system product sales.

Selling, General & Administrative Expenses

          The Company recorded $19,498,000 in selling, general & administrative expenses during the year ended December 31, 2001, including $1,571,000 for depreciation and amortization, $10,751,000 for losses on impairment or disposal of assets and $7,176,000 for other selling, general & administrative expenses.  Selling, general & administrative expenses were $10,861,000 during the year ended December 31, 2000, including $2,072,000 for depreciation and amortization, $67,000 for losses on disposal of assets and $8,722,000 for other selling, general & administrative expenses. 

          The most significant factor in the period-to-period increase of $8,637,000 in selling, general & administrative expenses was the 2001 recording of $10,748,000 of losses from impairment of assets related to goodwill associated with the acquisitions of Allin Consulting-Pennsylvania and Allin Consulting-California and inventory held by Allin Interactive.  See Impairment of Assets above under Critical Accounting Policies, Estimates and Judgments in this Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations and Note 9 – Impairment of Long-Lived Assets – in the Notes to Consolidated Financial Statements included in Part II, Item 8 – Financial Statements and Supplementary Data of this Report on Form 10-K for additional information concerning the impairment losses.  There was no comparable impairment loss recognized during the year ended December 31, 2000.

          Other selling, general & administrative expenses declined $1,546,000, or 18%, from 2000 to 2001.  Due to the impact of the economic downturn on the demand for technology consulting services, management moved to reduce the cost of personnel resources in its Technology Infrastructure and E-Business Solution Areas as well as in its corporate marketing and financial departments.  The net reduction in other selling, general & administrative expenses was achieved despite the Interactive Media Solution Area augmenting its personnel in late 2000 and early 2001 in anticipation of the expected substantial increase in project activity resulting from Allin Interactive’s February 2001 agreements with Carnival. 

          During the year ended December 31, 2001, severance accruals of approximately $132,000 were recorded as a result of the termination of services of three managerial personnel associated with the Company’s Interactive Media, Technology Infrastructure and E-Business Solution Area services.  During the year ended December 31, 2000, severance accruals of approximately $94,000 were recorded due to the Company’s termination of services of three managerial personnel associated with the Company’s Outsourced Services operations. 

          There were several unusual items impacting selling, general & administrative expenses in the year ended December 31, 2000.  The Company incurred expenses of approximately $111,000 in connection with an abandoned acquisition candidate.  A loss of approximately $53,000 was recorded on the sale of assets related to Allin Network’s Erie Computer operations.  There were no comparable losses recorded in the year ended December 31, 2001.

          Depreciation and amortization were $1,571,000 for the year ended December 31, 2001 as compared to $2,072,000 for the year ended December 31, 2000. The decrease of 24% is due to significantly reduced goodwill amortization in 2001 due to impairment of asset values, the discontinuation of depreciation on two ship-based interactive television systems upon their sale to Carnival in February 2001 and significant levels of fixed assets reaching full depreciation in December 2000 and June 2001. 

Loss from Continuing Operations

          The Company recorded a loss from continuing operations of $11,257,000 for the year ended December 31, 2001, as compared to a loss from continuing operations of $2,583,000 for the year ended December 31, 2000.  The increase in

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loss from continuing operations is primarily attributable to impairment losses of $10,748,000 recognized in the second quarter of 2001, as discussed above. 

Loss from Discontinued Operations

          During the year ended December 30, 2001, the Company recorded a loss of $689,000 from its discontinued digital imaging operations as compared to a loss of $371,000 during the year ended December 31, 2000.  The increased loss recognized in 2001 was due to inclusion of an impairment loss of approximately $348,000 related to Allin Digital’s inventory of digital imaging equipment and consumable supplies, assets utilized in certain photography concessionaire operations and capitalized hardware, software and equipment.  Allin Digital also recorded provisions of approximately $48,000 to increase its allowance for doubtful accounts receivable during the year ended December 31, 2001. 

Net Loss

          The Company’s net loss for the year ended December 31, 2001 was $11,946,000 as compared to $2,954,000 for the year ended December 31, 2000.  The most significant factor in the decrease in profitability was the inclusion of impairment losses associated with goodwill and inventory in 2001, as discussed above.  Several factors contributed to improvement in the Company’s results of operations in the second half of 2001, including increased Interactive Media activity associated with the Carnival agreements, decreased personnel costs and a reduced level of amortization expense for goodwill.  The Company recognized net income of $772,000 during the second half of 2001. 

Liquidity and Capital Resources

          At December 31, 2002, the Company had cash and liquid cash equivalents of $1,895,000 available to meet its working capital and operational needs.  The net change in cash from December 31, 2001 was a decrease of $331,000, which resulted primarily from payment of dividends on preferred stock and capital expenditures, partially offset by net cash flows provided by operations. 

          The Company recognized net income for the year ended December 31, 2002 of $1,009,000.  The Company recorded net non-cash expenses of $251,000, including $548,000 for depreciation of property and equipment and amortization of intangible assets, net of a benefit from income taxes of $272,000 and a $25,000 net reversal of previously recorded provisions for uncollectible accounts receivable, resulting in net cash provided of $1,260,000 related to the income statement.  Working capital adjustments resulted in net cash used of $1,193,000.  Major working capital adjustments resulting in cash used included increases in accounts receivable, unbilled receivables and costs and estimated gross margins in excess of billings of $1,195,000, $59,000 and $207,000, respectively.  These were partially offset by working capital adjustments providing cash, including increases in accounts payable and billings in excess of costs and estimated gross margins of $229,000 and $65,000, respectively, and a decrease in inventory of $51,000.  The net result of the income statement activity and working capital adjustments was net cash provided of $67,000 related to operating activities.

          Investing activities resulted in a net cash use of $43,000 for the year ended December 31, 2002 for capital expenditures for new software and the periodic upgrading of the Company’s computer hardware.  Financing activities resulted in a net cash use of $355,000 for the year ended December 31, 2002 for preferred stock dividends. 

          The Company does not rely on off-balance sheet financing and does not have non-consolidated special purpose entities.

          The Company’s common stock has been quoted on the OTC Bulletin Board since May 9, 2001.  The Company’s common stock was previously listed on The Nasdaq Stock Market’s (“Nasdaq”) National Market from the time of the Company’s initial public offering of its common stock in November 1996 until the common stock was delisted from the National Market as of the opening of business on May 9, 2001.  The Company was unable to maintain compliance with Nasdaq’s criteria for continued designation of the common stock as a National Market security.  At the time of the delisting, the common stock was not eligible for listing on Nasdaq’s SmallCap Market.  Should quotation of the common stock on the OTC Bulletin Board or a similar facility cease for any reason, the liquidity of the common stock and the Company’s ability to raise equity capital would likely decrease further.

          On October 1, 1998, the Company and S&T Bank, a Pennsylvania banking association, entered into a Loan and Security Agreement (the “S&T Loan Agreement”), under which S&T Bank agreed to extend the Company a revolving credit loan.  The S&T Loan Agreement has subsequently been renewed in each of the four succeeding years.  The current

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expiration date of the S&T Loan Agreement is September 30, 2003.  The maximum borrowing availability under the S&T Loan Agreement is the lesser of $5,000,000 or 80% of the aggregate gross amount of eligible trade accounts receivable aged sixty days or less from the date of invoice.  Accounts receivable qualifying for inclusion in the borrowing base are net of any prepayments, progress payments, deposits or retention and must not be subject to any prior assignment, claim, lien, or security interest.  As of December 31, 2002, maximum borrowing availability under the S&T Loan Agreement was approximately $2,463,000.  There was no outstanding balance under the S&T Loan Agreement as of December 31, 2002 and there have been no borrowings subsequent to that date.  As of March 7, 2003, maximum borrowing availability under the S&T Loan Agreement was approximately $724,000.  The decrease since year-end is primarily due to collection of a substantial amount of accounts receivable in the first quarter of 2003.

          Borrowings may be made under the S&T Loan Agreement for general working capital purposes.  Loans made under the S&T Loan Agreement bear interest at the bank’s prime interest rate plus one percent.  The interest rate in effect as of the beginning of 2002, 5.75%, was unchanged until November 7, 2002, when S&T Bank reduced the rate to 5.25%.  There have been no subsequent changes in the interest rate.  The interest rate increases or decreases from time to time as S&T Bank’s prime rate changes.  Interest payments on any outstanding loan balances are due monthly on the first day of the month.  The Company did not record any interest expense related to this revolving credit loan during the year ended December 31, 2002.  If additional borrowings are made under the revolving credit loan, the principal will be due at maturity, although any outstanding principal balances may be repaid in whole or part at any time without penalty.

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

          The S&T Loan Agreement, as amended, includes various covenants relating to matters affecting the Company, including insurance coverage, financial accounting practices, audit rights, prohibited transactions, dividends and stock purchases, which are disclosed in their entirety in the text of the S&T Loan Agreement filed as Exhibit 4 to the Company’s Current Report on Form 8-K filed on October 9, 1998, the Second Amendment to Note and Loan and Security Agreement filed as Exhibit 4.1 to the Company’s Report on Form 10-Q for the quarterly period ended September 30, 1999 and the Change in Terms Agreement  and Letter Agreement filed as Exhibits 4.1 and 4.2 to the Company’s Report on Form 10-Q for the quarterly period ended June 30, 2002.  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 D, F and G preferred shares.  The covenants also include a cash flow to interest ratio of not less than 1.0 to 1.0.  Cash flow is defined as operating income before depreciation, amortization and interest.  The cash flow coverage ratio is measured for each of the Company’s fiscal quarters.  The Company was in compliance with the cash flow covenant for the fiscal quarters ended June 30, September 30 and December 31, 2002.  During the fiscal quarter ended March 31, 2002, the Company recognized net interest income.  S&T Bank acknowledged that the cash flow to interest ratio could not be calculated as intended for this quarter since net interest expense was not recognized and that this instance did not represent a violation of the cash flow coverage covenant.  The Company was in compliance with all other covenants as of December 31, 2002 and currently remains in compliance with all other covenants.  The S&T Loan Agreement also includes reporting requirements regarding annual and monthly financial reports, accounts receivable and payable statements, weekly borrowing base certificates and audit reports.

          As of December 31, 2002, the Company had outstanding 25,000 shares of the Company’s Series C Redeemable Preferred Stock, having a liquidation preference of $100 per share.  There is no mandatory redemption date for the Series C preferred stock; however, the Company may redeem shares of Series C preferred stock at any time.  There are no sinking fund provisions applicable to the Series C preferred stock.  Series C preferred stock earns dividends at the rate of 8% of the liquidation value thereof per annum, compounded quarterly, until June 30, 2006, when the Company will be legally obligated to pay accrued dividends, subject to legally available funds for the payment of dividends as prescribed by the Delaware General Corporation Law.  Any accrued and unpaid dividends as of June 30, 2006 on Series C preferred stock are a legally enforceable obligation of the Company, whether the dividends have been declared or not.  Accordingly, dividends are accrued on an ongoing basis.  Accrued but unpaid dividends on the Series C preferred stock were approximately $1,644,000 as of December 31, 2002 and approximately $1,721,000 as of March 26, 2003.    Any accrued dividends on the Series C preferred stock not paid by June 30, 2006 will compound thereafter at a rate of 12% of the liquidation value thereof per annum.  After June 30, 2006, dividends on the Series C preferred stock will accrue and compound at a rate of 12% per annum and will be payable quarterly, subject to legally available funds.  The Company’s current credit agreement with S&T Bank prohibits payment of dividends on Series C preferred stock during the term of the agreement.  The

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Company intends to seek elimination of this prohibition for the Series C preferred stock prior to the scheduled payment of accrued dividends on June 30, 2006 and the commencement thereafter of scheduled quarterly dividend payments. 

          As of December 31, 2002, the Company had outstanding 2,750 shares of the Company’s Series D Convertible Redeemable Preferred Stock having a liquidation preference of $1,000 per share.  There is no mandatory redemption date for the Series D preferred stock; however, the Company may redeem shares of Series D preferred stock after August 13, 2003.  There are no sinking fund provisions applicable to the Series D preferred stock.  Series D preferred stock is convertible into the Company’s common stock until August 13, 2003.  Each share of Series D preferred stock is convertible into 276 shares of common stock, the number of shares determined by dividing 1,000 by $3.6125, which is 85% of the $4.25 closing price of the common stock on the last trading day prior to the date of closing of the acquisition of Allin Consulting-Pennsylvania.  Series D preferred stock earns dividends at the rate of 6% of the liquidation value thereof per annum, compounded quarterly if unpaid.  Dividends on Series D preferred stock are payable quarterly in arrears as of the last day of January, April, July and October, subject to legally available funds.  Accrued but unpaid dividends on Series D preferred stock were approximately $28,000 as of December 31, 2002 and approximately $24,000 as of March 26, 2003.  Holders of the Series D preferred stock who exercise the conversion right will have the right to receive any accrued and unpaid dividends through the date of conversion. 

          As of December 31, 2002, the Company had outstanding 1,000 shares of the Company’s Series F Convertible Redeemable Preferred Stock having a liquidation preference of $1,000 per share.  There is no mandatory redemption date for the Series F preferred stock; however, the Company may redeem shares of Series F preferred stock at any time.  There are no sinking fund provisions applicable to the Series F preferred stock.  Series F preferred stock is convertible to the Company’s common stock until the earlier of May 31, 2004 or the Company’s redemption of the Series F preferred shares, if any.  Each share of Series F preferred stock is convertible into 508 shares of common stock, the number of shares obtained by dividing 1,000 per preferred share by $1.966, 85% of the closing price of the common stock as reported by Nasdaq on the last trading date prior to the first anniversary of the date of issuance of the Series F preferred stock.  Series F preferred stock earns dividends at the rate of 7% of the liquidation value thereof per annum.  Dividends are payable quarterly in arrears on the 15^th of the first month of the following calendar quarter, subject to legally available funds.  Dividends accrued for seven months during 1999 of approximately $41,000 are not required to be paid prior to redemption or conversion, if any.  Dividends not paid at scheduled dates will compound quarterly thereafter.  Accrued but unpaid dividends on Series F preferred stock were approximately $59,000 as of December 31, 2002 and approximately $57,000 as of March 26, 2003.  Holders of the Series F preferred stock who exercise the conversion right will have the right to receive any accrued and unpaid dividends through the date of conversion. 

          As of December 31, 2002, the Company had outstanding 150 shares of the Company’s Series G Convertible Redeemable Preferred Stock having a liquidation preference of $10,000 per share.  There is no mandatory redemption date for the Series G preferred stock; however, the Company may redeem Series G shares after December 29, 2005.  The redemption price for each share of Series G preferred stock will be the liquidation value of such share, plus an amount that would result in an aggregate 25% compounded annual return on such liquidation value to the date of redemption after giving effect to all dividends paid on such share through the date of redemption.  There are no sinking fund provisions applicable to the Series G preferred stock.  Each share of Series G preferred stock is convertible into 28,571 shares of common stock at any time prior to redemption by the Company, if any.  The conversion price was set on December 29, 2001, the first anniversary of the issuance of the Series G preferred stock, at the minimum permissible price of $0.35 per common share.  The minimum price became effective since it exceeded 85% of the average closing price of the common stock for the five trading days prior to December 29, 2001.  Holders of the Series G preferred stock who exercise the conversion right will have the right to receive any accrued and unpaid dividends through the date of conversion.  Any shares of Series G preferred stock which are not converted to common stock will remain outstanding until converted or until redeemed.  Unless redeemed or converted to common stock sooner, Series G preferred earns cumulative quarterly dividends at the rate of 8% of the liquidation value thereof per annum until December 29, 2005.  Thereafter, the dividend rate will increase to 12% of the liquidation value until the earlier of the date of any redemption or the date of conversion into common stock.  Dividends are payable quarterly in arrears on the first day of each calendar quarter, subject to legally available funds.  Accrued but unpaid dividends on the Series G preferred stock were approximately $30,000 as of December 31, 2002 and approximately $28,000 as of March 26, 2003. 

          The order of liquidation preference of the Company’s outstanding preferred stock, from senior to junior, is Series F, Series G, Series D and Series C.  The S&T Loan Agreement prohibits the Company from 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 D, F and G preferred stock.  Each of the Certificates of Designation governing the Series C, D, F and G preferred stock prohibits the Company from declaring or paying dividends or any other distribution on the common stock or any

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other class of stock ranking junior as to dividends and upon liquidation unless all dividends on the senior series of preferred stock for the dividend payment date immediately prior to or concurrent with the dividend or distribution as to the junior securities are paid or are declared and funds are set aside for payment.  In the event that the number of shares of outstanding common stock is changed by any stock dividend, stock split or combination of shares at any time shares of Series D, F or G preferred stock are outstanding, the number of shares of common stock that may be acquired upon conversion will be proportionately adjusted.

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

          In connection with the Company’s original sale of Series B Redeemable Preferred Stock in August 1998, which was subsequently exchanged for Series D Convertible Redeemable Preferred Stock, the purchasers of Series B preferred stock also received warrants to purchase an aggregate of 647,059 shares of common stock which have an exercise price of $4.25 per share, the price of the common stock as of the last trading day prior to the closing for the acquisition of Allin Consulting-Pennsylvania.  The exercise price may be paid in cash or by delivery of a like value, including accrued but unpaid dividends, of Series C Redeemable Preferred Stock.  The warrants will expire August 13, 2003, unless exercised earlier.

          The Company has an outstanding amended note payable related to the November 1996 acquisition of Allin Consulting-California.  After the May 1999 conversion of a portion of the note principal to the Company’s Series F Convertible Redeemable Preferred Stock, the outstanding principal balance of the note is $1,000,000.  The principal balance of the note is due April 15, 2005.  The note provides for interest at the rate of 7% per annum.  Interest is payable quarterly in arrears on the 15^th of the first month of the following calendar quarter.  Any unpaid interest is compounded quarterly.  Accrued interest of approximately $58,000 applicable to the period June 1, 1999 to December 31, 1999 is not due prior to the maturity of the loan principal.  Accrued but unpaid interest was approximately $76,000 as of December 31, 2002 and approximately $75,000 as of March 26, 2002.

          During 2002, there were certain transactions among parties related to the Company in certain financial instruments related to the Company, including the Company’s common stock, Series F preferred stock and the above-described note payable.  For additional information concerning these transactions, see Certain Related Party Transactions above in this Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 18 – Related Party Transactions included in Item 8 – Financial Statements and Supplementary Data, Item 11 – Executive Compensation and Item 13- Certain Relationships and Related Transactions in this Report on Form 10-K for additional information concerning these related party transactions.

          Capital expenditures during the year ended December 31, 2002 were approximately $43,000 and included new software and computer hardware for the Company’s periodic upgrading of technology.  Management forecasts that capital expenditures will not exceed $200,000 for 2003, and will be for computer hardware, software and communications equipment for the Company’s periodic upgrading of technology and certain leasehold improvements for the Company’s Ft. Lauderdale office.  Business conditions and management’s plans may change during the remainder of 2003 so there can be no assurance that the Company’s actual amount of capital expenditures will not exceed the planned amount. 

          The Company believes that available funds and cash flows expected to be generated by current operations will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for its existing operations for at least the next twelve months.  As discussed above, the S&T Loan Agreement expires September 30, 2003.  If currently available funds and cash generated by operations were insufficient to satisfy the Company’s ongoing cash requirements or if the Company was unable to renew or replace the current credit facility after its expiration in September 2003, 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 securities or convertible debt securities would result in additional dilution to the Company’s stockholders.

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Effect of Recently Issued Accounting Standards

          In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”).  SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  This statement supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, Accounting Principles Board Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, and Committee on Accounting Procedure Accounting Research Bulletin No. 51, Consolidated Financial Statements.  SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years.  The Company adopted SFAS No. 144 effective January 1, 2002.  The adoption of SFAS No. 144 has not had a significant effect on the Company’s results of operations and financial position.

          In December 2001, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others (“SOP 01-6”).  SOP 01-6 eliminates differences in accounting established by certain industry-specific Audit and Accounting Guides previously issued by the AICPA that had primarily related to financial institutions.  However, the standards related to trade receivables included in SOP 06-1 are applicable to the Company.  SOP 01-6 is effective for fiscal years beginning after December 15, 2001  The Company adopted SOP 01-6 effective January 1, 2002.  The Company does not believe SOP 01-6 will have a significant effect on its results of operations and financial position as the standards related to trade receivables primarily specify disclosure requirements.

          In December 2002, the Financial Accounting Standards Board published Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS No. 148”), which amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”).  SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation.  The alternate transition methods reflect the full amount of stock-based compensation expense under the fair-value method immediately upon adoption of SFAS No. 148.  SFAS No. 123 had required prospective application of fair-value based accounting to new awards of stock options.  SFAS No. 148 also amends the annual disclosure requirements concerning the pro forma effects of fair-value based accounting for stock-based compensation and requires future disclosure in interim reports in addition to annual statements.  The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002.  The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002.  The Company will continue 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 under SFAS Nos. 123 and 148.  Accordingly, adoption of SFAS No. 148 will not have an effect on the Company’s results of operations or financial position, but will primarily impact the Company by increasing the frequency of disclosure regarding stock-based employee compensation plans.

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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 include, but are not limited to, interest rate risk, foreign currency exchange rate risk and collectability of accounts receivable,.  The Company manages these risks by assessing their possible impacts on a regular basis.  The Company does not anticipate any material losses in any of these market risk areas.  The Company currently does not invest excess funds in derivative financial instruments or other market rate sensitive instruments for any purpose.  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.  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 are also predominantly in United States dollars.  Therefore, the Company does not believe it is subject to material foreign exchange currency risk.

          Trading Risk.  The Company does not undertake any trading activities involving commodity contracts that are accounted for at fair value.

          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 any balance, which may be outstanding from time to time, of variable rate debt maturing September 30, 2003.  There was no variable rate debt outstanding as of December 31, 2002.  The revolving credit loan bears interest at S&T Bank’s prime interest rate plus 1%.  The Company believes S&T Bank’s prime interest rate will likely follow variations in short-term interest rates set by the United States Federal Reserve Bank.  During 2002, the applicable interest rate varied from a low of 5.25% to a high of 5.75%.  The applicable rate as of December 31, 2002 was 5.25%.  Since the Company did not have any borrowings on its revolving credit loan outstanding during 2002, there was no financial impact from the variation in interest rates.  There have been no borrowings on the revolving credit loan in 2003 and there is no current or variable rate debt outstanding at this time.

          The following table presents approximate principal cash flows and related interest rates by expected maturity date for the Company’s fixed rate debt. 

          Fixed rate debt represents a note payable with an outstanding principal balance of $1,000,000 as of December 31, 2002.  The note payable bears interest at a fixed rate of 7%.  Note principal is due April 15, 2005.  The note is related to the November 1996 acquisition of Allin Consulting-California, with the principal balance of the note being fixed and the maturity of the note being revised in a November 1998 amendment.  The amendment was entered into between the Company and the former sole shareholder of Allin Consulting-California, who at the time was the President of the Company and a beneficial holder of more than five percent of the Company’s common stock.  Because the terms of the note were established by related parties and were related to the particular circumstances of the acquisition of Allin Consulting-California, the Company does not believe the note is comparable to any publicly-traded debt instruments from which independent evidence of fair value could be obtained.  Consequently, no fair value can be estimated for the note.     

          Accounts Receivable/Accounts Payable.  Accounts receivable and accounts payable carrying amounts approximate the fair values of the accounts receivable and accounts payable balances at December 31, 2002, respectively.

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Item 8 - Financial Statements and Supplementary Data

ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

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

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ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

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

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ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)