Forward-Looking Statements: Except for historical information, the statements contained herein are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "could," "target," "potential," "is likely," "will," "expect" and similar expressions, as they relate to the Company are intended to identify forward-looking statements within the meaning of the "safe harbor" provisions of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such forward-

looking statements are based on the expectations of management when made and are subject to, and are qualified by, risks and uncertainties that could cause actual results to differ materially from those expressed or implied by those statements. These risks and uncertainties include, but are not limited to, the following factors, among others, that could affect the outcome of the Company's forward-looking statements: general economic and market conditions; reduced demand for information technology equipment; competitive pricing and difficulty managing product costs; development of new technologies which make the Company's products obsolete; rapid industry changes; failure by the Company's suppliers to meet quality or delivery requirements; the inability to attract, hire and retain key personnel; failure of an acquired business to further the Company's strategies; the difficulty of integrating an acquired business; undetected problems in the Company's products; the failure of the Company's intellectual property to be adequately protected; unforeseen litigation; unfavorable result of current pending litigation; the ability to maintain sufficient liquidity in order to support operations; the ability to maintain satisfactory relationships with lenders and to remain in compliance with financial loan covenants and other requirements under current banking agreements; the ability to maintain satisfactory relationships with suppliers; federal and/or state regulatory and legislative actions; customer preferences and spending patterns; the ability to implement or adjust to new technologies and the ability to secure and maintain key contracts and relationships. New risk factors emerge from time to time and it is not possible to accurately predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statements. Except as otherwise required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this Quarterly Report or in the documents we incorporate by reference, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Quarterly Report on Form 10-Q.

General

Information on industry segments is incorporated by reference from Note H - Industry Segment Data to the Condensed Consolidated Financial Statements.

Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the United States Securities and Exchange Commission. The preparation of our financial statements requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, estimates are revalued, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. These areas include allowances for doubtful accounts, inventory valuations, carrying value of goodwill and intangible assets, estimated profit and estimated percent complete on uncompleted contracts in process, stock-based compensation, income and expense recognition, income taxes, ongoing litigation, and commitments and contingencies. Our estimates are based upon historical experience, observance of trends in particular areas, information and/or valuations available from outside sources and on various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may materially differ from these estimates under different assumptions and conditions.

Accounting policies are considered critical when they are significant and involve difficult, subjective or complex judgments or estimates. We considered the following to be critical accounting policies:

Principles of consolidation - The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

Revenue recognition - The Company recognizes revenue, net of anticipated returns, at the time products are shipped to customers, or at the time services are provided. Revenue from material long-term contracts (in excess of $250,000 and not completed in the reporting period) in all business segments are recognized on the percentage-of-completion method for individual contracts, commencing when significant costs are incurred and adequate estimates are verified for substantial portions of the contract to where experience is sufficient to estimate final results with reasonable accuracy. Revenues are recognized in the ratio that costs incurred bear to total estimated costs. Changes in job performance, estimated profitability and final contract settlements would result in revisions to cost and income, and are recognized in the period in which the revisions were determined. Contract costs include all direct materials, subcontracts, labor costs and those direct and indirect costs related to contract performance. General and administrative costs are charged to expense as incurred. At the time a loss on a contract is known, the entire amount of the estimated ultimate loss is accrued.

Long-lived assets and intangible assets - The Company reviews carrying values at least annually or whenever events or circumstances indicate the carrying values may not be recoverable through projected discounted cash flows.

Results of Operations

Three months ended September 30, 2008 versus three months ended September 30, 2007

Net Sales

Consolidated net sales for the first fiscal quarter ended September 30, 2008 were $6,027,800, an increase of $1,475,200, or 32.4%, compared to sales of $4,552,600 reported for the first quarter of fiscal 2008. The increase resulted from an increase in sales of the RFID Technology segment of $1,839,200, or 608%, a $185,600, or 5.9%, increase in sales of the Company's Wireless Asset Management, offset by a decrease of $549,600, or 48.9%, in the Company's Data Storage segment. The increase in the RFID Technology segment resulted from sales under existing contracts as additional progress on the contracts was achieved and the slight increase in Wireless Asset Management segment sales resulted from increased hardware sales. The 48.9% decrease in sales in the Data Storage segment resulted from the segment's inability to replace some large orders that were billed in the first quarter of the prior year. The Company does not consider the first quarter percentage increases to be indicative of a trend.

Gross Profit

Consolidated gross profit for the quarter ended September 30, 2008 amounted to $1,583,600, a decrease of $4,100 compared to $1,587,700 in gross profit reported for the comparable quarter of the prior year. The gross profit decreases were due to decreases in both the Wireless Asset Management and Data Storage segments offset by an increase in gross profit for the RFID Technology segment. The gross profit of the Wireless Asset Management segment decreased by $425,200, decreasing to $804,500 in the current quarter from $1,229,700 in the comparable quarter of the prior fiscal year. Gross margins for the Wireless Asset Management segment also decreased from 39.3% in the comparable quarter of the prior year to 24.3% in the current quarter. The decrease in gross profit and gross margin was primarily due to unusually high warranty costs related to an early version of ReeferTrak product and additional cost incurred to assist current customers in their transition from analog to digital hardware products. In addition, Data Storage segment gross profit decreased during the current quarter compared to the same quarter of the prior year by $115,000, from $299,500 to $184,500. The Data Storage segment decrease was due to decreased sales as the gross margin actually increase from 26.7% in the comparable quarter of the prior fiscal year to 32.2% in the quarter ended September 30, 2008. .

The decreased gross margin of the Wireless Asset Management and Data Storage segments was offset by an increase of $536,100 in the RFID Technology segment, increasing from $58,500 in the first quarter of fiscal year 2008 to $594,600 in the current quarter. The gross profit increase is due to higher sales, although gross margins also improved to 27.8% compared to 19.3% reported for the same period of the prior year. Consolidated gross margins decreased from 34.9% in the prior year to 26.3% in the current year, due primarily to the reduced gross margin of the Wireless Asset Management segment. Gross margin can be impacted in all business segments by economic conditions and specific market pressures. As a result, the changes in gross margins reported for the current quarter are not considered to be trends.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses, excluding corporate expenses of $53,700, for the current quarter decreased to $2,199,800, a decrease of $376,200, or 14.6%, when compared to $2,576,000 incurred in the comparable quarter of fiscal year 2008. The decrease was due to decreases in all business segments, including a $176,300, or 31.3%, decrease in the RFID Technology segment due primarily to deferral of certain engineering costs, $153,100 decrease, or 34.2%, in the Data Storage segment related to decreased sales commissions and a reduction of general and administrative expenses and a decrease of $46,800, or 3%, in the Wireless Asset Management segment.

Operating Loss

Operating Loss for the quarter was ($669,900) compared to an Operating Loss of ($1,289,100) reported for the same quarter of the prior year, an improvement of $619,200, or 48%. The improved operating results are due to improved results in the RFID Technology segment, which reported an Operating Profit of $207,200 compared to a ($505,200) Operating Loss reported for the same quarter of the prior year, and improved results in the Data Storage segment, which reduced it Operating Loss to ($110,600), a reduction of $38,100, or 25.6%, when compared to ($148,700) reported in the first quarter of the prior fiscal year. The Wireless Asset Management segment reported an operating loss for the quarter of ($712,800), compared to an operating loss of ($334,400) for the comparable quarter of the prior year, an increase of ($378,400), or 113%. Corporate expenses decreased by 82.1% to ($53,700) from ($300,800), a decrease of $247,100, due to the recovery of legal expenses related to the TSIN lawsuit that has been settled.

Other Income and Expense

Net interest expense for the quarter increased to $378,400, an increase of $167,900, or 79.8%, compared to net interest expense of $210,500 for the same quarter in the prior year. The increase was due to a one-time accelerated amortization of deferred loan costs of approximately $215,000 related to the prepayment on the ComVest term loan. The increase in interest expense was partially offset by reduced borrowings.

The Company reported a reduction in Other Income from $16,400 in the first quarter of the prior fiscal year to a loss of ($183,400) reported in the current quarter. The reduction in Other Income was due to a $187,500 charge related to reduction in estimated value of the Company's 8.9% investment in TSIN.

The operations of TSI were acquired in May of 2002 by the issuance of 2.4 million (post October 16, 2006 reverse split) shares of the Company's Class A Common Stock and the assumptions of certain specific liabilities. In anticipation of the transaction, the Company had acquired approximately 8.9% of the then outstanding shares of TSIN. TSIN had stated it was its intent to liquidate enough shares of the Alanco stock to pay off all TSIN liabilities and to distribute the remaining Alanco shares to the TSIN stockholders. To reflect the 8.9% investment in TSIN subsequent to the acquisition, the Company estimated that approximately 2.25 million shares would be remaining after payment of all TSIN liabilities and that an 8.9% ownership would receive approximately 200,000 shares upon distribution. Therefore, the Company recorded 200,000 treasury shares valued at market price on the transaction date.

On January 30, 2003, a shareholder of TSIN filed suit naming as defendants the Company and its wholly owned subsidiary, ATSI. The complaint set forth various allegations and sought damages arising out of the Company's acquisition of substantially all of the assets of TSIN. Eventually, the lawsuit was transferred to TSIN who became the plaintiff and continued the legal process until September 2007 when the parties to the lawsuit entered into a Settlement Agreement more fully explained in Note K - TSIN Litigation Settlement. From 2003 through September 2007, TSIN incurred significant legal expenses associated with the lawsuit, which reduced the number of Alanco shares available to TSIN shareholders upon distribution. To reflect that reduction in investment value of the Company's 8.9% ownership in TSIN, the Company reduced the estimated number of treasury shares to be acquired upon distribution from 200,000 shares to 100,000 shares and recorded a charge to other expenses of $187,500 during the quarter ended September 30, 2008.

(Loss) Earnings before Dividends, Interest, Depreciation & Amortization (EBITDA)

The Company believes that (loss) earnings before net interest expense, income taxes, depreciation, and amortization of intangible assets, (EBITDA), is an important measure used by management to measure performance. EBITDA may also be used by certain investors to compare and analyze our operating results between accounting periods. However, EBITDA should not be considered in isolation or as a substitute for net income, cash flows or other financial statement data prepared in accordance with US GAAP or as a measure of our performance or liquidity. EBITDA for Alanco's 2009 fiscal year first quarter represents a loss of ($712,700) compared to a loss of ($1,103,100) for the same quarter of the prior fiscal year, an improvement of $390,400, or 35.4%. A reconciliation of EBITDA to Net Loss for the quarters ended September 30, 2008 and 2007 is presented below:

                     EBITDA RECONCILIATION to NET LOSS (unaudited)

                                                 3 months ended     3 months ended
                                                 September 30,      September 30,
                                                      2008               2007
     EBITDA                                  $          (712,700) $    (1,103,100)

         Net interest expense                           (378,400)        (210,500)
         Depreciation and amortization                  (140,600)        (169,600)

     NET LOSS                                $        (1,231,700) $    (1,483,200)

Dividends

The Company paid quarterly in-kind Series B Preferred Stock Dividends during the first quarter ended September 30, 2008 of $22,700. During the prior year quarter ended September 30, 2007, the Company paid in-kind dividends for Series A and Series B Preferred Stock valued at $357,000. All Series A Preferred Stock had been converted to Common Stock as of June 30, 2008. In addition, the Company paid cash dividends during the quarter

ended September 30, 2008 of $68,300 related to the Series D Preferred Stock. No Series D Preferred Stock was outstanding during the quarter ended September 30, 2007.

Net Loss Attributable to Common Shareholders

Net Loss Attributable to Common Shareholders for the quarter ended September 30, 2008 amounted to ($1,322,700), or ($.04) per share, compared to a loss of ($1,840,200), or ($.08) per share, in the comparable quarter of the prior year. The Company anticipates improved future operating results in all business segments. However, actual results in the Wireless Asset Management segment, Data Storage segment and the RFID Technology segment may be affected by unfavorable economic conditions and reduced capital spending budgets. If the economic conditions in the United States deteriorate or if a wider global economic slowdown occurs, Alanco may experience a material adverse impact on its operating results and business conditions.

Liquidity and Capital Resources

The Company's current assets at September 30, 2008 exceeded current liabilities by $2,555,200, resulting in a current ratio of 1.39 to 1. The comparable working capital at June 30, 2008 was $759,300, reflecting a current ratio of 1.10 to 1. The improvement in current ratio at September 30, 2008 versus June 30, 2008 resulted from the completion of a private offering to accredited investors whereby the Company issued 180,000 shares of Series D Preferred Stock at a price of $10.00 per share raising approximately $1.8 million.

Consolidated accounts receivable of $3,312,100 at September 30, 2008 reflects an increase of $521,500, or 18.7%, when compared to the $2,790,600 reported as consolidated accounts receivable at June 30, 2008. The accounts receivable balance at September 30, 2008 for the Data Storage segment represents sixteen days' sales in receivables, an increase compared to eight days' sales at June 30, 2008. The increase was due primarily to a decrease in the proportion of credit card sales during the current quarter compared to the year ended June 30, 2008. The days' sales calculation of the Data Storage segment can be significantly affected by the proportion of credit card sales in the last month of the reporting period and therefore, the increase in days' sales for the Data Storage segment is not considered a trend.

The accounts receivable balance for the Wireless Asset Management segment at September 30, 2008 was $1,967,800 compared to $1,783,700 at June 30, 2008, an increase of $184,100, or 10.3%. Days' sales in receivables for the Wireless Asset Management decreased to fifty-four from fifty-five days' sales in receivables reported at June 30, 2008.

The accounts receivable balance at September 30, 2008 for the RFID Technology segment represents fifty-three days' sales in receivables as compared to two hundred and three days' sales in receivables at June 30, 2008. Days' sales in receivables for the RFID Technology segment are distorted at June 30, 2008 due to the lack of significant sales for the period ended June 30, 2008.

Consolidated inventories at September 30, 2008 amounted to $3,676,000, a decrease of $1,114,900, or 23.3%, when compared to $4,790,900 at June 30, 2008. The inventory balance at September 30, 2008 for the Data Storage segment reflected an inventory turnover of 2.3 compared to an inventory turnover of 3.4 at June 30, 2008. The inventory balance for the Wireless Asset Management segment at September 30, 2008 was $2,061,900 compared to $2,024,100 at June 30, 2008, a decrease of $37,800, or 1.9%. The inventory balance at September 30, 2008 for the Wireless Asset Management segment represents an inventory turnover of 4.9 compared to 4.1 as of June 30, 2008. The inventory balance of the RFID Technology segment at September 30, 2008 represents inventory turnover of 6.6 as compared to .72 at June 30, 2008 due to increased shipments for existing contracts.

At September 30, 2008, the Company had fully drawn available funds of $2.5 million under a $2.5 million line of credit agreement. See Note J - Line of Credit and Term Loan for additional discussion of the existing line of credit agreement.

Cash used in operations for the three-month period ended September 30, 2008 was $875,700, a decrease of $1,539,000, or 63.7%, when compared to cash used in operations of $2,414,700 for the comparable period ended September 30, 2007. The decrease in cash used in operating activities during the three-month period resulted primarily from a decrease in inventories and reduced net loss.

During the three months ended September 30, 2008, the Company reported cash used by investing activities of $18,000, compared to $31,400 reported for the same period in the prior fiscal year. The decrease in cash used by investing activities is the result of a reduction in purchase of property, plant and equipment compared to the prior fiscal year quarter ended September 30, 2007.

Cash provided by financing activities for the three months ended September 30, 2008 amounted to $1.4 million, a decrease of $2.5 million compared to the $3.9 million provided by financing activities for the three months ended September 30, 2007. The decrease in financing activity resulted primarily from a $2.7 million reduction in proceeds from sale of equity instruments during the quarter ended September 30, 2008 compared to the same period of the prior fiscal year.

The Company believes that additional cash resources may be required for working capital to achieve planned operating results for fiscal year 2009 and, if working capital requirements exceed current availability, the Company anticipates raising capital through additional borrowing, the exercise of stock options and warrants and/or the sale of stock in a private placement. The additional capital would supplement the projected cash flows from operations and the line of credit agreement in place at September 30, 2008. If additional working capital is required and the Company is unable to raise the required additional capital, it may materially affect the ability of the Company to achieve its financial plan. The Company has raised a significant amount of capital in the past and believes it has the ability, if needed, to raise the additional capital to fund the planned operating results for fiscal year 2009. While the Company believes that it will succeed in attracting additional capital and generate capital from operations from its StarTrak acquisition, there can be no assurance that the Company's efforts will be successful. The Company's continued existence is dependent upon its ability to achieve and maintain profitable operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.