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/A for the fiscal year ended January 31, 2009 ("fiscal 2008"). Unless otherwise indicated, all dollar amounts presented are in thousands, except per share amounts.

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, Interactive, 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 the aforementioned factors.

In the fiscal year ending January 31, 2010 ("fiscal 2009"), 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. Additionally, 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 generally 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.

Three Months Ended April 30, 2009 Compared with Three Months Ended April 30, 2008

                                                      Three months ended April 30, 2009 (Unaudited)
                                            Promotion          Media      Placement     Corporate       Total
Revenues:
Services revenue                           $     9,341       $  18,462   $     9,450            -      $ 37,253
Product revenue                                  5,725              -             -             -         5,725


Total revenue                              $    15,066       $  18,462   $     9,450            -      $ 42,978
Cost of goods sold:
Cost of goods sold - services              $     4,962       $   4,995   $     6,919            -      $ 16,876
Cost of goods sold - product                     1,268              -             -             -         1,268


Total cost of goods sold                   $     6,230       $   4,995   $     6,919            -      $ 18,144
Expenses:
Operating                                  $     7,725       $  10,769   $     1,672   $       315     $ 20,481
General and administrative                       1,099             541           617         2,927        5,184
Depreciation and amortization                      212           1,288             9           229        1,738


Total expenses                             $     9,036       $  12,598   $     2,298   $     3,471     $ 27,403


Operating income (loss)                    $      (200 )     $     869   $       233   $    (3,471 )   $ (2,569 )

                                                      Three months ended April 30, 2008 (Unaudited)
                                            Promotion         Media      Placement     Corporate       Total
Revenues:
Services revenue                           $     9,960       $ 19,896   $    13,497            -      $ 43,353
Product revenue                                  5,792             -             -             -         5,792


Total revenue                              $    15,752       $ 19,896   $    13,497            -      $ 49,145
Cost of goods sold:
Cost of goods sold - services              $     5,161       $  5,925   $    10,100            -      $ 21,186
Cost of goods sold - product                     1,271             -             -             -         1,271


Total cost of goods sold                   $     6,432       $  5,925   $    10,100            -      $ 22,457
Expenses:
Operating                                  $     8,557       $ 11,488   $     2,153   $       120     $ 22,318
General and administrative                       1,218            184           719         2,212        4,333
Depreciation and amortization                      220          1,064             7           179        1,470


Total expenses                             $     9,995       $ 12,736   $     2,879   $     2,511     $ 28,121


Operating income (loss)                    $      (675 )     $  1,235   $       518   $    (2,511 )   $ (1,433 )

Revenue

Revenue in the first quarter of fiscal 2009 was $42,978, a decrease of $6,167 or 13%, from revenue for the first quarter of fiscal 2008 of $49,145. This decrease was attributable to decreases in revenue in our Promotion segment of $686, in our Media segment of $1,434 and our Placement segment of $4,047.

Promotion

Promotion segment revenue in the first quarter of fiscal 2009 was $15,066, a decrease of $686 or 4% from revenue in the first quarter of fiscal 2008 of $15,752. The decrease was primarily due to decreases in revenue in our sampling and on-campus marketing businesses ($700) which were offset by increases in the AMP Agency businesses ($20).

Media

Media segment revenue in the first quarter of fiscal 2009 was $18,462, a decrease of $1,434 or 7% from revenue in the first quarter of fiscal 2008 of $19,896. The decrease was primarily due to decreases in revenue in our display board ($1,000), interactive ($300), entertainment ($200), and print ad businesses ($100) which was slightly offset by an increase in education business ($300).

Placement

Placement segment revenue in the first quarter of fiscal 2009 was $9,450, a decrease of $4,047 or 30% from revenue in the first quarter of fiscal 2008 of $13,497. The decrease was primarily due to decreases in revenue in our college
($2,600), military ($600), general market ($1,200) and broadcast ($200)
advertising which were offset by increases in multicultural ($500) advertising.

Cost of Goods Sold

Promotion

Promotion segment cost of goods sold in the first quarter of fiscal 2009 was $6,230, a decrease of $202 or 3.1% from cost of goods sold in the first quarter of fiscal 2008 of $6,432. The decrease was primarily due to lower outside labor costs ($160) and production costs ($160), offset by increases in travel expenses ($70). The decrease in cost of sales enabled our gross profit percentage in the first quarter of fiscal 2009 to remain substantially consistent with the first quarter of fiscal 2008.

Media

Media segment cost of goods sold in the first quarter of fiscal 2009 was $4,995, a decrease of $930 or 15.7% from cost of goods sold in the first quarter of fiscal 2008 of $5,925. The decrease was primarily due to lower production costs ($700), payroll ($130) and temporary labor ($80). The decrease in cost of sales improved our gross profit to 73% in the first quarter of fiscal 2009 as compared to 70% in the first quarter of fiscal 2008.

Placement

Placement segment cost of goods sold in the first quarter of fiscal 2009 was $6,919, a decrease of $3,181 or 31.5% from cost of goods sold in the first quarter of fiscal 2008 of $10,100. Cost of goods sold as a percentage of revenue improved during the first quarter of fiscal 2009 due to lower marketing fees expense to place advertising in newspapers.

Operating Expenses

Promotion

Promotion segment operating expenses in the first quarter of fiscal 2009 were $7,725, a decrease of $832 or 9.7% from operating expenses in the first quarter of fiscal 2008 of $8,557. The decrease was primarily due to lower facilities costs ($274), corporate costs ($211), and bad debt expense ($120).

Media

Media segment operating expenses in the first quarter of fiscal 2009 were $10,769, a decrease of $719 or 6.3% from operating expenses in the first quarter of fiscal 2008 of $11,488. The decrease was primarily due to decreases in payroll ($1,110) slightly offset by increases in facilities and corporate costs ($330).

Placement

Placement segment operating expenses in the first quarter of fiscal 2009 were $1,672, a decrease of $481 or 22.3% from operating expenses in the first quarter of fiscal 2008 of $2,153. The decrease was primarily due to lower bad debt expense ($330) and lower corporate costs ($25).

Corporate

Corporate segment operating expenses in the first quarter of fiscal 2009 were $315, an increase of $195 from operating expenses in the first quarter of fiscal 2008 of $120. The increase was primarily due to increases in general corporate costs ($230) and payroll ($170), offset by lower information technology costs ($240).

General and Administrative

Promotion

Promotion segment general and administrative expenses in the first quarter of fiscal 2009 were $1,099, a decrease of $119 or 9.8% as compared to general and administrative expenses in the first quarter of fiscal 2008 of $1,218. The decrease was primarily due to lower corporate and stock compensation costs.

Media

Media segment general and administrative expenses in the first quarter of fiscal 2009 were $541, an increase of $357 as compared to general and administrative expenses in the first quarter of fiscal 2008 of $184. The increase was primarily due to higher corporate costs offset by lower stock compensation costs.

Placement

Placement segment general and administrative expenses in the first quarter of fiscal 2009 were $617, a decrease of $102 or 14.2% as compared to general and administrative expenses in the first quarter of fiscal 2008 of $719. The decrease was primarily due to lower corporate costs.

Corporate

Corporate segment general and administrative expenses in the first quarter of fiscal 2009 were $2,927, an increase of $715 or 32.3% as compared to general and administrative expenses in the first quarter of fiscal 2008 of $2,212. The increase was primarily due to increases in payroll and medical benefits costs.

Income Taxes

Income tax expense in the first quarter of fiscal 2009 was $164 at an annualized effective rate of 4% as compared to an effective rate of 4% in the first quarter of fiscal 2008. Due to our history of incurring operating losses, we have established a valuation allowance on all our deferred tax assets. Accordingly, the tax provision for the first quarter of fiscal 2009 was primarily due to the alternative minimum tax on our pretax income and state income taxes.

Liquidity and Capital Resources

Cash from Operations

Cash used in operating activities was $2,699 in the first quarter of fiscal 2009. Factors contributing to our cash used in operating activities were our net loss of $2,723 and uses of working capital of $2,570 mainly attributable to an increase in inventory and prepaid payroll and a decrease in accrued expenses, offset by lower accounts receivable. These uses of cash were offset by noncash items totaling $2,596, which included depreciation and amortization, and stock based compensation expense.

Cash used in operating activities was $649 in the first quarter of fiscal 2008. Factors contributing to our cash used in operating activities were our net loss of $1,569 and uses of working capital of $2,094 mainly attributable to an increase in inventory, offset by a decrease in accounts receivable and accrued expenses. These uses of cash were offset by noncash items totaling $3,014, which included depreciation and amortization, and stock based compensation expense.

Investing Activities

Cash used in investing activities was $1,185 in the first quarter of fiscal 2009 as compared to cash provided by investing activities of $1,186 in the first quarter of fiscal 2008.

Capital expenditures were $895 in the first quarter of fiscal 2009 as compared to $4,231 in the first quarter of fiscal 2008. Capital expenditures for the first quarter of fiscal 2009 were primarily for general operating purposes. In the first quarter of fiscal 2008, the Channel One digital upgrade was completed.

Our short-term investment portfolio did not increase in the first quarter of fiscal 2009 from January 31, 2009. Our short-term portfolio decreased $5,805 during the first quarter of fiscal 2008. Fluctuations in our short-term investment portfolio are primarily dependent upon our operating needs, and we may liquidate portions of our portfolio for these purposes.

Financing Activities

Cash used in financing activities was $730 in the first quarter of fiscal 2009, as a result of repurchases of our common stock.

Cash used in financing activities was $852 in the first quarter of fiscal 2008, as a result of repurchases of our common stock.

Our board of directors has authorized us to repurchase up to $10,000 of our common stock. As of April 30, 2009, our unused repurchase authorization for our common stock was approximately $6,075. As of May 31, 2009, our unused repurchase authorization for our common stock was approximately $5,628.

On August 15, 2007, the Company entered into a credit agreement with Bank of America, N.A. which was amended from time to time during fiscal 2008 (the "Credit Facility"). Most recently, it was amended and restated on April 9, 2009. At April 30, 2009, the Company had no outstanding borrowing on the Credit Facility.

The Credit Facility currently consists of a three year term $25,000 revolving loan (the "Revolver"), which may be drawn upon at any time while the Company is in compliance with the covenants and other borrowing terms, and a letter of credit facility which has a $2,000 issuance sublimit. Any letters of credit will reduce the available commitment under the Revolver on a dollar-for-dollar basis.

The loans and other obligations under the Credit Facility are guaranteed by wholly-owned direct and indirect operating subsidiaries of the Company, with a requirement that the Credit Facility be additionally guaranteed by any future subsidiaries of the Company.

Any borrowings under the Credit Facility and letters of credit will bear interest at annual rates as detailed in the Credit Facility and are based on the Eurodollar rate plus 1.00% - 2.00%, depending on the Company's twelve month EBITDA. In addition, the Company is required to pay quarterly an unused commitment fee and a letter of credit fee if the Company enters into a letter of credit arrangement. Total commitment fees paid by the Company under the Credit Facility was $16 for the first quarter of fiscal 2009.

The Credit Facility contains affirmative and restrictive covenants that require the Company to meet certain financial, business operations and other criteria. From time to time, the Company may not be able to satisfy such covenants, and therefore may be out of compliance with

certain provisions of the Credit Facility. In past instances, the Company has obtained waivers and amendments to the Credit Facility. In the future, the Company may, as necessary, need to seek waivers or renegotiate the terms and conditions of the Credit Facility in order to remain in compliance therewith. However, the Company cannot provide assurances that Bank of America will agree to any such waiver or amendment and in such event, Bank of America could terminate the Credit Facility and demand that the Company pay any outstanding amounts. In this event, the Company may not have access to working capital should its business activities require funds in excess of cash generated by the Company's ongoing operating activities.

At April 30, 2009, the Company was in compliance with all the financial ratios and other terms and conditions as stated in the Credit Facility. We continually project our anticipated cash requirements, which include our working capital needs, potential acquisitions and interest payments. Funding requirements may be financed primarily through our operations, the sale of equity, the use of our Credit Facility, or through equity-linked and debt securities. 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, as well as stock repurchase and acquisition activities.

We believe our existing cash, cash equivalents and investments balances, together with anticipated cash flows from operations, should be sufficient to meet our working capital and operating requirements for at least the next twelve months.

If our current sources of liquidity and cash generated from our operations are insufficient to satisfy our cash needs, we may be required to raise additional capital or utilize our Credit Facility. If we raise additional funds through the issuance of equity securities, our stockholders may experience significant dilution. If financing is not available when required or is not available on acceptable terms, we may be unable to develop or enhance our products or services. In addition, we may be unable to take advantage of business opportunities or respond to competitive pressures. Any of these events could have a material and adverse effect on our business, results of operations and financial condition.

Critical Accounting Policies and Estimates

During the first three months of fiscal 2009, there were no changes in our policies regarding the use of estimates and other critical accounting policies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," found in our Annual Report on Form 10-K/A for fiscal 2008, for additional information relating to our use of estimates and other critical accounting policies.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Forward-Looking Statements

Statements in this report expressing our expectations and beliefs regarding our future results or performance are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that involve a number of substantial risks and uncertainties. When used in this Form 10-Q, the words "anticipate," "may," "could," "plan," "believe," "estimate," "expect" and "intend" and similar expressions are intended to identify such forward-looking statements.

Such statements are based upon management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. Actual results may differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to the following:

• changes in business and economic conditions and other adverse conditions in our markets;

• increased competition;

• our ability to achieve and maintain profitability;

• lack of future earnings and ability to continue to grow our business;

• ability to maintain quality and size of database;

• our ability to protect or enforce our intellectual property or proprietary rights;

• changes in consumer preferences;

• volatility of stock price causing substantial declines;

• reliance on third-party suppliers; and

• our ability to successfully implement our operating, marketing, acquisition and expansion strategies.

For a discussion of these and other factors, see the risks discussed in our Annual Report on Form 10-K/A for fiscal 2008 in Item 1A-Risk Factors and the risks discussed in this Quarterly Report.

Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and we cannot assure you that our future results, levels of activity, performance or achievements will meet these expectations. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as may be required by law.