(Amounts in thousands, except per share)

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 Annual Report on Form 10-K. 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 in Item 1A of Part I, "Risk Factors" and elsewhere in this Annual Report on Form 10-K.

Executive Summary

Alloy (NASDAQ: "ALOY") is one of the country's largest providers of media and marketing programs offering advertisers the ability to reach youth and non-youth targeted consumer segments through a diverse array of assets and marketing programs, including interactive, display, direct mail, content production and educational programming. Collectively, our businesses operate under the umbrella name Alloy Media + Marketing, but the division brand names continue to receive recognition, such as Alloy Education, Alloy Entertainment, Alloy Marketing and Promotions ("AMP"), Alloy Access and On Campus Marketing ("OCM").

Each of our businesses falls in one of three operating segments-Promotion, Media and Placement. The Promotion segment is comprised of businesses whose products and services are promotional in nature and includes our AMP, OCM and sampling divisions. The Media segment is comprised of company-owned and

represented media assets, including our display board, Internet, database, specialty print, educational programming and entertainment businesses. The 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 a 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 specialty print publications, 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 also affected by these factors.

We have expanded our Media segment through acquisitions and internally generated growth. In this regard, in the fourth quarter of fiscal 2008, we acquired gURL.com, an online community and content site for teenage girls and TAKKLE.com, an online resource and college recruitment website for high school sports. These acquisitions demonstrate our commitment to developing our media assets. We intend to continue to expand our Media segment as we believe this segment provides the greatest opportunity to increase long-term profitability and shareholder value. For example, in our Interactive business, we are expanding our Teen.com network to deliver original, short-form video programming. Also, in our Alloy Entertainment business, we are working to monetize our library of book titles through television, motion picture, and short-form video programming. We also continue to evaluate acquisition opportunities. In our Promotion and Placement segments, we plan to continue to try to maximize profitability through cost management, not necessarily growth.

We 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 59,000 display media boards on college and high school campuses throughout the United States; (iii) placing advertising in over 3,000 college and high school newspapers; (iv) distributing educational programming to approximately 8,000 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 7,400 grocery and other high volume stores.

• Established 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, as well as many of our company-owned brands have a history in creating and implementing advertising and marketing programs primarily targeting the youth market. Our Alloy Entertainment franchise is widely recognized as a developer of original books, with a number of books developed into television series and feature films.

• 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 and non-youth marketers.

• Content. We are able to successfully develop original, unique, commercial entertainment properties primarily geared toward teens, young adults and families. These properties typically begin as a book property and are subsequently sold and developed into television series and feature films.

Results of Operations and Financial Condition

The principal components of our operating expenses are placement, production and distribution costs (including advertising 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 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. However, because the Media segment has relatively low variable costs, in a period of rising revenue operating income in the Media segment typically grows faster than the growth of revenue, and conversely, in a period of declining revenue, operating income typically falls faster than the decline in revenue.

                                                        Fiscal year ended January 31, 2009
                                       Promotion       Media        Placement       Corporate         Total
Revenues:
Services revenue                      $    42,940    $  81,188      $   52,222              -       $ 176,350
Product revenue                            40,576           -               -               -          40,576

Total revenue                         $    83,516    $  81,188      $   52,222              -       $ 216,926

Cost of goods sold:
Cost of goods sold-services           $    21,512    $  24,419      $   38,261              -       $  84,192
Cost of goods sold-product                 11,469           -               -               -          11,469

Total cost of goods sold              $    32,981    $  24,419      $   38,261              -       $  95,661

Expenses:
Operating                             $    37,035    $  45,016      $    7,341      $      926      $  90,318
General and administrative                  4,871        1,497           2,302          10,584         19,254
Depreciation and amortization                 906        4,550              32             941          6,429
Special charges                                -            40             100             148            288

Total expenses                        $    42,812    $  51,103      $    9,775      $   12,599      $ 116,289
Gain on sale of operating asset                -        (5,800 )            -               -          (5,800 )

Operating income (loss)               $     7,723    $  11,466      $    4,186      $  (12,599 )    $  10,776


                                                        Fiscal year ended January 31, 2008
                                       Promotion       Media        Placement       Corporate         Total
Revenues:
Services revenue                      $    43,438    $  62,780      $   52,911              -       $ 159,129
Product revenue                            39,967           -               -               -          39,967

Total revenue                         $    83,405    $  62,780      $   52,911              -       $ 199,096

Cost of goods sold:
Cost of goods sold-services           $    23,024    $  21,965      $   39,279              -       $  84,268
Cost of goods sold-product                 11,679           -               -               -          11,679

Total cost of goods sold              $    34,703    $  21,965      $   39,279              -       $  95,947

Expenses:
Operating                             $    35,082    $  35,195      $    6,284      $      451      $  77,012
General and administrative                  3,488        2,927           2,421          10,658         19,494
Depreciation and amortization                 904        3,310              33             833          5,080
Special charges                                -        48,845          22,783              -          71,628

Total expenses                        $    39,474    $  90,277      $   31,521      $   11,942      $ 173,214

Operating income (loss)               $     9,228    $ (49,462 )    $  (17,889 )    $  (11,942 )    $ (70,065 )

                                              Fiscal year ended January 31, 2007
                                 Promotion     Media      Placement    Corporate        Total
Revenues:
Services revenue                $    59,828   $ 46,287   $    53,838           -      $ 159,953
Product revenue                      36,151         -             -            -         36,151

Total revenue                   $    95,979   $ 46,287   $    53,838           -      $ 196,104

Cost of goods sold:
Cost of goods sold-services     $    29,702   $ 17,929   $    39,796           -      $  87,427
Cost of goods sold-product           11,286         -             -            -         11,286

Total Cost of goods sold        $    40,988   $ 17,929   $    39,796           -      $  98,713

Expenses:
Operating                       $    37,886   $ 19,498   $     6,923   $    1,709     $  66,016
General and administrative            5,213        471         1,452        8,061        15,197
Depreciation and amortization           815      1,751            38          761         3,365
Special charges                          -          -             -           127           127

Total expenses                  $    43,914   $ 21,720   $     8,413   $   10,658     $  84,705

Operating income (loss)         $    11,077   $  6,638   $     5,629   $  (10,658 )   $  12,686

Revenue

Revenue in fiscal 2008 was $216,926, an increase of $17,830 or 9.0%, from fiscal 2007 revenue of $199,096. This increase was attributable to increases in revenue in our Media segment of $18,408, and our Promotion segment of $111, offset by a decrease in our Placement segment of $689.

Revenue in fiscal 2007 was $199,096, an increase of $2,992 or 1.5%, from fiscal 2006 revenue of $196,104. This increase was attributable to strength of sales in our Media segment of $16,493, partially offset by a $12,574 and $927 decrease in our Promotion and Placement segments revenue, respectively.

Promotion

Promotion segment revenue in fiscal 2008 was $83,516, an increase of $111 from fiscal 2007 revenue of $83,405. This increase was primarily due to increased revenue in our sampling ($2,200) and OCM ($600) businesses, offset by decreased revenue in AMP ($2,700).

Promotion segment revenue in fiscal 2007 was $83,405, a decrease of $12,574 or 13.1% from fiscal 2006 revenue of $95,979. This decrease was primarily due to decreased revenue in AMP ($9,800) and sampling businesses ($2,300) as certain advertising and promotional campaigns were not executed, offset by increased on-campus marketing sales ($3,800).

Media

Media segment revenue in fiscal 2008 was $81,188, an increase of $18,408 or 29.3% from fiscal 2007 revenue of $62,780. This increase was primarily due to revenue increases in our Channel One ($7,000), display board ($6,000), entertainment ($3,000) and interactive businesses ($2,400).

Media segment revenue in fiscal 2007 was $62,780, an increase of $16,493 or 35.6% from fiscal 2006 revenue of $46,287. Channel One and Frontline, which both were acquired during fiscal 2007, contributed $20,528 in revenue. These contributions and increased revenue in our entertainment business were partially offset by decreases in our interactive, display board businesses ($4,200), as well as print advertisement business ($1,200).

Placement

Placement segment revenue in fiscal 2008 was $52,222, a decrease of $689 or 1.3% from fiscal 2007 revenue of $52,911. The decrease was primarily due to decreases in broadcast and military newspaper revenue ($4,900), partially offset by increases in billboard, college and minority newspaper revenue ($4,200).

Placement segment revenue in fiscal 2007 was $52,911, a decrease of $927 or 1.7% from fiscal 2006 revenue of $53,838. The decrease was primarily due to decreases in multicultural and college newspaper revenue ($3,100), partially offset by increases in billboard, and military advertising revenue ($2,200).

Cost of Goods Sold

Promotion

Promotion segment cost of goods sold in fiscal 2008 was $32,981, a decrease of $1,722 or 4.9% from fiscal 2007 cost of goods sold of $34,703. This decrease was primarily due to lower outside and temporary labor ($570), travel ($790), payroll ($920) in AMP Agency as less advertising campaigns were executed during the fiscal year. The expense decrease was partially offset by an increase in cost of goods sold expense ($560) primarily in OCM.

Promotion segment cost of goods sold in fiscal 2007 was $34,703, a decrease of $6,285 or 15.3% from fiscal 2006 cost of goods sold of $40,988. This decrease was primarily due to lower outside and temporary labor and travel and production costs primarily in AMP as less advertising campaigns were executed during the fiscal year. The expense decrease was partially offset by an increase in cost of goods sold expenses in OCM.

Media

Media segment cost of goods sold in fiscal 2008 was $24,419, an increase of $2,454 or 11.1% from fiscal 2007 cost of goods sold of $21,965. This increase was primarily due to increases in production costs ($2,800) such as printing, licenses and store commissions. These increases in cost of goods sold were offset by decreases in temporary labor ($200), travel ($100) and payroll ($100).

Media segment cost of goods sold in fiscal 2007 was $21,965, an increase of $4,036 or 22.5% from fiscal 2006 cost of goods sold of $17,929. Channel One and Frontline, which both were acquired during fiscal 2007, contributed $9,138 in cost of sales expense in fiscal 2007. The increase in cost of goods sold was offset by decreases in our interactive and display board and print advertisement businesses.

Placement

Placement segment cost of goods sold expense in fiscal 2008 was $38,261, a decrease of $1,018 or 2.6% from fiscal 2007 cost of goods sold of $39,279. The decrease is primarily due to a decrease in marketing fees ($1,000).

Placement segment cost of goods sold expense in fiscal 2007 was $39,279, a decrease of $517 or 1.3% from fiscal 2006 cost of goods sold of $39,796. The decrease is in direct proportion to the decrease in our revenue for fiscal 2007.

Operating Expenses

Promotion

Promotion segment operating expenses in fiscal 2008 were $37,035, an increase of $1,953 or 5.6% from fiscal 2007 operating expenses of $35,082. The increase was primarily due to increases in payroll expenses ($2,000) offset by lower general operating expenses ($160).

Promotion segment operating expenses in fiscal 2007 were $35,082, a decrease of $2,804 or 7.4% from fiscal 2006 operating expenses of $37,886. The decrease was primarily due to lower mailing, outside labor, and permits and licenses, as fewer campaigns were executed, lower overall payroll related expenses ($940), and lower travel related expense ($280).

Media

Media segment operating expenses in fiscal 2008 were $45,016, an increase of $9,821 or 27.9% from fiscal 2007 operating expenses of $35,195. The increase was primarily due to increases in payroll ($5,700), maintenance ($1,400), and corporate and facilities costs ($2,700).

Media segment operating expenses in fiscal 2007 were $35,195, an increase of $15,697 or 80.5% from fiscal 2006 operating expenses of $19,498. Channel One and Frontline, which both were acquired during fiscal 2007, contributed $11,743 in operating expenses in fiscal 2007. These increases, along with increases in marketing ($1,200), travel ($600) and payroll related expense ($2,100) were the primary reasons for the increase in operating expenses.

Placement

Placement segment operating expenses in fiscal 2008 were $7,341, an increase of $1,057 or 16.8% from fiscal 2007 operating expenses of $6,284. The increase was primarily due to increases in payroll ($900) and bad debt expense ($520) offset by lower facilities costs ($200).

Placement segment operating expenses in fiscal 2007 were $6,284, a decrease of $639 or 9.2% from fiscal 2006 operating expenses of $6,923. The decrease was primarily due to a decrease in rent and facilities cost.

Corporate

The Corporate segment operating expenses in fiscal 2008 were $926, an increase of $475 from fiscal 2007 operating expenses of $451. The increase is primarily due to an increase in rent and facilities cost.

The Corporate segment operating expenses in fiscal 2007 were $451, a decrease of $1,258 or 73.6% from fiscal 2006 operating expenses of $1,709. The decrease was primarily due to lower payroll related costs and rent and facilities cost.

General and Administrative

Promotion

Promotion segment general and administrative expenses in fiscal 2008 were $4,871, an increase of $1,383 or 39.6% as compared to fiscal 2007 general and administrative expenses of $3,488. The increase was primarily due to higher general corporate and facilities costs ($1,500) offset by lower payroll related expenses ($150).

Promotion segment general and administrative expenses in fiscal 2007 were $3,488, a decrease of $1,725 or 33.1% as compared to fiscal 2006 general and administrative expenses of $5,213. The decrease was primarily due to lower payroll related expenses.

Media

Media segment general and administrative expenses in fiscal 2008 were $1,497, a decrease of $1,430 or 48.8% as compared to fiscal 2007 general and administrative expenses of $2,927. The decrease is primarily due to a decrease in general corporate costs ($1,700) offset by increases in payroll costs ($200).

Media segment general and administrative expenses in fiscal 2007 were $2,927, an increase of $2,456 as compared to fiscal 2006 general and administrative expenses of $471. Channel One and Frontline, which were both acquired during fiscal 2007, contributed $728 to general and administrative expenses for fiscal 2007. These increases, combined with increases in facilities and consulting costs were the primary reasons for the increase.

Placement

Placement segment general and administrative expenses in fiscal 2008 were $2,302, a decrease of $119 or 4.9% as compared to fiscal 2007 general and administrative expenses of $2,421. The decrease was primarily due to decreases in general corporate costs.

Placement segment general and administrative expenses in fiscal 2007 were $2,421, an increase of $969 or 66.7% as compared to fiscal 2006 general and administrative expenses of $1,452. The increase was primarily due to increases in payroll related expenses and general corporate costs.

Corporate

The Corporate segment general and administrative expenses in fiscal 2008 were $10,584, remaining consistent with fiscal 2007 general administrative expenses of $10,658.

The Corporate segment general and administrative expenses in fiscal 2007 were $10,658, an increase of $2,597 or 32.2% from fiscal 2006 general administrative expenses of $8,061. The increase was primarily due to increases in payroll related expenses, stock based compensation, banking and accounting fees, and rent expense.

Depreciation and Amortization

Promotion

Promotion segment depreciation and amortization in fiscal 2008 was $906, and was consistent with fiscal 2007 depreciation and amortization of $904.

Promotion segment depreciation and amortization in fiscal 2007 was $904, an increase of $89 or 11.0% as compared to fiscal 2006 depreciation and amortization of $815. The increase was primarily due to additional customer mailing lists and marketing rights that were acquired during fiscal 2007.

Media

Media segment depreciation and amortization in fiscal 2008 was $4,550, an increase of $1,240 or 37.4 %, as compared to fiscal 2007 depreciation and amortization of $3,310. The increase was primarily due to the amortization of mailing lists and acquired intangible assets related our acquisition of Frontline, and fixed assets related to our digital upgrade of Channel One.

Media segment depreciation and amortization in fiscal 2007 was $3,310, an increase of $1,559 or 89.0%, as compared to fiscal 2006 depreciation and amortization of $1,751. The increase was primarily due to the acquired intangible and fixed assets related to our acquisitions of Channel One and Frontline.

Placement

Placement segment depreciation and amortization in fiscal 2008 was $32, which is consistent with fiscal 2007 depreciation and amortization of $33.

Placement segment depreciation and amortization in fiscal 2007 was $33, which is consistent with fiscal 2006 depreciation and amortization of $38.

Corporate

The Corporate segment depreciation and amortization in fiscal 2008 was $941, an increase of $108 or 12.9% as compared to fiscal 2007 depreciation and amortization of $833. The increase was due to normal monthly depreciation and amortization.

The Corporate segment depreciation and amortization in fiscal 2007 was $833, an increase of $72 or 9.5% as compared to fiscal 2006 depreciation and amortization of $761. The decrease was primarily due to fiscal 2007 monthly depreciation and amortization.

Special Charges

In fiscal 2008, we recorded special charges of $288. These special charges related to a trademark impairment in our Media segment of $40 and our Placement segment of $100. In addition, we recorded an impairment charge on our auction rate securities portfolio of $148 in our Corporate segment.

In fiscal 2007, we recorded special charges of $71,628. These special charges related to goodwill impairment in our Media segment in the amount of $48,052 and our Placement segment in the amount of $22,783. In addition, the Company recorded an impairment related to its trademarks and long-live assets in our Media segment totaling $120 and $673, respectively. In fiscal 2006, we recorded special charges in our Corporate segment in the amount of $127 related to the spin-off of dELiA*s, Inc.

Gain on Sale of Operating Asset

In fiscal 2008, we sold our CCS domain name and related assets for cash, recognizing a gain of $5,800. The gain was recorded in our Media segment. There were no such gains recorded in fiscal 2007 or fiscal 2006.

Income (Loss) from Operations

In fiscal 2008, operating income was $10,776, primarily due to increased revenues, a slightly lower cost structure and lower special items. In fiscal 2008, we recorded special charges in the amount of $288, related to impairments on two of our trademarks and our auction rates securities portfolio.

In fiscal 2007, operating loss was $70,065. In fiscal 2007, we recorded special charges in the amount of $71,628 as a result of goodwill impairments in our Placement and Media segments which along with an increased cost structure as a result of the Channel One and Frontline acquisitions were the primary factors that impacted our profitability.

In fiscal 2006, our operating income was $12,686 primarily due to higher program profitability and lower depreciation and amortization, partially offset by higher stock-based compensation expense.

Operating Income (Loss)

Promotion

The Promotion segment operating income in fiscal 2008 was $7,723, a decrease of $1,505, or 16.3% as compared to operating income of $9,228 in fiscal 2007. Operating income in fiscal 2008 decreased due to higher operating expenses and general and administrative expenses as a percentage of sales.

The Promotion segment operating income in fiscal 2007 was $9,228, a decrease of $1,849, or 16.7%, as compared to operating income of $11,077 in fiscal 2006. Operating income in fiscal 2007 decreased due to decreases in revenue and higher operating expenses as a percentage of sales.

Media

The Media segment fiscal 2008 operating income was $11,466 as compared to an operating loss of $49,462 for fiscal 2007. Operating income in fiscal 2008 increased due to increases in revenue, lower production costs, and lower special charges. In fiscal 2008, we sold our CCS domain name and related assets for $5,800 and recorded special charges related to a trademark impairment of $40. In fiscal 2007, we recorded special charges related to goodwill impairment in the amount of $48,845, which is the primary reason for the fiscal 2007 operating loss.

The Media segment fiscal 2007 operating loss was $49,462 as compared to . . .