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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended: March 31, 2005

OR

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)

N/A

(Former Name, Former Address and Former Fiscal Year, if changed since last report)

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

Shares Outstanding of the Registrant’s Common Stock

As of May 2, 2005

Common Stock, 6,967,339 Shares

Table of Contents

Allin Corporation

Form 10-Q

Index

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Forward-Looking Information

Certain matters in this Form 10-Q, including, without limitation, certain matters discussed under Part I, Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are typically identified by the words “believes,” “expects,” “intends,” “will,” “seek,” “continue,” “pursue” and similar expressions. In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of performance and that matters referred to in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Allin Corporation to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, risks and uncertainties discussed throughout Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and under the caption “Risk Factors” included therein. 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 - Financial Information

Item 1. - Financial Statements

ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

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

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ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

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

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ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

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

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ALLIN CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

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

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

The information contained in these financial statements and notes for the three-month periods ended March 31, 2004 and 2005 should be read in conjunction with the audited financial statements and notes for the years ended December 31, 2003 and 2004, contained in the Annual Report on Form 10-K of Allin Corporation (the “Company”) for the year ended December 31, 2004. The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission. These interim statements do not include all of the information and footnotes required for complete financial statements. It is management’s opinion that all adjustments (including all normal recurring accruals) considered necessary for a fair presentation have been made. However, results for these interim periods are not necessarily indicative of results to be expected for the full year. See Notes 5 – Goodwill and Intangible Assets, 6—Income Taxes and 7 – Industry Segment Information for information concerning the Company’s basis of presentation and accounting policies regarding these matters. The Consolidated Balance Sheet as of December 31, 2004 has been derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. It is the Company’s policy to consolidate all majority-owned subsidiaries and variable interest entities where the Company has control. The Company does not currently utilize or have interests in any variable interest entities. All significant intercompany accounts and transactions have been eliminated.

Reclassifications

The Consolidated Statement of Operations for the three months ended March 31, 2004 reflects a reclassification to the statement as previously reported to conform the prior period information to the current presentation of the statement. The reclassification did not impact the Company’s results of operations or earnings per share during this period. On the Consolidated Statement of Operations, amounts billed to customers for recovery of out-of-pocket costs associated with performance of the Company’s services are reflected as other services revenue while the associated costs are reflected as other services 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 $12,000 for the three months ended March 31, 2004. There is no change to aggregate gross profit for this period.

The Consolidated Statement of Cash Flows for the three months ended March 31, 2004 reflects a reclassification to the statement as previously reported to conform the prior period information to the current presentation of the statement. Separate changes are reflected for accrued compensation and payroll taxes, other accrued liabilities and customer deposits. Previously, the changes had been combined and reflected as accrued liabilities. There is no change to the aggregate net cash flows provided by operating activities for the three months ended March 31, 2004. The reclassification did not impact the Company’s results of operations or earnings per share during this period.

Use of Estimates in the Preparation of Financial Statements

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

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

Revenue Recognition

The Company recognizes revenue in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletins 101, Revenue Recognition in Financial Statements, and 104, Revenue Recognition, American Institute of Certified Public Accountants Statements of Position 97-2, Software Revenue Recognition (“SOP 97-2”), and 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (“SOP 81-1”), Accounting Research Bulletin No. 45, Long-Term Construction-Type Contracts (“ARB No. 45”), Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF No. 00-21), and other authoritative accounting literature. The Company’s revenue recognition policies are described below for each of the various revenue captions on the Company’s Consolidated Statements of Operations.

Consulting Services

Consulting services are provided by the Company’s Technology Infrastructure, Collaborative Solutions, Business Process and Interactive Media Practice Areas. The Company’s policy is to recognize revenue when persuasive evidence of an arrangement exists, price is fixed or determinable, services have been rendered and collectibility is reasonably assured. Fees are time-based for the majority of consulting engagements, with revenue recognized as the services are performed. Certain consulting engagements for these practice areas are performed on a fixed-price basis. The Company follows the contract accounting guidance of ARB No. 45 and SOP 81-1 for these engagements. Revenue is recognized on a proportional performance basis, utilizing the proportion of labor expended through the end of the period to expected total project labor. The Business Process Practice Area also performs engagements under which a fixed price is charged for support services for a specified time period, typically an annual period. Services are provided as requested by the customers. Revenue is recognized for these engagements on a pro-rata basis over the applicable time period.

Interactive Media consulting projects are frequently part of related arrangements, including computer hardware and equipment for interactive television systems, software, services, and post-contract support (“PCS”). SOP 97-2 specifies that if an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of software, the entire arrangement should be accounted for in conformity with the contract accounting guidance of ARB No. 45 and SOP 81-1. Interactive Media’s arrangements involve significant software modification, including the installation of customized software applications previously developed for the customer. Revenue for fixed-price service-based arrangements associated with these projects is recognized on the percentage of completion method of contract accounting, based on the proportion of labor expended through the end of the period to expected total project labor. Interactive Media arrangements frequently include PCS for a ninety-day period following system installation. 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 practice areas perform consulting projects where the Company recommends that the customer implement technology products to facilitate technology-based solutions. Under some of these arrangements, the Company also sells the recommended technology products to the customer. When consulting services are part of multiple-deliverable arrangements, revenue from services and product sales are recognized separately based on SOP 97-2 and EITF No. 00-21.

Integration Services

Integration services include projects conducted by the Interactive Media Practice Area that are part of related arrangements, including computer hardware and equipment for interactive television systems, software and services. The Company follows the contract accounting guidance of ARB No. 45 and SOP 81-1, as specified by SOP 97-2, in accounting for revenue derived under these arrangements that involve significant software modification. The Company’s 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

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

than 90 days duration, revenue is recognized based on percentage of completion. The proportion of labor incurred to expected total project labor is utilized as a quantitative factor in determining the percentage of completion recognized for projects when the proportion of total project costs incurred to expected total project costs is not representative of actual project completion status. For projects with expected revenue of $250,000 or less, or expected duration of 90 days or less, revenue is recognized upon completion of the project. Interactive Media arrangements do not include rights for software, hardware or equipment upgrades.

Outsourced Services

The Company recognizes revenue for its outsourced services operations in a similar manner as discussed above for time-based practice area consulting services.

Information System Product Sales

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

Revenue and cost of sales for the Company’s information system product sales are reported on a gross basis, in accordance with the guidelines of Emerging Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, based primarily on the Company’s assumption of primary responsibility for fulfillment of the sales, sole latitude in establishing prices, collection risk on amounts billed to customers and inventory risk. Amounts billed to customers for shipping charges are recorded as revenue and associated shipping costs are recorded as cost of sales.

Other Services

Other services include activities peripheral to the Company’s operations such as website hosting and archival fees, contractual commissions and placement fees. Amounts billed to customers for recovery of out-of-pocket costs associated with performance of consulting and integration engagements are also reflected as other services revenue. The Company recognizes revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, services have been rendered and collectibility is reasonably assured.

Earnings Per Share

Earnings per share (“EPS”) of common stock have been computed in accordance with Financial Accounting Standards Board Statement No. 128, Earnings Per Share (“SFAS No. 128”). The shares used in calculating basic and diluted EPS include the weighted average of the outstanding common shares of the Company. The Company’s outstanding stock options and warrants and the Company’s Series G convertible redeemable preferred stock are considered potentially dilutive securities under SFAS No. 128 and are included in the calculation of diluted EPS if the effect is dilutive. The Company’s Series F convertible redeemable preferred stock was also a potentially dilutive security prior to the expiration of its convertibility feature in May 2004.

The Company’s convertible preferred stock and outstanding stock options and warrants were not included in the calculation of diluted EPS for the three-month period ended March 31, 2005. Since the Company recognized a net loss attributable to common shareholders in this period, the effect of inclusion would have been anti-dilutive. An additional 4,285,714 shares would have been included in the diluted EPS calculation for this period related to the convertible preferred stock, if the effect was not anti-dilutive. The average market prices of the Company’s common stock exceeded the exercise prices of 75,000 outstanding options during the three-month period ended

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

March 31, 2005. This would have resulted in the inclusion of 15,273 in the calculation of diluted EPS for the three-month period ended March 31, 2005 if the effect had not been anti-dilutive. The exercise prices of all other outstanding stock options and all outstanding warrants exceeded the average market prices of the Company’s common stock for this period.

The Company’s convertible preferred stock was not included in the calculation of diluted EPS for the three-month period ended March 31, 2004, as the effect was anti-dilutive despite there being net income attributable to common shareholders. An additional 4,794,361 shares would have been included in the diluted EPS calculation for this period related to the convertible preferred stock, if the effect was not anti-dilutive. The average market price of the Company’s common stock during the three-month period ended March 31, 2004 exceeded the exercise price of 60,000 outstanding options. This resulted in the inclusion of 23,675 additional shares in the calculation of diluted EPS for the three-month period ended March 31, 2004. The exercise prices of all other outstanding stock options and all outstanding warrants exceeded the average market prices of the Company’s common stock for this period.

Accounts Receivable and Unbilled Receivables

The Company’s subsidiaries record accounts receivable based upon billing for services and products. Unbilled receivables are recorded when labor-based services have been provided prior to the end of the period and invoicing has not occurred. The Company evaluates the extension of credit to potential customers based on financial or other information and any special circumstances regarding the potential engagement. Payment for services or products is normally due within thirty days of billing, although alternate terms may be included in contracts or letters of engagement as agreed upon by the Company and the customer. Accounts receivable are not normally collateralized. The Company does not routinely charge interest on past due accounts receivable. However, the Company will occasionally reach agreement with a customer on a payment plan for accounts receivable that includes interest charges if the Company believes this will facilitate collection. In these instances, interest income is recognized as payments are received. As of March 31, 2005 and December 31, 2004, the Company’s risk of loss for accounts receivable and unbilled receivables was limited to the amounts recorded on the Consolidated Balance Sheets as of those dates.

Allowances on accounts receivable are recorded when circumstances indicate collection is doubtful for particular accounts receivable or as a general reserve for all accounts receivable. Accounts receivable are written off if reasonable collection efforts prove unsuccessful. Bad debt expense is reflected in other selling, general and administrative expenses on the Consolidated Statements of Operations when allowances on accounts receivable are increased or when accounts written off exceed available allowances.

As of March 31, 2005, two significant customers comprised 22% and 16%, respectively, of the Company’s accounts receivable. As of December 31, 2004, three significant customers comprised 23%, 14% and 12%, respectively, of the Company’s accounts receivable and two of the customers were affiliates of each other.

Costs and Estimated Gross Margins in Excess of Billings and Billings in Excess of Costs and Estimated Gross Margins

Costs and estimated gross margins in excess of billings and billings in excess of costs and estimated gross margins relate to Interactive Media Practice Area projects for which revenue and cost of sales are being recognized on a percentage of completion basis. For an individual project, costs and estimated gross margins in excess of billings consists of costs not yet recognized as cost of sales and estimated gross margins, net of amounts billed but not yet recognized as revenue. For an individual project, billings in excess of costs and estimated gross margins consists of amounts billed but not yet recognized as revenue, net of costs which have not yet been recognized as cost of sales and estimated gross margins associated with the project. Projects with costs and estimated gross margins in excess of billings are aggregated separately from projects with billings in excess of costs and estimated gross margins for presentation on the Consolidated Balance Sheets.

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

Financial Instruments

As of March 31, 2005, the Company’s Consolidated Balance Sheet includes a note payable with a principal balance of $1,000,000 related to the acquisition of Allin Corporation of California (“Allin Consulting-California”). The principal balance of the note payable was recorded at the face value of the instrument. The principal balance and accrued interest were repaid to the note-holders on April 15, 2005, the maturity date of the note.

Market Risk Sensitive Instruments

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

Stock-Based Compensation

The Company elected to account for stock-based compensation plans under the intrinsic value method established by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), as permitted by Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). Had compensation costs for the Company’s Plans been determined consistent with SFAS No. 123, pro forma compensation cost, net income and earnings (loss) per share would have been as follows:

Recently Issued Accounting Standards

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. In April 2005 the deadline for adoption of SFAS No. 123R was revised such that the requirement will become effective for the first annual period beginning after December 15, 2005. The pro forma disclosures previously permitted under SFAS No. 123 (See Stock-Based Compensation above) 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 January 1, 2006. 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 period 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 that adoption of the new standard will have on the Company’s results of operations or financial condition.

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

Supplemental Disclosure of Cash Flow Information

Cash payments for income taxes were approximately $6,000 during the three-month period ended March 31, 2004. There were no cash payments for income taxes during the three-month period ended March 31, 2005. Cash payments for interest were approximately $19,000 and $20,000 during the three-month periods ended March 31, 2004 and 2005, respectively. Cash payments of dividends were approximately $89,000 during each of the three-month periods ended March 31, 2004 and 2005. Dividends of approximately $164,000 and $169,000 were accrued but unpaid during the three-month periods ended March 31, 2004 and 2005, respectively, on outstanding shares of the Company’s preferred stock.

2. Preferred Stock

The Company has the authority to issue 100,000 shares of preferred stock with a par value of $.01 per share. Of the authorized shares, 40,000 have been designated as Series A Convertible Redeemable Preferred Stock, 5,000 as Series B Redeemable Preferred Stock, 25,000 as Series C Redeemable Preferred Stock, 2,750 as Series D Convertible Redeemable Preferred Stock, 2,000 as Series E Convertible Redeemable Preferred Stock, 1,000 as Series F Convertible Redeemable Preferred Stock and 150 as Series G Convertible Redeemable Preferred Stock. As of March 31, 2005, the Company has outstanding 25,000, 2,750, 1,000 and 150 shares of Series C, D, F and G preferred stock, respectively. The Company will not issue any additional shares of any of its existing series of preferred stock. The order of liquidation preference of the series of the Company’s outstanding preferred stock, from senior to junior, is Series F, Series G, Series D and Series C.

3. Equity Transactions and Changes in Shareholders’ Equity

Options to purchase a total of 984,128 shares of the Company’s common stock granted under the Company’s 1996, 1997, 1998 and 2000 Stock Plans (collectively the “Stock Plans”) were outstanding as of March 31, 2005. During the three months ended March 31, 2005, the Company awarded options to purchase 5,000 shares of the Company’s common stock under the Stock Plans. The grant price was $0.245 per share, which was the closing market price of the Company’s common stock on the grant date. These options to purchase common shares will fully vest on the first anniversary of the grant date. There was no compensation expense recognized in conjunction with the award of the options. During the three months ended March 31, 2005, vested and non-vested options to purchase 1,560 and 640 shares, respectively, were forfeited under the terms of the Stock Plans. Also, during this period, options to purchase 5,600 shares expired.

Information concerning changes to Series G preferred stock and additional paid-in-capital during the three months ended March 31, 2005 is as follows:

There were no changes to the other components of shareholders’ equity during this period other than the increase in accumulated deficit resulting from the net loss realized for the three months ended March 31, 2005.

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Notes to Consolidated Financial Statements – (Continued)

4. Line of Credit

On October 1, 1998, the Company and S&T Bank, a Pennsylvania banking association, entered into a Loan and Security Agreement, under which S&T Bank agreed to extend the Company a revolving credit loan. The original term of the revolving credit loan was one year and it has subsequently been renewed for six annual periods. The current expiration date of the revolving credit loan is September 30, 2005. Borrowings may be made under the S&T Loan Agreement for general working capital purposes. The maximum borrowing availability under the revolving credit loan 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 March 31, 2005, maximum borrowing availability under the revolving credit loan was approximately $1,834,000. There was no outstanding balance as of this date. Loans made under the revolving credit loan bear interest at the bank’s prime interest rate plus one percent. During the three months ended March 31, 2005, the rate of interest on any outstanding borrowings under the revolving credit loan would have ranged from 6.25% to 6.75%. As of March 31, 2005, the interest rate in effect was 6.75%.

The revolving credit loan includes provisions granting S&T Bank a security interest in certain assets of the Company including its accounts receivable, equipment, lease rights for real property, and inventory. The revolving credit loan also includes reporting requirements regarding annual audit reports, monthly financial reports, monthly accounts receivable and payable reports and weekly borrowing base certificates. The revolving credit loan also includes various covenants relating to matters affecting the Company including insurance coverage, financial accounting practices, audit rights, prohibited transactions, dividends and stock purchases. The covenants also include a cash flow to interest ratio of not less than 1.0 to 1.0. Cash flow is defined as operating income before depreciation, amortization and interest. The cash flow coverage ratio is measured for each of the Company’s fiscal quarters. The Company was not in compliance with the cash flow covenant for the fiscal quarter ended March 31, 2005. S&T Bank granted a waiver of the compliance requirement for this period. The Company is in compliance with all other covenants as of March 31, 2005.

5. Goodwill and Intangible Assets

The Company follows Statements of Financial Accounting Standards No. 141, Business Combinations (“SFAS No. 141”), No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), and No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). SFAS Nos. 141 and 142 set forth guidance for recording business combinations and required annual testing for potential impairment of goodwill. SFAS No. 144 sets forth standards for testing for the potential impairment of long-lived assets, including amortized intangible assets. Under SFAS No. 142, goodwill is not amortized, but separable intangible assets that are deemed to have definite lives are amortized over their useful lives. Goodwill and intangible assets associated with acquisitions prior to 2002 were valued in accordance with Accounting Principals Board Opinion No. 16, Accounting for Business Combinations.

As of March 31, 2005, the Company’s Consolidated Balance Sheet includes goodwill associated with the 1996 acquisition of Allin Corporation of California (“Allin Consulting-California”), the 1998 acquisitions of Allin Consulting of Pennsylvania, Inc. (“Allin Consulting-Pennsylvania”) and MEGAbase, Inc. and the 2004 acquisition of Accounting Technology Professionals, L.L.C. d/b/a Jimary Business Systems (“Jimary Business Systems”). Accumulated amortization for goodwill represents amortization expense related to the 1996 and 1998 acquisitions from their respective acquisition dates through December 31, 2001, after which amortization of goodwill was discontinued upon the adoption of SFAS No. 142. Amortized intangible assets include customer lists associated with the acquisitions of Allin Consulting-Pennsylvania, 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. Information concerning these assets is as follows:

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

The customer list associated with the acquisition of Allin Consulting-Pennsylvania was amortized during the three-month periods ended March 31, 2004 and 2005 utilizing an estimated useful life extending through 2013. The customer lists associated with the Computer Resources and Jimary Business Systems acquisitions are being amortized over estimated useful lives extending through 2009. The non-competition agreement is being amortized over the term of three years.

The Company performs annual tests for potential impairment of goodwill and intangible assets as of December 31 of each fiscal year. Key risk factors are monitored throughout the fiscal year and testing for potential impairment of goodwill or other 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 of the acquired businesses, including cash, accounts receivable, prepaid expenses, deferred tax assets, property and equipment, customer list and goodwill, net of accounts payable, accrued liabilities and deferred revenue, to reporting units. The reporting units utilized are the Company’s reported segments applicable to the acquired businesses, 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 to evaluate the value of goodwill are the valuation multiple and the revenue levels of the reporting units. Significant declines in these factors could indicate potential 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 estimates are determination of the proportions of the estimated cash flow of Allin Consulting-Pennsylvania for the applicable segments attributed to the acquired customer lists in each period and the assumed growth of the overall business operations. Management utilizes historical information related to business derived from the customers included on the acquired lists, future projections for the operations of Allin Consulting-Pennsylvania and industry information concerning expected growth in the technology consulting industry to develop estimates of future cash flows for Allin Consulting-Pennsylvania and the portions of the estimated cash flows attributed to the customer lists. If the sum of the undiscounted cash flows attributable to a customer list exceeds the recognized value of the customer list, no impairment is indicated. If the sum of the undiscounted cash flows is less than the recognized value, an impairment loss is recognized for the difference between the recognized value and the sum of the discounted cash flows attributable to the customer list. Key risk factors the Company monitors to evaluate the recorded value of the customer lists are forecast growth rates for the technology consulting industry and revenue derived from customers on the acquired lists. Significant declines in these factors could indicate potential impairment of the customer lists.

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

Goodwill – Changes in Recognized Value and Impairment Losses

The table below reflects the changes in recognized value of goodwill from January 1, 2004 through March 31, 2005, by reportable segment.

The estimated fair values of all reporting units exceeded the recognized assets attributed to the reporting units indicating no impairment of goodwill in annual testing performed as of December 31, 2004.

Customer List – Impairment Loss

Industry information utilized for the annual testing as of December 31, 2004 indicated a lowering of long-term growth rates for the technology consulting industry. The factors noted as reasons for the reduction include expectations that future growth will closely correlate with expectations of overall economic conditions, that economic return requirements will continue to be a constraint on future growth prospects and the impact of outsourcing of business to offshore information technology enterprises on domestic information technology service providers. With assumed long-term growth rates lowered, the December 31, 2004 test indicated that undiscounted projected cash flows attributed to the customer list associated with the acquisition of Allin Consulting-Pennsylvania did not exceed the recorded value of the customer list. The Company recorded a loss of approximately $191,000 in the year ended December 31, 2004 to reflect the impairment of this customer list and adjust the recognized value of the list to the estimated level of discounted cash flows attributable to the customer list. No impairment was indicated in the tests of the customer lists associated with the 2004 acquisitions of Computer Resources and Jimary Business Systems.

Amortization Expense

Information regarding aggregate amortization expense recorded during the three-month periods ended March 31, 2004 and 2005, and expected through December 31, 2010, follows.

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

6. Income Taxes

The Company records current and deferred provisions for or benefits from income taxes and deferred tax assets and liabilities in accordance with the requirements of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”). SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases using enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Valuation allowances will reduce deferred tax assets if there is material uncertainty as to the ultimate realization of the deferred tax benefits.

The Company’s results of operations in future periods are subject to a number of material risks, including risks arising from concentrations related to the operations of the Interactive Media Practice Area, where in recent periods revenue has resulted from a small number of large projects each year. Furthermore, these projects have been performed for a small number of customers concentrated in one industry. The Company’s Interactive Media revenue declined significantly during the three-month period ended March 31, 2005 as compared to the three-month period ended March 31, 2004 and may continue to decline in future periods if the Company fails to obtain additional projects from existing or new customers.

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, 2004 and March 31, 2005. 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 March 31, 2005. Management assesses the realizability of deferred tax assets quarterly and adjusts the valuation allowance based on its assessment. The valuation allowance was reduced by $48,000 during the first quarter of 2004 and increased by $97,000 during the first quarter of 2005.

The provision for income taxes is comprised of the following for the three-month periods ended March 31, 2004 and 2005:

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

A reconciliation of income taxes computed at the statutory federal income tax rate of 34% to the (benefit) provision for income taxes reflected in the Statements of Operations is as follows for the three-month periods ended March 31, 2004 and 2005:

The components of the deferred tax assets, as of December 31, 2004 and March 31, 2005, are as follows:

As of March 31, 2005, the Company estimates its potentially realizable net operating loss carryforwards are approximately $20,225,000 and $19,191,000 for federal and state income tax purposes, respectively. The realization of the potential federal and state tax benefits related to net operating loss carryforwards, estimated to be approximately $6,877,000 and $971,000, respectively, as of March 31, 2005, depends on the Company’s ability to generate future taxable income. The net operating loss carryforwards are scheduled to expire at various times from 2005 through 2025. The Company files state income tax returns for California on a unitary basis. Tax returns for other states in which the Company or subsidiaries operate are filed on a single corporation basis, which may limit the Company’s ability to realize benefits related to net operating loss carryforwards.

Cash payments for income taxes were $6,000 during the three-month period ended March 31, 2004. There were no cash payments for income taxes during the three-month period ended March 31, 2005.

7. Industry Segment Information

The Company follows Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), as the basis for determining its segments. SFAS No. 131 requires use of a model for segment reporting called the “management approach”. The management approach is based on the way the chief operating decision maker organizes segments within a company for making decisions and assessing performance.

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

Basis for Determining Segments

The Company’s operations and management’s evaluations are primarily oriented around four practice areas meeting customer needs for Microsoft-based technology and interactive media services: Technology Infrastructure, Collaborative Solutions, Business Process and Interactive Media. The operations of these practice areas comprise the substantial majority of the Company’s revenue and gross profit and are closely associated with its strategic focus of providing solutions-oriented consulting and systems integration services. The reportable segments related to these practice areas reflect aggregated practice area activity across the Company’s subsidiaries due to the similarity in nature of services, processes, types of customers and distribution methods for the practice areas.

During the second quarter of 2004 certain terminology regarding the Company’s operations was changed 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 had been 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, including portals and information workflow solutions, business intelligence solutions and applications development and deployment. Revenue and gross profit for the three-month period ended March 31, 2004 reported for Collaborative Solutions was previously reported as E-Business Consulting in the Company’s Report on Form 10-Q for the period ended March 31, 2004.

The Company’s reported segments are the following: Technology Infrastructure, Collaborative Solutions, Business Process, Interactive Media Consulting, Interactive Media Systems Integration, Outsourced Services, Information System Product Sales and Other Services. Business Process was initially reported as a separate segment in the Company’s Report on Form 10-K for the fiscal year ended December 31, 2004. The level of Business Process consulting services provided by the Company increased significantly following the November 2004 acquisitions of Computer Resources and Jimary Business Systems. The Company’s management expects that the level of Business Process services to be realized during 2005 will increase as compared to revenue realized during 2004 due to inclusion of the acquired operations in the Company’s results for the entire year of 2005. Management consequently determined that Business Process should be reported as a separate segment. Revenue and gross profit for the three-month period ended March 31, 2004 for the Business Profit segment were previously reported as part of the Collaborative Solutions segment. These amounts have been reclassified to conform to the current reporting format.

On the Company’s Consolidated Statements of Operations, the first four of the segments are aggregated and captioned as Consulting services while the segment Interactive Media Systems Integration corresponds with the Integration services caption. The Outsourced Services, Information System Product Sales and Other Services segments correspond with matching captions on the Consolidated Statements of Operations.

Measurement Method

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

Segment revenue for the three-month period ended March 31, 2004 reflects a reclassification on the Consolidated Statement of Operations. Amounts billed to customers for recovery of out-of-pocket costs associated with performance of the Company’s services during this period is now reflected as Other Services revenue. Previously, amounts billed were netted against the costs. The reclassification has no impact on previously reported information on gross profit.

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

Revenue

Information on revenue derived from external customers is as follows:

Certain of the Company’s segments performed services for related entities. All revenue recorded for these services is eliminated in consolidation. Information on revenue derived from services for and product sales to related entities is as follows:

Gross Profit

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

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

Assets

Information on total assets attributable to segments is as follows:

Information about Major Customers

A significant portion of the Company’s revenue for the three-month periods ended March 31, 2004 and 2005 was derived from a small number of customers. Furthermore, the major customers listed below utilizing the Interactive Media Practice Area are concentrated in the cruise industry. A loss of any of these major customers or a significant decline in the level of services provided to any of the customers could significantly negatively impact the Company’s future results of operations and financial condition.

Information about Major Suppliers

The Company purchases materials, including interactive television equipment, computer hardware, networking equipment and software, to be utilized in the operations of the Interactive Media Systems Integration and Information System Product Sales segments. Over 2004 and the first quarter of 2005, these materials purchases were highly concentrated with two major suppliers.

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Allin Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

The Company operates under a License and Supply Agreement with one of the major suppliers. The current agreement became effective June 30, 2003 and has a term of five years, expiring on June 30, 2008. Under the terms of the License and Supply Agreement, the supplier 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. The Company’s management does not expect that the exclusivity threshold for the first two years of the term will be reached and consequently, the Company expects to lose its exclusivity in purchasing hardware and end-user components for interactive television systems for the cruise line market after June 30, 2005. Such loss of exclusivity may negatively impact Interactive Media’s competitive position and consequently, may negatively impact the Company’s results of operations or financial condition in future periods. During the three-month periods ended March 31, 2004 and 2005, respectively, 76% and 65% of materials purchases were from the this major supplier.

The increase in the level of Business Process services provided by the Company in 2004 and the first quarter of 2005 also resulted in a significant increase in revenue for the Information System Product Sales segment as the sale of financial software products is actively promoted in conjunction with Business Process operations. Purchases of the financial software products are concentrated with one significant supplier. During the three-month periods ended March 31, 2004 and 2005, respectively, 19% and 9% of materials purchases were from this major supplier.

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Item 2.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following discussion and analysis by management provides information with respect to the financial condition and results of operations of Allin Corporation (the “Company”) for the three-month periods ended March 31, 2004 and 2005. This discussion should be read in conjunction with the information in the consolidated financial statements and the notes pertaining thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, the information in the consolidated financial statements and the notes pertaining thereto contained in Item 1 – Financial Statements - in this Report on Form 10-Q 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. All references to “Microsoft” refer to Microsoft Corporation.

Certain terminology regarding the Company’s operations was changed during the second quarter of 2004 and consequently differs from that used in the Company’s Report on Form 10-Q for the period ended March 31, 2004. 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, including portals and information workflow solutions, business intelligence solutions and applications development and deployment.

The Company commenced the operations of its Business Process Practice Area in December 2003. However, the Company did not report revenue and gross profit for Business Process as a separate segment prior to its Report on Form 10-K for the fiscal year ended December 31, 2004. The Company’s management believed that as a result of the acquisition of two businesses in late 2004, Business Process operations had increased in significance to the Company and thereafter merited reporting as a separate segment. In the Company’s Report on Form 10-Q for the period ended March 31, 2004, Business Process operations were included as part of the Collaborative Solutions segment. Information regarding this period 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 quarterly report on Form 10-Q, words such as “believes,” “expects,” “intends,” “will,” “seek,” “continue,” “pursue” 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.

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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 three-month periods ended March 31, 2004 and 2005, as well as period-to-period percentage changes.

Comparing the three months ended March 31, 2005 with the three months ended March 31, 2004, the Company experienced period-to-period declines in revenue of $281,000 and gross profit of $37,000. Significant period-to-period declines in revenue and gross profit resulted from the operations of the Interactive Media and Technology Infrastructure Practice Areas. Revenue for Interactive Media and Technology Infrastructure declined by $779,000 and $231,000, respectively, comparing the first quarter of 2005 with the first quarter of 2004. Interactive Media and Technology Infrastructure gross profit declined by $305,000 and $138,000, respectively, when comparing these periods. The declines were substantially offset by period-to-period improvement in the revenue and gross profit realized by the Collaborative Solutions and Business Process Practice Areas. Revenue for Collaborative Solutions and Business Process increased by $268,000 and $266,000, respectively, comparing the first quarter of 2005 with the first quarter of 2004, with corresponding respective period-to-period increases in gross profit of $162,000 and $169,000 for these practice areas. Revenue for consulting services provided by the four practice areas increased by $275,000, when comparing the first quarters of 2004 and 2005, as the majority of the decline in revenue for the Interactive Media Practice Area resulted from systems integration, rather than consulting 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. During the first quarter of 2004, Interactive Media performed the majority of project activity related to two interactive system installation projects. However, as a result of fewer new-build commitments among the Company’s existing customers in 2005 than in 2004 and project scheduling, there were no comparable projects during the first quarter of 2005. Only one significant interactive television system installation is among the projects included in the backlog as of March 31, 2005, the installation of a system on the Carnival Liberty, under an August 2004 amendment to a prior agreement with Carnival. The majority of activity for the Carnival Liberty project is expected to occur during the second quarter of 2005. Committed backlog for Interactive Media consulting and systems integration services was $1,485,000 as of March 31, 2005, all of which is expected to be realized over the remainder of 2005, as compared to $1,951,000 as of December 31, 2004. 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 believes the period from the fourth quarter of 2003 through 2004 reflected unusually high demand for the Technology Infrastructure Practice Area due 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 following several years during which demand was negatively impacted by a significant curtailment in technology-based spending due to domestic economic conditions. Management attributes the decline in Technology Infrastructure revenue and gross profit comparing the first quarters of 2004 and 2005 primarily to a return of

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demand to more normal levels in 2005. Comparable period-to-period increases in Collaborative Solutions revenue and gross profit offset the declines for Technology Infrastructure. Management believes the unusually high demand for Technology Infrastructure services in 2004 caused a substitution effect whereby applications development and business intelligence projects were deferred by customers while infrastructure-related projects were given a higher priority. Management believes that the deferred projects have resulted in increased demand for Collaborative Solutions services in 2005 that has offset the decline in demand for Technology Infrastructure services. The significant increases in Business Process revenue and gross profit when comparing the first quarters of 2004 and 2005 resulted primarily from the acquisition of two businesses in November 2004 that specialized in services based on Microsoft Business Solutions technology. There can be no assurance that the Collaborative Solutions or Business Process Practice Areas will realize future revenue equal to or greater than current levels. The Company’s committed backlog for Technology Infrastructure, Collaborative Solutions and Business Process consulting was $2,019,000 as of March 31, 2005, as compared to approximately $1,445,000 as of December 31, 2004. All of the March 31, 2005 backlog is expected to be realized over the remainder of 2005.

The increase in selling, general & administrative expenses for the first quarter of 2005 as compared to the first quarter of 2004 was $323,000. The most significant contributing factor was an increase in the Company’s workforce, primarily for consultants for the Microsoft-focused practice areas. 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. The increase in selling, general & administrative expenses was the most significant factor in the period-to-period decline of $356,000 in the Company’s profitability.

The Company’s cash balance decreased from $3,091,000 as of December 31, 2004 to $2,356,000 as of March 31, 2005, a decline of $735,000. The most significant factors in the decline were net cash flows used by operating activities of $616,000, primarily as a result of changes in working capital and net cash flows used for financing activities, primarily for payment of $89,000 in dividends on preferred stock. The Company’s cash balance was diminished further during April 2005 due to repayment of a note with a principal balance of $1,000,000 and $79,000 of accrued interest. The Company’s cash balance may continue to decline over the remainder of 2005 due to the use of cash for operations, changes in working capital, capital expenditures, dividends on preferred stock and other factors. On the Consolidated Balance Sheet as of March 31, 2005, the current portion of accrued dividends on preferred stock of $74,000 represents accrued dividends scheduled for payment within one year of March 31, 2005 while the non-current portion of accrued dividends on preferred stock of $2,493,000 represents $2,452,000 of accrued dividends on the Company’s Series C Redeemable Preferred Stock scheduled for payment within ten days of June 30, 2006 and $41,000 of accrued dividends on Series F Redeemable Preferred Stock which is not required to be paid prior to redemption, if any. The Company’s material obligations may result in significant cash payments in future periods beyond 2005. 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 March 31, 2005, 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. Since 1998, the Company has utilized the trade-names Allin Interactive, Allin Consulting and Allin Corporation in its operations. 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-Q are the property of their respective owners.

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, while Allin Consulting-Pennsylvania has also been designated with the Security Solutions,

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Microsoft Business Solutions and Networking Solutions competencies. The Company’s technical expertise and quality of services have been recognized by Microsoft in two 2005 awards. Allin Consulting-California received the Q2 2005 Western Region Partner Competencies and Best Practices Award in recognition of exceptional expertise or competency by a partner. Allin Consulting-Pennsylvania received the Microsoft Q1 2005 Greater Pennsylvania District Area Award in recognition of its outstanding achievement as a Microsoft Partner. 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. 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.

The Technology Infrastructure, Collaborative Solutions and Business Process Practice Areas target businesses across a broad spectrum of industries, ranging 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 Technology Infrastructure, Collaborative Solutions and Business Process 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.

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 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 Solution Vision phase articulates the ultimate goals for the solution and defines the solution scope and the project boundaries. The Solution Design phase focuses on the delivery and acceptance of the design specifications, test and project plans and the schedule for solution development. The Solution Development phase results in the delivery of a functionally complete solution, ready for pilot usage. The Solution Deployment phase culminates in the production release of the installed application, training and documentation, and conversion of, or integration with, existing systems.

The Company’s 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

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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.

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 computer software, interactive television equipment and other technology products. The Company actively promotes the sale of Microsoft Business Solutions software and associated products in association with the services of the Business Process Practice Area. The capability to provide other information system products is maintained primarily as a means to ensure customer convenience and satisfaction with the technology solutions recommended and implemented by the practice areas. Product sale and service-based revenue are accounted for separately, with any revenue from product sales included with the Information System Product Sales segment. The Other Services segment reflects amounts billed for out-of-pocket cost, the Company’s occasional performance of website hosting and archival services and revenue from referral commissions or placement fees. These three segments collectively accounted for 15% or less of the Company’s revenue during the three-month periods ended March 31, 2004 and 2005.

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 the Company’s Report on Form 10-K for the year ended December 31, 2004 and in notes 1, 5, 6 and 7 in the Notes to Consolidated Financial Statements included in Part I, Item 1 – Financial Statements in this Report on Form 10-Q. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions to apply certain of these critical accounting policies. These estimates and assumptions affect the reported amounts of assets and liabilities as of the reporting date and the reported amounts of revenue and expenses for the reporting periods. In applying policies requiring estimates and assumptions, management uses its judgment based on historical experience, terms of existing contracts, industry practices and trends, information available from customers, publicly available information and other factors deemed reasonable under the circumstances. Actual results may differ from estimates. Critical accounting policies requiring the use of estimates and assumptions include the following.

Revenue Recognition. 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 33% and 17% of the Company’s total revenue for the three-month periods ended March 31, 2004 and 2005, 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

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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 three-month 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 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 7% and 1% of the Company’s total revenue for the three-month periods ended March 31, 2004 and 2005, respectively.

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 Accounting Technology Professionals L.L.C. d/b/a Jimary Business Systems (“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 March 31, 2005, recognized balances for the customer lists, non-competition agreement and goodwill were approximately $1,076,000, $29,000 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

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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. The Company performs annual testing as of December 31 of each fiscal year. Key risk factors are monitored on an ongoing basis and interim testing for potential impairment of goodwill or intangible assets will be performed if indicators of potential impairment arise.

Testing for potential impairment of goodwill involves an attribution of the recognized assets and liabilities of the acquired businesses to reporting units. The recognized assets and liabilities include cash, accounts receivable, prepaid 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 estimated fair values of all reporting units exceeded the recognized assets attributed to the reporting units in the annual test performed as of December 31, 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. Industry information utilized for the annual testing as of December 31, 2004 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 $191,000 as of December 31, 2004 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. No impairment was indicated for the other customer lists or the non-competition agreement.

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

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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. Interactive Media revenue experienced a significant period-to-period decline comparing the first quarters of 2004 and 2005 due to a decline in the number of large projects undertaken and could continue to decline over the remainder of 2005 if the Company fails to obtain additional projects from existing or new customers. Accordingly, the 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, 2004 and March 31, 2005. 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 March 31, 2005. Management assesses the realizability of deferred tax assets quarterly and adjusts the valuation allowance based on its assessment.

Reclassifications. The Consolidated Statement of Operations for the three months ended March 31, 2004 reflects a reclassification to the statement as previously reported to conform the prior period information to the current presentation of the statement. The reclassification did not impact the Company’s results of operations or earnings per share during this period. On the Consolidated Statement of Operations, amounts billed to customers for recovery of out-of-pocket costs associated with performance of the Company’s services are reflected as other services revenue while the associated costs are reflected as other services 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 $12,000 for the three months ended March 31, 2004. There is no change to aggregate gross profit for this period.

Certain Related Party Transactions

During the three-month periods ended March 31, 2004 and 2005, 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 $34,000 during each of the three-month periods ended March 31, 2004 and 2005. This represented 2% of selling, general and administrative expenses during each of these periods. 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.

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Results of Operations

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

Revenue

The following table sets forth revenue for the Company’s operating segments for the three-month periods ended March 31, 2004 and 2005 and period-to-period percentage changes for each segment.

Management attributes the decline of $231,000 in Technology Infrastructure revenue comparing the first quarters of 2004 and 2005 primarily to an easing of demand following a peak period. Management believes the period from the fourth quarter of 2003 through 2004 reflected unusually high demand for the Technology Infrastructure Practice Area due 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 following several years during which demand was negatively impacted by a significant curtailment in technology-based spending due to domestic economic conditions. Management believes the level of Technology Infrastructure revenue realized in the first quarter of 2005 represents a more normal level of demand than was experienced in the first quarter of 2004. Management believes that certain trends in technology remain favorable to long-term 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. 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 period-to-period increase of $268,000 in revenue for the Collaborative Solutions Practice Area was realized in the first quarter of 2005 as compared to the first quarter of 2004. Collaborative Solutions projects are less frequently associated with expenditures for upgrading computer hardware, software and networking equipment than Technology Infrastructure projects. Management believes this generally results in a lower variation in demand over business cycles for Collaborative Solutions, but also results in a substitution effect whereby application development and business intelligence services receive lower priority during periods of peak infrastructure-related demand. Management believes this was the case during 2004 and that the results of the first quarter of 2005 reflect an improving priority for Collaborative Solutions services following the end of a peak period of demand for Technology Infrastructure services. Management believes certain trends in technology are also favorable to long-term 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, which specializes 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. Management primarily attributes the substantial period-to-period increase in Business Process revenue

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of $266,000 comparing the three months ended March 31, 2005 with the three months ended March 31, 2004 to the November 2004 acquisitions of Computer Resources and Jimary Business Systems. Approximately 75% of the period-to-period increase in revenue was derived from customers of the acquired businesses. The increase in Business Process revenue resulting from the acquired businesses also represents a majority of the Company’s overall increase in consulting revenue. 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 majority of Interactive Media revenue in the first quarters of both 2004 and 2005 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 the first quarter of 2004, the Interactive Media Practice Area performed the majority of project activity related to two interactive television system implementation projects. There were no projects with periods of peak activity that occurred during the first quarter of 2005, significantly negatively impacting Interactive Media systems integration revenue. However, the latter phases of several projects were completed during the first quarter of 2005, and the remaining consulting revenue under two fixed price arrangements was recognized upon the customer’s acceptance of the projects following their decision to not utilize certain alternate system components. The level of cruise industry new-build commitments is expected to remain low during 2005. The Company currently has only one major 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. 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 for 2005 will likely decline significantly from levels realized in 2004 and prior years if the Company is unsuccessful in obtaining new projects.

Management believes the period-to-period stability in Outsourced Services revenue reflects the long-term nature of the existing engagements. There was no significant change in the level of services performed from the first quarter of 2004 to the first quarter of 2005. The $150,000 period-to-period increase in revenue for the Information System Product Sales segment, comparing the first quarters of 2004 and 2005, was primarily attributable an increase in sales of Microsoft Business Solutions products in association with Business Process consulting services resulting from the Company’s November 2004 business acquisitions. Revenue for the Other Services segment represented no more than 2% of consolidated revenue in the first quarter of either 2004 or 2005. The period-to-period increase in revenue related primarily to referral commissions.

Cost of Sales and Gross Profit

The following table sets forth cost of sales for the Company’s operating segments for the three-month periods ended March 31, 2004 and 2005 and period-to-period percentage changes for each segment.