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 a combination of cost management and 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 July 31, 2009 Compared with Three Months Ended July 31, 2008



                                                       Three months ended July 31, 2009 (Unaudited)
                                             Promotion       Media      Placement     Corporate        Total
Revenues:
Services revenue                            $    11,099    $  20,167   $     6,900            -       $ 38,166
Product revenue                                  16,056           -             -             -         16,056


Total revenue                               $    27,155    $  20,167   $     6,900            -       $ 54,222
Cost of goods sold:
Cost of goods sold - services               $     5,993    $   4,494   $     5,190            -       $ 15,677
Cost of goods sold - product                      5,285           -             -             -          5,285


Total cost of goods sold                    $    11,278    $   4,494   $     5,190            -       $ 20,962
Expenses:
Operating                                   $    10,954    $  11,135   $     1,275   $       774      $ 24,138
General and administrative                        1,130        1,052           415         2,664         5,261
Depreciation and amortization                       236        1,354             6           220         1,816


Total expenses                              $    12,320    $  13,541   $     1,696   $     3,658      $ 31,215


Operating income (loss)                     $     3,557    $   2,132   $        14   $    (3,658 )    $  2,045

                                                     Three months ended July 31, 2008 (Unaudited)
                                           Promotion     Media         Placement     Corporate        Total
Revenues:
Services revenue                          $     9,376   $ 17,257      $     9,110            -       $ 35,743
Product revenue                                18,357         -                -             -         18,357


Total revenue                             $    27,733   $ 17,257      $     9,110            -       $ 54,100
Cost of goods sold:
Cost of goods sold - services             $     4,751   $  6,599      $     6,751            -       $ 18,101
Cost of goods sold - product                    6,071         -                -             -          6,071


Total cost of goods sold                  $    10,822   $  6,599      $     6,751            -       $ 24,172
Expenses:
Operating                                 $    11,387   $ 11,672      $     1,252   $       177      $ 24,488
General and administrative                      1,624         79              535         2,760         4,998
Depreciation and amortization                     198      1,130                8           242         1,578


Total expenses                            $    13,209   $ 12,881      $     1,795   $     3,179      $ 31,064


Operating income (loss)                   $     3,702   $ (2,223 )    $       564   $    (3,179 )    $ (1,136 )

Revenue

Revenue in the second quarter of fiscal 2009 was $54,222, and remained consistent with revenue of $54,100 in the second quarter fiscal 2008. Revenue in our Media segment increased $2,910, which was offset by a decrease in revenue in our Promotion and Placement segments of $578 and $2,210, respectively.

Promotion

Promotion segment revenue in the second quarter of fiscal 2009 was $27,155, a decrease of $578, or 2.1%, from revenue of $27,733 in the second quarter of fiscal 2008. Revenue decreased in the Company's OCM and sampling businesses of $2,310 and $399, respectively, which were offset by an increase in the AMP Agency business of $2,122.

Media

Media segment revenue in the second quarter of fiscal 2009 was $20,167, an increase of $2,910, or 16.8%, from revenue of $17,257 in the second quarter of fiscal 2008. The increase was primarily due to increases in our Interactive, display board, Channel One and print businesses of $733, $1,011, $1,371 and $204, respectively, which were offset by a decrease in our entertainment business of $406.

Placement

Placement segment revenue in the second quarter of fiscal 2009 was $6,900, a decrease of $2,210, or 24.2 %, from revenue of $9,110 in the second quarter of fiscal 2008. The decrease was primarily due to decreases in college newspaper sales, multicultural and broadcast advertising that totaled $2,609, which were offset by an increase in military advertising of $399.

Cost of Goods Sold

Promotion

Promotion segment cost of goods sold in the second quarter of fiscal 2009 was $11,278, an increase of $456, or 4.2%, from cost of goods sold of $10,822 in the second quarter of fiscal 2008. The increase was primarily due to increases in our AMP business production costs of $563 and travel costs of $128, which were offset by decreases in payroll and temporary labor of $304.

Media

Media segment cost of goods sold in the second quarter of fiscal 2009 was $4,494, a decrease of $2,105, or 31.8%, from cost of goods sold of $6,599 in the second quarter fiscal 2008. The decrease was primarily due to decreases in net production costs for Channel One of $2,249, which was offset by increases in payroll and temporary labor of $144.

Placement

Placement segment cost of goods sold in the second quarter of fiscal 2009 was $5,190, a decrease of $1,561, or 23.1%, from cost of goods sold in the second quarter of fiscal 2008 of $6,751. The decrease is in direct proportion to the decrease in revenue.

Operating Expenses

Promotion

Promotion segment operating expenses in the second quarter of fiscal 2009 were $10,954, a decrease of $433, or 3.8%, from operating expenses of $11,387 in the second quarter of fiscal 2008. The decrease was primarily due to decreases in general corporate costs ($744), facilities costs ($191) and travel costs ($97), which were offset by an increase in mailing costs ($601) and payroll ($52).

Media

Media segment operating expenses in the second quarter of fiscal 2009 were $11,135 a decrease of $537, or 4.6%, from operating expenses of $11,672 in the second quarter of fiscal 2008. The decrease was primarily due to decreases in payroll related costs ($1,084), which were offset by an increase in general corporate costs ($536) and facilities expenses ($56).

Placement

Placement segment operating expenses in the second quarter of fiscal 2009 were $1,275, and remained consistent with operating expenses of $1,252 in the second quarter of fiscal 2008.

Corporate

The Corporate segment operating expenses in the second quarter of fiscal 2009 were $774, an increase of $597, from operating expenses of $177, in the second quarter of fiscal 2008. The increase was primarily due to increases in general corporate costs ($293), facilities costs ($158), higher payroll costs ($92), and information technology costs ($50).

General and Administrative

Promotion

Promotion segment general and administrative expenses in the second quarter of fiscal 2009 were $1,130, a decrease of $494, or 30.4%, as compared to $1,624 in the second quarter of fiscal 2008. The decrease was primarily due to a decrease in general corporate costs ($423).

Media

Media segment general and administrative expenses in the second quarter of fiscal 2009 were $1,052, as compared to $79 in the second quarter of fiscal 2008. The increase was primarily due to increases in general corporate costs ($835) and payroll costs ($141).

Placement

Placement segment general and administrative expenses in the second quarter of fiscal 2009 were $415, a decrease of $120, or 22.4%, as compared to general and administrative expenses of $535 in the second quarter of fiscal 2008. The decrease was primarily due to a decrease in general corporate costs.

Corporate

The Corporate segment general and administrative expenses in the second quarter of fiscal 2009 were $2,664, a decrease of $96, or 3.4%, from general and administrative expenses of $2,760 in the second quarter of fiscal 2008. The decrease was primarily due to lower corporate costs ($210), offset by an increase in professional fees ($118).

Six Months Ended July 31, 2009 Compared with Six Months Ended July 31, 2008



                                                       Six months ended July 31, 2009 (Unaudited)
                                           Promotion     Media         Placement     Corporate         Total
Revenues:
Services revenue                          $    20,440   $ 38,629      $    16,350            -       $  75,419
Product revenue                                21,781         -                -             -          21,781


Total revenue                             $    42,221   $ 38,629      $    16,350            -       $  97,200
Cost of goods sold:
Cost of goods sold - services             $    10,955   $  9,489      $    12,109            -       $  32,553
Cost of goods sold - product                    6,553         -                -             -           6,553


Total cost of goods sold                  $    17,508   $  9,489      $    12,109            -       $  39,106
Expenses:
Operating                                 $    18,679   $ 21,904      $     2,947   $     1,089      $  44,619
General and administrative                      2,229      1,593            1,032         5,591         10,445
Depreciation and amortization                     448      2,642               15           449          3,554


Total expenses                            $    21,356   $ 26,139      $     3,994   $     7,129      $  58,618


Operating income (loss)                   $     3,357   $  3,001      $       247   $    (7,129 )    $    (524 )


                                                       Six months ended July 31, 2008 (Unaudited)
                                           Promotion     Media         Placement     Corporate         Total
Revenues:
Services revenue                          $    19,336   $ 37,153      $    22,607            -       $  79,096
Product revenue                                24,149         -                -             -          24,149


Total revenue                             $    43,485   $ 37,153      $    22,607            -       $ 103,245
Cost of goods sold:
Cost of goods sold - services             $     9,912   $ 12,524      $    16,851            -       $  39,287
Cost of goods sold - product                    7,342         -                -             -           7,342


Total cost of goods sold                  $    17,254   $ 12,524      $    16,851            -       $  46,629
Expenses:
Operating                                 $    19,944   $ 23,160      $     3,405   $       297      $  46,806
General and administrative                      2,842        263            1,254         4,972          9,331
Depreciation and amortization                     418      2,194               15           421          3,048


Total expenses                            $    23,204   $ 25,617      $     4,674   $     5,690      $  59,185


Operating income (loss)                   $     3,027   $   (988 )    $     1,082   $    (5,690 )    $  (2,569 )

Revenue

Revenue for the six months ended July 31, 2009 was $97,200, a decrease of $6,045, or 5.8%, from revenue of $103,245 for the six months ended July 31, 2008. Revenue in our Media segment increased $1,476, which was offset by a decrease in our Promotion and Placement segments of $1,264 and $6,257, respectively.

Promotion

Promotion segment revenue for the six months ended July 31, 2009 was $42,221, a decrease of $1,264, or 2.9%, from revenue of $43,485 for the six months ended July 31, 2008. Revenue decreased in the Company's OCM and sampling businesses of $2,368 and $1,044, respectively, which were offset by an increase in the AMP Agency business of $2,146.

Media

Media segment revenue for the six months ended July 31, 2009 was $38,629, an increase of $1,476, or 3.9%, from revenue of $37,153 for the six months ended July 31, 2008. The increase was primarily due to decreases in production costs of $2,248, which were offset by increases in payroll and temporary labor costs of $144.

Placement

Placement segment revenue for the six months ended July 31, 2009 was $16,350, a decrease of $6,257, or 27.6 %, from revenue of $22,607 for the six months ended July 31, 2008. The decrease was primarily due to decreases in college newspaper sales, multicultural, military and broadcast advertising that totaled $6,257.

Cost of Goods Sold

Promotion

Promotion segment cost of goods sold for the six months ended July 31, 2009 was $17,508, an increase of $254, or 1.4%, from cost of goods sold of $17,254 for the six months ended July 31, 2008. The increase was primarily due to increases in our AMP business related to production costs of $404, and travel costs of $194, which were offset by decreases in payroll and temporary labor costs of $464.

Media

Media segment cost of goods sold for the six months ended July 31, 2009 was $9,489, a decrease of $3,035, or 24.2%, from cost of goods sold of $12,524 for the six months ended July 31, 2008. The decrease was primarily due to decreases in net production costs for Channel One of $2,913, and payroll and temporary labor costs of $87.

Placement

Placement segment cost of goods sold for the six months ended July 31, 2009 was $12,109, a decrease of $4,742, or 28.1%, from cost of goods sold of $16,851 for the six months ended July 31, 2008. The decrease is in direct proportion to the decrease in revenue.

Operating Expenses

Promotion

Promotion segment operating expenses for the six months ended July 31, 2009 were $18,679, a decrease of $1,265, or 6.3%, from operating expenses of $19,944 for the six months ended July 31, 2008. The decrease was primarily due to decreased general corporate costs ($1,635), facilities costs ($465) and travel costs ($122), which were offset by increase in payroll ($96) and mailing costs ($965).

Media

Media segment operating expenses for the six months ended July 31, 2009 were $21,904, a decrease of $1,256, or 5.4%, from operating expenses of $23,160 for the six months ended July 31, 2008. The decrease was primarily due to decreases in payroll related costs ($2,717), stock based compensation ($235), and maintenance cost ($113), which were offset by increases in general corporate costs ($1,604) and facilities costs ($205).

Placement

Placement segment operating expenses for the six months ended July 31, 2009 were $2,947, a decrease of $458, or 13.4% from operating expenses of $3,405 for the six months ended July 31, 2008. The decrease was primarily due to decreases in payroll related costs ($288) and general corporate costs ($170).

Corporate

The Corporate segment operating expenses for the six months ended July 31, 2009 were $1,089, an increase of $792, from operating expenses of $297 for the six months ended July 31, 2008. The increase was primarily due to increases in facilities costs ($264), higher payroll ($261), general corporate costs ($195), and information technology costs ($99).

General and Administrative

Promotion

Promotion segment general and administrative expenses for the six months ended July 31, 2009 were $2,229, a decrease of $613, or 21.5%, as compared to $2,842 for the six months ended July 31, 2008. The decrease was primarily due to a decrease in general corporate costs ($548).

Media

Media segment general and administrative expenses for the six months ended July 31, 2009 were $1,593, an increase of $1,330 as compared to general and administrative expenses of $263 for the six months ended July 31, 2008. The increase was primarily due to increases in general corporate costs ($1,171) and payroll related expenses ($161).

Placement

Placement segment general and administrative expenses for the six months ended July 31, 2009 were $1,032, a decrease of $222, or 17.7%, as compared to general and administrative expenses of $1,254 for the six months ended July 31, 2008. The decrease was primarily due to a decrease in general corporate costs ($215).

Corporate

The Corporate segment general and administrative expenses for the six months ended July 31, 2009 were $5,591, an increase of $619, or 12.4%, from general administrative expenses of $4,972 for the six months ended July 31, 2008. The increase was primarily due to increases in payroll and medical benefits costs ($833), professional fees ($154), and stock based compensation ($110), which were offset by lower corporate costs ($466).

Liquidity and Capital Resources

Cash from Operations

Cash provided by operating activities was $6,354 for the six months ended July 31, 2009. Factors contributing to our cash provided by operating activities were sources of working capital of $1,291 primarily as a result of improvements in our accounts receivable collections, non-cash items of $5,521 which included depreciation and amortization, bad debt and stock based compensation expense. These items were offset by our net loss of $769 and the loss on the sale of assets related to the health club network of $311.

Cash provided by operating activities was $11,861 for the six months ended July 31, 2008. Factors contributing to our cash provided by 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 approximately $2,393 during the six months ended July 31, 2009, compared with cash provided by investing activities of approximately $619 during the six months ended July 31, 2008. The use of cash in investing activities during the first half of fiscal 2009 was principally attributable to capital expenditures and purchases of domain names for our Media segment. These uses of cash were slightly offset by cash received in conjunction with the acquisition of the operating assets of Rock Coast Media and proceeds on the sale of assets related to the health club network.

Capital expenditures decreased $3,156 to $2,181 in the six months ended July 31, 2009 compared with $5,337 in the six months ended July 31, 2008, primarily due to the completion of the capital expenditure for the digital upgrades to Channel One's infrastructure in the first quarter of fiscal 2008. In addition, the decrease was because we purchased domain names for a cost of $609 as compared to $974 during the first half of fiscal 2008.

We acquired Rock Coast Media and received cash of $275. In addition, we received net proceeds on the sale of operating assets of $122 during the six months ended July 31, 2009. There was no such activity for the comparable period in 2008.

Financing Activities

Cash used in financing activities was $4,169 during the six months ended July 31, 2009, as a result of repurchases of our common stock.

Cash used in financing activities was $6,403 during the six months ended July 31, 2008, primarily as a result of the payment of the $4.0 million balance owed on the Credit Facility, and the remaining principal due on our convertible debt.

Other Items

Our board of directors has authorized us to repurchase up to $10,000 of our common stock. As of July 31, 2009, our unused repurchase authorization for our common stock was approximately $2,675.

. . .