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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended: December 31, 2004

OR

For the transition period from              to             .

Commission file number: 0-21395

ALLIN CORPORATION

(Exact name of registrant as specified in its charter)

381 Mansfield Avenue, Suite 400,

Pittsburgh, Pennsylvania 15220-2751

(Address of principal executive offices, including zip code)

(412) 928-8800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value per Share

(Title of Class)

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the average of the bid and asked prices of the common stock as of June 30, 2004, the last day of the registrant’s most recently completed second fiscal quarter, as quoted on the OTC Bulletin Board, was approximately $600,000. 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 15, 2005, 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, 2004

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,” “commence,” “create,” “seek,” “growth,” “opportunity,” “improvement” “increase,” “projects,” “continue” 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

Unless the context otherwise requires, all references herein to the “Company” refer to Allin Corporation and its subsidiaries. Certain terminology regarding the Company’s operations was changed during the second quarter of 2004 as a result of management’s ongoing review of the Company’s business and direction. The Company now utilizes the term practice area to denote its core operating functions, whereas the term solution area was previously used. Also, the practice area formerly known as E-Business was renamed Collaborative Solutions. Management believes Collaborative Solutions better reflects the broad scope of the practice area. All references to “Microsoft” refer to Microsoft Corporation.

(a) General Development of Business

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

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, 2004, the organizational legal structure consists of Allin Corporation and five wholly-owned 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 Microsoft-focused and interactive media-based consulting and systems integration services provided by the Company. Allin Consulting-Pennsylvania also performs outsourced technology-based services. Allin Holdings Corporation (“Allin Holdings”), 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 has utilized the trade-names Allin Interactive, Allin Consulting and Allin Corporation in its operations since 1998. Management believes the trade-names are recognized in the markets the Company serves. All trade- and brand-names included in this Report on Form 10-K are the property of their respective owners.

The Company’s practice area-based organizational structure is designed to complement the customer-oriented focus of the Company’s marketing strategy. Practice area sales and operational personnel must understand a customer’s business issues to provide a solution designed to meet the customer’s needs. The Company believes the customer-based focus of its marketing strategy and its practice area organizational structure 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 practice areas follows:

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The Company has established operating relationships with some of the leading suppliers of information technology products to complement its practice area services. Foremost among these are the operating relationships with Microsoft and On Command Corporation (“On Command”). Allin Consulting-California and Allin Consulting-Pennsylvania 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 has been designated with five Microsoft technology competencies: Advanced Infrastructure Solutions, Security Solutions, Information Worker Solutions, Microsoft Business Solutions and Networking Solutions. The Company intends to continue its specialization in Microsoft-based technology. See Microsoft-Based Technology Focus under Consulting and Integration Services below in this Item 1 – Business for additional information concerning the Company’s relationship with Microsoft.

The Company’s rigorous review of available hardware platforms led to the selection in 1999 of On Command as the principal supplier of computer hardware platforms and configurations, end-user components and associated operating software for the Company’s interactive television systems integration projects. On Command is one of the world’s largest providers of interactive television services to the lodging industry. The Company has designed and developed unique application software that maximizes the capabilities of the On Command hardware platform for the Company’s customers. See Equipment Supply Considerations under Interactive Media Systems Integration below in this Item 1 – Business for additional information concerning the Company’s relationship with On Command.

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(b) Financial Information About Industry Segments

Financial information concerning the industry segments in which the Company operates is included in Note 14 – Industry Segment Information 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

The consulting services offered by the Technology Infrastructure, Collaborative Solutions, Business Process and Interactive Media Practice Areas are classified by the Company as individual operating segments of its business. Aggregate consulting revenue, cost of sales and gross profit are included in the Company’s Consolidated Statements of Operations in Item 8 – Financial Statements and Supplementary Data as Consulting services. Interactive Media systems integration is classified as an additional operating segment and is reflected as Integration services in the Consolidated Statements of Operations. Under the heading Consulting and Integration Services below, discussion includes an overview of the Company’s solutions framework and delivery methods applicable to all of the practice areas, industry overviews for the technology consulting services industry in which the Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas compete and the cruise industry, which accounts for the substantial majority of the Interactive Media Practice Area’s current business, and reviews of operations for each practice area, including discussion of marketing objectives, backlog, pricing, supply considerations and sources of competition.

The Company’s operations include three additional segments, Outsourced Services, Information System Product Sales and Other Services. Outsourced Services provides resources with varied technical skill sets that customers utilize to complement and assist internal staff in the execution of customer-managed projects. Information System Product Sales reflects the Company’s sales of Microsoft Business Solutions enterprise financial software, interactive television equipment and computer hardware, software and supplies necessary for implementation or ongoing use of technology solutions recommended and implemented by the practice areas. The Other Services segment reflects ancillary activities that result in revenue such as website hosting and archival fees, referral commissions and billed out-of-pocket costs associated with the Company’s operations. These segments are discussed below under the headings Outsourced Services, Information System Product Sales and Other Services

Consulting and Integration Services

The operations of the Company’s Technology Infrastructure, Collaborative Solutions, Business Process and Interactive Media Practice Areas comprise a substantial majority of the Company’s current activities. The services provided by the practice areas have been the focus of the Company’s sales and marketing efforts over recent years and are most closely associated with its strategic focus of being a provider of Microsoft-focused information technology and interactive media-based consulting and systems integration services. The following table sets forth the percentages of total revenue represented by the consulting and integration services provided by the Company’s practice areas for the three years ended December 31, 2004.

Carnival accounted for 22% of the Company’s consulting and integration services revenue during 2004 and Carnival, together with its affiliate Costa, accounted for 30% of such revenue.

The Company’s Business Process operations were commenced in December 2003, but the Company did not report revenue and gross profit for Business Process as a separate segment prior to this Report on Form 10-K. The Company’s management believes that as a result of the acquisition of businesses in late 2004, as described below under Business Process, Business Process operations have increased in significance to the Company and now merit reporting as a separate segment. In the Company’s Report on Form 10-K for the year ended December 31, 2003 and in Reports on Form 10-Q for the interim periods of 2004, Business Process operations were included as part of the Collaborative Solutions segment. Information regarding prior periods for the Collaborative Solutions Practice Area has been reclassified to conform to the current presentation.

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Solutions Framework and Delivery Methods

The Company utilizes the Allin Solutions Framework for guiding the planning and conduct of the solutions-oriented projects performed by the Technology Infrastructure, Collaborative Solutions, Business Process and Interactive Media Practice Areas. The Allin Solutions Framework assists customers in aligning their business and technology objectives, allows solution planning to draw upon a resource knowledge base developed through past projects and provides a solution development discipline for organizing project teams and managing project lifecycles. The Allin Solutions Framework provides a foundation for planning and controlling projects based on scope, schedule and resources. The adaptable process includes four phases:

The Company’s Technology Infrastructure, Collaborative Solutions, Business Process and Interactive Media Practice Areas primarily deliver consulting services that are either Allin-managed or co-managed with the customer. With the Allin-managed delivery method, practice area managers and consultants fully control the planning, development and implementation of turnkey solutions. Client personnel function as sources of information concerning the business need for which a solution is sought. With the co-managed delivery method, practice area managers and consultants and customer technical staff members work on a collaborative basis in planning, developing and implementing solutions. The Company is fully or partially responsible for the development and implementation of technology-based solutions under the Allin-managed or co-managed delivery methods. Services delivered under these methods are viewed by management as being solutions-oriented due to the Company’s performance of high level managerial tasks. 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 Collaborative Solutions Practice Areas also occasionally deliver services under the customer-managed method, with the practice 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.

The following information under Industry Overview – Technology Consulting Services, Microsoft-Based Technology Focus and Marketing Objectives is applicable to the operations of the Company’s Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas.

Industry Overview – Technology Consulting Services

The areas of the domestic information technology services market in which the Company’s Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas compete, primarily information technology consulting, development and integration and software support, experienced growth of 5.6% in 2004, according to the Gartner, Inc. (“Gartner”) report Worldwide IT Services Market Forecast, 2002-2008, January 19, 2005. The Gartner report sizes the American market for these segments at an estimated $113 billion in 2004. Gartner forecasts modest domestic growth in these segments of 1.5% in 2005 and an average annual growth rate of 5.2% from 2006 through 2008, when the domestic market is estimated to be $136 billion. The Legg Mason Information Technology Services report Commercial IT Services C3Q04 Preview, October 18, 2004, notes expectations for continued modest revenue improvement in consulting and systems integration that are consistent with the Gartner forecast.

Worldwide IT Services Market Forecast, 2002-2008 attributes the conservative growth expectations for these industry segments to many factors, including uncertainty about the degree of American business confidence in the value of information technology investments, lack of compelling new technologies generating demand for services, and modest expectations for growth driven by implementation of new hardware, software and telecommunications equipment as well as continuing competition from offshore providers of information technology services. The Gartner report notes that information technology spending is now seen by businesses as a cost to be managed rather than an expanding source of business leverage and is subject to greater consideration of return on investment requirements than in years past.

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Worldwide IT Services Market Forecast, 2002-2008 identifies areas of opportunity for businesses participating in the consulting, development and integration segments of the information technology services industry, most notably from developing applications built on Web services. The article Web Services Starts to Surge from the January 24, 2005 edition of VARBusiness notes significant growth expectations for Web services and cites Gartner research indicating a large opportunity over the next three years for consulting, development and integration providers for solutions facilitating Web services adoption. The Infoworld article Better Quality Through Software (January 3, 2005 edition) indicates that service-oriented architecture (“SOA”), which it identifies as a preferred label over Web services, presents new challenges in terms of quality control for decentralized systems woven together through XML messages. The article notes that as usage of decentralized systems proliferates, real-time analysis of system health and application response time become more essential for business operations. Other technology developments are expected to compound these system management challenges. The article VoIP: Busy Signals Abound from the January 3, 2005 edition of CRN notes solution providers’ expectations for increasing sales to help businesses implement voice over internet protocol and video capabilities in converged networks to realize cost savings and productivity improvements.

Business concerns regarding information security are also expected to drive demand for consulting, development and integration services in 2005 and beyond. The Entrepreneur article Technology Security Consulting (December 2004 edition) notes increasing demand, particularly from small to mid-size businesses, for specialized consultants knowledgeable about all aspects of technology security and capable of helping with protection against disruption from spam, viruses and security breaches. Increased demands for workflow solutions to improve the audit process for compliance with Sarbanes-Oxley Act of 2002 and Health Insurance Portability and Accountability Act of 1996 (HIPAA) regulations are also expected to drive demand for information technology professionals, according to the article 5 Trends in the January 3, 2005 edition of CRN. 5 Trends also notes an increasing prevalence of businesses seeking custom application development to solve business problems.

The Company maintains a strong Microsoft focus in the Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas. Microsoft is a dominant force in the information technology industry, particularly in software for server and client operating environments. 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. Microsoft’s operating strategy involves leveraging a large network of third party providers, such as the Company, for service and support for its products, and to stimulate demand for its products through customized applications development. The November 2004 Datamonitor article Microsoft Insists It Is Neither Microservices nor Microseller features an interview with Microsoft’s Chief Executive Officer in which he reiterates Microsoft’s support for the partner model. The article 2005: The Year Ahead from the January 3, 2005 issue of Infoworld identified significant Microsoft priorities for 2005, including an increased emphasis on security protection in its current product line, next generation upgrades to its Visual Studio developer toolbox and SQL Server database, delivering the first beta version of their upcoming operating system and a new emphasis on dynamic or adaptive approaches based on technology developments such as SOA. Several articles from February 2005 editions of eWeek also identify challenges for Microsoft, including erosion of market share for its Internet Explorer browser due to security concerns and increasing competition from IBM for collaboration products and from Linux-based operating systems.

The sourcing of information technology services to offshore competitors, particularly application development services, continued to gather widespread attention during 2004. As noted above, it was one of the significant factors cited by Gartner resulting in lower long-term growth projections. Offshore sourcing has become an important labor issue in technology services. The CRN article 5 Trends from the January 3, 2005 edition noted that industry analyst IDC projects an annual growth rate of about 20% for offshore information technology services for the five year period ending in 2008. Management does not believe that the offshore trend has significantly impacted the Company to date, and believes that any future impact will likely be more significant for larger organizations targeting larger customers. However, the Company’s future sales opportunities may be negatively impacted by this trend.

Microsoft-Based Technology Focus

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

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while Allin Consulting-Pennsylvania has also been designated with the Security Solutions, Microsoft Business Solutions and Networking Solutions competencies. Allin Consulting-Pennsylvania recently received the Microsoft Q1 2005 Greater Pennsylvania District Area Award in recognition of its outstanding achievement as a Microsoft Partner. In June 2004, Allin Consulting-California received a Microsoft Area Partner Award for Marketing Effectiveness in recognition of the high quality of the content and business-related information from its technical seminar program. The Company has also been recognized by Microsoft for demonstrated capabilities in developing and deploying project management solutions, and has assisted Microsoft in building awareness of the capabilities of new products and encouraging associated implementation and applications development. The Company intends to continue its specialization in Microsoft-based technology.

Marketing Objectives

The Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas target horizontal markets, meaning businesses across a broad spectrum of industries. Targeted potential customers for these practice areas range from relatively small organizations to Fortune 1000 companies seeking to achieve a competitive advantage through technology. The Company believes that businesses with annual revenue of up to $1 billion afford the Company the best opportunities for offering solutions creating value for the customers and fostering the development of long-term business relationships. Management believes smaller to mid-market companies are more likely to utilize Microsoft-oriented information technology than larger organizations and typically have less sophisticated internal technical resources. The Company will not, however, limit its marketing and sales efforts solely to customers of this size.

Management believes the solutions offered by the Technology Infrastructure, Collaborative Solutions and Business Process Practice 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 the solutions provided by these practice areas help customers eliminate inefficiencies and reduce costs. Management believes the practice areas can effectively compete on the basis of the quality and broad scope of their technological capabilities and on the basis of performance in meeting customer needs. There can be no assurance, however, that the Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas will be able to expand or maintain their current levels of business in the future.

The Company intends to continue its joint marketing efforts with Microsoft. Management believes that the Company’s Microsoft gold-certified partner status and technical competency designations and past and current participation on Microsoft advisory councils and product implementation teams provide it with the ability to quickly develop solutions capabilities for new Microsoft product offerings, which serves as a competitive advantage in the marketplace. Management also believes the Company’s established relationship with Microsoft will position the Company to benefit from any future growth in Microsoft’s infrastructure-, business intelligence- and business process-based products since Microsoft has historically relied extensively on third party partners to provide custom development and integration services to businesses implementing their technology. Microsoft is also an important source of leads for potential customers. The Company believes that the high quality of its services and its ability to quickly develop solutions capabilities for new Microsoft technology are recognized by Microsoft. No assurance can be given, however, that any growth or change in Microsoft’s product offerings or sales or the Company’s relationship with Microsoft will result in increased revenue or profitability for the Company.

The Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas utilize dedicated sales and marketing personnel based in the Company’s Pittsburgh and Northern California offices to pursue sales opportunities. The Company utilizes a variety of resources to help identify opportunities, including industry and community networking, existing customers and technology partner channels. Representatives of the practice areas and marketing personnel also conduct frequent seminars on new technology developments and potential business applications as an integral component of marketing efforts.

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Technology Infrastructure

The following table sets forth the percentages of consulting services and total revenue for the Company’s Technology Infrastructure operations for the three years ended December 31, 2004.

During 2004, two significant customers, Microsoft Consulting Services and KLA-Tencor Corporation, accounted for 19% and 12%, respectively, of Technology Infrastructure revenue.

Operations. The Technology Infrastructure Practice Area seeks to develop and implement enterprise-quality, scalable solutions that solve business problems, thereby bringing tangible benefits to customers. Technology Infrastructure services focus on network and application architecture, messaging and collaboration systems, operations management and security issues. Technology infrastructure is the foundation upon which business operations depend. Weak, archaic or disparate systems inhibit effective business operations. Technology Infrastructure provides integrated technology solutions that are custom designed to meet an organization’s unique challenges. Technology Infrastructure solutions meet customer needs for local and remote access, Internet connectivity and operating system protocol design, policies, profiles, desktop standards, client installation/imaging and backup schemas. Effective messaging and collaboration systems are tools that enable development and decision-making teams to reach a shared vision, make sound decisions and achieve greater productivity. Operations management solutions optimize software, patch and upgrade deployment and key information system monitoring. Security solutions focus on protecting key business system information through combinations of firewalls and proxy servers, virus protection and intrusion detection designed 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.

Technology Infrastructure services focus on providing reliable and scalable communication, networking and application platforms. Network and application architecture solutions for wide and local area networks feature Microsoft technology including Windows Server, SQL Server and Active Directory. Messaging and collaboration projects utilize Exchange Server, SharePoint technology, Office 2003 and Live Communications Server to provide solutions for creation, storage and sharing of information. Operations management and security solutions utilize Microsoft Operations Management, Microsoft Internet Security and Acceleration Server and Systems Management Server technology. 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 Technology Infrastructure Practice Area realized substantial revenue growth of 111% in 2004, as compared to the prior year. Management attributes this primarily to the release of pent-up demand for network architecture, server and storage upgrades, and demand driven by security concerns and related disaster recovery planning. Activity during 2004 represented a continuation of the upturn in demand for Technology Infrastructure consulting services that began in the fourth quarter of 2003, following several years during which the level of demand for Technology Infrastructure services was negatively impacted by a significant curtailment in technology-based spending due to domestic economic conditions. Technology Infrastructure solutions can represent a high total cost to customers, as they will frequently require that customers incur substantial costs to buy new hardware, software or networking equipment in addition to the consulting services provided by the Company in order to realize the potential benefits of recommended solutions. There can be no assurance that the surge in demand experienced during 2004 will continue or that Technology Infrastructure revenue will be realized in future periods at levels equal to or greater than that realized during 2004.

Management believes that certain trends in technology are favorable to future growth for Technology Infrastructure. Among these trends are heightened network security concerns due to threats from virus attacks and spyware, lost productivity from the intrusion of spam messages and increasing decentralization of information systems due to increasing SOA proliferation. Management believes these trends could have a beneficial impact on the Technology Infrastructure Practice Area in 2005 and beyond. There can be no assurance, however, that these trends 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.

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Examples of recent Technology Infrastructure projects include:

Technology Infrastructure consulting is performed by both of the 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 from Pittsburgh. The majority of services in 2004 were billed on an hourly basis with the remainder based on fixed prices or minimum monthly fees.

Backlog. As of December 31, 2004, the committed backlog for the Technology Infrastructure Practice Area was approximately $622,000, all of which is expected to be earned in 2005. As of December 31, 2003, the committed backlog for Technology Infrastructure was approximately $472,000. Management believes the improvement in backlog for Technology Infrastructure is primarily attributable to obtaining several significant project engagements late in 2004. The majority of the labor associated with these projects will be performed in 2005. Committed backlog as of December 31, 2004 includes both large and small projects for a diverse group of customers.

There are common attributes to pricing, supply considerations and competition for the Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas. Discussion related to these topics is presented below under Business Process.

Collaborative Solutions

The following table sets forth the percentages of consulting services and total revenue for the Company’s Collaborative Solutions operations for the three years ended December 31, 2004.

During 2004, three significant customers, Robert Half International, Microsoft Consulting Services and Hanson North America, accounted for 16%, 14% and 12%, respectively, of Collaborative Solutions revenue.

Operations. The Collaborative Solutions Practice Area provides custom solutions focused on automating and streamlining key business activities to enhance the availability and usefulness of information for decision making. Collaborative Solutions provides scalable solutions based on Microsoft technology focused on portals and information workflow, business intelligence, application development based on the .NET framework and enterprise project management. Collaborative Solutions services provide tools to empower customer personnel with information for fast and

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effective decision making and are targeted at increasing customer productivity, eliminating inefficiencies and reducing costs. Collaborative Solutions organizes raw data into understandable information that can provide customers with competitive advantages.

Collaborative Solutions’ portal and information workflow solutions utilize Active Directory, SharePoint Portal Server, Content Management Server, InfoPath and SQL Server. Business intelligence solutions are typically based on SQL Server and Analysis Services and are accessed through analytical tools including Excel and SQL Reporting Services as well as other third-party tools. Customized applications are developed based on Microsoft’s .NET framework utilizing Visual Studio .NET with SQL Server. Enterprise project management solutions are typically based on Microsoft Project and Project Server, SQL Server, Reporting Services, Analysis Services and other third-party tools.

Collaborative Solutions revenue has been a relatively steady proportion of consulting services and total revenue over the three years 2002 through 2004. A slight 2% decline in revenue was realized in 2004 as compared to 2003. Management believes Collaborative Solutions helps businesses meet their ongoing need to remain competitive through technology-based projects that offer functionality improvements and operating efficiencies.

Management believes the pervasiveness and continuing growth of Internet-based commerce will help to stimulate demand for Collaborative Solutions services as businesses need to have effective portals and interfaces with transactional systems to remain competitive. Management expects the future level of demand for Collaborative Solutions services will also be impacted by a number of factors and trends, including increasing demand for customized applications meeting specific business needs, applications supporting SOA proliferation, implementation of voice over internet protocol and video capabilities in converged networks and the increasing complexity of business intelligence products. There can be no assurance, however, that the Company will realize revenue growth in future periods for its Collaborative Solutions services as a result of these or any other factors.

Examples of recent projects completed by the Collaborative Solutions Practice Area include:

Collaborative Solutions services are performed by both of the Allin Consulting subsidiaries utilizing personnel based in the Company’s Northern California and Pittsburgh locations. The majority of services in 2004 were billed on an hourly basis with the remainder based on fixed prices.

Backlog. As of December 31, 2004, committed backlog for the Collaborative Solution Practice Area was approximately $410,000, all of which is expected to be earned in 2005. As of December 31, 2003, the committed backlog for the Collaborative Solutions Practice Area was approximately $399,000. Management believes the small change in backlog levels is consistent with the relatively steady levels of revenue realized from Collaborative Solutions operations from 2002 through 2004. Committed backlog as of December 31, 2004 includes both large and small projects for a diverse group of customers.

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Business Process

The following table sets forth the percentages of consulting services and total revenue for the Company’s Business Process operations for the three years ended December 31, 2004.

Operations. The Business Process Practice Area focuses on services based on Microsoft business management software that help small and mid-size organizations automate processes, make more profitable decisions and accelerate growth. Business Process provides customized development, implementation and support services for the full range of Microsoft Business Solutions financial accounting and enterprise resource planning software, including Great Plains, Solomon and MS CRM. Great Plains-based solutions provide outstanding financial tools to enhance the visibility and control of business information and the back office modules necessary to unify an organization’s business processes. The Business Process Practice Area maximizes Solomon’s project-centric back office capabilities by using its customization and integration tools to help customers implement project accounting best practices. Solutions based on MS CRM assist businesses in the development of profitable customer relationships through lead and opportunity management, incident management, a searchable knowledgebase and integrated reporting tools.

In December 2003, Allin Consulting-Pennsylvania acquired the operating assets of Information Designs, Inc., (“Information Designs”), including a customer list and the authorized Microsoft Business Solutions Partner designation previously granted by Microsoft to Information Designs. Allin Consulting-Pennsylvania hired three Information Designs employees. The Company built on this initial base of operations throughout 2004 through increased marketing efforts, expansion of dedicated staff and the acquisition of complementary businesses. In November 2004, Allin Consulting-Pennsylvania acquired certain operating assets of McCrory & McDowell LLC’s Computer Resources division (“Computer Resources”), and from Accounting Technology Professionals, L.L.C. d/b/a Jimary Business Systems (“Jimary Business Systems”). Allin Consulting-Pennsylvania hired eight employees from the predecessor organizations in conjunction with these acquisitions, substantially increasing the breadth of technical expertise and marketing capabilities of the Business Process operations. Management believes that as a result of the Company’s efforts throughout 2004 and the recent acquisitions, the Business Process Practice Area staff has extensive experience and a breadth of knowledge regarding Microsoft Business Solutions technology.

Since the Computer Resources and Jimary Business Systems acquisitions occurred late in 2004, management expects revenue from Business Process consulting services will likely increase in 2005. However, no assurance can be given that the Business Process Practice Area will realize revenue equal to or greater than the current level in any future period. There can also be no assurance that the Company will be able to successfully integrate the businesses or assets that it has acquired with the other businesses of the Company.

Business Process services are performed by Allin Consulting-Pennsylvania utilizing personnel based in the Company’s Pittsburgh location. The majority of services in 2004 were billed on an hourly basis. Prior to acquisition, Jimary Business Systems provided technical support services to a significant proportion of its customers on a fixed price basis for specified time periods, typically annual periods. Services are being provided by the Company on this basis over the remaining periods of these arrangements. The Company may enter new arrangements to provide technical support services on a similar basis in 2005 and future periods.

Backlog. As of December 31, 2004, committed backlog for the Business Process Practice Area was approximately $413,000, all of which is expected to be earned in 2005. As of December 31, 2003, the committed backlog for the Business Process Practice Area was approximately $89,000. Management believes the significant increase in backlog level resulted from various factors, including the Company’s recent acquisitions which substantially increased the Business Process customer base and the Company’s efforts at developing its Business Process operations throughout 2004. Committed backlog as of December 31, 2004 consists of small projects for a large and diverse group of customers.

The following discussion of pricing, supply considerations and competition relates to the Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas.

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Pricing. Average billing rates for the Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas for the year ended December 31, 2004 were $144 per hour for Northern California-based operations and $88 for Pittsburgh-based operations. Comparable average billing rates for the year ended December 31, 2003 were $147 per hour for Northern California-based operations and $80 for Pittsburgh-based operations. This represents a decline in average billing rates of 2% for Northern California and an increase of 10% for Pittsburgh operations. Management believes that while the recovery in demand for technology consulting services was particularly strong in Northern California, increased demand first resulted in increased utilization of available consulting resources which had been underutilized during the downturn in technology spending experienced from 2001 to 2003. Management believes that that a prolonged increase in demand will be necessary to result in upward pressure on pricing in Northern California. Management believes the increase in average billing rate experienced in the Pittsburgh area from 2003 to 2004 resulted from several factors, including a greater proportion of project activity being delivered under the higher-rate Allin-managed or co-managed methods and the growth in Business Process operations.

Supply Considerations. The services performed by the Technology Infrastructure, Collaborative Solutions and Business Process Practice 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, usage of online recruiting sites, advertising and other means, as necessary. The Company has not, to date, experienced undue difficulty in recruiting qualified consultants. The Company believes that the Allin Consulting subsidiaries are perceived as being on the leading edge in implementing new Microsoft-based technology in the geographic areas in which the Company operates as well as offering a high level of customer service. Management believes that the Company’s reputation in these markets helps to attract highly-qualified candidates for available positions with the Company’s practice areas. 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 which consequently reduces the cost of employee turnover. From time to time, Technology Infrastructure, Collaborative Solutions and Business Process utilize the services of independent contractors, particularly when specialized technical knowledge is needed for certain projects of limited duration. The Business Process Practice Area actively promotes the sale of Microsoft Business Solutions software in conjunction with its services. See below under Information System Product Sales for discussion of supply considerations related to these technology products. Other computer hardware, software and supplies purchased to support the Technology Infrastructure, Collaborative Solutions and Business Process operations and consultants are readily available from a large number of suppliers.

Competition. Technology consulting services are provided by companies diverse in size and scope of activities, including hardware and software vendors with significant computer services operations and large and small entities primarily focused on technology-related consulting. The industry has 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.

Competitors include very large consulting organizations such as Ciber, Inc., Accenture, Ltd. and ePartners and computer hardware and software manufacturers and vendors who also provide a significant level of computer consulting services, such as International Business Machines Corporation, Hewlett Packard and BearingPoint, Inc. However, management believes the larger competitors are generally oriented to very large engagements. Management believes that the practice 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 synergIT Incorporated, AEC Plc., Project Assistants, Inc. and Cagas. In Northern California, local competitors tend toward specialization. Collaborative Solutions competitors would include firms such as Magenic Technologies, Inc. and Interlink Group, Inc.. Competitors for Technology Infrastructure would include firms such as Convergent Computing, MicroMenders 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.

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Interactive Media

The following table sets forth information concerning Interactive Media consulting and systems integration revenue as percentages of consulting services, if applicable, and total revenue for the three years ended December 31, 2004.

As noted above, Interactive Media operations have historically been concentrated among a few significant customers in the cruise industry. Three cruise line customers, Carnival, Royal Caribbean and Costa, accounted for 55%, 25% and 19%, respectively, of Interactive Media revenue during 2004. Costa is an affiliate of the Carnival organization.

Industry Overview – Cruise Industry

The cruise industry, where the Interactive Media Practice Area’s services are focused, is an important force in the North American economy. The International Council of Cruise Lines (“ICCL”), an industry organization, reported in The Cruise Industry 2003 Economic Summary that the North American cruise industry generated $25.4 billion in economic activity in the United States in 2003 through direct spending for goods, services and wages. The ICCL report notes over 295,000 jobs were generated by these expenditures and that the cruise industry significantly benefits domestic industries including durable and non-durable goods, travel services, professional and technical services and airline transportation. The Cruise Lines International Association (“CLIA”), an industry association representing cruise lines and travel agents, estimates a worldwide cruise passenger level of 10.6 million in 2004, an 11% increase over the 2003 passenger level of 9.5 million, according to a CLIA January 19, 2005 press release. CLIA estimates North American cruise passenger levels at 9.0 and 8.0 million for 2004 and 2003, respectively. The CLIA press release notes that growth in passenger levels has been a long-term trend in the cruise industry, averaging 8% annual growth over the last fifteen years.

Carnival is the cruise industry’s leading operator, with its website listing 77 ships among twelve cruise line brands as of the end of its 2004 fiscal year. The article Carnival: Plenty of Ports in a Storm from the November 15, 2004 edition of Business Week indicates that Carnival holds a 47% market share in the cruise industry with annual revenue approaching $10 billion. Royal Caribbean and Star Cruises Group (“Star”) are the second and third largest cruise organizations, sailing fleets of 30 and 17 ships, respectively, per their web sites. Carnival, Royal Caribbean and Star realized aggregate fiscal year 2004 revenue of $16.0 billion, per their respective press releases (Carnival - December 16, 2004, Royal Caribbean – February 1, 2005, Star – February 22, 2005). As noted above, Carnival and Royal Caribbean have been the Company’s largest customers in recent years. The Company previously operated an interactive television system under its former owner-operator model under an agreement with Norwegian Cruise Lines (“Norwegian”) prior to Star’s 2000 acquisition of Norwegian, but has not to date performed other services for Star.

Forecasts for 2005 for the cruise industry are optimistic. The Cruise Industry News Quarterly article Promise of a Great Year, But With Major Changes (Winter 2004/2005 edition) notes expectations of strong demand, more control over pricing and increased passenger onboard spending during 2005. The article A Bright Future from the December 13, 2004 edition of TravelAgent notes that equalized pricing policies adopted during 2004 by Carnival and Royal Caribbean have reduced fare discounting and encouraged earlier booking of cruises. The article indicates the current booking window ranging from four to six months represents a return to pre-September 2001 reservation patterns and notes this contributes to stabilized pricing for the cruise lines.

The cruise industry responded to growing demand over the last fifteen years by building a significant number of new ships to increase industry capacity. However, new-build orders slowed during 2002 and 2003 due to concerns about overcapacity and the impact of the September 11, 2001 incidents of terrorism on the travel industry. As a result, only four new ships are coming into service in 2005, fewer than in the immediately preceding years, per information from the Winter 2005 edition of Even Keel, an ICCL newsletter, Cruise News Daily’s November 22, 2004 Guide to New Ships and the

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March 7, 2005 edition of Cruise News Daily. These sources indicate six, eight and three new ships are presently on order to enter service in 2006, 2007 and 2008. Currently, the Company has entered into an agreement to install an interactive television system on one of the ships entering service in 2005. Eight of the seventeen newly built ships expected to enter service from 2006 to 2008 will be operated by current customers of the Company, although no assurance can be provided that the Company will receive interactive television system orders for any of these ships. The new ships on order include three of Royal Caribbean’s Ultra Voyager class, including the Freedom of the Seas, which will become the largest cruise ship in the world when introduced in 2006. The new ships currently under construction or on order will continue a cruise industry trend toward larger ships allowing for a wider variety of passenger amenities and activities. Additional ship orders in the future will be dependent on a number of factors, including continued growth in passenger levels and the relative strength of the United States dollar to the euro as the major cruise lines predominantly utilize European ship yards for construction of new ships.

The Summer 2004 edition Cruise Industry News Quarterly includes several articles describing the ongoing trend in the cruise industry toward more choices and activities for passengers in dining, entertainment, sports and shore excursions. The article The Changing Face of Shore Excursions notes a growing trend toward the implementation of more action and adventure-oriented tours designed for fewer passengers. The New York Times January 30, 2005 edition reports in the article More Frills (and Even Chills) to Lure Landlubbers that “choice” is the buzzword behind recent cruise industry trends, enabling people to design their own cruise experience by choosing their trip duration, cabin configuration and dining arrangements. The articles notes that cruise lines are offering an increasing range of activities, creature comforts and technology connectivity to attract both prior cruise passengers eager to try something new and new passengers. The Company’s management believes the trends toward increasing passenger choices and convenience combined with increased ship size create a compelling need for automation of shipboard programs and that interactive television can be an effective component of this process. The Company’s management believes this trend and others, such as increasing demand for online access, create 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.

Achievement of future growth forecasts by the cruise industry is subject to a number of risks. The TravelAgent article Government Eyes Maritime Security Measures that Could Cost Consumer (November 22, 2004 edition) notes impending changes in security regulations could increase costs for cruise consumers. The Cruise News Daily edition of January 20, 2005 reports on an Alaskan tax initiative that could substantially increase consumer costs for that segment of the cruise market. Cost increases related to new security measures and taxes could result in decreasing passenger levels in the cruise industry in future periods. Other factors such as geopolitical considerations, economic conditions and widely publicized outbreaks of shipboard illness have resulted in short-term negative impacts to the cruise industry in recent years. Although the cruise industry reacted strategically to overcome the negative impact of these factors, the risks described above could negatively impact the cruise industry again in the future which may in turn decrease future opportunities for the Company’s Interactive Media Practice Area.

Marketing Objectives

The Company’s expertise in designing and installing interactive television systems has been recognized in the cruise industry, where the Company’s interactive television solutions are the predominant system of choice for the world’s two largest cruise organizations, Carnival and Royal Caribbean. Thirty-two shipboard interactive television systems installed by the Company since 1995 are currently in operation for Carnival, Celebrity, 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 forty applications have been developed by Interactive Media for the cruise industry to generate incremental revenue, promote operating efficiencies and enhance customer service. The Company’s management estimates that the revenue producing applications developed for, and implemented on, cruise ships will generate more than $275 million of revenue for the cruise industry in 2005. The Company seeks to continually improve the services offered to the cruise industry through broadening the scope and functionality of applications, improving the functionality and reliability of interactive television system hardware and components, ongoing efforts to reduce system costs and initiatives to develop advertising and promotional opportunities to enhance the cruise lines’ revenue and return on investment.

The Company’s leadership position in interactive television technology was highlighted in the article Video on the Seas in the February 2004 edition of VideoSystems. The article highlighted innovations in the use of video technology by the cruise industry. Among the innovations reported was the interactive television technology the Company designed, developed and implemented for Carnival and Royal Caribbean. In the article, cruise line executives confirm management’s

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beliefs regarding the benefits of the interactive television systems. The article reports that the interactive television systems have worked reliably on Carnival’s ships and have provided Royal Caribbean with significant staff cost savings and enable passengers to spend less time in lines and more time enjoying themselves.

Interactive Media’s extensive experience and broad-based development and implementation capabilities allow for solutions that give customers a degree of flexibility and control that management believes is unparalleled among cruise market service providers. Interactive Media offers customers choices by allowing them to pick from over thirty-five working service or entertainment applications, by enabling the creation of unique applications and systems for individual cruise lines or ships, by offering both thick- and thin-client solutions, and by enabling operations over digital, radio frequency-based and hybrid distribution systems. Interactive Media also offers extensive support services, which have kept systems running efficiently and cost-effectively for over nine years. Management believes that Interactive Media offers diverse, scalable solutions that meet customers’ technology preferences in a cost-efficient manner.

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

The Company 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. To date, the majority of installations performed by Interactive Media have been on newly built ships. However, the new-build commitments among the Company’s existing customers are fewer in 2005 than in 2004 or 2003. As of December 31, 2004, the Company has a contractual commitment in place for one interactive television system to be installed on the Carnival Liberty in 2005. Although the level of cruise industry new builds is expected to begin to increase in 2006, no assurance can be given that the Company will be successful in obtaining additional system orders as a result of the increase. The Company continues to actively market interactive television systems for ships currently in service and also continues ongoing efforts to lower system costs and to create programs that enhance cruise lines’ incremental revenue and return on investment.

Interactive Media Consulting

Operations. The Interactive Media Practice Area is a provider of core technology for the delivery of media rich content. Interactive Media has extensive experience with delivering innovative solutions involving the design of both software and hardware configurations that meet customers’ requirements for information on demand. Interactive Media offers consulting services specializing in interactive media applications that the Company’s management believes enable customers to improve service and increase productivity and revenue. Consulting services provided in 2004 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.

The level of Interactive Media consulting services provided to customers decreased by 39% from 2003 to 2004, due to a significant decline in the level of services related to interactive television systems for newly built ships. The backlog for Interactive Media consulting services is also significantly lower as of the end of 2004 than as of the end of 2003. There can be no assurance that consulting revenue will be recognized in 2005 or future periods at levels equal to or greater than the level experienced in 2004.

Interactive Media Practice 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 radio frequency-based television infrastructure. Interactive Media develops applications based on the open architecture of Microsoft products such as Windows XP and 2000, 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 high-end graphics and digital video content.

Applications developed by the Interactive Media Practice Area include, among others, shore excursion preview and ticketing, pay-per-view movies, in-cabin gaming, meal service and wine ordering, meal reservations, shipboard and

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destination shopping promotion, distribution of activities and ship informational and promotional content, future cruise previews, digital photography and passenger amenities such as internet access, music on demand, news updates, stock quotes, video games, cabin messaging and wake-up calls. Arrays of these applications are currently in use on thirty-two cruise ships. 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 seeks to broaden the scope and functionality of applications on an ongoing basis.

During 2004, 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 2005 operations will be conducted in a similar manner. During 2004, three significant clients, Carnival, Costa and Royal Caribbean, collectively accounted for 98% of Interactive Media consulting revenue. Revenue is expected to remain highly concentrated in 2005.

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, usage of online recruiting sites, advertising and other means as necessary. The Company has not, to date, experienced undue difficulty in recruiting qualified consultants. Because the Interactive Media Practice Area offers services in specialized technology niches, the Company provides extensive training to consultants and engineers to enhance their skills. Compensation for Interactive Media’s technical staff is primarily salary-based.

There are common attributes to backlog and pricing and competition for the Interactive Media consulting and systems integration segments. Discussion related to both segments is presented below under Interactive Media Systems Integration.

Interactive Media Systems Integration

Operations. During 2004, Interactive Media completed or substantially completed interactive television systems integration projects on Carnival’s Miracle and Valor, Costa’s Magica and Royal Caribbean’s Jewel of the Seas. Interactive Media installed seven shipboard interactive television systems in 2003. Interactive Media systems integration revenue declined 41% from 2003 to 2004 as a result of the decline in the number of major interactive television system projects. As noted above, one shipboard interactive television system installation project is currently committed for 2005 for the Carnival Liberty. There can be no assurance that the Company will receive orders for additional systems for 2005 or beyond or that any sales made will result in improvements to the Company’s financial condition or results of operations. If Interactive Media is unsuccessful in obtaining additional projects for 2005, revenue and gross profit from systems integration services will likely decline significantly from 2004 levels, further negatively impacting the Company’s overall profitability.

Interactive Media can deliver flexible, scalable solutions meeting customers’ technology needs and preferences. Both thick- and thin-client solutions are offered for digital networks. Thick-client solutions utilize high-end set top boxes, wireless keyboards, remote controls and monitors or high-definition televisions to offer the functional equivalent of a personal computer in each cabin. Advanced on-demand applications are delivered over Ethernet or ATM-based networks, and interface with the customer’s other information systems.

Thin-client solutions leverage centralized all-digital head-end equipment dynamically allocated to deliver advanced applications across digital networks, radio-frequency distribution systems or hybrid systems to end-user monitors or televisions. Solutions for radio frequency based distribution systems utilize low cost televisions, set top boxes and remote controls for end-user access. Thin-client 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 XP or 2000, SQL Server and Internet Information Server enables flexible delivery of video content from various sources and interfaces with the customer’s other information systems. 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.

During 2004, Interactive Media systems integration operations were conducted primarily by technical consultants and administrative personnel based in the Company’s Ft. Lauderdale office. Work associated with systems integration projects was performed onsite by Interactive Media personnel at various domestic and international locations, including European shipyards for installations on newly built ships. It is anticipated that 2005 operations will be conducted in a similar manner. Systems integration services were provided in 2004 exclusively to three significant customers, Carnival, Costa and Royal Caribbean. Revenue is expected to remain highly concentrated in 2005.

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Equipment Supply Considerations. The Company’s rigorous review of available hardware platforms for interactive television operations led to the 1999 selection of On Command as the preferred supplier of computer hardware platforms, end-user components and associated operating software for the Company’s interactive television solutions. On Command is one of the world’s largest providers of interactive television services to the lodging industry. On Command’s research and development efforts periodically update specifications and configurations for computer hardware, end-user components and operating software that facilitate efficient and reliable interactive television operations. The Company has designed and developed a suite of unique software applications which maximize the capabilities of the On Command hardware platforms for the Company’s customers. The Company’s purchases of materials, including interactive television equipment, computer hardware, networking equipment and software, to be utilized in the operations of the Interactive Media Practice Area and for information system product sales, have been highly concentrated with On Command. During the years ended December 31, 2003 and 2004, 90% and 61%, respectively, of materials purchased for these operations were from On Command.

Allin Interactive entered into a License and Supply Agreement with On Command, effective June 30, 2003, replacing a previously existing Supplier Agreement. The License and Supply Agreement has a term of five years, expiring on June 30, 2008. Under the terms of the License and Supply Agreement, On Command granted Allin Interactive exclusivity in utilizing its hardware and end-user components for interactive television systems for the cruise line market. Such exclusivity shall be in effect for the first two years of the term, and for each succeeding year of the term if a minimum threshold for equipment purchases over the preceding two years has been attained. There are no minimum purchase requirements under the agreement, so the Company’s risk is limited to the loss of exclusivity. Based on purchases to date and expectations for purchases over the first half of 2005, the Company believes it is unlikely that the minimum threshold required to maintain exclusivity beyond June 30, 2005 will be reached. The Company does not expect that the potential loss of exclusivity for the cruise line market will negatively impact its ability to purchase hardware and end-user components from On Command. However, should some of the Company’s competitors begin to utilize hardware and end-user components from On Command for interactive television projects, the Company’s competitive position may be negatively impacted.

The License and Supply Agreement provides for the grant from On Command to Allin Interactive of a non-exclusive, perpetual license to use, market, distribute and maintain the On Command software as well as rights to modify and sublicense the software. License fees are to be determined by mutual agreement. No license fees were incurred from the commencement of the agreement through December 31, 2004. The License and Supplier Agreement was included as Exhibit 10.1 to the Company’s Report on Form 10-Q for the quarterly period ended June 30, 2003. If On Command were removed as a source of supply for hardware and end-user components for any reason, the Company’s Interactive Media operations could be negatively impacted from factors such as increased research and development costs, difficulty in obtaining alternate components, increases in the cost of components and reduced functionality of alternate components.

Certain computer hardware and software, networking components and radio frequency-based communication equipment utilized in Interactive Media projects are purchased from other suppliers. These products 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 timely performance of its 2004 systems integration projects and does not anticipate any such difficulties in 2005.

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

Backlog and Pricing. As of December 31, 2004, the Company had a committed backlog of approximately $1,951,000 for Interactive Media consulting and systems integration services, all of which is expected to be earned in 2005. This compares with a committed backlog for Interactive Media services of approximately $3,353,000 as of December 31, 2003. The backlog as of December 31, 2004 includes development, configuration and implementation labor and equipment associated with a shipboard interactive television system for the Carnival Liberty under a contract amendment with Carnival, remaining interactive television system commitments under the agreements entered into with Carnival in February 2001, consulting and integration services under various purchase orders and support services under agreements with all of the Company’s cruise line customers. Management believes the decline in backlog is primarily attributable to 2005 representing the low point in a cycle of new-build activity for cruise ships.

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Because of the significant proportion of fixed-price services included in Interactive Media’s consulting and systems integration operations over the last two years, meaningful hourly rate information is not available.

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 businesses utilizing various technologies and marketing approaches. Some of the Company’s competitors may be larger and may have greater financial resources than the Company.

The following information regarding the organizations Company management considers as the primary competitors in this market was obtained from the respective websites of the organizations. IDF GmbH, a German company, has installed digital-based interactive television systems on the Cunard Line’s Queen Mary 2, which entered service in January 2004, and on two Hapag Lloyd cruise ships. Another German company, Acentic Holdings GmbH (“Acentic”), lists Radisson as a cruise line customer, but does not specify a number of shipboard systems. Otrum ASA (“Otrum”), a Norwegian company, and VDA Multimedia Spa (“VDA”), an Italian company, both indicate that they are providers of interactive television services to the cruise market, but do not specify cruise line customers or installed ships. Acentic, Otrum and VDA are operators of lodging-based interactive television systems in Europe. An American company, Insystcom, Inc., indicates its interactive television system operates on Silversea Cruises and Oceania ships, but does not specify an installed number of systems.

The Company believes the cost-effectiveness of its solutions, its wide array of developed fully-functional applications, the substantially larger number of installed interactive television systems on cruise ships than any of the Company’s competitors and Interactive Media’s extensive experience providing services to the cruise industry provide competitive advantages in the market for cruise industry services. 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 effectively 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 have at certain times been willing to make significant capital commitments to obtain system implementations. Competitors may market on the basis of a lower price as compared to the Company’s solutions by limiting the range or functionality of applications and system components. Competitors offering only thick-client solutions may market on the basis that their solutions represent a higher level of technology than a shared-resource solution. The Company believes it can compete effectively against these marketing approaches.

Outsourced Services

The following table sets forth the percentage of total revenue derived from Outsourced Services operations for the three years ended December 31, 2004.

Marketing Objectives. The Company places significantly greater marketing emphasis on the solutions-oriented services offered by the Technology Infrastructure, Collaborative Solutions, Business Process and Interactive Media Practice Areas. While the Company is not aggressively seeking new clients for its Outsourced Services operations, renewal of services with existing clients is 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. Outsourced Services provides resources performing services and application development based on Microsoft, Oracle and Informix software and products. Engagements carried out in 2004 and committed for the future have been relatively long-term in nature, frequently of multiple years’ duration. Outsourced Services operations are based in Pittsburgh and are primarily conducted in the Pittsburgh area. During 2004, all of the services were billed on an hourly basis. Five customers accounted for all of the 2004 Outsourced Services revenue. Revenue is expected to remain concentrated among this small base of customers in 2005.

Backlog & Pricing. As of December 31, 2004, the Company had a committed backlog of approximately $119,000 for its Outsourced Services operations, all of which is expected to be earned in 2005. As of December 31, 2003, committed

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backlog for Outsourced Services was approximately $263,000. The significant decline in committed backlog is primarily attributable to one multiple year engagement entered in 2002 for a period through June 30, 2005. Committed backlog for this project as of December 31, 2003 represented a 1.5 year period as compared to a half year period as of December 31, 2004.

The average per hour billing rate for Outsourced Services was $57 per hour for the year ended December 31, 2004, as compared with $58 per hour for the year ended December 31, 2003.

Supply Considerations. Outsourced Services operations are labor intensive and are provided by the Company’s consultants. The Company has experienced little turnover related to its Outsourced Services operations over the last two years and consequently has not had a significant need to recruit personnel for these operations. The Company’s Outsourced Services staff is a mix of salary- and hourly-based employees and one hourly-based independent contractor.

Competition. Services similar to those provided by the Company’s Outsourced Services segment are provided by companies diverse in size and geographic presence. The Company believes effective competitors in the Northeastern United States include Ciber, Inc. and Pyramid Consulting. The Company competes on the basis of the high quality of the services that it offers.

Information System Product Sales

The following table sets forth the percentage of the Company’s revenue derived from information system product sales for the three years ended December 31, 2004.

As discussed above, in December 2003 the Company commenced Business Process consulting operations focused on Microsoft’s Business Solutions technology. The sale of Microsoft Business Solutions products, including Great Plains and Solomon enterprise accounting systems and MS CRM customer relationship management software, was actively sought in conjunction with these consulting services in 2004. The marketing of Microsoft Business Solutions technology was the primary reason for the 85% increase in revenue for the Information System Product Sales segment from 2003 to 2004. Management expects that revenue from information system product sales will likely increase in 2005 as operations associated with customers acquired from Computer Resources and Jimary Business Systems in November 2004 will be included for the full year during 2005. There can be no assurance, however, that revenue for the Information System Product Sales segment will be realized at levels equal to or greater than current levels during 2005 or future periods.

Other types of information system products sold include interactive television equipment and components, computer hardware, software networking equipment and supplies. The Company’s cruise line customers were a large source of information system product sales in recent years, primarily for replacement equipment and spare components for interactive television systems. Information system product sales have also occasionally been obtained in connection with technology consulting engagements carried out by the Company’s Technology Infrastructure and Collaborative Solutions Practice Areas. The Company has not aggressively pursued information system product sales in association with services performed by these practice areas, but rather has maintained the capability to fulfill requests as a means to ensure customer convenience and satisfaction with implemented solutions.

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 Pittsburgh and Ft. Lauderdale offices in 2004. During 2004, Royal Caribbean accounted for 19% of information system product sales revenue.

Supply Considerations. The Microsoft Business Solutions products being sold are supplied exclusively through Microsoft in accordance with the terms of the Microsoft Business Solutions North American Partner Agreement between Allin Consulting-Pennsylvania and Microsoft. The availability of Microsoft Business Solutions products is dependent on the Company’s continued ability to maintain its qualification as a Microsoft partner and the timely payment of annual partner fees. Most of the interactive television equipment sold by the Company is purchased from On Command under the License and Supply Agreement. See Equipment Supply Considerations under the Interactive Media Systems Integration

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section of this Item 1 – Business for additional information regarding the Company’s agreement with On Command. The Company does not anticipate problems in obtaining software or equipment from Microsoft Business Solutions or On Command, although there are no other sources of supply for the products. However, the Company’s operations could be negatively impacted from factors such as increased research and development costs, difficulty in obtaining alternate products, increases in the cost of products and reduced functionality of alternate products if availability of the Microsoft Business Solutions or On Command products ceased for any reason. Most of the other computer hardware and software sold by the Company is readily available from a large number of sources.

Other Services

The following table sets forth the percentage of total revenue derived from Other Services for the three years ended December 31, 2004.

The Other Services segment includes revenue derived from activities peripheral to the consulting or systems integration activity of the Company’s practice areas. Examples of these types of revenue earned in 2004 are out-of-pocket expense reimbursements, website hosting and archival fees, commissions for 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.

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 Practice Area did not incur significant research and development expenses related to On Command’s equipment and hardware during 2004. Software development is generally conducted by the Company’s practice 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 expects that research and development efforts and expenses in 2005 will relate primarily to application development and platform refinements for Interactive Media’s thick-client interactive television solutions.

Employees

As of February 28, 2005, the Company employed 101 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 marketing and sales efforts of the Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas are targeted toward businesses ranging from small to mid-size to those having up to $1 billion in annual revenue. These practice areas target horizontal markets, meaning potential clients in any industry. The Interactive Media Practice Area currently targets the cruise industry as the primary source of new business.

The Company has ten dedicated sales and marketing personnel focused on promoting, or securing engagements for, the Company’s practice areas. 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 operations.

(d) Financial Information About Geographic Areas

Financial information about geographic areas in which the Company operates is included in Note 14 – Industry Segment Information of the Notes to the Company’s Consolidated Financial Statements included herein in Item 8 – Financial Statements and Supplementary Data. Contracts covering any of the Company’s foreign or at sea operations are

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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.

Item 2 - Properties

The Company’s principal executive offices are located at 381 Mansfield Avenue, Suite 400, Pittsburgh, Pennsylvania 15220 in rented 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, Collaborative Solutions and Business Process Practice Areas and the Company’s Outsourced Services and Information System Product Sales operations also utilize the Pittsburgh office. The Company’s long-term lease for the office space expired January 31, 2002. Pursuant to an agreement with the landlord for the Pittsburgh office, the Company is occupying 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 lease space within the same building commensurate to its needs or, if such space is not available, space in another building. Management believes the current arrangement has been and remains beneficial to the Company since rent expense was significantly reduced from levels under the long-term lease while the costs and inconvenience of moving have been deferred. 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 Collaborative Solutions Practice 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 practice area management, sales, technical and administrative personnel associated with western United States operations. The term of the San Jose office lease extends through February 28, 2007. The San Jose office is comparable in size to the office formerly utilized until January 2004; however, rental expense is less than half of the rate for the former office. Management believes this reflects the then current commercial real estate market in the San Jose area when the lease was agreed upon in late 2003, when the lease was entered into between the Company and the landlord, due to the negative impact of economic conditions from 2001 through 2003 on technology-related businesses, which are a significant sector of the local economy. The lease for the Walnut Creek office was amended in December 2003 to extend the term for an additional three-year period. The lease now expires December 31, 2006. Rental expense under the amendment is at similar levels as under the original lease for the Walnut Creek space.

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. Practice area management, 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. The Company is currently in discussion with the landlord for the Ft. Lauderdale office regarding renewal of the lease beyond its present expiration date. Interactive Media also leases space on a month-to-month basis in an offsite storage facility. The space is used for storage of inventory and equipment purchased for projects, but not yet shipped. The storage facility utilized is a secure facility with limited access.

As of December 31, 2004, the Company’s leased offices were fully utilized.

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 2004.

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Part II

Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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.” 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, 2003 to December 31, 2004, the high and low bid prices per share of common stock as quoted on the OTC Bulletin Board were $0.140 and $0.490, 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 bid prices per OTC Bulletin Board quotations per share of common stock during 2003 and 2004 were as follows:

On March 11, 2005, there were 88 record holders of the common stock. Record holders do not include owners whose shares are held 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 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, 2005, but the Company expects to seek an extension of this facility beyond such date. 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, 2000, 2001, 2002, 2003 and 2004 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, 2002 and 2003.

In June 2001, the Company decided to discontinue Allin Digital Imaging Corp.’s (“Allin Digital”) 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 periods ended December 31, 2000, 2001, 2002, 2003 and 2004 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 then ended. The selected balance sheet data as of December 31, 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, 2003 and 2004 reflects the financial position of Allin Corporation, Allin Interactive, Allin Consulting-California, Allin Consulting-Pennsylvania, Allin Network and Allin Holdings as of those dates.

Certain reclassifications have been made to the selected statement of operations data for the years ended December 31, 2000, 2001, 2002 and 2003 to conform to the current presentation of this information. The reclassifications impacted revenue and cost of sales for these periods. Amounts billed to customers for recovery of out-of-pocket costs associated with performance of the Company’s services have been reclassified as revenue while the associated costs are reflected as cost of sales. Previously, amounts billed had been netted against the costs. As a result of the reclassification, aggregate revenue and cost of sales have been increased by $274,000, $107,000, $79,000 and $111,000, respectively, for the years ended December 31, 2000, 2001, 2002 and 2003. The reclassifications did not impact the Company’s gross profit, loss or income from operations, net loss or income or earnings per share during any of the periods.

Certain reclassifications have been made to the selected balance sheet data as of December 31, 2000 and 2001 to conform to the current presentation of this information. The reclassifications impacted working capital, total assets and total liabilities as of these dates. The reclassifications did not impact the preferred stock or shareholders’ equity balances presented as of either 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, 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 $1,078,000 and $1,370,000 as of December 31, 2000 and 2001, respectively.

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 $25,000 and $360,000, respectively, in both total assets and total liabilities as of December 31, 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, 2002, 2003 and 2004. 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 and the information discussed herein under Risk Factors. Unless the context otherwise requires, all references herein to the “Company” refer to Allin Corporation and its subsidiaries. Certain terminology regarding the Company’s operations was changed during the second quarter of 2004 as a result of management’s ongoing review of the Company’s business and direction. The Company now utilizes the term practice area to denote its core operating functions, whereas the term solution area was previously used. Also, the practice area formerly known as E-Business was renamed Collaborative Solutions. Management believes Collaborative Solutions better reflects the broad scope of the practice area. All references to “Microsoft” refer to Microsoft Corporation.

The Company commenced the operations of its Business Process Practice Area operations in December 2003. However, the Company did not report revenue and gross profit for Business Process as a separate segment prior to this Report on Form 10-K. The Company’s management believes that as a result of the acquisition of two businesses in late 2004, as described under Business Process in Item 1 – Business and in Note 7 – Acquisitions in the Notes to Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data, Business Process operations have increased in significance to the Company and now merit reporting as a separate segment. In the Company’s Report on Form 10-K for the year ended December 31, 2003 and in Reports on Form 10-Q for the interim periods of 2004, Business Process operations were included as part of the Collaborative Solutions segment. Information regarding prior periods for the Collaborative Solutions Practice Area has been reclassified to conform to the current presentation.

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

Overview of Organization, Operations & Markets

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

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

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The following provides a summary of key financial information from the Company’s Statements of Operations for the years ended December 31, 2003 and 2004, as well as period-to-period percentage changes.

Comparing the year ended December 31, 2004 with the prior year, the Company experienced period-to-period declines in revenue of $481,000 and gross profit of $535,000. The declines resulted from the operations of the Interactive Media Practice Area, where revenue and gross profit declined by $3,015,000 and $1,886,000, respectively. In percentage terms, the declines were 40% and 42%, respectively, for Interactive Media revenue and gross profit. The declines were substantially offset by period-to-period improvement in the revenue and gross profit realized by the Technology Infrastructure Practice Area. Technology Infrastructure experienced growth in revenue of $1,928,000, or 111%, and gross profit of $1,093,000, or 119%. The growth in Technology Infrastructure revenue more than offset the decline in Interactive Media consulting revenue, resulting in a net increase in the Company’s overall revenue from consulting services of

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$1,263,000, or 18%. Another factor contributing to the period-to-period increase in revenue from consulting services was the commencement of operations for the Business Process Practice Area in December 2003. Period-to-period growth in Business Process revenue of $424,000 was realized comparing 2004 with 2003.

The Company’s net income declined by $496,000, comparing 2004 to 2003, primarily as a result of the decline in Interactive Media services. The majority of the Interactive Media Practice Area’s revenue and gross profit in recent years has been derived from consulting and systems integration services for a small number of customers concentrated in the cruise industry. Interactive Media’s operations during this period have typically included large projects for interactive television system installations on newly-built cruise ships. However, the new-build commitments among the Company’s existing customers were fewer in 2004 than in 2003. Consequently, the level of Interactive Media activity related to these major projects was significantly lower in 2004 than in 2003, resulting in the period-to-period declines in Interactive Media revenue and gross profit indicated above. The Company’s committed backlog for Interactive Media consulting and systems integration services was approximately $1,951,000 as of December 31, 2004, all of which is expected to be realized in 2005, as compared to approximately $3,353,000 as of December 31, 2003. Only one significant interactive television system installation is among the projects included in the backlog as of December 31, 2004, the installation of a system on the Carnival Liberty, under an August 2004 amendment to a prior agreement with Carnival. The level of cruise industry new-build commitments is expected to drop during 2005. In addition to newly-built ships, management also focuses its sales efforts on interactive television systems for ships currently in service through ongoing efforts to lower system costs and create programs that enhance cruise lines’ incremental revenue and return on investment. The Interactive Media Practice Area’s operations in 2005 will be significantly impacted by the Company’s ability to market interactive television systems for ships currently in service, add new cruise industry customers or develop alternate markets for consulting and systems integration services based on interactive media.

Management attributes the improvement in revenue and gross profit for the Technology Infrastructure Practice Area to the release of pent-up demand for network architecture, server and storage upgrades, and demand driven by security concerns and related disaster recovery planning. Activity during 2004 represented a continuation of the upturn in demand for Technology Infrastructure services that began in the fourth quarter of 2003, following several years during which demand was negatively impacted by a significant curtailment in technology-based spending due to domestic economic conditions. The first full year of operation for the Company’s Business Process Practice Area also resulted in significant period-to-period growth in revenue and gross profit from 2003 to 2004. There can be no assurance that the Technology Infrastructure or Business Process Practice Areas will realize future revenue equal to or greater than current levels or that any increases realized will result in improvement to the Company’s financial condition or results of operations. The Company’s committed backlog for Technology Infrastructure, Collaborative Solutions and Business Process consulting was approximately $1,445,000 as of December 31, 2004, as compared to approximately $960,000 as of December 31, 2003. All of the December 31, 2004 backlog is expected to be realized during 2005.

The Company’s cash balance decreased from $4,580,000 as of December 31, 2003 to $3,091,000 as of December 31, 2004, a decline of $1,489,000. The most significant factors in the decline were net cash flows used by operating activities of $578,000 as a result of changes in working capital, net cash flows used for investing activities of $558,000, including $459,000 for the acquisition of Accounting Technology Professionals, L.L.C. d/b/a Jimary Business Systems (“Jimary Business Systems”), and net cash flows used for financing activities, primarily for payment of $356,000 in dividends on preferred stock. The Company’s cash balance may be diminished further during 2005 due to many factors, including repayment of a note with a principal balance of $1,000,000 due April 15, 2005, the use of cash for operations, changes in working capital, capital expenditures, dividends on preferred stock and other factors. The Company also has material obligations which may result in significant cash payments in future periods beyond 2005, including the scheduled payment of $2,967,000 of accrued dividends on the Company’s Series C Redeemable Preferred Stock in 2006. See Liquidity and Capital Resources following in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information concerning these and other future obligations of the Company.

The Company was organized as a Delaware corporation in July 1996 to act as a holding company for operating subsidiaries which focus on particular aspects of the Company’s business. As of December 31, 2004, the organizational legal structure consists of Allin Corporation and five subsidiaries. Allin Interactive Corporation (“Allin Interactive”), Allin Corporation of California (“Allin Consulting-California”), Allin Consulting of Pennsylvania, Inc. (“Allin Consulting-Pennsylvania”) and Allin Network Products, Inc. (“Allin Network”) are operating subsidiaries focusing on different aspects of the consulting and systems integration services provided by the Company. Allin Holdings Corporation (“Allin Holdings”) is a non-operating subsidiary that provides treasury management services to the Company.

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

In addition to the practice areas described above, the Company’s operations include three other segments, Outsourced Services, Information System Product Sales and Other Services. Outsourced Services provides resources with varied technical skill sets that customers utilize to complement and assist the customer’s internal staff in the execution of customer-managed projects. Information System Product Sales reflects the Company’s sales of Microsoft Business Solutions software and associated products, interactive television equipment and computer hardware, software and supplies. The Other Services segment reflects revenue from the Company’s billing for out-of-pocket costs associated with the operations of its practice areas, website hosting and archival services and revenue from referral commissions. These three segments collectively account for 12% or less of the Company’s revenue in all of the periods presented in the Consolidated Statements of Operations.

Critical Accounting Policies, Estimates and Judgments

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

Revenue Recognition. Interactive Media consulting and systems integration projects are frequently part of related arrangements, including services, computer hardware and equipment for interactive television systems, software, and post-contract support (“PCS”). Statement of Position 97-2, Software Revenue Recognition (“SOP 97-2”), specifies that if an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of software, the entire arrangement should be accounted for in conformity with the contract accounting guidance of Accounting Research Bulletin No. 45, Long-Term Construction-Type Contracts (“ARB No. 45”), and Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (“SOP 81-1”). Interactive Media’s arrangements frequently involve significant software modification including the installation of customized software applications previously developed for the customer. Revenue associated with Interactive Media operations involving multiple-deliverable arrangements that included significant software modification accounted for under the contract accounting standards described above was approximately 48%, 50% and 30% of the Company’s total revenue for the years ended December 31, 2002, 2003 and 2004, respectively.

Revenue for fixed-price service-based arrangements associated with these projects is recognized on the percentage of completion method of contract accounting, based on the proportion of labor expended through the end of the period to expected total project labor. Management must estimate expected labor for project completion at the beginning of each project. Interactive Media consulting projects of this type are reviewed monthly, including consideration of any factors related to current or expected future progress on the projects and the Company’s past performance of similar projects. Any resulting changes to expected project labor are factored into the determination of cumulative percentage of completion used to determine current revenue recognition. Interactive Media arrangements frequently include PCS for a ninety-day period following the installation of interactive television systems. A portion of the contract value is allocated to the PCS based on the proportion of expected PCS-related labor to expected total project labor and, in accordance with SOP 97-2, revenue is recognized for PCS over the period when services are performed.

The Company’s recognition method for revenue for systems integration projects is based on the size and expected duration of the project. For projects in excess of $250,000 of revenue and expected to be of greater than 90 days duration, revenue is recognized based on percentage of completion. The proportion of labor incurred to expected total project labor is utilized as a quantitative factor in determining the percentage of completion recognized for projects when the proportion

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

The Company’s practice areas also perform consulting engagements on a fixed-price basis. The Company follows the contract accounting guidance of ARB No. 45 and SOP 81-1 and recognizes revenue on a proportional performance basis, utilizing the proportion of labor expended through the end of the period to expected total project labor. Management must estimate expected labor for project completion at the beginning of each project. Fixed-price consulting projects are reviewed monthly, with any changes to expected project labor factored into the determination of proportional performance, which is used to determine current revenue recognition. Revenue associated with these projects was approximately 2% of the Company’s total revenue for the year ended December 31, 2002 and 4% of the Company’s total revenue for each of the years ended December 31, 2003 and 2004.

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

Goodwill and Intangible Assets. The Company’s intangible assets include goodwill associated with the acquisitions of Allin Consulting-California in 1996, Allin Consulting-Pennsylvania and MEGAbase, Inc. (merged into Allin-Consulting-California) in 1998 and Jimary Business Systems in 2004, customer lists associated with the acquisitions of Allin Consulting-Pennsylvania and Jimary Business Systems and the 2004 acquisition of McCrory & McDowell LLC’s Computer Resources division (“Computer Resources”) and a non-competition agreement associated with the Jimary Business Systems acquisition. As of December 31, 2004, recognized balances for the customer lists, non-competition agreement and goodwill were approximately $1,110,000, $32,000 and $996,000, respectively.

The Company follows the requirements of Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), and No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), regarding amortization and testing for the potential impairment of intangible assets. Under SFAS No. 142, goodwill and other separable intangible assets with indefinite lives are not amortized, but separable intangible assets that are deemed to have definite lives, such as the customer lists and non-competition agreement, are amortized over their useful lives. SFAS No. 142 also sets forth guidance as to required annual testing for the potential impairment of goodwill. SFAS No. 144 sets forth standards for testing for the potential impairment of long-lived assets, including amortized intangible assets.

During 2003, management elected to change the date of annual testing for impairment from January 1 to December 31. Management concluded that evaluation of risk factors and testing for potential impairment are more beneficial to financial reporting when done as of the end, rather than as of the beginning, of a fiscal period because this results in estimates and determinations based on more recent data. Key risk factors will continue to be monitored on an ongoing basis and testing for potential impairment of goodwill or intangible assets will be performed on an interim basis if indicators of potential impairment arise.

Testing for potential impairment of goodwill involves an attribution of the recognized assets and liabilities of the acquired businesses to reporting units. The recognized assets and liabilities include cash, accounts receivable, prepaid

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

The industry valuation multiple utilized in the January 1, 2003 annual test for goodwill represented a decrease of over 25% from the multiple used for the 2002 annual test, reflecting lower future growth expectations in the technology consulting industry at that time. Allin Consulting-Pennsylvania recorded losses of $27,000 due to impairment of goodwill related to the Outsourced Services and Technology Infrastructure reporting units during 2003. The estimated fair values of all reporting units exceeded the recognized assets attributed to the reporting units in the annual tests performed as of January 1, 2002 and December 31, 2003 and 2004, indicating no impairment of goodwill.

To test for potential impairment of the customer lists, the Company utilizes a cash flow model to estimate fair value. The critical judgments and estimates are the determination of which Allin Consulting-Pennsylvania reporting units will be utilized in testing each customer list, the proportions of the reporting unit cash flows to attribute to the acquired customer lists in each period and the assumed growth rates for the overall business operations. Management uses its judgment to match reporting units with customer lists based on the areas of specialization of the predecessor businesses as well as the Company’s long-term marketing objectives regarding the customers on the acquired list. Management utilizes historical information related to business derived from the customers included on each acquired list, future projections for the operations of the applicable reporting units of Allin Consulting-Pennsylvania and industry information concerning expected growth in the technology consulting industry to develop estimates of future cash flows for the reporting units and the portions of the estimated cash flows to be attributed to each customer list. If the sum of the undiscounted cash flows attributable to a customer list exceeds the recognized value of the customer list, no impairment is indicated. If the sum of the undiscounted cash flows is less than the recognized value, an impairment loss is recognized for the difference between the recognized value and the sum of the discounted cash flows attributable to the customer list. Key risk factors the Company monitors regarding the customer lists are forecast growth rates for the technology consulting industry and revenue derived from customers on the acquired lists. Significant declines in these factors could indicate potential impairment of the customer lists. Testing of the non-competition agreement utilizes a similar cash flow-based method.

The estimate of fair value exceeded the recognized value of the customer list in annual testing performed as of January 1, 2002 and 2003. Industry information utilized for the annual testing as of December 31, 2003 indicated lower long-term growth rates for the technology consulting industry than had been indicated in previous information. The forecast reduction in longer-term growth rates resulted from expectations that future growth will more closely correlate with overall economic conditions, will be more dependent on economic return requirements than in the past, and from the growing outsourcing of business to offshore technology enterprises. The Company recorded a loss of $349,000 as of December 31, 2003 to reflect the impairment of the customer list associated with the 1998 acquisition of Allin Consulting-Pennsylvania and to adjust the recognized value of the list to the then estimated level of discounted cash flows attributed to the list. Industry information utilized for the annual testing as of December 31, 2004 indicated further lowering of long-term growth rates for the technology consulting industry due to similar reasons as noted for the 2003 test. The Company recorded a loss of $191,000 as of December 31, 2004 to reflect further impairment of the customer list associated with the acquisition of Allin Consulting-Pennsylvania. No impairment was indicated for the other customer lists.

Income Taxes. The Company records current and deferred provisions for, or benefits from, income taxes and deferred tax assets and liabilities in accordance with the requirements of Statement of Financial Accounting Standards No. 109 – Accounting for Income Taxes. Valuation allowances will reduce deferred tax assets if there is material uncertainty as to the ultimate realization of the deferred tax benefits. Results of operations for future periods are subject to a number of material risks, including risks arising from customer and industry concentrations related to the operations of the Interactive Media Practice Area. In recent periods, Interactive Media revenue has primarily resulted from a small number of large projects each year for a small number of customers concentrated in the cruise industry. The Company’s Interactive Media revenue declined significantly in 2004 due to a decline in the number of large projects undertaken and could continue to decline in 2005 if the Company fails to obtain additional projects from existing or new customers. Accordingly, the

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Company’s estimates of the realizability of deferred tax assets arising primarily from net operating loss carryforwards include projections for Interactive Media’s future operations based solely on projects included in committed backlog or considered highly likely to be undertaken.

Valuation allowances have been recorded based on the Company’s realizability estimates such that the Company’s Consolidated Balance Sheets include net deferred tax assets of $138,000 as of December 31, 2003 and 2004. Valuation allowances offset any additional net deferred tax assets. Management believes it is more likely than not that the recognized deferred tax assets will be realized in future periods. During 2004, the Company realized benefits from the use of previously recorded deferred tax assets for net operating loss carryforwards to reduce taxable income. Given the risks associated with the Company’s operations, the Company believes that material uncertainty continues to exist as to the long-term realization of deferred tax benefits greater than the recognized balance as of December 31, 2004. Management assesses the realizability of deferred tax assets quarterly and adjusts the valuation allowance based on its assessment.

Certain Related Party Transactions

During the years ended December 31, 2002, 2003 and 2004, the Company engaged in transactions with related parties, including the sale of services and products and rental payments for office space. Services and products sold represented 1% or less of the Company’s revenue in each of these periods. The charges for services and products sold to related parties were comparable to charges for similar services and products sold to non-related entities.

The Company’s office space in Pittsburgh, Pennsylvania is rented from an entity in which a beneficial holder of greater than five percent of the Company’s common stock, as well as certain of his family members, have equity interests. Rental expense related to this office was $149,000 during the year ended December 31, 2002 and $136,000 during each of the years ended December 31, 2003 and 2004. This represented 3% of selling, general and administrative expenses during 2002 and 2% of selling, general and administrative expenses during each of 2003 and 2004. The Company has rented its Pittsburgh office space on a month-to-month basis since the expiration of a five-year lease on January 31, 2002. The Company’s landlord agreed to this arrangement until such time as the landlord identifies an alternate tenant for the Company’s space. At that time, the Company will likely move to other space within the same building commensurate with its needs or, if such space is not available, space in another building. Management believes the current arrangement benefits both parties as the Company benefited from an expense reduction as compared to its previous lease rental costs and has deferred the cost and inconvenience of moving while the landlord has deferred the costs associated with buildout of new space for the Company.

Results of Operations

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Revenue

The following table sets forth revenue for the Company’s operating segments for the years ended December 31, 2003 and 2004 and period-to-period percentage changes for each segment.

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Management believes that improving domestic economic expectations in late 2003 prompted the release of pent-up demand for network architecture design updates, server and storage upgrades, security upgrades and related disaster recovery planning. Management believes this upturn in demand was the primary factor resulting in the 111% increase in revenue for the Technology Infrastructure Practice Area for the year ended December 31, 2004, as compared to the year ended December 31, 2003. Management believes that certain trends in technology are favorable to future growth for Technology Infrastructure. Among these trends are heightened network security concerns due to threats from virus attacks and spyware, lost productivity from the intrusion of spam messages and increasing decentralization of information systems due to increasing service-oriented architecture (“SOA”) proliferation. Management believes these trends could have a beneficial impact on the Technology Infrastructure Practice Area over 2005 and beyond. There can be no assurance, however, that these trends will result in the future realization of Technology Infrastructure revenue equal to or greater than current levels or that any growth realized will result in improvement to the Company’s results of operations and financial condition.

A slight 2% decline in revenue for the Collaborative Solutions Practice Area was realized in 2004 as compared to 2003. Management believes Collaborative Solutions helps businesses meet their ongoing need to remain competitive through technology-based projects that offer functionality improvements and operating efficiencies. Collaborative Solutions projects are less frequently associated with expenditures for upgrading computer hardware, software and networking equipment than Technology Infrastructure projects. Management believes these factors result in a lower variation in demand over business cycles for Collaborative Solutions. Management believes the slight decline in revenue in 2004 resulted from a substitution effect as previously deferred infrastructure projects were performed in 2004. Management believes certain trends in technology are favorable to future growth for Collaborative Solutions, including expected continuing growth of Internet-based commerce, increasing demand for customized applications meeting specific business needs, and applications supporting SOA proliferation and other emerging technologies such as voice over internet protocol. There can be no assurance, however, that the Company will realize revenue growth in future periods for its Collaborative Solutions services as a result of these or any other factors.

In December 2003, the Company commenced the operations of its Business Process Practice Area following the acquisition of the operating assets of Information Designs, Inc. (Information Designs”), a business specializing in services based on Microsoft Business Solutions software. The Business Process Practice Area built on this initial base of operations throughout 2004 through increased marketing efforts and expansion of dedicated staff. In November 2004, the Company acquired two complementary businesses with a Microsoft Business Solutions focus, substantially increasing the breadth of technical expertise and marketing capabilities of the Business Process operations. Revenue associated with the acquired operations is included in Business Process revenue for the periods beginning with the effective date of the Computer Resources acquisition and the date of the Jimary Business Systems acquisition. Such periods represent two months or less of 2004. The substantial period-to-period increase in Business Process revenue comparing 2004 with 2003 is attributable to operations being active for the full year during 2004 as compared to less than a month of 2003 and to the acquisitions of Computer Resources and Jimary Business Systems late in 2004. Management expects revenue from Business Process consulting services will likely increase in 2005 due to the inclusion of the recently acquired operations for the full year. However, no assurance can be given that the Business Process Practice Area will realize revenue equal to or greater than the current level in any future period. There can also be no assurance that the Company will achieve successful long-term integration of the recently acquired businesses with the pre-existing Business Process operations.

The Company realized a decline in average billing rates of 2% for Northern California-based consulting operations and an increase of 10% for Pittsburgh-based consulting operations in 2004 as compared to 2003. Management believes that while the recovery in demand for technology consulting services was particularly strong in Northern California, increased demand first resulted in increased utilization of available consulting resources which had been underutilized during the downturn in technology spending experienced from 2001 to 2003. Management believes that that a prolonged increase in demand will be necessary to result in upward pressure on pricing in Northern California. Management believes the increase in average billing rate experienced in the Pittsburgh area from 2003 to 2004 resulted from several factors, including a greater proportion of project activity being delivered under the higher-rate Allin-managed or co-managed methods and the growth in Business Process operations. Management does not believe inflation resulting from general economic conditions was a significant factor in the changes in average bill rates and consequently, did not significantly impact the Company’s revenue or net income.

The majority of Interactive Media revenue in both 2003 and 2004 was realized from related consulting and systems integration arrangements that included services for applications development, technical architecture design, configuration and implementation of interactive television systems aboard cruise ships, computer hardware and equipment, software, and post-contract support. During 2003 and 2004, the Interactive Media Practice Area completed or substantially

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completed seven and four interactive television system implementation projects, respectively. Consequently, revenue realized from Interactive Media services for the full year 2004 represented a significant decline of 40% from 2003 levels, negatively impacting the Company’s overall profitability. The level of cruise industry new-build commitments is expected to drop during 2005. The Company currently has only one interactive television system implementation project committed for 2005, for the Carnival Liberty under an August 2004 amendment to a prior agreement with Carnival. There can be no assurance that the Company will receive orders for additional systems or that any orders received will result in improvement to the Company’s financial condition or results of operations. As noted above, management is actively marketing interactive television systems for ships currently in service, is seeking to engage additional cruise industry customers and is pursuing opportunities in other markets for services based on interactive media technology. The level of Interactive Media revenue realized in 2005 will be significantly impacted by the Company’s success with these initiatives. Interactive Media revenue will decline in 2005 if the Company is unsuccessful in obtaining new projects. A significant portion of Interactive Media revenue during 2003 and 2004 resulted from a small number of large projects based on fixed prices resulting from negotiations between the Company and its customers. Management does not believe inflation resulting from general economic conditions was a significant factor in the prices determined as a result of these negotiations.

Revenue from the Company’s Outsourced Services operations declined 6% for the year ended December 31, 2004, as compared to the year ended December 31, 2003. Management believes this reflects the continuation of a long-term trend of reduction in the level of Outsourced Services business for the Company. Revenue for the Information System Product Sales segment increased 85%, comparing 2004 to 2003. The most significant factor contributing to the 2004 increase in revenue was the Company’s sales of Microsoft Business Solutions products in association with Business Process consulting services. In 2003, the Company did not sell products of this type until the final month of the year. Revenue for the Other Services segment represented less than 2% of consolidated revenue in both 2003 and 2004. The majority of Other Services revenue in each period resulted from out-of-pocket expense reimbursements.

Cost of Sales and Gross Profit

The following table sets forth cost of sales for the Company’s operating segments for the years ended December 31, 2003 and 2004 and period-to-period percentage changes for each segment.

The period-to-period increase in cost of sales for the Technology Infrastructure Practice Area corresponds with the change in revenue, comparing 2004 to 2003, and results from the substantial increase in the level of services provided. In terms of percentage of revenue, the increase in cost of sales was lower in 2004, indicating overall improvement in the relationship between average hourly fees and the average hourly cost of labor for consultants. Cost of sales for the Collaborative Solutions Practice Area follows a similar pattern, with the period-to-period decrease in cost of sales exceeding the decrease in revenue in percentage terms, indicating overall improvement in the fee to cost relationship for consultants. This represents the reversal of a trend experienced from 2001 to 2003 when the downturn in technology-based spending in the domestic economy exerted significant downward pressure on pricing that exceeded the change in the associated labor cost. There can be no assurance given, however, that the reversal of this trend experienced during 2004 will continue in future periods. Cost of sales associated with the acquired operations is included in Business Process cost of sales for the periods beginning with the effective date of the Computer Resources acquisition and the date of the Jimary Business Systems acquisition. Such periods represent two months or less of 2004. The substantial growth in Business Process cost of sales comparing 2004 to 2003 is attributable to operations commencing for the practice area late in 2003 and the acquisitions of Computer Resources and Jimary Business Systems late in 2004.

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The decrease in Interactive Media consulting cost of sales, comparing the year ended December 31, 2004 with the year ended December 31, 2003, is attributable to both a corresponding period-to-period decrease in revenue and a proportional change in the types of labor utilized on projects. Labor costs incurred in 2004 included a higher proportion associated with application development than in 2003. The cost of application development labor is relatively high compared to other Interactive Media resources and accordingly, consulting cost of sales declined less in percentage terms than consulting revenue. The period-to-period decrease in Interactive Media systems integration cost of sales is primarily attributable to the corresponding decrease in revenue, but was also impacted by equipment cost savings resulting from Interactive Media’s ongoing efforts to control project associated costs.

The period-to-period decrease in cost of sales for the Outsourced Services segment, comparing 2004 to 2003, was consistent with its corresponding period-to-period decrease in revenue. Information System Product Sales cost of sales represented a significantly higher percentage of the related revenue during the year ended December 31, 2004 than in the year ended December 31, 2003. Information System Product Sales during 2003 included a larger proportion of salvaged interactive televisions equipment as opposed to newly purchased equipment than in 2004. Consequently cost of sales was significantly lower as a percentage of revenue. The period-to-period increase in Other Services cost of sales relates to an increase in the amount of out-of-pocket expenses billed to customers.

The following table sets forth gross profit for the Company’s operating segments for the years ended December 31, 2003 and 2004 and period-to-period percentage changes for each segment.

The period-to-period increase in gross profit for the Technology Infrastructure Practice Area, comparing the year ended December 31, 2004 to the year ended December 31, 2003, exceeded the related increase in revenue in percentage terms. The Collaborative Solutions Practice Area experienced a period-to-period improvement in gross profit of 3% despite a corresponding decrease in revenue. As discussed above, improvement was realized in the relationship between average hourly fees and the average hourly cost of labor for the Company’s consultants for these practice areas. There can be no assurance, however, that this trend will continue in future periods. The substantial growth in gross profit for the Business Process Practice Area, comparing 2004 to 2003, resulted from operations being conducted for the full year in 2004 and the acquisitions of Computer Resources and Jimary Business Systems late in 2004. The period-to-period improvement in gross profit for Technology Infrastructure, Collaborative Solutions and Business Process of $1,357,000 offset a significant portion of the period-to-period decline in gross profit of $1,886,000 for the Interactive Media Practice Area.

The period-to-period decreases in consulting gross profit of 46% and systems integration gross profit of 39% for the Interactive Media Practice Area are primarily attributable to a decline in new-build ship commitments in 2004 among Interactive Media’s customers. As discussed above, there was a significantly reduced level of project activity in 2004 as compared to 2003. The decline in consulting gross profit was also impacted by the utilization of a higher proportion of high labor cost consultants in 2004 than in 2003.

The period-to-period decrease in gross profit for the Outsourced Services segment was consistent with the corresponding period-to-period decrease in revenue. Information System Product Sales gross profit increased only slightly

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from 2003 to 2004 despite a significant increase in revenue. Sales of salvaged interactive television system products with a very low inventory value represented a significantly higher proportion of overall sales in 2003 than in 2004, due to the substantial growth in sales of Microsoft Business Solutions software in 2004. Consequently, gross profit for 2003 was higher as a percentage of revenue.

Selling, General & Administrative Expenses

The Company recorded $6,219,000 in selling, general & administrative expenses during the year ended December 31, 2004, including $201,000 for depreciation and amortization, $186,000 for net loss from impairment or disposal of assets and $5,832,000 for other selling, general & administrative expenses. Selling, general & administrative expenses were $6,063,000 during the year ended December 31, 2003, including $268,000 for depreciation and amortization, $376,000 from losses due to impairment of assets and $5,419,000 for other selling, general & administrative expenses. The increase in aggregate selling, general & administrative expenses was $156,000, or 3%.

The period-to-period increase in other selling, general & administrative expenses was $413,000, or 8%. The most significant contributing factor was an increase in the Company’s workforce, primarily for consultants for the Microsoft-focused practice areas and sales and marketing personnel. The general expenses of the Company include compensation related to non-billable time for the Company’s consultants and, consequently, will often increase in periods when the Company is adding to its productive workforce. Other contributing factors to the period-to-period increase in other selling, general & administrative expenses included a significant increase in non-billable time for Interactive Media consultants, which exceeded a period-to-period reduction in overall compensation expense for Interactive Media and corporate headquarters personnel, increased sales force commissions and consulting expenses. These increases were partially offset by significant reductions in rent associated with the Company’s San Jose office and expense for insurance and professional services.

A $27,000 loss due to impairment of goodwill associated with the 1998 acquisition of Allin Consulting-Pennsylvania was recorded during 2003. Losses of $349,000 and $191,000 were recorded in the years ended December 31, 2003 and 2004, respectively, for impairment of the customer list associated with this acquisition. See Goodwill and Intangible Assets under the caption Critical Accounting Policies, Estimates and Judgments above in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 8 – Goodwill and Intangible Assets in the Notes to Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data in this Report on Form 10-K for additional information concerning the impairment losses. A gain of $5,000 was also recorded in 2004 related to disposal of equipment.

Depreciation and amortization were $201,000 for the year ended December 31, 2004, as compared to $268,000 for the year ended December 31, 2003. The decrease of $67,000, or 25%, is due to a higher level of fixed assets reaching full depreciation in June and December 2003 and June 2004 than new assets which were placed in service by the Company during this period and a period-to-period reduction in amortization expense for the customer list associated with the acquisition of Allin Consulting-Pennsylvania due to the impairment charge which reduced the recognized value of the customer list in December 2003.

Net Income (Loss)

The Company recorded net income of $284,000 for the year ended December 31, 2004, as compared to $780,000 for the year ended December 31, 2003. The $496,000 decline in profitability is attributable to the $535,000 decline in gross profit from operations and the $156,000 increase in selling, general & administrative expenses, partially offset by a $189,000 reduction in income tax expense. The factors resulting in the changes in gross profit and selling, general & administrative expenses are discussed above.

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Results of Operations

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenue

The following table sets forth revenue for the Company’s operating segments for the years ended December 31, 2002 and 2003 and year-to-year percentage changes for each segment.

Revenue for the Technology Infrastructure Practice Area improved in the fourth quarter of 2003 such that modest growth of 4% was achieved for the full year, whereas revenue for the first three quarters of 2003 had trailed the comparable period of 2002. Management believes that pent-up demand for network architecture, server and storage upgrades, related disaster recovery planning and security concerns all contributed to the increase in revenue. Through 2002 and much of 2003, the level of demand for Technology Infrastructure consulting services was negatively impacted by the significant curtailment in technology-based spending which resulted from domestic economic conditions during this period. Technology Infrastructure solutions can represent a high total cost to customers, as they will frequently require that customers incur substantial costs to buy new hardware, software or networking equipment, in addition to the consulting services provided by the Company, in order to realize the potential benefits of the recommended solution. Management believes the environment for technology-based spending in 2002 and early 2003 made many customers reluctant to undertake Technology Infrastructure projects, but improving business expectations later in 2003 prompted a release of pent-up demand by many of these customers.

Management believes the need to remain competitive requires businesses to address their technology capabilities and undertake initiatives that offer improvements to functionality and operating efficiencies. Management believes this need contributed to demand for Collaborative Solutions services and was a significant contributing factor to the 14% increase in revenue for the Collaborative Solutions Practice Area, when comparing the year ended December 31, 2003 to the year ended December 31, 2002. Another factor contributing to the period-to-period increase in Collaborative Solutions revenue was a greater number of large customer engagements in 2003. Four customers individually accounted for greater than ten percent of Collaborative Solutions revenue in 2003 as compared with two customers in 2002.

Declines in average billing rates of approximately 5% for the Company’s Northern California-based consulting services and 6% for Pittsburgh-based consulting services were realized in 2003 as compared to 2002. Management believes the declines were reflective of the difficult market for technology consulting services in 2003 due to the impact of general economic conditions on technology services businesses. Management does not believe inflation resulting from general economic conditions was a significant factor in the changes in average bill rates and consequently, did not significantly impact the Company’s revenue or net income.

The Company’s Business Process Practice Area commenced operations in December 2003 following the Company’s acquisition of a business specializing in services related to Microsoft Business Solutions technology. Revenue realized in 2003 was insignificant to the Company’s operations.

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The majority of revenue for the Interactive Media Practice Area in both periods was realized from related consulting and systems integration arrangements that included services, computer hardware and equipment, software, and post-contract support for applications development, technical architecture design, configuration and implementation of interactive television systems aboard cruise ships. During 2003, Interactive Media completed or substantially completed interactive television systems integration projects on seven ships. Interactive Media installed six shipboard interactive television systems in 2002. The change in project activity levels is the primary reason for the 3% period-to-period increase in Interactive Media consulting revenue. Despite the greater number of projects in 2003, Interactive Media systems integration revenue declined 7% from 2002 to 2003. The decline in revenue resulted from price reductions implemented in late 2002 following the introduction of a new head-end hardware platform offering both functionality and reliability improvements to customers and reductions in head-end equipment costs to the Company. A significant portion of Interactive Media revenue during 2002 and 2003 resulted from a small number of large projects based on fixed prices resulting from negotiations between the Company and its customers. Management does not believe inflation resulting from general economic conditions was a significant factor in the prices determined as a result of these negotiations.

Revenue from the Company’s Outsourced Services operations declined 37% for the year ended December 31, 2003, as compared to the year ended December 31, 2002. Management believes this reflected the continuation of a long-term trend of reduction in the level of Outsourced Services business for the Company.

The majority of sales by the Information System Product Sales segment during 2003 were to the Company’s cruise line customers for replacement of interactive television equipment and spare parts for their shipboard interactive television systems. There is substantial period-to-period variability in the level of these sales. Management attributes the 24% decline in information system product sales from 2002 to 2003 to this normal variability. Revenue for the Other Services segment represented less than 2% of consolidated revenue in both 2002 and 2003.

Cost of Sales and Gross Profit

The following table sets forth cost of sales for the Company’s operating segments for the years ended December 31, 2002 and 2003 and year-to-year percentage changes for each segment.

In percentage terms, the period-to-period increases in cost of sales from 2002 to 2003 for the Technology Infrastructure and Collaborative Solutions Practice Areas significantly exceeded the corresponding period-to-period percentage increases in revenue. Management believes the negative impact of then current domestic economic conditions on spending for technology-based services created market conditions exerting greater downward pressure on Technology Infrastructure and Collaborative Solutions pricing than on labor costs.

The decrease in Interactive Media consulting cost of sales, comparing the year ended December 31, 2003 with the year ended December 31, 2002, is attributable to enhanced operational efficiency experienced in performing 2003 project services. The period-to-period decrease in Interactive Media systems integration cost of sales is attributable to the introduction of a new On Command all-digital hardware platform in late 2002, which resulted in equipment cost savings and decreased cost of sales, and Interactive Media’s ongoing efforts to control other project associated costs.

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The period-to-period decreases in cost of sales for the Outsourced Services and Information System Product Sales segments were consistent with their corresponding period-to-period declines in revenue. The period-to-period increase in Other Services cost of sales relates to an increase in the amount of out-of-pocket expenses billed to customers.

The following table sets forth gross profit for the Company’s operating segments for the years ended December 31, 2002 and 2003 and year-to-year percentage changes for each segment.

Gross profit from Technology Infrastructure and Collaborative Solutions consulting services did not experience period-to-period growth when comparing the year ended December 31, 2003 to the year ended December 31, 2002, despite revenue growth. Management believes this reflected then prevailing market conditions which exerted downward pressure on Technology Infrastructure and Collaborative Solutions pricing. Average billing rates for these practice areas declined 5% and 6% for the Company’s Northern California-based and Pittsburgh-based operations, respectively, from 2002 to 2003.

The increase in Interactive Media consulting gross profit, comparing the year ended December 31, 2003 with the year ended December 31, 2002, is attributable to enhanced operational efficiency combined with a greater proportion of consulting activity on a fixed-price basis in 2003 than in 2002. Fixed-price projects represent a greater financial risk to the Company because many factors which might increase project-associated labor may be beyond the Company’s control. Accordingly, fixed-price projects that experience a high level of operational efficiency, including many of those performed in 2003, result in a higher proportion of gross profit to revenue than is typical for time-based services. Management attributes the period-to-period increase in Interactive Media systems integration gross profit to the cost savings resulting from the introduction of the new hardware platform, which resulted in equipment cost savings, and Interactive Media’s ongoing efforts to control other project associated costs. The benefit of the savings from the new hardware platform was offset by accompanying price reductions for customers.

The rate of decline in Outsourced Services gross profit of 44% exceeded the 37% period-to-period decline in revenue, comparing the year ended December 31, 2003 to the year ended December 31, 2002. Management attributes this to the loss of certain projects during 2003 which had a better margin percentage than the remaining Outsourced Services projects.

There was period-to-period variability in the cost of sales and gross profit associated with sales by the Information System Product Sales segment to cruise industry customers as some of the sales involve replacement parts for older ship systems. The Company was able to fulfill some of these orders with equipment salvaged from ships formerly operated by the Company on an owner-operator model. The Company carries this equipment at a very low inventory value due to its age and the lack of a consistent market. There was a higher proportion of sales of this type in 2003, resulting in a smaller rate of decline in gross profit than in revenue.

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Selling, General & Administrative Expenses

The Company recorded $6,063,000 in selling, general & administrative expenses during the year ended December 31, 2003, including $268,000 for depreciation and amortization, $376,000 for losses from impairment of assets and $5,419,000 for other selling, general & administrative expenses. Selling, general & administrative expenses were $5,695,000 during the year ended December 31, 2002, including $537,000 for depreciation and amortization and $5,158,000 for other selling, general & administrative expenses. The increase in selling, general & administrative expenses of $368,000, or 6%, is primarily attributable to the recognition of impairment losses related to intangible assets during 2003.

The period-to-period increase in other selling, general & administrative expenses was $261,000, or 5%, and resulted from period-to-period increases in compensation and expenses for professional services, insurance and non-income taxes, among others.

In the fourth quarter of 2003, the Company recorded a $349,000 loss due to impairment of the customer list associated with the Company’s 1998 acquisition of Allin Consulting-Pennsylvania. A $27,000 loss due to impairment of goodwill associated with this acquisition was previously recorded during the first quarter of 2003. See Goodwill and Intangible Assets under the caption Critical Accounting Policies, Estimates and Judgments above in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 8 – Goodwill and Intangible Assets in the Notes to Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data below in this Report on Form 10-K for additional information concerning the impairment losses. No losses due to impairment of intangible assets were recorded in the year ended December 31, 2002.

Depreciation and amortization were $268,000 for the year ended December 31, 2003, as compared to $537,000 for the year ended December 31, 2002. The decrease of $269,000, or 50%, is due to significant levels of fixed assets reaching full depreciation in June and December 2002 and June 2003. The level of assets reaching full depreciation exceeded the level of new assets which were placed in service by the Company during 2002 and 2003. Amortization expense related to the customer list associated with the acquisition of Allin Consulting-Pennsylvania experienced a $30,000 period-to-period reduction due to a revision in the estimated useful life of the customer list implemented in 2003.

Net Income

The Company recognized net income of $780,000 for the year ended December 31, 2003, a decline of $229,000, or 23%, from recognized net income of $1,009,000 for the year ended December 31, 2002. A $624,000 period-to-period increase in gross profit related to the factors discussed above was partially offset by the $368,000 period-to-period increase in selling, general & administrative expenses due primarily to the 2003 impairment losses related to intangible assets. Also, during the year ended December 31, 2003, the Company realized a decline in profitability related to income taxes. A provision for income taxes of $190,000 was recorded during 2003 whereas a benefit from income taxes of $272,000 was recognized during 2002. The benefit and provision for income taxes related primarily to changes in estimates related to deferred tax assets and changes in the associated valuation allowance.

Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

At December 31, 2004, the Company had cash and liquid cash equivalents of $3,091,000 available to meet its working capital and operational needs. The net change in cash from December 31, 2003 was a decrease of $1,489,000. The Company recognized net income for the year ended December 31, 2004 of $284,000. The Company recorded net non-cash expenses of $387,000, including $201,000 for depreciation of property and equipment and amortization of intangible assets and a $186,000 net loss from impairment or disposal of assets, resulting in net cash provided of $671,000 related to the income statement. Working capital adjustments resulted in a net cash use of $1,249,000. Major working capital adjustments resulting in cash used included an increase in accounts receivable of $962,000 and decreases in accounts

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payable, accrued compensation and payroll taxes and billings in excess of costs and estimated gross margins of $295,000, $178,000 and $229,000, respectively. These adjustments were partially offset by major working capital adjustments resulting in cash provided, including decreases in unbilled receivables and costs and estimated gross margins in excess of billings of $155,000 and $103,000, respectively. The net result of the income statement activity and working capital adjustments was net cash used of $578,000 related to operating activities. Investing activities resulted in a net cash use of $558,000 for the year ended December 31, 2004, $459,000 for acquisition of a business and $116,000 for capital expenditures related to the periodic upgrading of the Company’s computer hardware, software and network equipment. Financing activities resulted in a net cash use of $353,000 for the year ended December 31, 2004, primarily for preferred stock dividends.

On October 1, 1998, the Company and S&T Bank, a Pennsylvania banking association, entered into a Loan and Security Agreement (the “S&T Loan Agreement”), under which S&T Bank agreed to extend the Company a revolving credit loan. The S&T Loan Agreement has subsequently been renewed in each of the six succeeding years. The current expiration date of the S&T Loan Agreement is September 30, 2005. The maximum borrowing availability under the S&T Loan Agreement is the lesser of $5,000,000 or 80% of the aggregate gross amount of eligible trade accounts receivable aged sixty days or less from the date of invoice. Accounts receivable qualifying for inclusion in the borrowing base are net of any prepayments, progress payments, deposits or retention and must not be subject to any prior assignment, claim, lien, or security interest. As of December 31, 2004, maximum borrowing availability under the S&T Loan Agreement was approximately $1,634,000. There was no outstanding balance under the S&T Loan Agreement as of December 31, 2004 and there have been no borrowings subsequent to that date.

Borrowings may be made under the S&T Loan Agreement for general working capital purposes. Loans made under the S&T Loan Agreement bear interest at the bank’s prime interest rate plus one percent. During 2004, the interest rate under the S&T Loan Agreement has ranged from a low of 5.00% to a high of 6.25%, which was in effect as of December 31, 2004. Subsequently in February 2005, the interest rate under the S&T Loan Agreement increased to 6.50%. 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 2003 or 2004 as the Company had no borrowings outstanding during this period. If additional borrowings are made under the revolving credit loan, the principal will be due at maturity, although any outstanding principal balances may be repaid in whole or part at any time without penalty.

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

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

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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. The Company’s Board of Directors has declared dividends on the Series C preferred stock accrued since issuance of the preferred stock in 1996 through March 31, 2005. Accrued but unpaid dividends on the Series C preferred stock were approximately $2,357,000 as of December 31, 2004 and approximately $2,446,000 as of March 25, 2005. Any accrued dividends on the Series C preferred stock not paid within ten days of June 30, 2006 will compound thereafter at a rate of 12% of the liquidation value thereof per annum. After June 30, 2006, further dividends on the Series C preferred stock will accrue and compound at a rate of 12% per annum and will be payable quarterly, subject to legally available funds. The Company’s current credit agreement with S&T Bank prohibits payment of dividends on Series C preferred stock during the term of the agreement. The Company intends to seek elimination of this prohibition for the Series C preferred stock prior to the scheduled payment of accrued and unpaid dividends within ten days of June 30, 2006 and, if business conditions so permit, to commence thereafter the payment of scheduled quarterly dividends.

As of December 31, 2004, the Company had outstanding 2,750 shares of the Company’s Series D Convertible Redeemable Preferred Stock having a liquidation preference of $1,000 per share. There is no mandatory redemption date for the Series D preferred stock; however, the Company may redeem shares of Series D preferred stock at any time. There are no sinking fund provisions applicable to the Series D preferred stock. Series D preferred stock earns dividends at the rate of 6% of the liquidation value thereof per annum, compounded quarterly if unpaid. Dividends on Series D preferred stock are payable quarterly in arrears as of the last day of January, April, July and October, subject to legally available funds. Accrued but unpaid dividends on Series D preferred stock were approximately $28,000 as of December 31, 2004 and approximately $24,000 as of March 25, 2005.

As of December 31, 2004, the Company had outstanding 1,000 shares of the Company’s Series F Convertible Redeemable Preferred Stock having a liquidation preference of $1,000 per share. There is no mandatory redemption date for the Series F preferred stock; however, the Company may redeem shares of Series F preferred stock at any time. There are no sinking fund provisions applicable to the Series F preferred stock. Series F preferred stock earns dividends at the rate of 7% of the liquidation value thereof per annum. Dividends are payable quarterly in arrears on the 15^th of January, April, July and October, subject to legally available funds. Dividends accrued for seven months during 1999 of approximately $41,000 are not required to be paid prior to redemption, if any. Dividends not paid at scheduled dates will compound quarterly thereafter. Accrued but unpaid dividends on Series F preferred stock were approximately $59,000 as of December 31, 2004 and approximately $57,000 as of March 25, 2005.

As of December 31, 2004, the Company had outstanding 150 shares of the Company’s Series G Convertible Redeemable Preferred Stock having a liquidation preference of $10,000 per share. There is no mandatory redemption date for the Series G preferred stock; however, the Company may redeem Series G shares after December 29, 2005. The redemption price for each share of Series G preferred stock will be the liquidation value of such share, plus an amount that would result in an aggregate 25% compounded annual return on such liquidation value to the date of redemption after giving effect to all dividends paid on such share through the date of redemption. There are no sinking fund provisions applicable to the Series G preferred stock. Prior to redemption by the Company, if any, each share of Series G preferred stock is convertible into 28,571 shares of the Company’s common stock. Any holder of Series G preferred stock wishing to exercise the conversion right must give written notice thereof to the Company, after which the Company shall set a date for conversion of the Series G preferred stock which shall be no later than thirty days from the date of notice. Any shares of Series G preferred stock which are not converted to common stock will remain outstanding until converted or until redeemed. Unless redeemed or converted to common stock sooner, Series G preferred stock earns cumulative quarterly dividends at the rate of 8% of the liquidation value thereof per annum until December 29, 2005. Thereafter, the dividend rate will increase to 12% of the liquidation value until the earlier of the date of any redemption or the date of conversion into common stock. Dividends are payable quarterly in arrears on the first day of each calendar quarter, subject to legally available funds. Dividends not paid at scheduled dates will compound quarterly thereafter. Accrued but unpaid dividends on the Series G preferred stock were approximately $30,000 as of December 31, 2004 and approximately $28,000 as of March 25, 2005. Holders of the Series G preferred stock who exercise the conversion right will have the right to receive any accrued and unpaid dividends through the date of conversion.

The order of liquidation preference of the Company’s outstanding preferred stock, from senior to junior, is Series F, Series G, Series D and Series C. The S&T Loan Agreement prohibits the Company from paying dividends on any shares of its capital stock, except for current dividends payable in the ordinary course of business on the Company’s Series D, F and G preferred stock. Each of the Certificates of Designation governing the Series C, D, F and G preferred stock prohibits

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

The Company expects to continue to accrue dividends for the Series C, D, F and G preferred stock in a manner similar to its current practice. The Company has, to date, made all scheduled dividend payments for Series D, F and G preferred stock. Continued payment of dividends related to the Company’s preferred stock is subject to legally available funds for the payment of dividends as prescribed by the Delaware General Corporation Law. Scheduled dividend payments may also be deferred for other reasons. The Company’s Board of Directors pre-approves all payments of dividends. Assuming no redemption or conversion into common stock occurs related to the Series G preferred stock, aggregate scheduled dividend payments related to the Series D, F, and G preferred stock are approximately $355,000 for 2005. If the current prohibition under the Company’s credit facility of payment of dividends on Series C preferred stock is eliminated prior to the first scheduled payment for that series, and the Company has legally available funds, the Company anticipates approximately $2,967,000 of dividends will be paid within ten days of June 30, 2006 related to the Series C preferred stock. Aggregate scheduled quarterly dividend payments for 2006 for Series D, F and G and for Series C preferred stock subsequent to the initial scheduled payment are approximately $490,000. Since none of the issues of preferred stock are mandatorily redeemable, dividend payments could extend for an indefinite period beyond 2006. Assuming no redemption or conversion of preferred stock occurs, estimated annual dividend payment requirements for 2007 and beyond are approximately $715,000 per year.

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

The Company has an outstanding amended note payable in the principal amount of $1,000,000 related to the November 1996 acquisition of Allin Consulting-California. 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 January, April, July and October. 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, 2004 and approximately $75,000 as of March 25, 2005.

On November 22, 2004, Allin Consulting-Pennsylvania acquired certain assets owned by, and assumed certain liabilities of, Jimary Business Systems under an Asset Purchase Agreement entered into between the parties. The acquired assets include cash, accounts receivable, computer equipment and the performance rights to Jimary Business Systems’ consulting projects in progress as of the date of acquisition or under agreement between Jimary Business Systems and its customers as of such date. Liabilities assumed included accounts payable, accrued compensation and payroll taxes, other accrued liabilities and deferred revenue. Allin Consulting-Pennsylvania paid $464,000 in cash purchase consideration at the time of the closing and incurred $20,000 for professional services associated with the transaction. Allin Consulting-Pennsylvania acquired Jimary Business Systems’ cash balance of $25,000, resulting in a net cash outlay of $459,000 associated with the acquisition. Portions of the purchase price were also allocated to a customer list, a non-competition agreement and goodwill.

The Asset Purchase Agreement for the acquisition of Jimary Business Systems provides for contingent consideration for the purchased assets in the form of annual earn-out payments in cash for each of three annual periods ending November 30, 2005, 2006 and 2007 based on agreed upon percentages of “Earn-Out Margin” for each of such annual periods generated from consulting and certain related revenue, determined and adjusted in accordance with the Asset Purchase Agreement. The aggregate amount of all such annual earn-out payments shall not exceed $252,000. Any contingent purchase consideration due is to be remitted to Jimary Business Systems within sixty days of the end of each such annual period.

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The Asset Purchase Agreement for the acquisition of Computer Resources provides for the payment of contingent purchase consideration for the purchased assets based on agreed upon percentages of earned and collected revenue from consulting services and product sales related to projects identified on schedules to the agreement and certain additional future projects that may be obtained with customers included on the acquired customer list. Any contingent purchase consideration due will be calculated based on applicable amounts collected during each calendar quarter and is to be remitted to M&M within fifteen days of the end of each calendar quarter. Allin Consulting-Pennsylvania paid no cash or other form of purchase consideration at the time it acquired the assets, and it assumed no liabilities related to the operations of Computer Resources.

Capital expenditures during the year ended December 31, 2004 were $116,000 and included computer hardware, software and networking equipment for the Company’s periodic upgrading of technology and leasehold improvements for the Company’s offices. Management forecasts that capital expenditures during 2005 will not exceed $200,000. Management expects that capital expenditures during this period will be for the Company’s periodic upgrading of technology and necessary leasehold improvements for the Company’s offices. Business conditions and management’s plans may change during 2005 so there can be no assurance that the Company’s actual amount of capital expenditures will not exceed the planned amount.

The Company’s cash balances may be diminished over 2005 due to many factors, including the use of cash for operations, changes in working capital, capital expenditures, dividends on preferred stock, repayment of the outstanding note payable and related interest and other factors. The number of major consulting and systems integration projects for the Interactive Media Practice Area currently committed for 2005 is fewer than were performed in 2004, which may negatively impact the Company’s cash balances if the Company is unsuccessful in obtaining additional projects to be performed in 2005. Despite these factors, the Company believes that available funds and cash flows expected to be generated by current operations will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for its existing operations for at least the next twelve months.

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

Aggregate Contractual Obligations

The following table summarizes the Company’s aggregate contractual obligations as of December 31, 2004.

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There are no future purchase commitments with any of the Company’s vendors as of December 31, 2004, including On Command.

Risk Factors

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

Backlog. As of December 31, 2004, the Company’s total committed backlog was $3,515,000, all of which is expected to be realized as revenue during 2005. Committed backlog as of December 31, 2004 represents 28% of 2004 revenue. Backlog includes unrealized revenue for fixed price projects and management’s estimate of future fees for projects billed on an hourly basis. The actual revenue realized from the projects included in backlog is subject to variability in timing due to project schedule delays or acceleration and to variability in amount due to many factors, including the actual project needs for hourly-based projects and additions or reductions in project scope.

As of December 31, 2004, committed backlog for the Interactive Media Practice Area was approximately $1,951,000, or 44% of 2004 Interactive Media revenue. To date, the majority of significant Interactive Media projects have been for installation of interactive television systems on newly built ships. However, the new-build commitments among the Company’s existing customers are fewer in 2005 than in 2003 or 2004. Only one significant interactive television system implementation project, for the Carnival Liberty, is among the projects included in the backlog expected to be realized in 2005. 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 is also making ongoing efforts to lower system costs and create programs that enhance cruise lines’ incremental revenue and return on investment, as well as seeking opportunities outside of the cruise industry. Failure to obtain a significant level of additional projects or project cancellations for projects currently in the Interactive Media backlog would likely significantly negatively impact the Company’s business, results of operations and financial condition during 2005. The level of cruise industry new-build commitments is expected to increase beginning in 2006. However, there can be no assurance that an increase in newly built ships for the cruise industry will result in additional system orders for the Company.

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As of December 31, 2004, backlogs for the Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas were $622,000, $410,000 and $413,000, respectively. These backlog levels represent 17%, 16% and 95%, respectively, of 2005 Technology Infrastructure, Collaborative Solutions and Business Process revenue. Backlog for these practice areas as of December 31, 2004 represents a 51% increase from backlog as of December 31, 2003. The committed backlog for the Technology Infrastructure and Collaborative Solutions Practice Areas represents a short lead time for expected performance of the projects, which is consistent with the Company’s experience with recent years’ sales for these practice areas. The backlog for the Business Process Practice Areas represents a comparatively high percentage of 2004 revenue. Management attributes this to a significant increase in the level of activity for Business Process following the November 2004 acquisitions of two businesses. There can be no assurance that the Company will be able to continue to sustain or improve the backlog levels for the Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas. The future success of these practice areas is dependent on the ability of their sales and marketing resources to continually identify and obtain new engagements from existing and prospective customers. General economic conditions and other risk factors such as geopolitical considerations may make future business more difficult to obtain, which would negatively impact the Company’s business, results of operations and financial condition.

Practice Area and Customer Concentration. Interactive Media consulting and systems integration services accounted for 35% and 39%, respectively of the Company’s revenue and gross profit for the year ended December 31, 2004. Interactive Media revenue is highly concentrated among a few customers in the cruise industry. During the year ended December 31, 2004, Carnival, a significant Interactive Media customer operating in the cruise industry, accounted for 20% of the Company’s consolidated revenue. Costa, an affiliate of Carnival, accounted for another 7% of consolidated revenue. As of December 31, 2004, Interactive Media projects represented a majority of the Company’s committed backlog for 2005. The loss of any of these customers would likely negatively impact the Company’s business, results of operations and financial condition. The cruise industry is subject to various risks from geopolitical and economic considerations, future potential increases in passenger costs related to security and tax initiatives and other factors. Any factors which negatively impact the cruise industry could decrease demand for Interactive Media services.

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

Risks Associated with Significant Suppliers. The Company utilizes end-user components and computer hardware platforms and configurations developed by On Command for its interactive television systems integration projects. The Company has developed software applications and interfaces for the On Command components and hardware platforms. The Company operates under a License and Supply Agreement with On Command, which became effective June 30, 2003 and has a term of five years, expiring on June 30, 2008. Under the terms of the agreement, On Command granted Allin Interactive exclusivity in purchasing hardware and end-user components for interactive television systems for the cruise line market. Such exclusivity shall be in effect for the first two years of the term and for each succeeding year of the term if a minimum threshold for equipment purchases over the preceding two years has been attained. Allin Interactive is not obligated to purchase equipment, but risks the loss of exclusivity if purchases are less than the threshold level. Based on aggregate purchases through December 31, 2004 and purchases expected to be made over the first half of 2005 to fulfill Interactive Media backlog for systems integration projects, the Company believes it is unlikely the minimum threshold required to maintain exclusivity beyond June 30, 2005 will be reached. The Company does not expect that the potential loss of exclusivity for the cruise line market will negatively impact its ability to purchase interactive television equipment, computer hardware, networking equipment and software from On Command. However, should some of the Company’s competitors may begin to utilize hardware and end-user components from On Command for interactive television projects, the Company’s competitive position may be negatively impacted.

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

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

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

The Company’s Interactive Media consulting and systems integration services are currently provided to a limited market of cruise lines. The Company believes its application development expertise and hardware platforms offer cost-effective, flexible solutions with a broad range of functionality. However, the types of interactive television systems and applications offered by the Company are significant capital expenditures for potential customers. Some of the Company’s current and potential competitors may have longer operating histories and significantly greater financial, technical, marketing and other resources than the Company and, therefore, may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. There can also be no assurance that competitors will not develop systems and applications with superior functionality or cost advantages over the Company’s systems and applications.

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

Liquidity Risk. The Company’s cash resources and cash flow generated from operations have been adequate to meet its needs to date, but there can be no assurance that a prolonged downturn in operations or business setbacks to the

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Company’s operating entities will not result in working capital shortages that may adversely impact the Company’s operations. The liquidity risk is mitigated somewhat by the Company’s current revolving credit facility, which permits borrowing for general working capital needs. The Company’s revolving credit facility expires September 30, 2005. Failure to renew the existing credit facility beyond September 30, 2005 or replace it with another facility with similar terms may adversely impact the Company’s operations in the future.

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

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

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

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

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

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

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

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

Recently Issued Accounting Standards

In September 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share (“EITF No. 04-8”), that all issued securities with embedded conversion features that are contingently exercisable upon occurrence of a market price condition should be included in the calculation of diluted EPS regardless of whether the market price trigger has been met. This consensus also applies to instruments with embedded conversion features that are contingently exercisable upon the occurrence of a market price condition or the occurrence of another contingency. The Financial Accounting Standards Board is presently in the process of amending certain aspects of Statement of Financial Accounting Standards No. 128, Earnings Per Share (“SFAS No. 128”) and is expected to require that share settlement be assumed in the diluted EPS calculation for contracts that can be settled in stock or cash. The consensus in EITF No. 04-8 will become effective in the period when the proposed amendment to SFAS No. 128 becomes effective. The Company does not believe that EITF No. 04-8 will have a material effect on the Company’s diluted EPS calculation as the Company has not issued any securities with embedded conversion features that are contingently exercisable upon the occurrence of a market price condition or the occurrence of another contingency.

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

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Non-Monetary Assets – An Amendment of APB Opinion No. 29, Accounting for Non-Monetary Transactions (“SFAS No. 153”). SFAS No. 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of Accounting Principles Board Opinion No. 29, Accounting for Non-Monetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a non-monetary exchange has commercial substance if the future cash flows for the entity are expected to change significantly as

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a result of the exchange. SFAS No. 153 is effective for the fiscal periods beginning after June 15, 2005. The Company will be required to adopt SFAS No. 153 beginning January 1, 2006. The Company is evaluating the requirements of SFAS No. 153, but does not believe adoption of the standard will have a material impact on its results of operations or financial condition.

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 impact 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, 2005. There was no variable rate debt outstanding as of December 31, 2004. 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 2004, the interest rate under the S&T Loan Agreement has ranged from a low of 5.00% to a high of 6.25%, which was in effect as of December 31, 2004. In February 2005, the interest rate under the S&T Loan Agreement increased to 6.50%. Since the Company did not have any borrowings on its revolving credit loan outstanding during 2004, there was no financial impact from the variation in interest rates. There have been no borrowings on the revolving credit loan to date in 2005 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.