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- and nine-month periods ended September 30, 2008 and 2007. This discussion should be read in conjunction with the information contained in Part I, Item 1A - Risk Factors and Part II, Item 8
- Financial Statements and Supplementary Data in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, and the information contained in

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," "estimate," "likely," "anticipate," "may," "could," "future," "project" 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, dependence on key personnel, general economic conditions, committed backlog, practice area and customer concentration, project schedule delays by customers, risks associated with significant suppliers, fluctuations in operating results, integration of recently acquired businesses, competitive market conditions in the Company's existing lines of business, geopolitical considerations, liquidity and credit risk, public market and trading issues and technological obsolescence, as well as other risks and uncertainties. See Part II, Item 1A-Risk Factors below.

Executive Summary

Overview of Services and Organization

The Company 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 applications, solutions and platforms that provide customers with the agility necessary to compete in today's fast-paced business climate. The Company's consulting services include 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 within budget.

The Company is headquartered in Pittsburgh, Pennsylvania, with additional offices located in Northern California in San Jose and Walnut Creek, in Wakefield, Massachusetts near Boston, in Ft. Lauderdale, Florida, and in Philadelphia, Pennsylvania.

Revenue, cost of sales and gross profit derived for the four practice areas is collectively reflected as Consulting Services on the Company's Consolidated Statements of Operations in Item 1 - Financial Statements. A brief description of the Company's practice areas follows.

• The Technology Infrastructure Practice Area focuses on customers' network and application architecture, messaging and collaboration systems, operations management and security issues. Technology Infrastructure designs and implements enterprise-quality Microsoft technology that maximizes network availability and efficiency, and enables customers to reduce costs and protect vital resources. Services include network architecture and application design, evaluation of customer operating systems and database platforms, design and deployment of messaging and collaboration infrastructure to store and share information, and evaluation and upgrading of operations management and information system security procedures. Technology Infrastructure consulting services are provided from the Company's Northern California, Pittsburgh and Boston offices. Technology Infrastructure revenue represented 9% and 10% of the Company's consolidated revenue during the nine months ended September 30, 2008 and the year ended December 31, 2007, respectively.

• The Collaborative Solutions Practice Area provides customized application development based on the Microsoft .NET framework, portals and information workflow solutions, business intelligence solutions and

• The Business Process Practice Area provides services that help organizations across a broad array of industries automate processes, make more profitable decisions, and accelerate growth. Business Process customizes and implements the full range of Microsoft Dynamics software including Dynamics GP, Dynamics SL and Dynamics CRM. Dynamics GP-based solutions provide outstanding financial tools to enhance the visibility and control of business information and the back office modules necessary to unify an organization's business processes. The Business Process Practice Area maximizes Dynamics SL's project-centric back office capabilities by using its customization and integration tools to help customers implement project accounting best practices. Business Process designs and deploys Dynamics CRM to assist businesses in the development of profitable customer relationships through lead and opportunity management, incident management, a searchable knowledgebase and integrated reporting tools. Business Process services are provided from the Company's Pittsburgh, Northern California and Boston offices. Business Process revenue represented 7% and 12% of the Company's consolidated revenue during the nine months ended September 30, 2008 and the year ended December 31, 2007, respectively.

• The Interactive Media Practice Area offers innovative solutions including technology architecture design and applications development for the on-demand delivery of media rich video content. Interactive Media customers, historically concentrated in the cruise industry, include premiere operating brands from the world's largest cruise organizations, Carnival Corporation & Plc. ("Carnival"), Royal Caribbean Cruises, Ltd. ("Royal Caribbean"), MSC Crociere S.p.A. ("MSC") and NCL Corporation ("NCL"), as well as smaller cruise lines serving distinct markets. The Company's DigiMix™ and DigiRF™ interactive television solutions support cruise lines' onboard operations and enhance passenger amenities by providing in-cabin entertainment, shore excursion preview and ordering, real-time ship-to-cabin communication, information and other services, including food and wine orders, spa/salon information and shopping. Interactive Media's solutions enable customers to generate incremental revenue, promote operating efficiencies and enhance customer service. Interactive Media solutions are Internet accessible, highly-functional applications utilizing high-end graphics and digital video content. Interactive Media activities are provided from the Company's Ft. Lauderdale office, which is located near the most active concentration of cruise line operations in the United States. Interactive Media revenue represented 12% and 9% of the Company's consolidated revenue during the nine months ended September 30, 2008 and the year ended December 31, 2007, respectively.

In addition to the practice areas described above, the Company's operations include three other segments, Systems Integration, Information System Product Sales and Other Services:

• Systems Integration operations focus on the implementation of specialized technology platforms that provide flexible, scalable solutions meeting customers' technology needs and preferences. Historically, Systems Integration revenue has been concentrated among cruise industry customers in projects related to the services provided by the Interactive Media Practice Area. The Company's flexible DigiMix™ and DigiRF™ interactive television platform offers solutions for digital networks and hybrid distribution systems. Fifty shipboard interactive television systems installed by the Company since 1997 are currently in operation. Implementation projects for interactive television systems are also currently in progress or under commitment for three additional ships. Management believes this represents the largest base of cruise industry interactive television operations by any provider of interactive television services. During 2007 and the first nine months of 2008, Systems Integration operations also included implementation of specialized technology platforms for a customer in the financial services market. Systems Integration operations are provided from the Company's Ft. Lauderdale and Boston offices. Systems Integration revenue represented 28% and 19% of the Company's consolidated revenue during the nine months ended September 30, 2008 and the year ended December 31, 2007, respectively.

• The Other Services segment reflects revenue derived from online hosting services, software license fees, amounts billed for out-of-pocket costs, fees for resources outsourced for customer-managed projects, and other activities peripheral to the Company's operations, including referral commissions or placement fees. Other Services revenue represented 8% of the Company's consolidated revenue during each of the nine-month period ended September 30, 2008 and the year ended December 31, 2007. The Company's online hosting services feature the SharePointHosting.com domain, providing hosting solutions based on Microsoft Windows SharePoint Services and Microsoft Office SharePoint Server. SharePointHosting.com multi-tenant and dedicated SaaS environments are currently utilized by more than eight hundred domestic and international customers. The Company's management believes SharePointHosting.com's ability to offer secure, dependable and cost-effective SharePoint software as a service ("SaaS") environments gives the Company the opportunity to alleviate one of its customers' largest obstacles to deploying SharePoint as a key platform for business communication, collaboration and enterprise search.

The Company was organized as a Delaware corporation in July 1996 to act as a holding company. As of September 30, 2008, the organizational legal structure consists of Allin Corporation and six subsidiaries. Allin Interactive Corporation ("Allin Interactive"), Allin Corporation of California ("Allin Consulting-California"), Allin Consulting-Pennsylvania, CodeLab Technology Group, Inc. ("CodeLab") and Allin Network Products, Inc. ("Allin Network") are operating subsidiaries that focus on the Company's consulting and systems integration services. Allin Holdings Corporation ("Allin Holdings") is a non-operating subsidiary that provides treasury management services to the Company. The Company utilizes the trade-names Allin Interactive, Allin Consulting, CodeLab Technology Group and SharePointHosting.com in its operations. Management believes the trade names are recognized in the markets the Company serves. All trade- and brand-names included in this Quarterly Report on Form 10-Q are the property of their respective owners.

Financial Overview

The following table provides a summary of key financial information from the
Company's Statements of Operations for the three-month periods ended
September 30, 2008 and 2007, as well as period-to-period percentage changes.



                                                      Three Months
                                                          Ended
                                                      September 30,
    (Dollars in thousands)                          2008        2007     % Increase
    Statement of Operations Data:
    Revenue                                        $ 5,905     $ 5,682            4 %
    Gross profit                                     3,172       3,148            1 %
    Selling, general and administrative expenses     3,481       2,953           18 %
    Net income                                        (336 )     1,204         (128 )%

Comparing the three-month periods ended September 30, 2008 and 2007, the Company experienced period-to-period increases in revenue of $223,000 and gross profit of $24,000. The Company's aggregate consulting services realized decreases of $219,000 (5%) in revenue and $174,000 (7%) in gross profit. Significant period-to-period improvements in revenue and gross profit were realized by the Technology Infrastructure, Interactive Media, Systems Integration and Other Services segments. However, the Collaborative Solutions and Business Process segments experienced significant period-to-period declines in revenue and gross profit that partially offset the increases. The period-to-period changes in revenue or gross profit for the Information System Product Sales segment were relatively small and did not significantly impact the period-to-period changes in total revenue or gross profit.

Technology Infrastructure revenue and gross profit increased by $239,000 (44%) and $147,000 (49%), comparing the three-month periods ended September 30, 2008 and 2007. Management attributes the period-to-period increases primarily to the commencement of large projects in Northern California during the period.

Period-to-period changes in Interactive Media included increases in revenue of $76,000 (16%) and gross profit of $63,000 (19%), comparing the three-month periods ended September 30, 2008 and 2007. Although the number of active large projects for shipboard interactive television systems was relatively small in both periods, activity during the third quarter of 2008 included work on several interactive television system centralized hardware upgrades. There were no comparable projects active during the third quarter of 2007. Comparing the three-month periods ended September 30, 2008 and 2007, Systems Integration revenue and gross profit increased by $172,000 (22%) and $37,000 (13%), respectively. Management attributes the period-to-period increases in Systems Integration revenue and gross profit to the higher level of activity during the third quarter of 2008 on shipboard interactive television system upgrades,, which were related to those noted above for Interactive Media consulting.

Comparing the third quarters of 2008 and 2007, Other Services revenue and gross profit increased by $237,000 (71%) and $123,000 (63%), respectively. Management attributes the increase primarily to the inclusion of online hosting fees from the operations of the SharePointHosting.com domain during the third quarter of 2008 following its acquisition by the Company in May 2008.

Comparing the third quarters of 2008 and 2007, Collaborative Solutions revenue and gross profit declined by $265,000 (10%) and $228,000 (15%), respectively. Business Process revenue and gross profit declined by $269,000 (31%) and $156,000 (31%), respectively, comparing the same periods. Management attributes the changes primarily to a softening of demand during the third quarter of 2008 due to business concerns regarding domestic economic conditions.

The increase in selling, general and administrative expenses for the three-month period ended September 30, 2008, as compared to the three-month period ended September 30, 2007, was $528,000. Period-to-period increases were realized in compensation for additions to the Company's technical consulting staff and sales and marketing personnel, rent expense due to expansion of the Boston and Ft. Lauderdale offices and the acquisition of SharePointHosting.com, and depreciation and amortization.

During the third quarter of 2007, the Company recognized a significant reduction in the valuation allowance associated with deferred tax assets which resulted in the recognition of a benefit from income taxes of $1,037,000 for the quarter.

The following table provides a summary of key financial information from the Company's Statements of Operations for the nine-month periods ended September 30, 2008 and 2007, as well as period-to-period percentage changes.

                                                      Nine Months
                                                         Ended
                                                     September 30,
   (Dollars in thousands)                           2008       2007     % Increase
   Statement of Operations Data:
   Revenue                                        $ 22,019   $ 18,648           18 %
   Gross profit                                     11,670      9,999           17 %
   Selling, general and administrative expenses     10,500      8,493           24 %
   Net income                                        1,473      2,398          (39 )%

Comparing the nine-month periods ended September 30, 2008 and 2007, the Company experienced period-to-period increases in revenue of $3,371,000 and gross profit of $1,671,000. The Company's aggregate consulting services realized a period-to-period increase of $133,000 (1%) in revenue and decline of $52,000 (1%) in gross profit. Significant period-to-period improvements in revenue and gross profit were realized by the Technology Infrastructure, Interactive Media, Systems Integration and Other Services segments. However, the Collaborative Solutions and Business Process segments experienced period-to-period declines in revenue and gross profit that largely offset the increases. The period-to-period changes in revenue or gross profit for Information System Product Sales segment were relatively small and did not significantly impact the period-to-period changes in total revenue or gross profit.

Technology Infrastructure revenue and gross profit increased by $149,000 (8%) and $120,000 (12%), comparing the nine-month periods ended September 30, 2008 and 2007. As noted above, management attributes the period-to-period increases primarily to the commencement of large projects in Northern California during the third quarter of 2008.

Period-to-period changes in Interactive Media included increases in revenue of $758,000 (41%) and gross profit of $382,000 (31%), comparing the nine-month periods ended September 30, 2008 and 2007. Management attributes the increases to a greater number of active large projects for shipboard interactive television systems in the first nine months of 2008 than in the first nine months of 2007. Comparing the nine-month periods ended September 30, 2008 and 2007, Systems Integration revenue and gross profit increased by $2,464,000 (68%) and $1,105,000 (67%), respectively. Management also attributes the period-to-period increases in Systems Integration revenue and gross profit to the higher level of activity on large shipboard interactive television systems related to those projects noted above for Interactive Media consulting during the first nine months of 2008.

Comparing the nine-month periods ended September 30, 2008 and 2007, Collaborative Solutions revenue and gross profit declined by $116,000 (2%) and $137,000 (3%), respectively. As discussed above, management attributes the declines to softening demand due to business concerns regarding domestic economic conditions.

Business Process revenue and gross profit declined by $658,000 (29%) and $417,000 (31%), respectively, comparing the nine-month periods ended September 30, 2008 and 2007. Management attributes the changes to the inclusion of activity for three unusually large projects during the first nine months of 2007. There were no projects with a comparable level of activity during the same period in 2008. Management also attributes the declines to business concerns regarding domestic economic conditions.

Other Services revenue and gross profit increased by $702,000 (73%) and $560,000 (185%), respectively, comparing the nine-month periods ended September 30, 2008 and 2007. Other services revenue and gross profit during the first nine months of 2008 increased due to growth in software licensing revenue associated with the Company's DigiMix™ software applications utilized for shipboard interactive television platforms and the inclusion of hosting fees for SharePointHosting.com for a portion of 2008.

The increase in selling, general and administrative expenses for the nine-month period ended September 30, 2008, as compared to the nine-month period ended September 30, 2007, was $2,007,000. Period-to-period increases were realized in compensation for additions to the Company's technical consulting staff and sales and marketing personnel, rent, travel and research and development expenses, as well as the acquisition of SharePointHosting.com and depreciation and amortization.

The Company recognized a gain of $609,000 during June 2008 from the extinguishment of a liability for goods purchased and utilized in the Company's operations. The gain recognized was due to the expiration of the statutory period for a commercial claim under the sales terms of the arrangement.

The Company recognized a significant reduction in the valuation allowance associated with deferred tax assets resulting in the recognition of a benefit from income taxes of $964,000 for the nine months ended September 30, 2007. During the nine months ended September 30, 2008, the Company recognized a provision for income taxes of $208,000, resulting in a period-to-period decline in profitability of $1,172,000.

The Company's cash balance decreased from $900,000 as of December 31, 2007 to $634,000 as of September 30, 2008, a decrease of $266,000. The overall change in cash reflects the netting of significant cash flows provided by operating activities, primarily from current operations, and cash flows provided by financing activities, primarily borrowing on the Company's line of credit, with cash flows used for investing activities, primarily for consideration related to acquisitions and capital expenditures. Operating activities resulted in net cash provided of $579,000 during the nine-month period ended September 30, 2008. Cash generated from operations was $1,827,000, while changes in working capital resulted in a net use of $1,248,000. Working capital changes using cash included significant decreases in accounts payable and billings in excess of costs and estimated gross margins of $891,000 and $471,000, respectively, along with an increase in accounts receivable of $982,000. Working capital changes providing cash included a significant decrease in costs and estimated gross margins in excess of billings of $372,000 and increases in customer deposits, accrued compensation and payroll taxes, and deferred revenue of $271,000, $261,000 and $239,000, respectively. Investing activities resulted in net cash used of $1,542,000, primarily $1,212,000 for consideration related to acquisitions, including both initial consideration related to the acquisition of SharePointHosting.com and contingent consideration related to the acquisitions in 2004 and 2005, respectively, of Accounting Technology Professionals L.L.C. d/b/a Jimary

Business Systems ("Jimary Business Systems") and CodeLab, and $335,000 for capital expenditures. Financing activities resulted in net cash provided of $697,000, primarily from net borrowings on the Company's line of credit, net of preferred stock dividend payments.

Operational Focus, Marketing Strategy and Delivery Framework and Methods

The Company's operations are focused on providing Microsoft-based technology solutions. The Company is a Microsoft Gold Certified Partner designated with the following Microsoft Competencies in recognition of the attainment of rigorous certification criteria and demonstrated technical competency in providing complex business solutions:

• Advanced Infrastructure Solutions, with specializations in Active Directory and Identity Management and Systems Management;

• Business Intelligence Solutions, with specializations in Business Intelligence Platform and Performance Management;

• Custom Development Solutions, with specializations in Smart Client Development and Web Development;

• Information Worker Solutions, with specializations in Search, Portals and Collaboration and Enterprise Content Management and Forms;

• Microsoft Business Solutions, with a specialization in Dynamics CRM, Dynamics GP, and Dynamics SL;

• Networking Infrastructure Solutions;

• Security Solutions, with specializations in Identity and Secure Access;

• and Unified Communications Solutions.

Microsoft has long recognized the Company's technical expertise and quality of services through partner awards. In July 2008, the Company received the Partner of the Year award for the Northwest Area at Microsoft's Worldwide Partner Conference, in recognition of the Company's ability to adopt new technologies ahead of the curve, to lead the way with customer education and deployment and to provide high customer satisfaction. The Northwest Area includes partners from Alaska, Washington, Oregon and Northern California. In May 2008 and October and December 2007, respectively, the Company received the General Manager's Award and Northern California awards for Customer Satisfaction and Best Practices. In July 2007, at the Microsoft Worldwide Partner Conference, the Company received the worldwide award Competing to Win Partner of the Year: Search for superior technology and innovation with Microsoft Search technologies. In July 2007, the Company was recognized by Microsoft's Eastern Region as the EPG Loyalty Award - Partner of the Year and the SMS&P Marketing Excellence - Partner of the Year, and by Microsoft's Western Region as the Regional VP Award - Partner of the Year and with the Security Partners - Trusted Advisor Award. In July 2006, the Company received the Microsoft Eastern Region Partner of the Year Award in recognition of strong performance, leadership and outstanding results in . . .