The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q. Descriptions of all documents incorporated by reference herein or included as exhibits hereto are qualified in their entirety by reference to the full text of such documents so incorporated or referenced. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those set forth under "Forward-Looking Statements" and elsewhere in this report and in Item 1A of Part I, "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2008 ("fiscal 2007"). Unless otherwise indicated, all dollar amounts presented are in thousands, except per share amounts.

Executive Summary

Alloy is a media and marketing services company that reaches targeted consumer segments using a diverse array of assets in interactive, display, direct mail, content production and educational programming businesses. We operate our business through three operating segments-Promotion, Media and Placement. Our Promotion segment is comprised of businesses whose products and services are promotional in nature and includes our Alloy Marketing and Promotion business ("AMP"), on-campus marketing unit ("OCM") and sampling business. Our Media segment is comprised of company-owned and represented media assets, including our display board, Internet, database, specialty print, educational programming, and entertainment businesses. Our Placement segment is made up of our businesses that aggregate and market third party media properties owned by others primarily in the college, military and multicultural markets. These three operating segments utilize our wide array of owned and represented online and offline media and marketing assets, such as websites, magazines, college and high school newspapers, on-campus message boards, satellite delivered educational programming and college guides, giving us significant reach into the targeted demographic audience and providing our advertising clients with significant exposure to the intended market.

A variety of factors influence our revenue, including but not limited to:
(i) economic conditions and the relative strength or weakness of the United States economy (ii) advertiser and consumer spending patterns, (iii) the value of our consumer brands and database, (iv) the continued perception by our advertisers and sponsors that we offer effective marketing solutions, (v) use of our websites, and (vi) competitive and alternative advertising mediums. In addition, our business is seasonal. Our third quarter has historically been our most significant in terms of revenue and operating income. The majority of our revenues and operating income is earned during the third and fourth quarters of our fiscal year. Quarterly comparisons are affected by these factors.

In fiscal year ending January 31, 2009 ("fiscal 2008"), we intend to continue to expand our Media segment through acquisitions and internally generated growth, as we believe this segment provides the greatest opportunity to increase long-term profitability and shareholder value. We also intend to review ways we can continue to capitalize on the increased recognition of our Alloy Entertainment brand. In our Promotion and Placement segments, we plan to continue to try to maximize profitability through cost management, and to a lesser extent growth.

In addition, we also believe our business should continue to grow as we strive to capitalize on the following key assets:

• Broad Access. We are able to reach a significant portion of targeted consumers by: (i) producing a wide range of college guides, books and recruitment publications; (ii) owning and operating over 60,000 display media boards on college and high school campuses throughout the United States; (iii) placing advertising in over 2,900 college and high school newspapers; (iv) distributing educational programming to approximately 8,500 secondary schools in the United States; (v) maintaining and expanding our ability to execute large scale promotional service programs; and (vi) utilizing our national in-store advertising and display network comprising approximately 7,000 grocery and other stores.

• Comprehensive Database. As of October 31, 2008, our database contained information on millions of individuals. In addition to names and addresses, our database contains a variety of valuable information that may include age, postal address, stated interests, online behavior, educational level and socioeconomic factors. We continually refresh and grow our database with information we gather through our media properties and marketing services, as well as through acquisitions of companies that have database information and by purchasing or licensing the information from third parties. We analyze this data in detail, which we believe enables us to not only offer advertisers cost-effective ways of reaching highly targeted audiences but also to improve response rates from our own direct marketing sales efforts.

• Established Marketing Franchises. Our principal marketing franchises are well-known by market consumers and by advertisers. For advertisers, Alloy Media + Marketing, the umbrella name for all of our media and marketing brands, and many of our company-owned brands, have a history in creating and implementing advertising and marketing programs primarily targeting the youth market.

• Strong Relationship with Advertisers and Marketing Partners. We strive to provide advertisers and our marketing partners with highly targeted, measurable and effective means to reach their target market. Our seasoned advertising sales force has established strong relationships with youth marketers.

Results of Operations and Financial Condition

The principal components of our operating expenses are placement, production and distribution costs (including ad placement fees, catalog and signage fees, temporary help and production costs), selling expenses (including personnel costs, commissions, promotions and bad debt expenses), general and administrative expenses, depreciation and amortization and special charges. Our Promotion and Placement segments have significant variable costs, while the costs of the Media segment's costs are largely fixed in nature. As a result, an increase or decrease in revenue attributable to the Promotion and Placement segments typically results in segment operating income increasing or decreasing by a similar percentage. While the Media segment has relatively low variable costs, we have recently incurred additional expenses specifically related to building and updating the infrastructure within our Media segment. As a result, our operating income is not as predictable as our Promotion and Placement segments described above.

Three Months Ended October 31, 2008 Compared with Three Months Ended October 31, 2007

                                                      Three months ended October 31, 2008 (Unaudited)
                                             Promotion        Media       Placement     Corporate       Total
Revenues:
Services revenue                            $    15,666    $    25,032   $    18,736            -      $ 59,434
Product revenue                                  10,473             -             -             -        10,473

Total revenue                               $    26,139    $    25,032   $    18,736            -      $ 69,907
Cost of goods sold:
Cost of goods sold - services               $     8,530    $     6,688   $    13,533            -      $ 28,751
Cost of goods sold - product                      2,973             -             -             -         2,973

Total cost of goods sold                    $    11,503    $     6,688   $    13,533            -      $ 31,724
Expenses:
Operating                                   $    10,207    $    10,406   $     2,180   $       201     $ 22,994
General and administrative                          535          1,228           313         2,259        4,335
Depreciation and amortization                       225          1,141             9           246        1,621

Total expenses                              $    10,967    $    12,775   $     2,502   $     2,706     $ 28,950

Operating income (loss)                     $     3,669    $     5,569   $     2,701   $    (2,706 )   $  9,233


                                                      Three months ended October 31, 2007 (Unaudited)
                                             Promotion        Media       Placement     Corporate       Total
Revenues:
Services revenue                            $    15,852    $    21,652   $    18,938            -      $ 56,442
Product revenue                                  10,076             -             -             -        10,076

Total revenue                               $    25,928    $    21,652   $    18,938            -      $ 66,518
Cost of goods sold:
Cost of goods sold - services               $     8,887    $     7,243   $    13,936            -      $ 30,066
Cost of goods sold - product                      3,115             -             -             -         3,115

Total cost of goods sold                    $    12,002    $     7,243   $    13,936            -      $ 33,181
Expenses:
Operating                                   $     8,832    $     9,341   $     2,032   $       250     $ 20,455
General and administrative                          692          1,064           275         2,404        4,435
Depreciation and amortization                       217          1,018             8           166        1,409

Total expenses                              $     9,741    $    11,423   $     2,315   $     2,820     $ 26,299

Operating income (loss)                     $     4,185    $     2,986   $     2,687   $    (2,820 )   $  7,038

Revenue

Revenue in the third quarter of fiscal 2008 was $69,907, an increase of $3,389, or 5.1%, from revenue of $66,518 in the third quarter fiscal 2007. Revenue in our Media and Promotion segments increased $3,380 and $210, respectively, which were offset by a decrease in revenue in our Placement segment of $201.

Promotion

Promotion segment revenue in the third quarter of fiscal 2008 was $26,139, an increase of $211, or 1.0%, from revenue of $25,928 in the third quarter of fiscal 2007. Revenue increased in the Company's OCM and sampling businesses ($1,504), which was partially offset by a decrease in the Company's AMP Agency business ($1,294). During the third quarter of fiscal 2008, we acquired Fulgent Media Group, Inc. ("Fulgent"), which did not have a material impact on the Promotion segment.

Media

Media segment revenue in the third quarter of fiscal 2008 was $25,032, an increase of $3,380, or 15.6%, from revenue of $21,652 in the third quarter of fiscal 2007. Revenue increased in our interactive, display board, entertainment and Channel One businesses ($4,200) offset by decreases in our print catalog and nightlife business ($850).

Placement

Placement segment revenue in the third quarter of fiscal 2008 was $18,736, a decrease of $202, or 1.1 %, from revenue of $18,938 in the third quarter of fiscal 2007. The decrease was primarily due to a decrease in broadcast advertising offset by increases in college, multicultural and military advertising.

Cost of Goods Sold

Promotion

Promotion segment cost of goods sold in the third quarter of fiscal 2008 was $11,503, a decrease of $499, or 4.2%, from cost of goods sold of $12,002 in the third quarter of fiscal 2007. The decrease was primarily due to decreases in production costs primarily in our AMP business ($765), and payroll related costs ($241), offset by increases in travel-related costs ($34), and temporary labor ($335).

Media

Media segment cost of goods sold in the third quarter of fiscal 2008 was $6,688, a decrease of $555, or 7.7%, from cost of goods sold of $7,243 in the third quarter fiscal 2007. The decrease was primarily due to decreases in production costs ($513), payroll ($98) and travel related costs ($37) offset by an increase in temporary and outside labor ($90).

Placement

Placement segment cost of goods sold expense in the third quarter of fiscal 2008 was $13,533, a decrease of $403, or 2.9%, from the third quarter of fiscal 2007 cost of goods sold of $13,936. The decrease is primarily due to a decrease in marketing fees.

Operating Expenses

Promotion

Promotion segment operating expenses in the third quarter of fiscal 2008 were $10,207, an increase of $1,375, or 15.6%, from operating expenses of $8,832 in the third quarter of fiscal 2007. The increase was primarily due to increases in payroll related costs ($950), printing costs ($243), and general corporate costs ($182).

Media

Media segment operating expenses in the third quarter of fiscal 2008 were $10,406, an increase of $1,065, or 11.4%, from operating expenses of $9,341 in the third quarter of fiscal 2007. The increase was primarily due to increases in payroll related costs ($1,489), temporary labor and consulting expenses ($191), offset by decreases in maintenance expense ($326) and general corporate costs ($298).

Placement

Placement segment operating expenses in the third quarter of fiscal 2008 were $2,180, an increase of $148, or 7.3%, from operating expenses of $2,032 in the third quarter of fiscal 2007. The increase was primarily due to an increase in payroll related costs and general corporate costs ($134).

Corporate

The Corporate segment operating expenses in the third quarter of fiscal 2008 were $201, a decrease of $49, or 19.6%, from operating expenses of $250, in the third quarter of fiscal 2007. The decrease in operating expenses is primarily due to a decrease in IT costs.

General and Administrative

Promotion

Promotion segment general and administrative expenses in the third quarter of fiscal 2008 were $535, a decrease of $157, or 22.7%, as compared to $692 in the third quarter of fiscal 2007. The decrease was primarily due to decreases in general corporate costs.

Media

Media segment general and administrative expenses in the third quarter of fiscal 2008 were $1,228, an increase of $164, or 15.4%, as compared to general and administrative expenses of $1,064 in the third quarter of fiscal 2007. The increase was primarily due to increases in payroll related costs ($59), general corporate and facilities costs ($104), and stock based compensation ($14).

Placement

Placement segment general and administrative expenses in the third quarter of fiscal 2008 were $313, an increase of $38, or 13.8%, as compared to general and administrative expenses of $275 in the third quarter of fiscal 2007. The increase was primarily due to an increase in general corporate costs.

Corporate

The Corporate segment general and administrative expenses in the third quarter of fiscal 2008 was $2,259, a decrease of $145 or 6%, from general administrative expenses of $2,404 in the third quarter of fiscal 2007. The decrease was primarily due to decreases in payroll related costs and professional fees.

Nine Months Ended October 31, 2008 Compared with Nine Months Ended October 31, 2007

                                                      Nine months ended October 31, 2008 (Unaudited)
                                            Promotion       Media        Placement     Corporate        Total
Revenues:
Services revenue                           $    35,002    $  62,185     $    41,343            -      $ 138,530
Product revenue                                 34,622           -               -             -         34,622

Total revenue                              $    69,624    $  62,185     $    41,343            -      $ 173,152
Cost of goods sold:
Cost of goods sold - services              $    18,442    $  19,212     $    30,384            -      $  68,038
Cost of goods sold - product                    10,315           -               -             -         10,315

Total cost of goods sold                   $    28,757    $  19,212     $    30,384            -      $  78,353
Expenses:
Operating                                  $    30,151    $  33,566     $     5,585   $       498     $  69,800
General and administrative                       3,377        1,491           1,567         7,231        13,666
Depreciation and amortization                      643        3,335              24           667         4,669

Total expenses                             $    34,171    $  38,392     $     7,176   $     8,396     $  88,135

Operating income (loss)                    $     6,696    $   4,581     $     3,783   $    (8,396 )   $   6,664


                                                      Nine months ended October 31, 2007 (Unaudited)
                                            Promotion       Media        Placement     Corporate        Total
Revenues:
Services revenue                           $    33,617    $  46,081     $    42,172   $        -      $ 121,870
Product revenue                                 34,101           -               -             -         34,101

Total revenue                              $    67,718    $  46,081     $    42,172   $        -      $ 155,971
Cost of goods sold:
Cost of goods sold - services              $    18,153    $  16,698     $    31,121            -      $  65,972
Cost of goods sold - product                    10,514           -               -             -         10,514

Total cost of goods sold                   $    28,667    $  16,698     $    31,121            -      $  76,486
Expenses:
Operating                                  $    26,331    $  26,547     $     3,731   $       627     $  57,236
General and administrative                       3,847          876           2,343         7,709        14,775
Depreciation and amortization                      694        2,417              26           626         3,763

Total expenses                             $    30,872    $  29,840     $     6,100   $     8,962     $  75,774

Operating income (loss)                    $     8,179    $    (457 )   $     4,951   $    (8,962 )   $   3,711

Revenue

Revenue for the nine months ended October 31, 2008 was $173,152, an increase of $17,181, or 11.0%, from revenue of $155,971 for the nine months ended October 31, 2007. Revenue in our Media and Promotion segments increased $16,104 and $1,906, respectively, which was offset by a decrease in revenue in our Placement segment of $829.

Promotion

Promotion segment revenue for the nine months ended October 31, 2008 was $69,624, an increase of approximately $1,906, or 2.8%, from revenue of $67,718 for the nine months ended October 31, 2007. The increase was a result of increased revenue in our OCM and sampling businesses ($2,794), offset by a decrease in revenue in AMP Agency ($889). During the nine months ended October 31, 2008, we acquired Fulgent, which did not have a material impact on the Promotion segment.

Media

Media segment revenue for the nine months ended October 31, 2008 was $62,185, an increase of $16,104, or 34.9%, from revenue of $46,081 for the nine months ended October 31, 2007. The increase was a result of increases in revenue in our entertainment, Channel One, interactive, and display board businesses ($15,920).

Placement

Placement segment revenue for the nine months ended October 31, 2008 was $41,343, a decrease of $829, or 2.0 %, from revenue of $42,172 for the nine months ended October 31, 2007. The decrease was primarily due to decreases in military and broadcast advertising ($4,593), partially offset by an increase in college, multicultural and outdoor advertising ($3,379).

Cost of Goods Sold

Promotion

Promotion segment cost of goods sold for the nine months ended October 31, 2008 was $28,757, and remained consistent from cost of goods sold of $28,667 for the nine months ended October 31, 2007.

Media

Media segment cost of goods sold for the nine months ended October 31, 2008 were $19,212, an increase of $2,514, or 15.1%, from cost of goods sold of $16,698 for the nine months ended October 31, 2007. The increase was primarily due to increases in production costs ($2,742) and increases in payroll related costs ($37), partially offset by a decrease in temporary labor costs ($194) and travel related costs ($74).

Placement

Placement segment cost of goods sold for the nine months ended October 31, 2008 was $30,384, a decrease of $737, or 2.4%, from cost of goods sold of $31,121 for the nine months ended October 31, 2007. The decrease was primarily due to a decrease in marketing fees ($737).

Operating Expenses

Promotion

Promotion segment operating expenses for the nine months ended October 31, 2008 were $30,151, an increase of $3,820, or 14.5%, from operating expenses of $26,331 for the nine months ended October 31, 2007. The increase was primarily due to an increase in payroll related costs ($2,070), facilities costs ($995), general operating costs ($173), bad debt expense ($207) and postage ($350).

Media

Media segment operating expenses for the nine months ended October 31, 2008 were $33,566, an increase of $7,019, or 26.4%, from operating expenses of $26,547 for the nine months ended October 31, 2007. The increase was primarily due to increases in payroll related costs ($5,300), consulting expenses ($990), and depreciation expense ($710).

Placement

Placement segment operating expenses for the nine months ended October 31, 2008 were $5,585, an increase of $1,804, or 47.7%, from operating expenses of $3,731 for the nine months ended October 31, 2007. The increase was primarily due to an increase in payroll related costs ($749), bad debt expense ($594), and general corporate and facilities costs ($433).

Corporate

The Corporate segment operating expenses for the nine months ended October 31, 2008 were $498, a decrease of $129, or 20.6%, from operating expenses of $627 for the nine months ended October 31, 2007. The decrease was primarily due to a decrease in information technology related costs ($339), partially offset by an increase in payroll related costs ($227).

General and Administrative

Promotion

Promotion segment general and administrative expenses for the nine months ended October 31, 2008 were $3,377, a decrease of $470, or 12.2%, as compared to $3,847 for the nine months ended October 31, 2007. The decrease was primarily due to payroll and related expenses ($99) and general corporate expenses ($366).

Media

Media segment general and administrative expenses for the nine months ended October 31, 2008 were $1,491, an increase of $615, or 70.2%, as compared to general and administrative expenses of $876 in for the nine months ended October 31, 2007. The increase was primarily due to payroll related expenses ($220), general corporate costs ($265) and stock based compensation ($130).

Placement

Placement segment general and administrative expenses for the nine months ended October 31, 2008 was $1,567, a decrease of $776, or 33.1%, as compared to general and administrative expenses of $2,343 for the nine months ended October 31, 2007. The decrease was primarily due to decreases in general corporate and other related costs.

Corporate

The Corporate segment general and administrative expenses for the nine months ended October 31, 2008 was $7,231, a decrease of $478, or 6.2%, from general administrative expenses of $7,709 for the nine months ended October 31, 2007. The decrease was primarily due to decreases in professional services ($275) and payroll related expenses ($177).

Liquidity and Capital Resources

Cash from Operations

Net cash provided by operating activities was $14,752 for the nine months ended October 31, 2008, compared with net cash provided by operating activities of $2,509 for the nine months ended October 31, 2007. The increase in cash provided by operating activities is principally attributable to higher net income from operations and a lower accounts receivable balance due to improved collections.

Investing Activities

Cash provided by investing activities was approximately $2,656 during the nine months ended October 31, 2008, compared with cash used in investing activities of $704 during the nine months ended October 31, 2007. The increase in cash provided by investing activities during the first nine months of fiscal 2008 was principally attributable to the acquisition of Fulgent, which included a cash balance of $3,214, less cash paid of $596, and a decrease in capital expenditures.

Capital expenditures decreased $1,734 to $6,432 in the nine months ended October 31, 2008, compared with $8,166 in the nine months ended October 31, 2007 primarily due to the completion of the capital expenditure for the digital upgrades to Channel One's infrastructure.

Our short-term investment portfolio was $0 at October 31, 2008, compared with $13,441 at October 31, 2007. During the third quarter of fiscal 2008, we reclassified our remaining $1,325 of auction rate securities to long-term as we do not believe that these auction rate securities will liquidate over the next twelve months. Each of the auction rate securities are rated "Aaa" by Moody's Investors Service.

Financing Activities

Net cash used in financing activities was $8,615 during the nine months ended October 31, 2008, compared with net cash provided by financing activities of $4,073 during the nine months ended October 31, 2007. The use of cash for financing activities during the nine months ended October 31, 2008, was attributable to the payment of the $4,000 balance owed on the Credit Facility, payment of the remaining principal due on our convertible debt ($1,255) and cash used to buyback $3,400 of our common stock.

We continually project our anticipated cash requirements, which include our working capital needs, potential acquisitions and interest payments. Funding requirements will be financed primarily through our operations, the sale of equity, the use of our credit facility, or through equity-linked and debt securities. If we raise additional funds through the issuance of equity securities, our stockholders may experience significant dilution. We believe that cash generated from operations and amounts available under our Credit Facility are adequate to meet our reasonably foreseeable operating and capital expenditure requirements. During fiscal 2008, we expect to spend approximately $8,500 to $10,000 in capital expenditures including acquisitions of domain names and mailing lists as we continue to expand our Media segment.

. . .